First Trinity Financial Corporation and Subsidiaries |
Consolidated Statements of Financial Position |
| | December 31, 2010 | | | December 31, 2009 | |
| | | | | | |
Assets | | | | | | |
Investments | | | | | | |
Available-for-sale fixed maturity securities at fair value (amortized cost: $23,183,633 and $19,772,497 as of December 31, 2010 and 2009, respectively) | | $ | 26,623,318 | | | $ | 22,510,660 | |
Available-for-sale equity securities at fair value (cost: $347,353 and $350,318 as of December 31, 2010 and 2009, respectively) | | | 529,314 | | | | 448,484 | |
Mortgage loans on real estate | | | 1,156,812 | | | | 1,365,953 | |
Investment real estate | | | 3,077,520 | | | | 3,146,944 | |
Policy loans | | | 367,284 | | | | 335,022 | |
Other long-term investments | | | 6,886,529 | | | | 4,975,188 | |
Total investments | | | 38,640,777 | | | | 32,782,251 | |
Cash and cash equivalents ($65,000 is restricted as to withdrawal as of December 31, 2010 and 2009) | | | 12,985,278 | | | | 7,080,692 | |
Certificate of deposit (restricted) | | | 102,273 | | | | 102,273 | |
Accrued investment income | | | 385,948 | | | | 340,384 | |
Recoverable from reinsurers | | | 977,397 | | | | 870,294 | |
Accounts receivable | | | 357,979 | | | | 273,843 | |
Loans from premium financing | | | 1,143,977 | | | | 2,749,830 | |
Deferred policy acquisition costs | | | 3,234,285 | | | | 1,918,994 | |
Value of insurance business acquired | | | 2,507,258 | | | | 2,778,723 | |
Property and equipment | | | 102,374 | | | | 82,349 | |
Other assets | | | 1,151,315 | | | | 837,210 | |
Total assets | | $ | 61,588,861 | | | $ | 49,816,843 | |
| | | | | | | | |
Liabilities and Shareholders' Equity | | | | | | | | |
Policy liabilities | | | | | | | | |
Policyholders' account balances | | $ | 30,261,070 | | | | 24,417,483 | |
Future policy benefits | | | 13,444,284 | | | | 11,349,640 | |
Policy claims | | | 367,306 | | | | 289,273 | |
Premiums paid in advance | | | 42,908 | | | | 18,941 | |
Total policy liabilities | | | 44,115,568 | | | | 36,075,337 | |
Deferred federal income taxes | | | 293,221 | | | | 159,315 | |
Other liabilities | | | 524,125 | | | | 331,501 | |
Total liabilities | | | 44,932,914 | | | | 36,566,153 | |
| | | | | | | | |
Shareholders' Equity | | | | | | | | |
Common stock, par value $.01 per share, 20,000,000 shares authorized, 5,805,000 issued and outstanding as of December 31, 2010 and 2009, and 448,310 subscribed as of December 31, 2010 | | | 62,533 | | | | 58,050 | |
Additional paid-in capital | | | 16,677,615 | | | | 13,806,503 | |
Accumulated other comprehensive income | | | 3,305,370 | | | | 2,867,044 | |
Accumulated deficit | | | (3,389,571 | ) | | | (3,480,907 | ) |
Total shareholders' equity | | | 16,655,947 | | | | 13,250,690 | |
Total liabilities and shareholders' equity | | $ | 61,588,861 | | | $ | 49,816,843 | |
See notes to consolidated financial statements. |
First Trinity Financial Corporation and Subsidiaries |
Consolidated Statements of Operations |
| | Year Ended December 31, | |
| | 2010 | | | 2009 | |
Revenues | | | | | | |
Premiums | | $ | 5,895,030 | | | $ | 5,860,351 | |
Income from premium financing | | | 259,296 | | | | 582,816 | |
Net investment income | | | 2,441,334 | | | | 2,222,525 | |
Net realized investment losses | | | | | | | | |
Total other-than-temporary impairment losses | | | - | | | | (155,364 | ) |
Other net realized investment gains (losses) | | | 159,300 | | | | (31,046 | ) |
Net realized investment gains (losses) | | | 159,300 | | | | (186,410 | ) |
Other income | | | 66,346 | | | | 63,510 | |
Total revenues | | | 8,821,306 | | | | 8,542,792 | |
| | | | | | | | |
Benefits, Claims and Expenses | | | | | | | | |
Benefits and claims | | | 5,063,553 | | | | 4,234,016 | |
Policy acquisition costs deferred | | | (1,773,199 | ) | | | (1,478,104 | ) |
Amortization of deferred policy acquisition costs | | | 451,349 | | | | 452,960 | |
Amortization of value of insurance business acquired | | | 271,465 | | | | 333,493 | |
Commissions | | | 1,673,975 | | | | 1,450,437 | |
Other underwriting, insurance and acquisition expense | | | 3,249,353 | | | | 4,391,242 | |
Total benefits, claims and expenses | | | 8,936,496 | | | | 9,384,044 | |
| | | | | | | | |
Loss before deferred federal income tax expense (benefit) | | | (115,190 | ) | | | (841,252 | ) |
| | | | | | | | |
Deferred federal income tax expense (benefit) | | | (206,526 | ) | | | 49,139 | |
| | | | | | | | |
Net income (loss) | | $ | 91,336 | | | $ | (890,391 | ) |
| | | | | | | | |
Net income (loss) per common share basic and diluted | | $ | 0.01 | | | $ | (0.15 | ) |
See notes to consolidated financial statements. |
First Trinity Financial Corporation and Subsidiaries |
Consolidated Statement of Changes in Shareholders' Equity |
| | | | | | | | Accumulated | | | | | | | |
| | Common | | | Additional | | | Other | | | | | | Total | |
| | Stock | | | Paid-in | | | Comprehensive | | | Accumulated | | | Shareholders' | |
| | $.01 Par Value | | Capital | | Income | | Deficit | | Equity | |
Balance at January 1, 2009 | | $ | 58,050 | | | $ | 13,806,503 | | | $ | 2,733 | | | $ | (2,590,516 | ) | | $ | 11,276,770 | |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | (890,391 | ) | | | (890,391 | ) |
Change in net unrealized appreciation on available-for-sale securities | | | - | | | | - | | | | 2,864,311 | | | | - | | | | 2,864,311 | |
| | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | - | | | - | | | - | | | - | | | 1,973,920 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2009 | | | 58,050 | | | | 13,806,503 | | | | 2,867,044 | | | | (3,480,907 | ) | | | 13,250,690 | |
| | | | | | | | | | | | | | | | | | | | |
Subscriptions of common stock | | | 4,483 | | | | 2,871,112 | | | | | | | | | | | | 2,875,595 | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | 91,336 | | | | 91,336 | |
Change in net unrealized appreciation on available-for-sale securities | | | - | | | | - | | | | 438,326 | | | | - | | | | 438,326 | |
| | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 529,662 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2010 | | $ | 62,533 | | | $ | 16,677,615 | | | $ | 3,305,370 | | | $ | (3,389,571 | ) | | $ | 16,655,947 | |
See notes to consolidated financial statements. |
| | First Trinity Financial Corporation and Subsidiaries |
Consolidated Statements of Cash Flows |
| | Year Ended December 31, | |
| | 2010 | | | 2009 | |
Operating activities | | | | | | |
Net income (loss) | | $ | 91,336 | | | $ | (890,391 | ) |
Adjustments to reconcile net income (loss) to net cash | | | | | | | | |
provided by (used in) operating activities: | | | | | | | | |
Provision for depreciation | | | 81,768 | | | | 79,643 | |
Accretion of discount on investments | | | (692,415 | ) | | | (564,296 | ) |
Realized investment (gains) losses | | | (159,300 | ) | | | 186,410 | |
Amortization of policy acquisition cost | | | 451,349 | | | | 452,960 | |
Policy acquisition cost deferred | | | (1,773,199 | ) | | | (1,478,104 | ) |
Amortization of value of insurance business acquired | | | 271,465 | | | | 333,493 | |
Provision for deferred federal income tax | | | (206,526 | ) | | | 49,139 | |
Interest credited on policyholder deposits | | | 1,225,864 | | | | 1,067,592 | |
Change in assets and liabilities | | | | | | | | |
Accrued investment income | | | (45,564 | ) | | | 4,685 | |
Policy loans | | | (32,262 | ) | | | (81,930 | ) |
Allowance for loan losses | | | 124,245 | | | | 297,521 | |
Recoverable from reinsurers | | | (107,103 | ) | | | 13,917 | |
Accounts receivable | | | (84,136 | ) | | | (94,144 | ) |
Other assets | | | (314,105 | ) | | | (574,817 | ) |
Future policy benefits | | | 2,094,644 | | | | 1,727,795 | |
Policy claims | | | 78,033 | | | | (54,196 | ) |
Premiums paid in advance | | | 23,967 | | | | (1,294 | ) |
Other liabilities | | | 192,624 | | | | (798,388 | ) |
Net cash provided by (used in) operating activities | | | 1,220,685 | | | | (324,405 | ) |
| | | | | | | | |
Investing activities | | | | | | | | |
Purchase of fixed maturity securities | | | (4,859,909 | ) | | | (4,054,880 | ) |
Sales and maturity of fixed maturity securities | | | 1,868,930 | | | | 2,556,904 | |
Purchase of equity securities | | | (42,500 | ) | | | (136,565 | ) |
Sale of equity securities | | | 65,592 | | | | - | |
Purchase of mortgage loan | | | - | | | | (110,000 | ) |
Reduction in mortgage loans | | | 209,141 | | | | 86,742 | |
Purchase of real estate | | | (117,873 | ) | | | (141,483 | ) |
Sale of real estate | | | 123,500 | | | | - | |
Purchase of other long term investments | | | (2,724,500 | ) | | | (1,206,500 | ) |
Payments on other long term investments | | | 1,224,591 | | | | 975,424 | |
Purchase of certificate of deposit | | | - | | | | (2,273 | ) |
Loans made for premiums financed | | | (3,628,294 | ) | | | (9,860,038 | ) |
Loans repaid for premiums financed | | | 5,109,902 | | | | 11,515,277 | |
Purchases of furniture and equipment | | | (37,997 | ) | | | (47,630 | ) |
Net cash used in investing activities | | | (2,809,417 | ) | | | (425,022 | ) |
| | | | | | | | |
Financing activities | | | | | | | | |
Policyholder account deposits | | | 6,382,876 | | | | 3,699,270 | |
Policyholder account withdrawals | | | (1,765,153 | ) | | | (1,538,946 | ) |
Proceeds from public stock offering | | | 2,875,595 | | | | - | |
Net cash provided by financing activities | | | 7,493,318 | | | | 2,160,324 | |
| | | | | | | | |
Increase in cash | | | 5,904,586 | | | | 1,410,897 | |
| | | | | | | | |
Cash and cash equivalents, beginning of period | | | 7,080,692 | | | | 5,669,795 | |
Cash and cash equivalents, end of period | | $ | 12,985,278 | | | $ | 7,080,692 | |
| /s/ Kerber, Eck & Braeckel LLPSee notes to consolidated financial statements. |
Springfield, Illinois
April 14, 2010
20
First Trinity Financial Corporation and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | |
| | December 31, | | | December 31, | |
| | 2009 | | | 2008 | |
Assets | | | | | | | | |
Investments | | | | | | | | |
Available-for-sale fixed maturities at fair value (amortized cost: $19,772,497 and $18,203,764 at December 31, 2009 and 2008, respectively) | | $ | 22,510,660 | | | $ | 18,207,905 | |
Equity securities (cost: $350,318 and $213,752 at December 31, 2009 and 2008, respectively) | | | 448,484 | | | | 213,752 | |
Mortgage loans on real estate | | | 1,365,953 | | | | 1,315,401 | |
Investment real estate | | | 3,146,944 | | | | 372,000 | |
Policy loans | | | 335,022 | | | | 253,092 | |
Other long-term investments | | | 4,975,188 | | | | 4,464,280 | |
| | | | | | |
| | | | | | | | |
Total investments | | | 32,782,251 | | | | 24,826,430 | |
| | | | | | | | |
Cash and cash equivalents ($325,000 is restricted as to withdrawal at December 31, 2009 and 2008) | | | 7,080,692 | | | | 5,669,795 | |
Certificate of deposit (restricted) | | | 102,273 | | | | 100,000 | |
Accrued investment income | | | 340,384 | | | | 345,069 | |
Recoverable from reinsurers | | | 870,294 | | | | 884,211 | |
Accounts receivable | | | 273,843 | | | | 179,699 | |
Loans from premium financing | | | 2,749,830 | | | | 4,702,590 | |
Deferred policy acquisition costs | | | 1,918,994 | | | | 898,134 | |
Value of insurance business acquired | | | 2,778,723 | | | | 2,509,950 | |
Property and equipment | | | 82,349 | | | | 2,747,822 | |
Deferred federal income tax asset | | | — | | | | 454,824 | |
Other assets | | | 837,210 | | | | 262,393 | |
| | | | | | |
Total assets | | $ | 49,816,843 | | | $ | 43,580,917 | |
| | | | | | |
| | | | | | | | |
Liabilities and Shareholders’ Equity | | | | | | | | |
Policy liabilities | | | | | | | | |
Policyholders’ account balances | | $ | 24,417,483 | | | $ | 21,189,567 | |
Future policy benefits | | | 11,349,640 | | | | 9,621,845 | |
Policy claims | | | 289,273 | | | | 343,469 | |
Other policyholder funds | | | 100,731 | | | | 102,025 | |
| | | | | | |
Total policy liabilities | | | 36,157,127 | | | | 31,256,906 | |
Deferred federal income taxes | | | 159,315 | | | | — | |
Other liabilities | | | 249,711 | | | | 1,047,241 | |
| | | | | | |
Total liabilities | | | 36,566,153 | | | | 32,304,147 | |
| | | | | | |
| | | | | | | | |
Shareholders’ Equity | | | | | | | | |
Common stock, par value $.01 per share 8,000,000 shares authorized, 5,805,000 issued and outstanding | | | 58,050 | | | | 58,050 | |
Additional paid-in capital | | | 13,806,503 | | | | 13,806,503 | |
Accumulated other comprehensive income | | | 2,867,044 | | | | 2,733 | |
Accumulated deficit | | | (3,480,907 | ) | | | (2,590,516 | ) |
| | | | | | |
Total shareholders’ equity | | | 13,250,690 | | | | 11,276,770 | |
| | | | | | |
Total liabilities and shareholders’ equity | | $ | 49,816,843 | | | $ | 43,580,917 | |
| | | | | | |
See notes to consolidated financial statements.
