United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20112012
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period From to .
Commission file number 000-52613
FIRST TRINITY FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
| Oklahoma | | 34-1991436 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer number) |
| | |
| 7633 East 63rd Place, Suite 230 | Tulsa, Oklahoma | 74133 |
| | (Address of principal executive offices) | |
(918) 249-2438
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
None
Securities registered pursuant to section 12(g) of the Exchange Act:
Title of Each Class
Common Stock, $.01 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer: ¨ Accelerated filer: ¨ Non accelerated filer: ¨ | Accelerated filer: ¨ | Non accelerated filer: ¨ | Smaller reporting company: x |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes o¨ No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
Because of the absence of an established trading market for the common stock, the registrant is unable to calculate the aggregate market value of the voting stock held by non-affiliates as of the last business day of the registrant’s most recently completed fiscal quarter.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Common stock $.01 par value as of March 26, 2011: 6,798,75811, 2013: 7,789,060 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement to be used in connection with its 20122013 Annual Meeting of Shareholders, which is expected to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Form 10-K, are incorporated by reference into Part III of this report.
FIRST TRINITY FINANCIAL CORPORATION
TABLE OF CONTENTS
| Part I | | | |
| | | |
| Item 1. | Business | | 4 |
| Item 2. | Properties | | 9 |
| Item 3. | Legal Proceedings | 9 | 10 |
| Item 4. | Submission of Matters to a Vote of Security HoldersMine Safety Disclosures | 9 | 10 |
| | | |
| Part II | | | |
| | | |
| Item 5. | Market for Regristrant’sRegistrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities | 9 | 11 |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations and Liquidity and Capital Resources | 10 | 12 |
| Item 8. | Financial Statements | 28 | 33 |
| Item 9. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure | 63 | 70 |
| Item 9A. | Controls and Procedures | 63 | 70 |
| Item 9B. | Other Information | 64 | 71 |
| | | |
| Part III | | | |
| | | |
| Item 10. | Directors, Executive Officers and Corporate Governance | 64 | 71 |
| Item 11. | Executive Compensation | 64 | 71 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | 71 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 64 | 71 |
| Item 14. | Principal AccountantAccounting Fees and Services.Services | 64 | 71 |
| Item 15. | Exhibits | 64 | 71 |
| Signatures | | 65 | 72 |
| Exhibit Index | | 67 | 73 |
Exhibit 21.1 | |
Exhibit 31.1 | |
Exhibit 31.2 | |
Exhibit 32.1 | |
Exhibit 32.2 | |
Exhibit No 101.INS | |
Exhibit No. 101.SCH | |
Exhibit No. 101.CAL | |
Exhibit No. 101.DEF | |
Exhibit No. 101.LAB | |
Exhibit No. 101.PRE | |
Exhibit 21.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit No 101.INS
Exhibit No. 101.SCH
Exhibit No. 101.CAL
Exhibit No. 101.DEF
Exhibit No. 101.LAB
Exhibit No. 101.PRE
PART 1 I
Item 1. Business
Business Development
First Trinity Financial Corporation (the “Company” or “FTFC") is the parent holding company of Trinity Life Insurance Company, Family Benefit Life Insurance Company, First Trinity Capital Corporation and Southern Insurance Services, LLC.
First Trinity Financial Corporation 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 $12,750,000, which included a 10% "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 was completed April 30, 2012. The Company raised $11,000,010 from this offering.
On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas, Missouri and South Dakota. The private placement is for 1,333,334600,000 shares of the Company’s common stock for $7.50$8.50 per share. All theseIf all shares were sold, as of February 17, 2012 and the Company has nowwould have received $8.5 million$4,335,000 after reduction for estimated offering expenses and sales commissions. The Company has registered an additional 133,334 shares of its common stock to cover over subscriptions. The Company is now selling these oversubscriptions. 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 was extended on June 28, 2011 and will end on June 28, 2012, unless all the Company’s shares are sold before then.expenses. As of December 31, 2011,2012, the Company hashad received gross proceeds of $9,271,215$536,095 from the subscription of 1,236,16263,070 shares of its common stock in this offeringprivate placement and incurred $1,404,300$232,921 in offering costs. The proceeds were originally deposited in an escrow account thatThis offering was released from escrow by the Oklahoma Department of Securities in August 2010 after the offering exceeded $1,000,000suspended on March 8, 2013 and resulted in gross proceeds. Proceedsproceeds of $620,245 from the salesubscription of 72,970 shares of the Company’sits common stock and incurred $290,163 in this public offering after August 2010 were available to the Company without being held in escrow.costs.
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”) and 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 had two wholly owned subsidiaries, First Trinity Capital Corporation (“FTCC”) and TLIC, domiciled in Oklahoma.