21
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Operations
| | | | | | | | |
| | Year ended | |
| | December 31, | |
| | 2009 | | | 2008 | |
Revenues | | | | | | | | |
Premiums | | $ | 5,860,351 | | | $ | 1,572,599 | |
Income from premium financing | | | 582,816 | | | | 503,885 | |
Net investment income | | | 2,222,525 | | | | 164,924 | |
Net realized investment losses: | | | | | | | | |
Total-other-than-temporary impairment losses | | | (155,364 | ) | | | — | |
Other realized investment losses | | | (31,046 | ) | | | — | |
| | | | | | |
Total net realized investment losses | | | (186,410 | ) | | | — | |
Other income | | | 63,510 | | | | — | |
| | | | | | |
Total revenues | | | 8,542,792 | | | | 2,241,408 | |
| | | | | | | | |
Benefits, losses and expenses | | | | | | | | |
Benefits and claims | | | 4,234,016 | | | | 724,571 | |
Acquisition costs deferred | | | (1,478,104 | ) | | | (553,292 | ) |
Amortization of deferred acquisition costs | | | 452,960 | | | | 114,673 | |
Amortization of value of insurance business acquired | | | 333,493 | | | | — | |
Commissions | | | 1,450,437 | | | | 625,492 | |
Loan fees and losses | | | 684,300 | | | | 124,858 | |
Salaries and wages | | | 1,347,897 | | | | 682,555 | |
Third party administration fees | | | 247,211 | | | | 169,341 | |
Other underwriting, insurance and acquisition expense | | | 2,111,834 | | | | 858,894 | |
| | | | | | |
Total benefits, losses and expenses | | | 9,384,044 | | | | 2,747,092 | |
| | | | | | |
| | | | | | | | |
Loss before income tax expense | | | (841,252 | ) | | | (505,684 | ) |
| | | | | | | | |
Provision for federal income taxes | | | | | | | | |
Deferred | | | 49,139 | | | | (832 | ) |
| | | | | | |
Total federal income tax (benefit) | | | 49,139 | | | | (832 | ) |
| | | | | | |
| | | | | | | | |
Net loss | | $ | (890,391 | ) | | $ | (504,852 | ) |
| | | | | | |
| | | | | | | | |
Net loss per common share basic and diluted | | $ | (0.15 | ) | | $ | (0.09 | ) |
| | | | | | |
See notes to consolidated financial statements.
22
First Trinity Financial Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | |
| | Common | | | Additional | | | Other | | | | | | | Total | |
| | Stock | | | Paid-in | | | Comprehensive | | | Accumulated | | | Shareholders’ | |
| | $.01 Par Value | | | Capital | | | Income | | | Deficit | | | Equity | |
Balance at January 1, 2008 | | $ | 58,050 | | | $ | 13,806,503 | | | $ | 926 | | | $ | (2,085,664 | ) | | $ | 11,779,815 | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | | — | | | | — | | | | (504,852 | ) | | | (504,852 | ) |
Change in net unrealized appreciation on available-for-sale securities | | | — | | | | — | | | | 1,807 | | | | — | | | | 1,807 | |
| | | | | | | | | | | | | | | | | | | |
Total comprehensive loss | | | — | | | | — | | | | — | | | | — | | | | (503,045 | ) |
| | | | | | | | | | | | | | | |
Balance at December 31, 2008 | | | 58,050 | | | | 13,806,503 | | | | 2,733 | | | | (2,590,516 | ) | | | 11,276,770 | |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | |
Net loss | | | — | | | | — | | | | — | | | | (890,391 | ) | | | (890,391 | ) |
Change in net unrealized appreciation on available-for-sale securities | | | — | | | | — | | | | 2,864,311 | | | | — | | | | 2,864,311 | |
| | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | — | | | | — | | | | — | | | | — | | | | 1,973,920 | |
| | | | | | | | | | | | | | | |
Balance at December 31, 2009 | | $ | 58,050 | | | $ | 13,806,503 | | | $ | 2,867,044 | | | $ | (3,480,907 | ) | | $ | 13,250,690 | |
| | | | | | | | | | | | | | | |
See notes to consolidated financial statements.
23
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | |
| | Year ended | |
| | December 31, | |
| | 2009 | | | 2008 | |
Operating activities | | | | | | | | |
Net loss | | $ | (890,391 | ) | | $ | (504,852 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | |
Provision for depreciation | | | 79,643 | | | | 10,818 | |
Accretion of discount on fixed maturity investments | | | (564,296 | ) | | | 2,167 | |
Realized investment losses | | | 186,410 | | | | — | |
Amortization of policy acquisition cost | | | 452,960 | | | | 114,673 | |
Policy acquisition cost deferred | | | (1,478,104 | ) | | | (553,292 | ) |
Amortization of value of business acquired | | | 333,493 | | | | — | |
Provision for deferred federal income tax | | | 49,139 | | | | (832 | ) |
Interest credited on policyholder deposits | | | 1,067,592 | | | | 10,484 | |
Change in assets and liabilities | | | | | | | | |
Accrued investment income | | | 4,685 | | | | 7,378 | |
Policy loans | | | (81,930 | ) | | | — | |
Allowance for loan losses | | | 297,521 | | | | — | |
Recoverable from reinsurers | | | 13,917 | | | | (14,900 | ) |
Accounts receivable | | | (94,144 | ) | | | (28,761 | ) |
Other assets | | | (574,817 | ) | | | (20,240 | ) |
Future policy benefits | | | 1,727,795 | | | | 693,347 | |
Policy claims | | | (54,196 | ) | | | 35,640 | |
Other policyholder funds | | | (1,294 | ) | | | 30,201 | |
Other liabilities | | | (798,388 | ) | | | 327,252 | |
| | | | | | |
Net cash provided by (used in) operating activities | | | (324,405 | ) | | | 109,083 | |
| | | | | | | | |
Investing activities | | | | | | | | |
Purchase of fixed maturities | | | (4,054,880 | ) | | | (325,000 | ) |
Sales and maturity of fixed maturities | | | 2,556,904 | | | | 625,000 | |
Purchase of equity securities | | | (136,565 | ) | | | — | |
Purchase of mortgage loan | | | (110,000 | ) | | | — | |
Reduction in mortgage loans | | | 86,742 | | | | — | |
Purchase of real estate | | | (141,483 | ) | | | — | |
Purchase of other long term investments | | | (1,206,500 | ) | | | — | |
Payments on other long term investments | | | 975,424 | | | | — | |
Purchase of certificate of deposit | | | (2,273 | ) | | | — | |
Loans made for premiums financed | | | (9,860,038 | ) | | | (9,279,014 | ) |
Loans repaid for premiums financed | | | 11,515,277 | | | | 6,875,259 | |
Purchase price for subsidiary in excess of cash received | | | — | | | | (1,723,875 | ) |
Purchases of furniture and equipment | | | (47,630 | ) | | | (9,005 | ) |
| | | | | | |
Net cash used in investing activities | | | (425,022 | ) | | | (3,836,635 | ) |
| | | | | | | | |
Financing activities | | | | | | | | |
Policyholder account deposits | | | 3,699,270 | | | | 375,936 | |
Policyholder account withdrawals | | | (1,538,946 | ) | | | — | |
| | | | | | |
Net cash provided by financing activities | | | 2,160,324 | | | | 375,936 | |
| | | | | | |
| | | | | | | | |
Increase (decrease) in cash | | | 1,410,897 | | | | (3,351,616 | ) |
| | | | | | | | |
Cash and cash equivalents, beginning of period | | | 5,669,795 | | | | 9,021,411 | |
| | | | | | |
Cash and cash equivalents, end of period | | $ | 7,080,692 | | | $ | 5,669,795 | |
| | | | | | |
See notes to consolidated financial statements.
24
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 20092010 and 20082009
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
1. | Organization and Significant Accounting Policies |
Nature of Operations
First Trinity Financial Corporation is the parent holding company of Trinity Life Insurance Company and First Trinity Capital Corporation.
First Trinity Financial Corporation, (the “Company”) was incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a life insurance subsidiary. The Company raised $1,450,000 from two private placement stock offerings during 2004. On June 22, 2005, the Company’s intrastate public stock offering filed with the Oklahoma Department of Securities for a $12,750,000, intrastate public stock offering, which included a 10% “over-sale”"over-sale" provision (additional sales of $1,275,000), was declared effective. The offering was completed February 23, 2007. The Company raised $14,025,000 from this offering.
On June 29, 2010, the Company commenced a public offering of its common stock registered with the U.S. Securities and Exchange Commission and the Oklahoma Department of Securities. The public offering is for 1,333,334 shares of the Company’s common stock for $7.50 per share. If all shares are sold, the Company will receive $8.5 million after reduction for offering expenses and sales commissions. The Company has registered an additional 133,334 shares of its common stock to cover over subscriptions if any occur. The sale of all the additional shares would provide the Company with an additional $850,000 after reduction for offering expenses and sales commissions.
The offering will end on June 28, 2011, unless all the Company’s shares are sold before then or the offering is extended. As of December 31, 2010, the Company has received gross proceeds of $3,362,325 from the subscription of 448,310 shares of its common stock in this offering and incurred $486,730 in offering costs. The proceeds were originally deposited in an escrow account that was released from escrow by the Oklahoma Department of Securities in August 2010 after the offering exceeded $1,000,000 in gross proceeds. These proceeds are now available to the Company. Future proceeds from the sale of shares of the Company’s common stock in this public offering will be available to the Company without being held in escrow.
The Company purchased First Life America Corporation (“FLAC”) on December 23, 2008. On August 31, 2009, two of the Company’s subsidiaries, Trinity Life Insurance Company (“Old TLIC’TLIC”) and First Life America Corporation (“FLAC”)FLAC, were merged, with FLAC being the surviving company. Immediately following the merger, FLAC changed its name to Trinity Life Insurance Company (“TLIC”). After the merger, the Company has two wholly owned subsidiaries, First Trinity Capital Corporation (“FTCC”) and TLIC, domiciled in Oklahoma. FTCC was incorporated in 2006, and began operations in January 2007 providing financing for casualty insurance premiums. FLAC was purchased December 23, 2008 and had statutory capital and surplus of $2,700,455 at December 31, 2008.
TLIC is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in eight states primarily in the Midwest. TLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment and annuity products. The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense is issued as either a simplified issue or as a graded benefit, determined by underwriting. The products are sold through independent agents in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas.
The Company’s operations, prior to the acquisition of FLAC, involved the sale of a modified premium whole life insurance policy with a flexible premium deferred annuity rider through its subsidiary Old TLIC in the state of Oklahoma. FTCC provides financing for casualty insurance premiums for individuals and companies and is licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC is the sole memberThe Company owns 100% of Southern Insurance Services, LLC, (“SIS”), a limited liability company, that operates a property and casualty insurance agency. FTCC is the sole member of SIS.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
1. | Organization and Significant Accounting Policies (continued) |
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”("U.S. GAAP").
Principles of Consolidation
The consolidated financial statements include the accounts and operations of the Company and its subsidiaries, including FLAC from its date of acquisition, which is treated as December 31, 2008 for financial reporting purposes. No operating results of FLAC are included in the consolidated financial statements for the year ended December 31, 2008.subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
Reclassifications
Certain reclassifications have been made in the prior year financial statements to conform to current year classifications. These reclassifications had no effect on previously reported net lossincome or shareholders’shareholders' equity.
25
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred acquisition costs related to annuitieslimited-payment long-duration annuity contracts are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains and (losses) from available-for-sale securities had actually been realized. This adjustment is included in the change in net unrealized appreciation (depreciation) on available-for-sale securities, a component of “Accumulated Other Comprehensive Income (Loss)”Income” in the shareholders’ equity section of the balance sheet.statement of financial position
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
1. | Organization and Significant Accounting Policies (continued) |
Loans from Premium Financing
Loans from premium financing are carried at their outstanding unpaid principal balances, net of unearned interest, charge-offs and an allowance for loan losses. Interest on loans is earned based on the interest method for computing unearned interest. The rule of 78’s78s is used to calculate the amount of the interest charge to be forgiven in the event that a loan is repaid prior to the agreed upon number of monthly payments. When serious doubt concerning collectability arises, loans are placed on a nonaccrual basis, generallybasis. Generally if no payment is received after one hundred twenty days, all accrued and uncollected interest income is reversed against current period operations. Interest income on nonaccrual loans is recognized only when the loan is paid in full. Loan origination fees and costs are charged to expense as incurred.
Allowance for Loan Losses from Premium Financing
The allowance for possible loan losses from financing casualty insurance premiums is a reserve established through a provision for possible loan losses charged to expense which represents, in management’s judgment, the known and inherent credit losses existing in the loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses inherent in the loan portfolio.portfolio and reduces the carrying value of the loans from premium financing to the estimated net realizable value on the statement of financial position.
While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy and changes in interest rates. The Company’s allowance for possible loan losses consists of specific valuation allowances established for probable losses on specific loans and a portfolio reserve for probable incurred but not specifically identified loans.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loanloan-by-loan basis.
Property and Equipment
The home office building that was acquired in the acquisition of FLAC and carried as property and equipment on the balance sheet in 2008 was leased to third parties in December 2009 and has been reclassified on the balance sheet to investment real estate.
Property and equipment are carried at amortized cost. Depreciation on the office building occupied by SIS is calculated over its estimated useful life of 39 years. Office furniture and equipment is recorded at cost or fair value at acquisition less accumulated depreciation using the 200% declining balancestraight-line method over the estimated useful life of the respective assets of 3 to 7 years. Leasehold improvements are recorded at cost and amortized over the remaining non cancelable lease term.
Reinsurance
The Company cedes reinsurance under various agreements allowing management to control exposure to potential losses arising from large risks and providing additional capacity for growth. Estimated reinsurance recoverablesrecoverable balances are reported as assets and are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts.
27
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 20092010 and 20082009
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
1. | Organization and Significant Accounting Policies (continued) |
Value of Insurance Business Acquired
As a result of the Company’s purchase of FLAC, an asset was recorded in the application of purchase accounting to recognize the value of acquired insurance in force. The Company’s value of acquired insurance in force is an intangible asset with a definite life and is amortized under Financial Accounting Standards Board (“FASB”) guidance. The value of acquired insurance in force will beis amortized primarily over 34 years, which is the expected remaining lifeemerging profit of the insurancerelated policies using the same assumptions that were used in force.computing liabilities for future policy benefits. For the amortization of the value of acquired insurance in force, the Company will periodically reviewreviews its estimates of gross profits. The most significant assumptions involved in the estimation of gross profits include interest rate spreads, future financial market performance, business surrender/lapse rates, mortality and morbidity, expenses and the impact of realized investment gains and losses. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company is required to record a charge or credit to amortization expense for the period in which an adjustment is made. During 2009, the Company evaluated it’s originally recorded purchase price allocation of assets and liabilities of FLAC. As a result, value of business acquired was increased $602,266 due to a change to the original assumptions made on the deferred taxes of the investment portfolio of FLAC. This change in deferred taxes and value of business acquired had the effect of increasing net loss by $159,175 ($.02 per share).
At December 31, 20092010 and 20082009 there was $604,958 and $333,493, and $0respectively, of accumulated amortization of the value of insurance business acquired due to the purchase of FLAC occurringthat occurred at the end of 2008. The Company expectsWe expect to amortize the value of insurance business acquired by the following amounts over the next five years: $309,254, $290,542, $265,065, $237,704$257,729 in 2011, $211,579 in 2012, $197,041 in 2013, $184,256 in 2014 and $220,155.$173,500 in 2015.
Other Assets and Other liabilitiesLiabilities
Other assets consist primarily of prepaid expenses, andrecoverable federal and state income tax recoverables.taxes, notes receivable and customer account balances receivable. Other liabilities consist primarily of accrued expenses, account payables, deposits on pending policy applications and payables.unearned investment income.
Policyholders’ Account Balances
The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the balance sheetfinancial statement date. This liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Interest crediting rates for individual annuities range from 3.75% to 6.75%. Interest crediting rates for premium deposit funds range from 3.5%3% to 4%.
Future Policy Benefits
The Company’s liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. For life insurance and annuity products, expected mortality and morbidity is generally based on the Company’s historical experience or standard industry tables including a provision for the risk of adverse deviation. Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality, and morbidity and interest rate assumptions are “locked-in” upon the issuance of new insurance with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to provide for expected future losses on a product by establishing premium deficiency reserves.
Policy Claims
Policy claim liabilities represent the estimated liabilities for claims reported plus estimated incurred but not yet reported claims developed from trends of historical market data applied to current exposure.
Common Stock
Common stock is fully paid, non-assessable and has a par value of $.01 per share.
28
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 20092010 and 20082009
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
1. | Organization and Significant Accounting Policies (continued) |
On January 10, 2011, the Company’s Board of Directors approved a 5% share dividend by which shareholders will receive a share of Common Stock for each 20 shares of common stock of the Company they hold. The dividend is payable to the holders of shares of the Corporation as of March 10, 2011. Fractional shares will be rounded to the nearest whole number of shares. It is anticipated that approximately 324,000 shares will be issued in connection with the stock dividend that will result in accumulated deficit being charged by approximately $2,430,000 with an offsetting credit of approximately $2,430,000 to common stock and additional paid-in capital.
Federal Income Taxes
The Company uses the liability method of accounting for income taxes. Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under GAAP and balances determined using tax bases. A valuation allowance is established for the amount of the deferred tax asset that exceeds the amount of the estimated future taxable income needed to utilize the future tax benefits.
Revenues and Expenses
Revenues on traditional life insurance products consist of direct premiums reported as earned when due. Liabilities for future policy benefits are provided and acquisition costs are amortized by associating benefits and expenses with earned premiums to recognizein a systematic manner based on the related contract revenues or gross profits over the life of the contracts.as appropriate. Acquisition costs for traditional life insurance contracts are deferred to the extent deemed recoverable and are amortized over the premium paying period of the related policies using the net level premium method.assumptions consistent with those used in computing future policy benefit liabilities. Traditional life insurance products are treated as long durationlong-duration contracts since they are ordinary whole life insurance products, which generally remain in force for the lifetime of the insured.
Deferred acquisition costs related to annuities that subject us to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies. These annuities are treated as long-duration insurance contracts since the Company is subject to risk from policyholder mortality and morbidity over an extended period.
Income from premium financing includes cancellation and late fees.
Net LossIncome (Loss) per Common Share
Net lossincome (loss) per common share basic and diluted is calculated using the weighted average number of common shares outstanding and subscribed during the year. The weighted average outstanding and subscribed common shares basic and diluted for the years ended December 31, 2010 and 2009 were 6,235,407 and 2008 were 5,805,000.6,095,250, respectively. These weighted average shares reflect the retrospective adjustment for the impact of the 5% stock dividend declared by the Company on January 10, 2011 and payable to holders of shares of the Company as of March 10, 2011.
Accumulated Other Comprehensive Income
FASB guidance requires the inclusion of unrealized gains or losses on available-for-sale securities, net of tax, as a component of other comprehensive income. Unrealized gains and losses recognized in accumulated other comprehensive income that are later recognized in net income through a reclassification adjustment are identified on the specific identification method. There were no reclassification amounts
In addition, deferred acquisition costs related to limited-payment long-duration annuity contracts are also adjusted, net of tax, for the years ended change in amortization that would have been recorded if the unrealized gains (losses) from available-for-sale securities had actually been realized. This adjustment is included in the change in net unrealized appreciation (depreciation) on available-for-sale securities, a component of “Accumulated Other Comprehensive Income” in the shareholders’ equity section of the statement of financial position.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 20092010 and 2008.20091. | Organization and Significant Accounting Policies (continued) |
Subsequent Events
Management has evaluated all events subsequent to December 31, 20092010 through the date that these financial statements have been issued.
Recent Accounting Pronouncements
In April 2009,January 2010, the FinancialFASB issued Accounting Standards BoardUpdate No. 2010-06, Improving Disclosures about Fair Value Measurements (“FASB”ASU 2010-06”) issued new guidance regarding the recognition and presentation of other-than-temporary impairments.. The new guidance requires entities to separately disclose information relative to transfers in and out of Levels 1 and 2 in the fair value hierarchy. In addition, ASU 2010-06 requires separate an other-than-temporary impairmentpresentation of a fixed maturity security into two components when there are credit related losses associated withtransfers in, transfers out, purchases, sales, issuances and settlements of Level 3 investments in the impaired fixed maturity securitytabular reconciliation of Level 3 activity. ASU 2010-06 also clarifies the level of disaggregation for which management assertsfair value measurements should be disclosed and requires that it does not have the intent to sell the security,information about input and it is not more likely than not that it willvaluation techniques be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings,disclosed for Level 2 and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive income (loss). The new guidance also expands prior guidance in annual reporting for investment disclosures to interim periodsLevel 3 assets and further enhances certain disclosures contained therein. This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.liabilities. The Company adopted this guidance effective for the secondfirst quarter 2009. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
29
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 20082010.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
In April 2009,October 2010, the FASB issued new guidance to clarify fair valuation in inactive markets and includes all assets and liabilities subject to fair value measurements. Under this guidance, if an entity determines that there has been a significant decrease in the volume and level of activityAccounting Standards Update No. 2010-26, Accounting for the assetCosts Associated with Acquiring or the liability in relation to the normal market activity for the asset or liability (or similar assets and liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly; the entity shall place little, if any weight on that transaction price as an indicator of fair value. This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this guidance effective for the second quarter 2009, with no material impact to the consolidated financial statements.
In April 2009, the FASB issued new guidance to expand the fair value disclosures required for financial instruments for interim periods. The guidance also requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim and annual basis and to highlight any changes from prior periods. This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this guidance effective for the second quarter of 2009, with no material impact to the consolidated financial statements.
In May 2009, the FASB issued new guidance that established general accounting standards and disclosure for events occurring subsequent to the balance sheet date but before the financial statements are issued. This guidance became effective for interim and annual accounting periods ending after June 15, 2009. The Company adopted this guidance upon issuance, with no material impact to the consolidated financial statements.
In June 2009, the FASB issued new guidance to reorganize existing U.S. accounting and reporting standards issued by the FASB and other private sector standard setters into a single source of authoritative accounting principles arranged by topic (the “Codification”Renewing Insurance Contracts (“ASU 2010-26”). The Codification replaced previousnew guidance requires that an insurance entity capitalize only the following as acquisition costs related directly to the same issuesuccessful acquisition of new or renewal insurance contracts:
| 1. | Incremental direct costs of contract acquisition. |
| 2. | The portion of an employee’s total compensation and payroll-related fringe benefits related directly to acquisition activities for time spent performing underwriting, policy issuance, policy processing, medical, inspection and sales force contract selling for a contract that has actually been acquired. |
| 3. | Other costs related directly to the acquisition activities described in point 2 above that would not have been incurred by the insurance entity had the acquisition contract transaction not occurred. |
| 4. | Advertising costs that meet the capitalization criteria of Subtopic 340-20. |
All other acquisition costs should be charged to expense as incurred. In addition, administrative costs, rent, depreciation, occupancy, equipment and becameall other general overhead costs are considered indirect costs and should be charged to expense as incurred. ASU 2010-26 is effective for interim and annual reporting periods endingbeginning after SeptemberDecember 15, 2009.2011. Early adoption is permitted, but only at the beginning of an entity’s annual reporting period. The Company will likely adopt ASU 2010-26 in first quarter 2012. The Company has assessed the guidance and has determined that it will not have a significant financial impact since the Company utilizes a dynamic model whereby deferred acquisition costs on the statement of financial position only include policies currently in force. This current dynamic model results in immediate amortization of all deferred acquisition costs on the statement of operations where the policy is no longer in force. Once adopted, this guidance upon issuance, with no material impactthe above defined acquisition costs will only be capitalized directly related to the consolidated financial statements.successful acquisition of new or renewal insurance contracts. After adoption, these acquisition costs will be amortized on the statement of operations when the related policies are no longer in force.