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 product is issued as either a simplified issue or as a graded benefit, determined by underwriting. TLIC also offers various annuity and deposit-type liability products. 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.
On October 20, 2011, Trinity Life Insurance Company announced that it had signed a transaction agreement to acquireTLIC purchased Family Benefit Life Insurance Company a life and annuity insurance company incorporated and domiciled in Missouri. Prior to October 20, 2011, the Company purchased 401,381 (“Family Benefit Life common shares. TLIC purchased all of the remaining 886,259 issued and outstanding shares of Family Benefit Life from its shareholders. The transaction price per share was $11.05 and was basedLife”) on Family Benefit Life’s statutory capital and surplus (presented in accordance with statutory accounting principles) as of September 30, 2011 and the number of common shares issued and outstanding as of September 30, 2011 plus a premium of approximately $3.7 million. The transaction was subject to completion of due diligence, the continuation of Family Benefit Life’s business in the ordinary course and certain other conditions.
Closing of the Family Benefit Life acquisition occurred between December 13, 2011 and December 28, 2011 as Trinity Life Insurance Company purchased the Family Benefit Life’s remaining 886,259 issued and outstanding shares from the Company’s shareholders.2011. Family Benefit Life is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in seven states. Family Benefit Life’s current product portfolio consists of whole life, term, accidental death and dismemberment, annuity, endowment and group life insurance products. The products are sold through independent agents in the states of Arizona, Colorado, Kansas, Missouri, Nebraska, New Mexico and Oklahoma. In late 2012, Family Benefit Life was initially licensed in the states of Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia.
FTCC was incorporated in 2006, and began operations in January 2007 providing financing for casualty insurance premiums.2007. 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.
The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC will not accept new premium financing contracts after June 30, 2012. FTCC will continue to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
The Company also owns 100% of Southern Insurance Services, LLC, (“SIS”), a limited liability company acquired in 2009, that operated as a property and casualty insurance agency through 2010 but currently has no operations.
The Company was a development stage company until commencing operations in 2007. Net losses of $3,480,907 occurred from 2004 through 2009. Those losses resulted primarily from costs incurred while raising capital and establishing the subsidiary companies as well as losses resulting from issuing and administering new and renewal life insurance policies. The Company’s operations produced combined net income of $7,451,329$8,553,210 in 2010, 2011 and 2011.2012. The Company has therefore had cumulative net income since inception of $3,850,422. $5,072,303.
The Company issued 323,777 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2011, however, that resulted in accumulated earnings (deficit) being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital. The Company also issued 378,928 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2012, that resulted in accumulated earnings being charged an additional $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital. The impact of thisthese two stock dividend chargecharges of $2,428,328$5,270,288 to accumulated earnings (deficit) decreased the balance of accumulated deficit as of December 31, 20112012 to $1,542,094.$197,985.
Acquisition of Other Companies
On December 23, 2008, FTFC acquired 100% of the outstanding common stock of First Life America Corporation from an unaffiliated company (the “FLAC acquisition”). The FLAC acquisition was accounted for as a purchase. 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% payable monthly, that was approved by the Oklahoma Insurance Department.
On December 28, 2011, TLIC acquired 100% of the outstanding common stock of Family Benefit Life from Family Benefit Life’s shareholders (the “Family Benefit Life acquisition”). The Family Benefit Life acquisition was accounted for as a purchase. The aggregate purchase price for the Family Benefit Life acquisition was $13,855,129. Given that the Family Benefit Life acquisition occurred in late December 2011, the acquisition only impacted the Company’s consolidated statement of financial position as of December 31, 2011 and not the Company’s consolidated statement of operations for the year ended December 31, 2011. Family Benefit Life’s 2012 operating results are reflected in the Company’s consolidated statement of operations for the year ended December 31, 2012.
TLIC acquiredTLIC's acquisition of 100% ownership of Family Benefit Life for $13,855,129 was paid in cash. The fair value of the net assets acquired in this transaction was $20,770,608. Since the fair value of the net assets acquired exceeded the purchase price for acquiring those net assets by $6,915,479, the residual was recorded in the consolidated statements of operations as a component of revenues captioned as “Gain from acquisition of Family Benefit Life” per the requirements of Financial Accounting Standards Board Codification Topic 805 “Business Combinations.” The reason for the gain from the acquisition of Family Benefit Life primarily related primarily to that company’sits management not being committed to wanting to rebuild theits marketing force of that company in the current2011 economic environment.
Financial Information about Segments
Our business is comprised of three primary operating business segments: Life and Annuity Insurance Operations, Premium Finance Operations and Corporate Operations. Results for the parent holding company, after elimination of intercompany amounts, are allocated to the corporate operations segment.
See Note 12 of the “Notes to Consolidated Financial Statements” for operating results of our segments for each of the years ended December 31, 20112012 and 2010.