In February 2010, the FASB modified its guidance related to subsequent events. This guidance continues to require entities that file or furnish financial statements with the SEC to evaluate subsequent events through the date the financial statements are issued; however, this guidance removed the requirement for these entities to disclose the date through which events have been evaluated. This guidance became effective upon issue. The Company adopted this guidance upon issue, with no material impact to the consolidated financial statements.
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First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Fixed Maturity and Equity Securities Available-For-Sale
Investments in fixed maturity and equity securities available-for-sale as of December 31, 2010 and December 31, 2009 are summarized as follows:
| | | | | Gross | | | Gross | | | | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
December 31, 2010 | | Cost | | | Gains | | | Losses | | | Value | |
| | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | |
U.S. government agency | | $ | 1,121,014 | | | $ | 19,442 | | | $ | 31,495 | | | $ | 1,108,961 | |
Residential mortgage-backed securities | | | 153,176 | | | | 38,327 | | | | - | | | | 191,503 | |
Corporate bonds | | | 21,700,965 | | | | 3,422,257 | | | | 11,623 | | | | 25,111,599 | |
Foreign bonds | | | 208,478 | | | | 2,777 | | | | - | | | | 211,255 | |
Total fixed maturity securities | | | 23,183,633 | | | | 3,482,803 | | | | 43,118 | | | | 26,623,318 | |
Mutual funds | | | 52,000 | | | | 34,800 | | | | - | | | | 86,800 | |
Corporate common stock | | | 295,353 | | | | 147,161 | | | | - | | | | 442,514 | |
Total equity securities | | | 347,353 | | | | 181,961 | | | | - | | | | 529,314 | |
| | | | | | | | | | | | | | | | |
Total fixed maturity and equity securities | | $ | 23,530,986 | | | $ | 3,664,764 | | | $ | 43,118 | | | $ | 27,152,632 | |
| | | | | Gross | | | Gross | | | | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
December 31, 2009 | | Cost | | | Gains | | | Losses | | | Value | |
| | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | |
U.S. government agency | | $ | 1,921,463 | | | $ | 7,955 | | | $ | 51,235 | | | $ | 1,878,183 | |
Residential mortgage-backed securities | | | 182,835 | | | | 22,403 | | | | - | | | | 205,238 | |
Corporate bonds | | | 17,668,199 | | | | 2,796,431 | | | | 37,391 | | | | 20,427,239 | |
Total fixed maturity securities | | | 19,772,497 | | | | 2,826,789 | | | | 88,626 | | | | 22,510,660 | |
Mutual funds | | | 52,000 | | | | 28,150 | | | | - | | | | 80,150 | |
Corporate common stock | | | 298,318 | | | | 70,016 | | | | - | | | | 368,334 | |
Total equity securities | | | 350,318 | | | | 98,166 | | | | - | | | | 448,484 | |
| | | | | | | | | | | | | | | | |
Total fixed maturity and equity securities | | $ | 20,122,815 | | | $ | 2,924,955 | | | $ | 88,626 | | | $ | 22,959,144 | |
First Trinity Financial Corporation and 2008Subsidiaries
2. INVESTMENTSNotes to Consolidated Financial Statements
Fixed MaturitiesDecember 31, 2010 and Equity Securities2009
The following tables provide additional information relating to fixed maturities and equity securities as of December 31:
| | | | | | | | | | | | | | | | |
| | | | | | Gross | | | Gross | | | | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
December 31, 2009 | | Cost | | | Gains | | | Losses | | | Value | |
Fixed maturity securities | | | | | | | | | | | | | | | | |
U.S. Government Agency | | $ | 1,921,463 | | | $ | 7,955 | | | $ | 51,235 | | | $ | 1,878,183 | |
Residential mortgage-backed securities | | | 182,835 | | | | 22,403 | | | | — | | | | 205,238 | |
Corporate bonds | | | 17,668,199 | | | | 2,796,431 | | | | 37,391 | | | | 20,427,239 | |
| | | | | | | | | | | | |
Total fixed maturity securities | | $ | 19,772,497 | | | $ | 2,826,789 | | | $ | 88,626 | | | $ | 22,510,660 | |
Equity securities | | | 350,318 | | | | 98,166 | | | | — | | | | 448,484 | |
| | | | | | | | | | | | |
Total | | $ | 20,122,815 | | | $ | 2,924,955 | | | $ | 88,626 | | | $ | 22,959,144 | |
| | | | | | | | | | | | |
2. | Investments (continued) |
| | | | | | | | | | | | | | | | |
| | | | | | Gross | | | Gross | | | | |
| | Amortized | | | Unrealized | | | Unrealized | | | Fair | |
December 31, 2008 | | Cost | | | Gains | | | Losses | | | Value | |
Fixed maturity securities | | | | | | | | | | | | | | | | |
U.S. Government Agency | | $ | 953,650 | | | $ | 4,141 | | | $ | — | | | $ | 957,791 | |
Residential mortgage-backed securities | | | 221,951 | | | | — | | | | — | | | | 221,951 | |
Corporate bonds | | | 17,028,163 | | | | — | | | | — | | | | 17,028,163 | |
| | | | | | | | | | | | |
Total fixed maturity securities | | $ | 18,203,764 | | | $ | 4,141 | | | $ | — | | | $ | 18,207,905 | |
Equity securities | | | 213,752 | | | | — | | | | — | | | | 213,752 | |
| | | | | | | | | | | | |
Total | | $ | 18,417,516 | | | $ | 4,141 | | | $ | — | | | $ | 18,421,657 | |
| | | | | | | | | | | | |
The following table summarizes, for allAll securities in an unrealized loss position as of the balance sheetfinancial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position.position as of December 31, 2010 and 2009 are summarized as follows:
| | | | | | | | | | | | |
| | Less than 12 months | |
| | | | | | Unrealized | | | Number of | |
December 31, 2009 | | Fair Value | | | Loss | | | Securities | |
Fixed maturity securities | | | | | | | | | | | | |
U.S. Government agency | | $ | 1,676,246 | | | $ | 51,235 | | | | 6 | |
Corporate bonds | | | 742,087 | | | | 37,391 | | | | 5 | |
| | | | | | | | | |
Total fixed maturity securities | | $ | 2,418,333 | | | $ | 88,626 | | | | 11 | |
| | | | | | | | | |
There were no
| | Less than 12 Months | |
| | | | | Unrealized | | | Number of | |
December 31, 2010 | | Fair Value | | | Loss | | | Securities | |
Fixed maturity securities | | | | | | | | | |
Less than 12 months | | | | | | | | | |
U.S. Government agency | | $ | 718,021 | | | $ | 31,495 | | | | 2 | |
Corporate bonds | | | 749,795 | | | | 11,623 | | | | 3 | |
| | | | | | | | | | | | |
Total fixed maturity securities | | $ | 1,467,816 | | | $ | 43,118 | | | | 5 | |
| | | | | Unrealized | | | Number of | |
December 31, 2009 | | Fair Value | | | Loss | | | Securities | |
Fixed maturity securities | | | | | | | | | |
Less than 12 months | | | | | | | | | |
U.S. Government agency | | $ | 1,676,246 | | | $ | 51,235 | | | | 6 | |
Corporate bonds | | | 742,087 | | | | 37,391 | | | | 5 | |
| | | | | | | | | | | | |
Total fixed maturity securities | | $ | 2,418,333 | | | $ | 88,626 | | | | 11 | |
As of December 31, 2010, all of the above fixed maturity securities in an unrealized loss positionhad a fair value to cost ratio equal to or greater than 12 months and there were no equity securities in an unrealized loss position. There were no securities in an unrealized loss position at December 31, 2008.
94%. As of December 31, 2009, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 86% and all equity securities had a fair value to cost ratio equal to or greater than 100%. As of both December 31, 2008, all of our fixed maturity2010 and equity securities had a fair value to cost ratio equal to or greater than 100%. At December 31, 2009, and 2008, fixed maturity securities were 87% and 85% investment grade respectively, as rated by Standard & Poor’s.
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First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
There were no equity securities in an unrealized loss position as of December 31, 20092010 and 2008December 31, 2009.
2. INVESTMENTS (continued)
The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value in light of all the factors considered. Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value.
For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors. The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings. The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss). Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains/lossesgains (losses) in the consolidated statements of income.operations. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of incomeoperations in the periods incurred as the difference between fair value and cost.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
2. | Investments (continued) |
Based on our review, the Company experienced no other-than-temporary impairments during the year ended December 31, 2010.
The Company recorded two other-than-temporary impairments during 2009. During the second quarter of 2009, the Company impaired its $200,000 par value General Motors (“GM”) bond as a result of a bankruptcy filing by GM. This impairment was considered fully credit-related, resulting in a charge to the income statement of operations before tax of $8,659 as of June 30, 2009. This charge represents the difference between the amortized cost basis of the security and its fair value. During the third quarter 2009, the Company recorded ana second other-than-temporary impairment relative to CITCit Group (“CIT”) bonds with a total par value of $710,000. These CIT bonds were written down to their fair value at September 30, 2009. The Company determined that the entire loss was credit related and recognized a realized loss of $146,705 in the statement of operations. These bonds defaulted on October 30, 2009. The Company experienced no additional other-than temporaryother-than-temporary impairments during 2009.
Management believes that the Company will fully recover its cost basis in the securities held at December 31, 2009,2010, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The remaining temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.
Net unrealized gains included in other comprehensive income for investments classified as available-for-sale, are presented below, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized.
| | | | | | | | |
| | December 31, | |
| | 2009 | | | 2008 | |
Gross unrealized appreciation on available-for-sale securities | | $ | 2,836,329 | | | $ | 4,141 | |
Adjustment to deferred acquisition costs | | | (4,284 | ) | | | — | |
Deferred income taxes | | | 34,999 | | | | (1,408 | ) |
| | | | | | |
Net unrealized appreciation on available-for-sale securities | | $ | 2,867,044 | | | $ | 2,733 | |
| | | | | | |
32
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
realized as of December 31, 2010 and 2009 and 2008are summarized as follows:
2. INVESTMENTS (continued)
| | December 31, 2010 | | | December 31, 2009 | |
Unrealized appreciation on available-for-sale securities | | $ | 3,621,646 | | | $ | 2,836,329 | |
Adjustment to deferred acquisition costs | | | (10,843 | ) | | | (4,284 | ) |
Deferred income taxes | | | (305,433 | ) | | | 34,999 | |
| | | | | | | | |
Net unrealized appreciation on available-for-sale securities | | $ | 3,305,370 | | | $ | 2,867,044 | |
The amortized cost and estimated fair value of fixed maturities,maturity available-for-sale securities as of December 31, 2010, by contractual maturity, at December 31, 2009 is shown below. Actualare summarized as follows:
| | Available-for-Sale | |
| | Amortized Cost | | | Fair Value | |
Due in one year or less | | $ | 787,178 | | | $ | 812,961 | |
Due in one year through five years | | | 7,366,837 | | | | 8,441,033 | |
Due after five years through ten years | | | 9,721,078 | | | | 11,107,361 | |
Due after ten years | | | 5,155,364 | | | | 6,070,460 | |
Due at multiple maturity dates | | | 153,176 | | | | 191,503 | |
| | $ | 23,183,633 | | | $ | 26,623,318 | |
Expected maturities maywill differ from contractual maturities because issuersborrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | | | |
| | Available-for-Sale | |
| | Amortized | | | Fair | |
| | Cost | | | Value | |
Due in one year or less | | $ | 43,500 | | | $ | 56,619 | |
Due in one year through five years | | | 5,826,977 | | | | 6,734,979 | |
Due after five years through ten years | | | 8,479,628 | | | | 9,642,869 | |
Due after ten years | | | 5,239,557 | | | | 5,870,955 | |
Due at multiple maturity dates | | | 182,835 | | | | 205,238 | |
| | | | | | |
| | $ | 19,772,497 | | | $ | 22,510,660 | |
| | | | | | |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
2. | Investments (continued) |
Proceeds and gross realized gains (losses) from the salesales, calls and maturityimpairments of fixed maturities duringmaturity available-for-sale securities for the years ended December 31, 2010 and 2009 and 2008 were $2,556,904 and $625,000, respectively. Gross gains of $5,323 and $0 and gross losses of $36,369 and $0 were realized on the sales during 2009 and 2008, respectively. Certain other than temporary losses were recognized on General Motors and CIT Corporation bonds totaling $155,364.are summarized as follows:
Presented below is investment information, including the
| | Years Ended December 31, | |
| | Fixed Maturity Securities | | | Equity Securities | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | | | | | | | | | | | |
Proceeds | | $ | 1,868,930 | | | $ | 2,556,904 | | | $ | 65,592 | | | $ | - | |
| | | | | | | | | | | | | | | | |
Gross realized gains | | | 140,032 | | | | 5,323 | | | | 20,128 | | | | - | |
| | | | | | | | | | | | | | | | |
Gross realized losses | | | (860 | ) | | | (36,369 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Other than temporary impairments | | | - | | | | (155,364 | ) | | | - | | | | - | |
The accumulated and annual change in net unrealized investment gains or losses. Additionally,for fixed maturity and equity securities available-for-sale for the table shows the annual change in net unrealized investment gains (losses)years ended December 31, 2010 and 2009 and the amount of realized investment gains (losses) on debtfixed maturity and equity securities for the year’syears ended December 31, 2010 and 2009 are summarized as follows:
| | Years Ended December 31, | |
| | 2010 | | | 2009 | |
Change in unrealized investment gains | | | | | | |
| | | | | | |
Available-for-sale securities | | | | | | |
| | | | | | | | |
Fixed maturity securities | | $ | 701,522 | | | $ | 2,734,022 | |
| | | | | | | | |
Equity securities | | | 83,795 | | | | 98,166 | |
| | | | | | | | |
Other than temporary impairment losses | | | - | | | | (155,364 | ) |
| | | | | | | | |
Other realized investment gains (losses) | | | | | | | | |
| | | | | | | | |
Fixed maturity securities | | | 139,172 | | | | (31,046 | ) |
| | | | | | | | |
Equity securities | | | 20,128 | | | | - | |
First Trinity Financial Corporation and 2008.Subsidiaries
| | | | | | | | |
| | 2009 | | | 2008 | |
Change in unrealized investment gains | | | | | | | | |
Fixed maturities | | $ | 2,734,022 | | | $ | 2,738 | |
Equity securities | | | 98,166 | | | | — | |
Realized investment losses | | | | | | | | |
Fixed maturities | | $ | (186,410 | ) | | $ | — | |
Equity securities | | | — | | | | — | |
Notes to Consolidated Financial StatementsDecember 31, 2010 and 2009
2. | Investments (continued) |
Mortgage Loans on Real Estate
The Company’s mortgage loans by property type atas of December 31, 2010 and 2009 and 2008 are summarized as follows:
| | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | Amount | | | % of Total | | | Amount | | | % of Total | |
Residential loans | | $ | 110,000 | | | | 8.05 | % | | $ | — | | | | 0.00 | % |
| | | | | | | | | | | | | | | | |
Commercial loans | | | | | | | | | | | | | | | | |
Retail stores | | $ | 851,607 | | | | 62.35 | % | | $ | 900,435 | | | | 68.45 | % |
Office buildings | | | 404,346 | | | | 29.60 | % | | | 414,966 | | | | 31.55 | % |
| | | | | | | | | | | | |
Total commercial loans | | | 1,255,953 | | | | 91.95 | % | | | 1,315,401 | | | | 100.00 | % |
| | | | | | | | | | | | |
Total mortgage loans | | $ | 1,365,953 | | | | 100.00 | % | | $ | 1,315,401 | | | | 100.00 | % |
| | | | | | | | | | | | |
| | December 31, 2010 | | | December 31, 2009 | |
| | Amount | | | % of Total | | | Amount | | | % of Total | |
Residential loans | | $ | - | | | | 0.00 | % | | $ | 110,000 | | | | 8.05 | % |
| | | | | | | | | | | | | | | | |
Commercial loans | | | | | | | | | | | | | | | | |
Retail stores | | $ | 765,065 | | | | 66.14 | % | | $ | 851,607 | | | | 62.35 | % |
Office buildings | | | 391,747 | | | | 33.86 | % | | | 404,346 | | | | 29.60 | % |
| | | | | | | | | | | | | | | | |
Total commercial loans | | | 1,156,812 | | | | 100.00 | % | | | 1,255,953 | | | | 91.95 | % |
| | | | | | | | | | | | | | | | |
Total mortgage loans | | $ | 1,156,812 | | | | 100.00 | % | | $ | 1,365,953 | | | | 100.00 | % |
The 2009 residential loan iswas located in Mississippi and commercial loans are geographically concentrated in the states of Colorado (98%(99%) and Arizona (2%(1%) at December 31, 2009.
33
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 20082010.
2. INVESTMENTS (continued)
There were no loans more than 90 days past due at December 31, 2009.2010. There were no mortgage loans in default at December 31, 20082010 and there was no allowance for losses at December 31, 20092010 and 2008.2009.
Investment real estate
TLIC owns approximately six and one-half acres of land located in Topeka, Kansas. A 20,000 square foot office building has been constructed on approximately one-half of this land. TLIC occupied approximately 7,500 square feet of the building until it was leased to a third party effective December 24, 2009 and the remaining 12,500 square feet is leased. This building appeared on the balance sheet as property and equipment at December 2008 and was reclassified as
The Company’s investment real estate due to the changeas of usage in December 2009.
A summary of investment real estate at December 31, 2010 and 2009 and 2008 is summarized as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
Land and improvements | | $ | 3,210,050 | | | $ | 372,000 | |
Less — accumulated depreciation | | | (63,106 | ) | | | — | |
| | | | | | |
Investment real estate, net of accumulated depreciation | | $ | 3,146,944 | | | $ | 372,000 | |
| | | | | | |
| | December 31, 2010 | | | December 31, 2009 | |
Land and improvements | | $ | 3,204,422 | | | $ | 3,210,050 | |
Less - accumulated depreciation | | | (126,902 | ) | | | (63,106 | ) |
| | | | | | | | |
Investment real estate, net of accumulated depreciation | | $ | 3,077,520 | | | $ | 3,146,944 | |
Other Long-Term Investments
The Company’s investment in lottery prize cash flows was $6,886,529 and $4,975,188 and $4,464,280 atas of December 31, 20092010 and 2008,2009, respectively. The lottery prize cash flows are assignment of the future rights from lottery winners at a discounted price. Payments on these investments are made by state run lotteries.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
2. | Investments (continued) |
The amortized cost and estimated fair value of lottery prize cash flows, by contractual maturity, at December 31, 20092010 are shown below:summarized as follows:
| | | | | | | | |
| | Amortized | | | Fair | |
| | Cost | | | Value | |
Due in one year or less | | $ | 1,096,582 | | | $ | 1,041,012 | |
Due in one year through five years | | | 2,639,259 | | | | 2,741,285 | |
Due in five years through ten years | | | 1,046,495 | | | | 1,078,389 | |
Due after ten years | | | 192,852 | | | | 226,050 | |
| | | | | | |
| | $ | 4,975,188 | | | $ | 5,086,736 | |
| | | | | | |
| | Amortized | | | Fair | |
| | Cost | | | Value | |
Due in one year or less | | $ | 1,545,698 | | | $ | 1,308,930 | |
Due in one year through five years | | | 3,631,099 | | | | 3,998,188 | |
Due in five years through ten years | | | 1,364,343 | | | | 1,581,454 | |
Due after ten years | | | 345,389 | | | | 534,547 | |
| | $ | 6,886,529 | | | $ | 7,423,119 | |
The outstanding balance of lottery prize cash flows, by state lottery, atas of December 31, 2010 and 2009 are summarized as follows:
| | December 31, 2010 | | | December 31, 2009 | |
Florida | | $ | 316,649 | | | $ | 347,274 | |
Illinois | | | 863,519 | | | | 1,047,617 | |
Indiana | | | 391,451 | | | | 465,977 | |
Kentucky | | | 165,360 | | | | 170,103 | |
Massachusetts | | | 2,489,977 | | | | 2,345,406 | |
New York | | | 2,244,228 | | | | 431,209 | |
Pennsylvania | | | 415,345 | | | | - | |
Texas | | | - | | | | 147,808 | |
Washington | | | - | | | | 19,794 | |
| | $ | 6,886,529 | | | $ | 4,975,188 | |
Investment Income and 2008Investment Gains and Losses
Major categories of net investment income for the years ended December 31, 2010 and 2009 are shown below:summarized as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
Florida | | $ | 347,274 | | | $ | 376,252 | |
Illinois | | | 1,047,617 | | | | 246,694 | |
Indiana | | | 465,977 | | | | 535,978 | |
Kentucky | | | 170,103 | | | | — | |
Massachusetts | | | 2,345,406 | | | | 2,604,914 | |
New York | | | 431,209 | | | | 499,825 | |
Pennsylvania | | | — | | | | 31,058 | |
Texas | | | 147,808 | | | | 141,613 | |
Washington | | | 19,794 | | | | 27,946 | |
| | | | | | |
| | $ | 4,975,188 | | | $ | 4,464,280 | |
| | | | | | |
34
| | Years Ended December 31, | |
| | 2010 | | | 2009 | |
| | | | | | |
Fixed maturity securities | | $ | 2,107,980 | | | $ | 1,803,860 | |
Equity securities | | | 14,361 | | | | 15,503 | |
Mortgage loans | | | 94,133 | | | | 119,607 | |
Real estate | | | 344,850 | | | | 244,703 | |
Short-term and other investments | | | 65,803 | | | | 44,134 | |
| | | | | | | | |
Gross investment income | | | 2,627,127 | | | | 2,227,807 | |
| | | | | | | | |
Investment expenses | | | (185,793 | ) | | | (5,282 | ) |
| | | | | | | | |
Net investment income | | $ | 2,441,334 | | | $ | 2,222,525 | |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 20092010 and 20082009
2. INVESTMENTS (continued)
Investment Income and Investment Gains and Losses3. | Fair Value Measurements |
Net investment income arose from the following sources for the years ended December 31, 2009 and 2008:
| | | | | | | | |
| | Year Ended December 31, | |
| | 2009 | | | 2008 | |
| | | | | | | | |
Fixed maturities | | $ | 1,803,860 | | | $ | 21,412 | |
Equity securities | | | 15,503 | | | | — | |
Mortgage loans | | | 119,607 | | | | — | |
Real estate | | | 244,703 | | | | — | |
Short-term and other investments | | | 44,134 | | | | 145,623 | |
| | | | | | |
Gross investment income | | | 2,227,807 | | | | 167,035 | |
| | | | | | | | |
Investment expenses | | | (5,282 | ) | | | (2,111 | ) |
| | | | | | |
Net investment income | | $ | 2,222,525 | | | $ | 164,924 | |
| | | | | | |
3. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) inon the measurement date. The Company also considers the impact on fair value of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity.
The Company holds fixed maturitiesmaturity and equity securities that are measured and reported at fair market value on the balance sheet.statement of financial position. The Company determines the fair market values of its financial instruments based on the fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value, as follows:
Level 1 — - Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assetassets and liabilities include debtfixed maturity and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2 — - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 assets and liabilities include debtfixed maturity securities with quoted prices that are traded less frequently than exchange-traded instruments or assets and liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes U.S. Government and agency mortgage-backed debt securities and corporate debt securities.
Level 3 — - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company’s Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments and asset-backed securities where independent pricing information was not able to be obtained for a significant portion of the underlying assets.