Life and Annuity Insurance Operations
Our Life and Annuity Insurance Operations consists of issuing ordinary whole life insurance, modified premium whole life with an annuity rider, term, final expense, accidental death and dismemberment and annuity products. The policies 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,graded benefit, determined by underwriting.
TLIC entered into anrenewed its administrative services agreement with Investors Heritage Life Insurance Company (“IHLIC”) on January 11, 2007.August 28, 2012. Under the terms of this agreement, IHLIC provided services that includedinclude underwriting, actuarial, policy issue, accounting, claims processing and other services incidental to the operations of OLD TLIC. The agreement wasis effective for a period of five (5) years. However, the agreement was terminated after the merger with FLACyears from September 1, 2012 through August 31, 2017 and replaced with a new TLIC administrative services agreement dated May 28, 2009 that provides the same services as the terminated agreement with Old TLIC. The new agreement terminated on January 31, 2012 and is now on a month-to-month basis as a new agreement is being negotiated with virtually the same terms as the previous agreement that will likely includeincludes a provision that the agreement may be terminated at any time by either party with a 180 day prior notice.
WeFamily Benefit Life entered into an administrative services agreement with IHLIC on November 28, 2012. Under the terms of this agreement, IHLIC provided services include underwriting, actuarial, policy issue, accounting, claims processing and other services incidental to the operations of FBLIC. The agreement is effective for a period of five (5) years from November 1, 2012 through October 31, 2017 and includes a provision that the agreement may be terminated at any time by either party with a 180 day prior notice.
FTFC entered into an administrative services agreement with IHLIC on January 7, 2011. Under the terms of this agreement, IHLIC provides services incidental to the operation of FTFC as a financial holding company. The agreement is effective for a period of five (5) years from January 1, 2011 through December 31, 2015 and includes a provision that the agreement may be terminated at any time by either party with a 180 day prior notice.
TLIC continues to seek to serve middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas. The majority of ourits inforce business resultsresulted from the acquisition of FLAC. We market ourTLIC markets its products through independent agents. TheWith the acquisition of Family Benefit Life will allow us to expand during 2012in late 2011, we expanded into the additional states of Arizona, Colorado, Missouri and New Mexico. In late 2012, Family Benefit Life was initially licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia.
The following table sets forth our direct collected life insurance premiums and annuity considerations by the policyholder’s state of residence at the time of premium collection, for each statethe most significant states in which we are licensed, for the years ended December 31, 20112012 and 2010,2011, in accordance with statutory accounting practices prescribed by the states of domicile of TLIC.TLIC and Family Benefit Life.
| | | 2011 | | | 2012 | |
| State | | Life | | | | | | Annuity | | | | | | Life | | | | | | Annuity | | | | |
| Illinois | | $ | 662,596 | | | | 10 | % | | $ | 233,200 | | | | 2 | % | | $ | 759,462 | | | | 10 | % | | $ | 271,584 | | | | 2 | % |
| Kansas | | | 2,027,065 | | | | 31 | % | | | 4,416,651 | | | | 29 | % | | | 2,216,328 | | | | 28 | % | | | 3,353,559 | | | | 24 | % |
| Kentucky | | | 117,781 | | | | 2 | % | | | - | | | | 0 | % | | | 157,717 | | | | 2 | % | | | - | | | | 0 | % |
| Missouri | | | | 672,018 | | | | 8 | % | | | 686,815 | | | | 5 | % |
| Nebraska | | | 127,653 | | | | 2 | % | | | 768,952 | | | | 5 | % | | | 200,166 | | | | 3 | % | | | 1,568,425 | | | | 11 | % |
| North Dakota | | | 141,904 | | | | 2 | % | | | 3,491,223 | | | | 23 | % | | | 139,999 | | | | 2 | % | | | 1,604,688 | | | | 11 | % |
| Ohio | | | 709,532 | | | | 11 | % | | | 25,600 | | | | 0 | % | | | 802,968 | | | | 10 | % | | | 142,100 | | | | 1 | % |
| Oklahoma | | | 1,615,111 | | | | 24 | % | | | 1,466,488 | | | | 10 | % | | | 1,728,591 | | | | 21 | % | | | 1,479,199 | | | | 11 | % |
| Texas | | | 1,090,481 | | | | 17 | % | | | 4,769,022 | | | | 31 | % | | | 1,163,941 | | | | 15 | % | | | 4,730,831 | | | | 34 | % |
| All other | | | 98,814 | | | | 1 | % | | | 65,508 | | | | 0 | % | | | 113,223 | | | | 1 | % | | | 185,013 | | | | 1 | % |
| Total direct collected premium | | $ | 6,590,937 | | | | 100 | % | | $ | 15,236,644 | | | | 100 | % | | $ | 7,954,413 | | | | 100 | % | | $ | 14,022,214 | | | | 100 | % |