35
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
3. FAIR VALUE MEASUREMENTS (continued)
The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
3. | Fair Value Measurements (continued) |
The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 2010 and 2009 and 2008.is summarized as follows:
| | | | | | | | | | | | | | | | |
December 31, 2009 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Fixed maturities, available for sale | | | | | | | | | | | | | | | | |
U.S. government agency | | $ | — | | | $ | 1,878,183 | | | $ | — | | | $ | 1,878,183 | |
Corporate | | | — | | | | 20,427,239 | | | | — | | | | 20,427,239 | |
Residential MBS | | | — | | | | 205,238 | | | | — | | | | 205,238 | |
| | | | | | | | | | | | |
Total fixed maturities | | $ | — | | | $ | 22,510,660 | | | $ | — | | | $ | 22,510,660 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Equity securities | | | | | | | | | | | | | | | | |
Mutual funds | | $ | 80,150 | | | $ | — | | | $ | — | | | $ | 80,150 | |
Corporate common stock | | | 333,334 | | | | — | | | | 35,000 | | | | 368,334 | |
| | | | | | | | | | | | |
Total equity securities | | $ | 413,484 | | | $ | — | | | $ | 35,000 | | | $ | 448,484 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
December 31, 2008 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Fixed maturities, available for sale | | | | | | | | | | | | | | | | |
U.S. government agency | | $ | — | | | $ | 957,791 | | | $ | — | | | $ | 957,791 | |
Corporate | | | — | | | | 17,028,163 | | | | — | | | | 17,028,163 | |
Residential MBS | | | — | | | | 221,951 | | | | — | | | | 221,951 | |
| | | | | | | | | | | | |
Total fixed maturities | | $ | — | | | $ | 18,207,905 | | | $ | — | | | $ | 18,207,905 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Equity securities | | | | | | | | | | | | | | | | |
Mutual funds | | $ | 52,000 | | | $ | — | | | $ | — | | | $ | 52,000 | |
Corporate common stock | | | 161,752 | | | | — | | | | — | | | | 161,752 | |
| | | | | | | | | | | | |
Total equity securities | | $ | 213,752 | | | $ | — | | | $ | — | | | $ | 213,752 | |
| | | | | | | | | | | | |
December 31, 2010 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Fixed maturity securities, available-for-sale | | | | | | | | | | | | |
U.S. government agency | | $ | - | | | $ | 1,108,961 | | | $ | - | | | $ | 1,108,961 | |
Residential mortgage-backed securities | | | - | | | | 191,503 | | | | - | | | | 191,503 | |
Corporate bonds | | | - | | | | 25,111,599 | | | | - | | | | 25,111,599 | |
Foreign bonds | | | - | | | | 211,255 | | | | - | | | | 211,255 | |
| | | | | | | | | | | | | | | | |
Total fixed maturity securities | | $ | - | | | $ | 26,623,318 | | | $ | - | | | $ | 26,623,318 | |
| | | | | | | | | | | | | | | | |
Equity securities, available-for-sale | | | | | | | | | | | | | | | | |
Mutual funds | | $ | - | | | $ | 86,800 | | | $ | - | | | $ | 86,800 | |
Corporate common stock | | | 365,014 | | | | - | | | | 77,500 | | | | 442,514 | |
| | | | | | | | | | | | | | | | |
Total equity securities | | $ | 365,014 | | | $ | 86,800 | | | $ | 77,500 | | | $ | 529,314 | |
December 31, 2009 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Fixed maturity securities, available-for-sale | | | | | | | | | | | | |
U.S. government agency | | $ | - | | | $ | 1,878,183 | | | $ | - | | | $ | 1,878,183 | |
Residential mortgage-backed securities | | | - | | | | 205,238 | | | | - | | | | 205,238 | |
Corporate bonds | | | - | | | | 20,427,239 | | | | - | | | | 20,427,239 | |
| | | | | | | | | | | | | | | | |
Total fixed maturity securities | | $ | - | | | $ | 22,510,660 | | | $ | - | | | $ | 22,510,660 | |
| | | | | | | | | | | | | | | | |
Equity securities, available-for-sale | | | | | | | | | | | | | | | | |
Mutual funds | | $ | 80,150 | | | $ | - | | | $ | - | | | $ | 80,150 | |
Corporate common stock | | | 333,334 | | | | - | | | | 35,000 | | | | 368,334 | |
| | | | | | | | | | | | | | | | |
Total equity securities | | $ | 413,484 | | | $ | - | | | $ | 35,000 | | | $ | 448,484 | |
At December 31, 2010, Level 3 financial instruments consisted of two private placement common stocks that have no active trading. At December 31, 2009, Level 3 financial instruments consisted of one private placement common stock that hashad no active trading. This stock represents an investmentThese stocks represent investments in a small development stage insurance holding company.companies. The fair value for this securitythese securities was determined through the use of unobservable assumptions about market participants. The Company has assumed a willing market participant would purchase the securities for the same price as the Company paid until such time as the development stage company commences operations.
36
Fair values for Level 1 and Level 2 assets for the Company’s fixed maturity and equity securities available-for-sale are primarily based on prices supplied by its custodian bank. The custodian bank utilizes a third party pricing service to provide quoted prices in the market which use observable inputs in developing such rates.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 20092010 and 20082009
3. FAIR VALUE MEASUREMENTS (continued)
3. | Fair Value Measurements (continued) |
The following table providesCompany analyzes market valuations received to verify reasonableness and to understand the key assumptions used and the sources. Since the fixed maturity securities owned by the Company do not trade on a summarydaily basis, the custodian bank and the third party pricing service prepare estimates of changesfair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing. As the fair value estimates of the Company’s fixed maturity securities are based on observable market information rather than market quotes, the estimates of fair value on these fixed maturity securities are included in Level 2 of the hierarchy. The Company’s Level 2 investments include obligations of U.S. government agencies, mortgage-backed securities, corporate bonds and foreign bonds.
The Company’s equity securities are included in Level 1 except for mutual funds included in Level 2 and the private placement common stocks discussed above and included in Level 3. Level 1 for these equity securities is appropriate since they trade on a daily basis, are based on quoted market prices in active markets and based upon unadjusted prices. Level 2 for the mutual funds is appropriate since they are not actively traded as of December 31, 2010 and as such were moved from Level 1 to Level 2 during 2010. The Company’s fixed maturity and equity securities portfolio is highly liquid and allows for a high percentage of the portfolio to be priced through pricing services.
The change in the fair value of ourthe Company’s Level 3 financial instrumentsequity securities, available-for-sale for the yearyears ended December 31, 2010 and 2009 (none at is summarized as follows:
| | Year Ended December 31, | |
| | 2010 | | | 2009 | |
| | | | | | |
Beginning balance | | $ | 35,000 | | | $ | - | |
| | | | | | | | |
Purchases | | | 42,500 | | | | 35,000 | |
| | | | | | | | |
Ending balance | | $ | 77,500 | | | $ | 35,000 | |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008):2010 and 2009
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 1, | | | Realized | | | Unrealized | | | | | | | | | | | December 31, | |
| | 2009 | | | Gains | | | Gains | | | Purchases | | | Transfers | | | 2009 | |
| | Balance | | | (Losses) | | | (Losses) | | | (Sales) | | | In (Out) | | | Balance | |
Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Private placement common stock | | $ | — | | | $ | — | | | $ | — | | | $ | 35,000 | | | $ | — | | | $ | 35,000 | |
| | | | | | | | | | | | | | | | | | |
Total equity securities | | $ | — | | | $ | — | | | $ | — | | | $ | 35,000 | | | $ | — | | | $ | 35,000 | |
| | | | | | | | | | | | | | | | | | |
3. | Fair Value Measurements (continued) |
Fair Value of Financial Instruments
The following disclosure contains the estimated fair values of financial instruments, as of December 31, 2010 and 2009 and 2008. are summarized as follows:
| | December 31, 2010 | | | December 31, 2009 | |
| | Carrying | | | Fair | | | Carrying | | | Fair | |
| | Value | | | Value | | | Value | | | Value | |
Assets | | | | | | | | | | | | |
Fixed maturity securities | | $ | 26,623,318 | | | $ | 26,623,318 | | | $ | 22,510,660 | | | $ | 22,510,660 | |
Equity securities | | | 529,314 | | | | 529,314 | | | | 448,484 | | | | 448,484 | |
Mortgage loans on real estate | | | | | | | | | | | | | | | | |
Residential | | | - | | | | - | | | | 110,000 | | | | 110,000 | |
Commercial | | | 1,156,812 | | | | 1,192,284 | | | | 1,255,953 | | | | 1,298,765 | |
Policy loans | | | 367,284 | | | | 367,284 | | | | 335,022 | | | | 335,022 | |
Other long-term investments | | | 6,886,529 | | | | 7,423,119 | | | | 4,975,188 | | | | 5,086,736 | |
Cash and cash equivalents | | | 12,985,278 | | | | 12,985,278 | | | | 7,080,692 | | | | 7,080,692 | |
Loans from premium financing | | | 1,143,977 | | | | 1,143,977 | | | | 2,749,830 | | | | 2,749,830 | |
| | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Policyholders' account balances | | $ | 30,261,070 | | | | 28,700,425 | | | $ | 24,417,483 | | | | 22,730,469 | |
Policy claims | | | 367,306 | | | | 367,306 | | | | 289,273 | | | | 289,273 | |
The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment was required to interpret market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.
| | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | Carrying | | | Fair | | | Carrying | | | Fair | |
| | Value | | | Value | | | Value | | | Value | |
Assets | | | | | | | | | | | | | | | | |
Fixed maturities | | $ | 22,510,660 | | | $ | 22,510,660 | | | $ | 18,207,905 | | | $ | 18,207,905 | |
Equity securities | | | 448,484 | | | | 448,484 | | | | 213,752 | | | | 213,752 | |
Mortgage loans on real estate | | | | | | | | | | | | | | | | |
Residential | | | 110,000 | | | | 110,000 | | | | — | | | | — | |
Commercial | | | 1,255,953 | | | | 1,298,765 | | | | 1,315,401 | | | | 1,315,401 | |
Investment real estate | | | 3,146,944 | | | | 3,146,944 | | | | 372,000 | | | | 372,000 | |
Policy loans | | | 335,022 | | | | 335,022 | | | | 253,092 | | | | 253,092 | |
Other long-term investments | | | 4,975,188 | | | | 5,086,736 | | | | 4,464,280 | | | | 4,464,280 | |
Cash and cash equivalents | | | 7,080,692 | | | | 7,080,692 | | | | 5,669,795 | | | | 5,669,795 | |
Loans from premium financing | | | 2,749,830 | | | | 2,749,830 | | | | 4,702,590 | | | | 4,702,590 | |
| | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | |
Policyholders’ account balances | | $ | 24,417,483 | | | | 22,730,469 | | | | 21,189,567 | | | | 21,189,567 | |
Policy claims | | | 289,273 | | | | 289,273 | | | | 343,469 | | | | 343,469 | |
The following methods and assumptions were used in estimating the “fair value” disclosures for financial instruments in the accompanying financial statements and notes thereto:
Fixed MaturitiesMaturity and Equity Securities
The fair value of fixed maturitiesmaturity and equity securities are based on the principles previously discussed.discussed as Level 1, Level 2 and Level 3.
Mortgage Loans on Real Estate
The fair value of commercialvalues for mortgage loans are based uponestimated using discounted cash flow analyses, using the present valueactual spot rate yield curve in effect at the end of the expected future cash flows discounted at the appropriate rate for similar quality loans.
37
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008period.
3. FAIR VALUE MEASUREMENTS (continued)
Investment Real Estate
The fair value of investment real estate is based on cost, which approximates appraisal value.
Cash and Cash Equivalents and Policy loans
The carrying value of these financial instruments approximates their fair values.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
3. | Fair Value Measurements (continued) |
Other Long-Term Investments
Other long-term investments are comprised of lottery prize receivables and fair value is derived by using a discounted cash flow approach. Projected cash flows are discounted using applicable rates.
Loans from Premium Financing
The carrying value of loans from premium financing is net of unearned interest and any estimated loan losses and approximates fair value. Estimated loan losses were $443,071 and $318,826 and $21,305 atas of December 31, 20092010 and 2008,2009, respectively.
Investment Contracts —– Policyholders’ Account Balances
The fair value for liabilities under investment-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and the nonperformance risk of the liabilities.
The fair values for insurance contracts other than investment-type contracts are not required to be disclosed.
Policy Claims
The carrying amounts reported for these liabilities approximate their fair value.
4. CERTIFICATE OF DEPOSIT PLEDGED AND SPECIAL DEPOSITS
4. | Certificate of Deposit Pledged and Special Deposits |
TLIC has a $100,000 line$65,000 letter of credit from a bank. The lineletter of credit expires on December 31, 20102011 and interest is accrued on the outstanding principal balance at Bankbalance. The Company pledged a certificate of America’s Prime Rate.deposit with a market value of $65,000 as collateral for the letter of credit. There were no amounts borrowed against this letter of credit. The lineletter of credit was obtained solely to secure the issuance of standby letters of credit. The standby letters of credit are used to guarantee reserve credits taken by Optimum Re Insurance Company (“Optimum Re”). At December 31, 2009 for TLIC and December 31, 2008 for FLAC there was a $65,000 letter of credit secured by the line of credit agreement. The Company pledged certificate of deposits with a market value of $65,000 as collateral for the letter of credit. There were no amounts borrowed against this line of credit.
TLIC is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At December 31, 20092010 and 2008,2009, these required deposits totaled $2,643,506 and $2,393,687, and $2,422,622, respectively.
5. LOANS FROM PREMIUM FINANCING
5. | Loans from Premium Financing |
The Company finances amounts up to 80% of the premium on casualty insurance policies after a 20% or greater down payment is made by the policy owner. The premiums financed are collateralized by the amount of the unearned premium of the insurance policy. Policies that become delinquent are submitted for cancellation and recovery of the unearned premium, up to the amount of the loan balance, 25 days after a payment becomes delinquent. Loans from premium financing are carried net of unearned interest and any estimated loan losses.
38
Unearned interest was $35,519 and $72,144 as of December 31, 2010 and 2009, respectively. Allowances for loan losses were $443,071 and $318,826 at December 31, 2010 and 2009, respectively.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 20092010 and 20082009
5. LOANS FROM PREMIUM FINANCING (continued)
Unearned interest was $72,144 and $124,950 at December 31, 2009 and 2008, respectively. Allowances for loan losses were $318,826 and $21,305 at December 31, 2009 and 2008, respectively.5. | Loans from Premium Financing (continued) |
The following table presents the company’s credit losses related to loans from premium financing atas of December 31, 2010 and 2009 and 2008.is summarized as follows:
| | | | | | | | | |
| | 2009 | | 2008 | | | December 31, 2010 | | | December 31, 2009 | |
Allowance at beginning of period | | $ | 21,305 | | $ | 3,500 | | | $ | 318,826 | | | $ | 21,305 | |
Additions charged to operations | | 297,521 | | 17,805 | | | | 124,245 | | | | 297,521 | |
| | | | | | | | | | | | | |
Allowance at end of period | | $ | 318,826 | | $ | 21,305 | | | $ | 443,071 | | | $ | 318,826 | |
| | | | | | |
On August 6, 2009, the Company was made aware of potentially fraudulent loans and financial transactions made by an independent agency that did business with the Company’s wholly owned subsidiary, FTCC. The fraudulent loans and financial transactions totaled $1,293,450. The independent agency and its owner have assigned assets having an estimated fair value of $622,377 to cover loan losses. Assets received were mortgage loan on real estate of $110,000, investment real estate of $141,483, property and equipment including an office building of $24,017, furniture and equipment of $2,000, accounts of property and casualty insurance agency of $150,000 and accounts receivable of $194,877.
Additionally,
In addition, the independent agency endorsed and deposited $326,479 of checks issued by FTCC in the agency’s bank account that were payable to other third parties for insurance premiums. FTCC recovered these funds from the banks due to improper endorsement.
FTCC recorded losses related to loans originated by this agency net of assets received of $344,594 that has been recognized in the December 31, 2009 financial statements. FTCC and the Company continuecontinued to investigate the facts and circumstances relating to any fraudulent loans and financial transactions in 2010 and will continue to seek restitution for any losses.
6. DEFERRED POLICY ACQUISITION COST
6. | Deferred Policy Acquisition Costs |
The balances of and changes in deferred acquisition costs as of and for the years ended December 31, 2010 and 2009 are summarized as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
Balance, beginning of year | | $ | 898,134 | | | $ | 459,515 | |
Capitalization of commissions, sales and issue expenses | | | 1,478,104 | | | | 553,292 | |
Amortization | | | (452,960 | ) | | | (114,673 | ) |
Deferred acquisition costs allocated to investment | | | (4,284 | ) | | | — | |
| | | | | | |
Balance, end of year | | $ | 1,918,994 | | | $ | 898,134 | |
| | | | | | |
39
| | 2010 | | | 2009 | |
Balance, beginning of year | | $ | 1,918,994 | | | $ | 898,134 | |
Capitalization of commissions, sales and issue expenses | | | 1,773,199 | | | | 1,478,104 | |
Amortization | | | (451,349 | ) | | | (452,960 | ) |
Deferred acquisition costs allocated to investment | | | (6,559 | ) | | | (4,284 | ) |
| | | | | | | | |
Balance, end of year | | $ | 3,234,285 | | | $ | 1,918,994 | |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 20092010 and 20082009
7. FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with FTCC and does not file a consolidated return with TLIC. TLIC is taxed as a life insurance company under the provisions of the Internal Revenue Code and must file a separate tax return until they have been a member of the filing group for five years.
There was no current federal income tax expense for the years 20092010 and 2008.2009.
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets atas of December 31, 2010 and 2009 and 2008 are summarized as follows:
| | | | | | | | | |
| | December 31, | | | December 31, | |
| | 2009 | | 2008 | | | 2010 | | | 2009 | |
Deferred tax liabilities: | | | | | | | |
Net unrealized investment gains | | $ | — | | $ | 1,408 | | | $ | 305,433 | | | $ | - | |
Deferred policy acquisition costs | | 147,097 | | 71,555 | | | | 386,061 | | | | 147,097 | |
Premiums receivable | | 18,335 | | 18,467 | | |
Reinsurance recoverable | | 173,561 | | 9,153 | | | | 195,007 | | | | 173,561 | |
Investment real estate | | 19,487 | | 19,487 | | | | 31,902 | | | | 19,487 | |
Other long term investments | | 37,216 | | 46,718 | | |
Value of business acquired | | 555,745 | | 501,990 | | |
Other long-term investments | | | | 28,275 | | | | 37,216 | |
Value of insurance business acquired | | | | 501,452 | | | | 555,745 | |
Property and equipment | | 11,920 | | 9,268 | | | | 878 | | | | 11,920 | |
Other | | | | 3,758 | | | | 18,335 | |
| | | | | | | | | | | | | |
Total deferred tax liabilities | | 963,361 | | 678,046 | | | | 1,452,766 | | | | 963,361 | |
| | | | | | | | | |
Deferred tax assets: | | | | | | | | | |
Net unrealized investment losses | | 35,001 | | 758,673 | | | | - | | | | 34,999 | |
Policy reserves and contract liabilities | | 277,276 | | 205,536 | | |
Policyholders' account balance and future policy benefits | | | | 598,161 | | | | 277,276 | |
Policy claims | | 14,664 | | 7,827 | | | | 21,588 | | | | 14,664 | |
Other | | 4,519 | | 4,089 | | | | 36,454 | | | | 4,521 | |
Alternative minimum tax carryforward | | | | 2,155 | | | | - | |
Net operating loss carryforward | | 1,644,319 | | 1,192,024 | | | | 1,790,233 | | | | 1,644,319 | |
Net capital loss carryforward | | 26,995 | | — | | | | 199,099 | | | | 26,995 | |
| | | | | | | | | | | | | |
Total deferred tax assets | | 2,002,774 | | 2,168,149 | | | | 2,647,690 | | | | 2,002,774 | |
| | | | | | | | | |
Valuation allowance | | | (1,198,728 | ) | | | (1,035,279 | ) | | | (1,488,145 | ) | | | (1,198,728 | ) |
| | | | | | | | | | | | | |
Net deferred tax assets | | 804,046 | | 1,132,870 | | | | 1,159,545 | | | | 804,046 | |
| | | | | | | | | | | | | |
Net deferred tax liabilities (assets) | | $ | 159,315 | | $ | (454,824 | ) | |
| | | | | | |
Net deferred tax liabilities | | | $ | 293,221 | | | $ | 159,315 | |
FTFC has net operating loss carry forwards of approximately $3,525,000,$4,376,897 expiring in 2019 through 2024,2025. TLIC has net operating loss carry forwards of approximately $1,008,000,$1,510,442, expiring in 20212018 through 2024.2025. Net operating loss carry forwards of $1,219,940,$926,226 (included in the TLIC amount above), expiring in 20172018 through 2023 and capital loss carry forwards of $63,727, expiring in 2011 and 2013, that may beremain from the acquisition of FLAC are available to offset future taxable income were acquired in the acquisitionincome. The utilization of FLAC and the use of thesethose losses areis restricted by the tax laws and some or all of the losses may not be available for use.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
7. | Federal Income Taxes (continued) |
The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, have not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 20062007 through 20092010 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.
40
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
TLIC participates in reinsurance in order to provide risk diversification, additional capacity for future growth and limit the maximum net loss potential arising from large risk. TLIC reinsures all amounts of risk on any one life in excess of $55,000 for individual life insurance with Investors Heritage Life Insurance Company, Munich American Reassurance Company, Optimum Re and Wilton RE.Re.
TLIC is a party to an Automatic Retrocession Pool Agreement (the “Reinsurance Pool”) with Optimum Re, Catholic Order of Foresters, American Home Life Insurance Company and Woodmen of the World. The agreement provides for automatic retrocession of coverage in excess of Optimum Res’Re’s retention on business ceded to Optimum Re by the other parties to the Reinsurance Pool. TLIC’s maximum exposure on any one insured under the Reinsurance Pool is $50,000. As of January 1, 2008, the Reinsurance Pool stopped accepting new cessions.
Effective September 29, 2005, FLAC and Wilton Re executed a binding letter of intent whereby both parties agreed that FLAC would cede the simplified issue version of its Golden Eagle Whole Life (Final Expense) product to Wilton Re on a 50/50 quota share original term coinsurance basis. The letter of intent was executed on a retroactive basis to cover all applicable business issued by FLAC subsequent to January 1, 2005. Wilton Re agreed to provide various commission and expense allowances to FLAC in exchange for FLAC ceding 50% of the applicable premiums to Wilton Re as they are collected. As of June 24, 2006, Wilton Re terminated the reinsurance agreement for new business issued after the termination date.
To the extent that the reinsurance companies are unable to meet their obligations under the reinsurance agreements, TLIC remain primarily liable for the entire amount at risk.
Reinsurance assumed and ceded amounts for TLIC for 2010 and 2009 are summarized as follows:
| | | | | | | | | | | | | | | | |
| | 2009 | | | 2008 | |
| | TLIC | | | Old TLIC | | | FLAC | | | Total | |
Premiums assumed | | $ | 31,943 | | | $ | — | | | $ | — | | | $ | — | |
Benefits assumed | | | 10,599 | | | | — | | | | — | | | | — | |
Commissions and expense allowances | | | 113 | | | | — | | | | — | | | | — | |
Reserve credits assumed | | | 48,319 | | | | — | | | | 47,979 | | | | 47,979 | |
Inforce amount assumed | | | 25,916,794 | | | | — | | | | 27,972,812 | | | | 27,972,812 | |
| | | | | | | | | | | | | | | | |
Premiums ceded | | | 548,986 | | | | 8,379 | | | | — | | | | 8,379 | |
Commissions and expense allowances | | | 31,604 | | | | — | | | | — | | | | — | |
Benefits ceded | | | 222,425 | | | | 15,761 | | | | — | | | | 15,761 | |
Reserve credits ceded | | | 785,411 | | | | 3,899 | | | | 547,836 | | | | 551,735 | |
Inforce amount ceded | | | 47,349,732 | | | | 23,576,690 | | | | 20,716,162 | | | | 44,292,852 | |
9. PROPERTY AND EQUIPMENT | | 2010 | | | 2009 | |
Premiums assumed | | $ | 32,157 | | | $ | 31,943 | |
Commissions and expense allowances | | | 120 | | | | 113 | |
Benefits assumed | | | 5,593 | | | | 10,599 | |
Reserve credits assumed | | | 50,147 | | | | 48,319 | |
Inforce amount assumed | | | 24,807,969 | | | | 25,916,794 | |
| | | | | | | | |
Premiums ceded | | | 389,866 | | | | 416,282 | |
Commissions and expense allowances | | | 26,796 | | | | 31,604 | |
Benefits ceded | | | 238,828 | | | | 222,425 | |
Reserve credits ceded | | | 731,031 | | | | 785,411 | |
Inforce amount ceded | | | 44,869,095 | | | | 47,349,732 | |
TLIC’s home office property that appeared on the balance sheet in property and equipment at December 31, 2008 was leased to a third party in December 2009 and was reclassified due to the change of usage in December 2009 and now appears as investment real estate.
41
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 20092010 and 20082009
9. PROPERTY AND EQUIPMENT (continued)
A summary of property9. | Property and Equipment |
Property and equipment atas of December 31, 2010 and 2009 and 2008 is summarized as follows:
| | | | | | | | |
| | 2009 | | | 2008 | |
Land and improvements | | $ | 27,064 | | | $ | 2,679,000 | |
Furniture and fixtures | | | 100,990 | | | | 97,990 | |
| | | | | | |
Total property and equipment | | | 128,054 | | | | 2,776,990 | |
| | | | | | |
Less — accumulated depreciation | | | (45,705 | ) | | | (29,168 | ) |
| | | | | | |
Property and equipment net of accumulated depreciation | | $ | 82,349 | | | $ | 2,747,822 | |
| | | | | | |
10. LEASES | | December 31, 2010 | | | December 31, 2009 | |
Land and improvements | | $ | - | | | $ | 27,064 | |
Furniture and fixtures | | | 161,904 | | | | 100,990 | |
| | | | | | | | |
Total property and equipment | | | 161,904 | | | | 128,054 | |
Less - accumulated depreciation | | | (59,530 | ) | | | (45,705 | ) |
| | | | | | | | |
Property and equipment net of accumulated depreciation | | $ | 102,374 | | | $ | 82,349 | |
The Company leasesleased approximately 2,517 square feet of office space pursuant to a three-year lease that began July 1, 2008, leased approximately 200 square feet on a month to monthmonth-to-month basis during 2009 and leased 950 square feet of office space effective December 15, 2009 that terminatesterminated December 31, 2010. On June 17, 2010, the Company agreed to lease an additional 4,252 square feet of expansion office space whereby effective October 1, 2010, the Company would lease for five years a combined 6,769 square feet. Under the terms of the home office leases as amended, the monthly rent expense for the 2,517 square feet iswas $3,041 through June 30, 2009, $3,146 from July 1, 2009 through June 30, 2010, and $3,251 from July 1, 2010 through JuneSeptember 30, 20112010 and the$7,897 from October 1, 2010 through September 30, 2015. The month to month lease iswas $300 per month and the 950 square feet islease was $1,225 per month. The Company incurred rent expense of $43,809$72,855 and $31,562$43,809 for the years 20092010 and 2008,2009, respectively. Future minimum lease payments to be paid under non cancelable lease agreements are $53,084 and $19,507$94,764 for the years 20102011 through 2014 and 2011, respectively.$71,073 in 2015.
TLIC occupied approximately 7,500 square feet of its building in Topeka, Kansas until December 2009. Effective December 24, 2009, TLIC entered into a five year lease with a tenant for this space with an option to renew for five additional years. The monthly lease payments are as follows: $8,888 in 2010, are $8,888,$9,130 in 2011 and 2012 are $9,130 and $9,371 in 2013 and 2014 are $9,371.2014. TLIC has leased 10,000 square feet under a lease that was renewed during 2006 to run through June 30, 2011 with a 90 day notice to terminate the lease by the lessee. The lease agreement calls for minimum monthly base lease payments of $15,757.
Effective August 29, 2005, TLIC executed a lease agreement with a tenant for 2,500 square feet. The base lease period commenced on September 1, 2005 and will endended on August 31, 2010. The lease will automatically renew, if not terminatedrenewed on or after August 15, 2010, for another five years with a 90 day notice by the lessee to terminate the lease by the lessee.lease. The lease agreement callscalled for minimum monthly base lease payments of $4,332 through August 31, 2010. The lease payments will decreasedecreased to $3,100 per month for the period September 1, 2010 through August 31, 2015.
The future minimum lease payments to be received under the above non cancelable lease agreements are approximately $142,170, $109,563, $109,563, $112,461$241,302, $146,760, $149,652, $149,652 and $112,461$24,800 for the years 20102011 through 2014, respectively.2015, respectively
11. SHAREHOLDERS’ EQUITY AND STATUTORY ACCOUNTING PRACTICES
11. | Shareholders’ Equity and Statutory Accounting Practices |
The insurance subsidiary is domiciled in Oklahoma and prepares its statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Oklahoma Department of Insurance.Insurance Department. Prescribed statutory accounting practices include publications of the NAIC, state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Statutory accounting practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions and valuing investments, deferred taxes, and certain assets on a different basis.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
11. | Shareholders’ Equity and Statutory Accounting Practices(continued) |
The statutory net loss for TLIC amounted to $449,123 and $882,176 for the yearyears ended December 31, 2009. The statutory net loss for Old TLIC was $238,936 for the year ended December 31, 2008.2010 and 2009, respectively. The statutory surplus of TLIC was $4,316,574 and $4,327,428 atas of December 31, 2010 and 2009, and the statutory surplus of Old TLIC and FLAC at December 31, 2008 was $2,242,226 and $2,700,455, respectively.
42
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
11. SHAREHOLDERS’ EQUITY AND STATUTORY ACCOUNTING PRACTICES (continued)
Old TLIC and TLIC are subject to Oklahoma laws and FLAC was subject to Kansas laws which limit the amount of dividends that insurance companies can pay to stockholders without approval of the respective DepartmentDepartments of Insurance. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the lesser of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is no capacity to pay a dividend in 20102011 without prior approval. There were no dividends paid or a return of capital to the parent company in 20092010 and 2008.2009.
12. SEGMENT DATA
FASB guidance requires a “management approach” (how management internally evaluates
Given the operating performancelimited nature of its business units) ineach subsidiary’s operations, the presentation of business segments. The segment data that follows has been prepared in accordance with this guidance.
The Company operates in three segments as shown in the following table. The Company has a life insurance segment, consisting of the operations of TLIC, and a premium financing segment, consisting of the operations of FTCC and SIS. The asset segment for year 2008 information includes values relating to FLAC allocated to the life and annuity insurance operations. Results for the parent company, after elimination of intercompany amounts, are allocated to the corporate segment. The Company’s three operating segments for the years ended December 31, 2010 and 2009 are summarized as follows:
| | | | | | | | |
| | For the years ended December 31, | |
| | 2009 | | | 2008 | |
Revenues: | | | | | | | | |
Life and annuity insurance operations | | $ | 7,898,665 | | | $ | 1,619,020 | |
Premium finance operations | | | 642,729 | | | | 505,543 | |
Corporate operations | | | 1,398 | | | | 116,845 | |
| | | | | | |
Total | | $ | 8,542,792 | | | $ | 2,241,408 | |
| | | | | | |
| | | | | | | | |
Income (loss) before income taxes: | | | | | | | | |
Life and annuity insurance operations | | $ | 219,889 | | | $ | (132,603 | ) |
Premium finance operations | | | (619,613 | ) | | | 913 | |
Corporate operations | | | (441,528 | ) | | | (373,994 | ) |
| | | | | | |
Total | | $ | (841,252 | ) | | $ | (505,684 | ) |
| | | | | | |
| | | | | | | | |
Depreciation and amortization expense: | | | | | | | | |
Life and annuity insurance operations | | $ | 858,035 | | | $ | 118,336 | |
Premium finance operations | | | 5,218 | | | | 3,611 | |
Corporate operations | | | 2,843 | | | | 3,544 | |
| | | | | | |
Total | | $ | 866,096 | | | $ | 125,491 | |
| | | | | | |
| | | | | | | | | | Year Ended December 31, | |
| | December 31, | | December 31, | | | 2010 | | | 2009 | |
| | 2009 | | 2008 | | |
Segment asset information as of: | | |
Assets: | | |
Revenues: | | | | | | | |
Life and annuity insurance operations | | $ | 45,153,138 | | $ | 37,823,321 | | | $ | 8,495,479 | | | $ | 7,898,665 | |
Premium finance operations | | 3,925,683 | | 4,867,683 | | | | 323,816 | | | | 642,729 | |
Corporate operations | | 738,022 | | 889,913 | | | | 2,011 | | | | 1,398 | |
| | | | | | | | | | | | | |
Total | | $ | 49,816,843 | | $ | 43,580,917 | | | $ | 8,821,306 | | | $ | 8,542,792 | |
Income (loss) before income taxes: | | | | | | | | | |
Life and annuity insurance operations | | | $ | 736,035 | | | $ | 219,889 | |
Premium finance operations | | | | (340,395 | ) | | | (619,613 | ) |
Corporate operations | | | | (510,830 | ) | | | (441,528 | ) |
| | | | | | | | | | | | | |
Total | | | $ | (115,190 | ) | | $ | (841,252 | ) |
Depreciation and amortization expense: | | | | | | | | | |
Life and annuity insurance operations | | | $ | 792,490 | | | $ | 858,035 | |
Premium finance operations | | | | 7,363 | | | | 5,218 | |
Corporate operations | | | | 4,729 | | | | 2,843 | |
| | | | | | | | | |
Total | | | $ | 804,582 | | | $ | 866,096 | |
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| | December 31, | |
| | 2010 | | | 2009 | |
Assets: | | | | | | |
Life and annuity insurance operations | | $ | 55,436,841 | | | $ | 45,153,138 | |
Premium finance operations | | | 3,247,530 | | | | 3,925,683 | |
Corporate operations | | | 2,904,490 | | | | 738,022 | |
Total | | $ | 61,588,861 | | | $ | 49,816,843 | |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 20092010 and 20082009
13. ACQUISITION OF FIRST LIFE AMERICA CORPORATIONPursuant
The components of comprehensive income, net of related federal income taxes and adjustments to the terms of a stock purchase agreement, on December 23, 2008, the Company acquired 100% of the outstanding common stock of First Life America Corporation from an unaffiliated company (the “FLAC Acquisition”). The FLACdeferred acquisition was accounted for as a purchase. Results of operations are not included in the consolidated financial statementscosts, for the year ended December 31, 2008. The Company acquired FLAC to expand its insurance operations in additional states2010 and FLAC had insurance policies in force similar to the product that TLIC is currently selling.
The aggregate purchase price for the FLAC acquisition was approximately $2,695,000 (including direct cost associated with the acquisition of approximately $195,000). The FLAC acquisition was financed with the working capital of FTFC. On December 31, 2008, FTFC made FLAC a 15 year loan in the form of a surplus note in the amount of $250,000 with an interest rate of 6%, with interest payable monthly. In the event of liquidation, and in all other situations, the claims under the surplus note2009 are subordinated to policyholder, claimant and beneficiary claims as well as debts owed to all other classes of creditors, other than surplus note holders, and that all repayment of principal and payment of interest are not payable and shall not be paid until approved by the Kansas Insurance Commissioner.
The acquisition of FLAC is summarized as follows:
| | | | |
Assets acquired: | | | | |
Fixed maturities | | $ | 17,878,764 | |
Equity securities | | | 213,752 | |
Commercial mortgage loans | | | 1,315,401 | |
Investment real estate | | | 372,000 | |
Policy loans | | | 253,092 | |
Other long term investments | | | 4,464,280 | |
Cash and cash equivalents | | | 971,359 | |
Certificate of deposit | | | 100,000 | |
Accrued investment income | | | 344,671 | |
Recoverable from reinsurers | | | 857,291 | |
Value of insurance business acquired | | | 2,509,950 | |
Property and equipment | | | 2,679,000 | |
Deferred federal tax asset | | | 456,232 | |
Other assets | | | 363,615 | |
| | | |
| | $ | 32,779,407 | |
| | | |
| | | | |
Liabilities acquired: | | | | |
Policyholders’ account balances | | | 20,803,147 | |
Future policy benefits | | | 8,395,450 | |
Policy claims | | | 288,819 | |
Other liabilities | | | 596,757 | |
| | | |
| | | 30,084,173 | |
| | | |
| | | | |
Fair value of net assets acquired | | $ | 2,695,234 | |
| | | |
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| | Year Ended December 31, | |
| | 2010 | | | 2009 | |
Net income (loss) | | $ | 91,336 | | | $ | (890,391 | ) |
| | | | | | | | |
Total net unrealized gains arising during the period | | | | | | | | |
| | | 597,626 | | | | 2,677,901 | |
Less: Net realized investment gains (losses) | | | 159,300 | | | | (186,410 | ) |
| | | | | | | | |
Net unrealized gains | | | 438,326 | | | | 2,864,311 | |
| | | | | | | | |
Total comprehensive income | | $ | 529,662 | | | $ | 1,973,920 | |
First Trinity Financial CorporationRealized gains and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2009losses on the sales of investments are determined based upon the specific identification method and 2008include provisions for other-than-temporary impairments where appropriate.
13. ACQUISITION OF FIRST LIFE AMERICA CORPORATION (continued)
The following unaudited pro forma information has been prepared to present the results of operations of the Company assuming the acquisition of First Life America Corporation had occurred at the beginning of the years ended December 31, 2008. This pro forma information is supplemental and does not necessarily present the operations of the Company that would have occurred had the acquisitions occurred on those dates and may not reflect the operations that will occur in the future:14. | Concentrations of Credit Risk |
| | | | | | | | | | | | | | | | |
| | Historical | | | Historical | | | Pro Forma | | | | |
2008 (Unaudited) | | FTFC | | | FLAC | | | Adjustments | | | Pro Forma | |
Revenue | | $ | 2,241,408 | | | $ | 4,968,271 | | | $ | 275,867 | | | $ | 7,485,546 | |
Income (loss) before extraordinary items | | $ | (504,852 | ) | | $ | (933,867 | ) | | $ | 743,258 | | | $ | (695,461 | ) |
Net income (loss) | | $ | (504,852 | ) | | $ | (933,867 | ) | | $ | 743,258 | | | $ | (695,461 | ) |
| | | | | | | | | | | | | | | | |
Net loss per share | | $ | (0.09 | ) | | | | | | | | | | $ | (0.12 | ) |
14. CONCENTRATIONS OF CREDIT RISK
Credit risk is limited by diversifying the Company’s investments. The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insuranceinsurance Corporation currently insures accounts up to $250,000 at each banking institution.all non-interest bearings accounts. Other funds are invested in mutual funds that invest in U.S. government securities. Uninsured balances aggregate $1,975,925$2,192,570 at December 31, 2009.2010. The Company has not experienced any losses in such accounts. The company has lottery prize receivables due from the states of Massachusetts, New York and Illinois in the amountamounts of $2,345,406$2,489,977, $2,244,228 and $1,047,617,$863,519, respectively.
15. REVOLVING LINE OF CREDIT
15. | Revolving Line of Credit |
On April 30, 2009, FTCC renewed and modified its loan agreement with the First National Bank of Muskogee, to increase the revolving loan amount to $3,600,000. The loan bearsbore interest on the outstanding principal amount for each interest period at a rate per annum equal to the sum of the J.P. Morgan Chase Prime Rate at all times in effect plus the Prime Rate Margin of .25 of one percent. The rate shall havehad a floor of no less than 5% at any time. FTFC iswas a guarantor on the loan. The loan maturesmatured May 31, 2010. At December 31, 2009,2010 and was not renewed at the outstanding balance on the loan was $1.election of FTFC. The maximum amount that has beenwas borrowed iswhen the revolving loan was effective was $100,000.
16. CONTINGENT LIABILITIES
16. | Contingent Liabilities |
Guaranty fund assessments may be taken as a credit against premium taxes over a five-year period. These assessments, brought about by the insolvency of life and health insurers, are levied at the discretion of the various state guaranty fund associations to cover association obligations. It is management’s opinion that the effect of any future assessments would not be material to the financial position or results of operations of the Company because of the use of premium tax offsets.
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