| | | 2010 | | | 2011 | |
| State | | Life | | | | | | Annuity | | | | | | Life | | | | | | Annuity | | | | |
| Illinois | | $ | 504,128 | | | | 8 | % | | $ | 11,500 | | | | 0 | % | | $ | 662,596 | | | | 10 | % | | $ | 233,200 | | | | 2 | % |
| Kansas | | | 1,912,919 | | | | 30 | % | | | 2,596,393 | | | | 42 | % | | | 2,027,065 | | | | 31 | % | | | 4,416,651 | | | | 29 | % |
| Kentucky | | | 105,531 | | | | 2 | % | | | - | | | | 0 | % | | | 117,781 | | | | 2 | % | | | - | | | | 0 | % |
| Nebraska | | | 108,450 | | | | 2 | % | | | 6,500 | | | | 0 | % | | | 127,653 | | | | 2 | % | | | 768,952 | | | | 5 | % |
| North Dakota | | | 120,800 | | | | 2 | % | | | 1,793,832 | | | | 29 | % | | | 141,904 | | | | 2 | % | | | 3,491,223 | | | | 23 | % |
| Ohio | | | 605,955 | | | | 9 | % | | | 600 | | | | 0 | % | | | 709,532 | | | | 10 | % | | | 25,600 | | | | 0 | % |
| Oklahoma | | | 1,836,252 | | | | 29 | % | | | 985,933 | | | | 16 | % | | | 1,615,111 | | | | 25 | % | | | 1,466,488 | | | | 10 | % |
| Texas | | | 1,027,304 | | | | 16 | % | | | 831,800 | | | | 13 | % | | | 1,090,481 | | | | 17 | % | | | 4,769,022 | | | | 31 | % |
| All other | | | 95,760 | | | | 2 | % | | | 12,185 | | | | 0 | % | | | 98,814 | | | | 1 | % | | | 65,508 | | | | 0 | % |
| Total direct collected premium | | $ | 6,317,099 | | | | 100 | % | | $ | 6,238,743 | | | | 100 | % | | $ | 6,590,937 | | | | 100 | % | | $ | 15,236,644 | | | | 100 | % |
Reinsurance
TLIC cedes reinsurance under various agreements allowing management to control exposure to potential losses arising from large risks and providing additional capacity for growth and risk diversification. 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 Life Company and Wilton Reassurance Company.
TLIC is a party to an Automatic Retrocession Pool Agreement (the “Reinsurance Pool”) with Optimum Re Life Company, 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 Re Life Company’s retention on business ceded to Optimum Re Life Company 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 Reassurance Company 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 Reassurance Company 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 Reassurance Company agreed to provide various commission and expense allowances to FLAC in exchange for FLAC ceding 50% of the applicable premiums to Wilton Reassurance Company as they were collected. As of June 24, 2006, Wilton Reassurance Company terminated the reinsurance agreement for new business issued after the termination date.
Family Benefit Life assumesalso participates in reinsurance fromin order to provide risk diversification, additional capacity for future growth and ceded insurance to other insurers and reinsurers under various contracts that cover individual risks or entire classes of business. These reinsurance arrangements provide greater diversification of business and minimize losseslimit the maximum net loss potential arising from large risks or from hazardsrisk. Family Benefit Life reinsures initial amounts of an unusual nature. risk on any one life in excess of $50,000 for individual life insurance with Optimum Re. Family Benefit Life also reinsures its accidental death benefit portion of their life policies under a bulk agreement with Optimum Re.
Family Benefit Life participates in the Servicemen Group Life Insurance Pool, administered by Prudential Life Insurance Company, in which it assumes group life insurance on a percentage based on the total inforce amount of participating companies. The group plan permits conversion to permanent insurance with the initial face amount reinsured with the Office of Servicemembers Group Life Insurance.
To the extent that the reinsurance companies are unable to meet their obligations under the reinsurance agreements, TLIC and Family Benefit Life remain primarily liable for the entire amount at risk.
Competition
The U.S. life insurance industry is a mature industry that, in recent years, has experienced little to no growth. Competition is intense because the life insurance industry is consolidating, with larger, more efficient and more effective organizations emerging from consolidation. In addition, legislation became effective in the United States that permits commercial banks, insurance companies and investment banks to combine. These factors have increased competitive pressures in general.
Many domestic life insurance companies have significantly greater financial, marketing and other resources, longer business histories and more diversified lines of insurance products than we do. We also face competition from companies marketing in person as well as with direct mail and Internet sales campaigns. Although we may be at a competitive disadvantage to these entities, we believe that our premium rates and policy features are generally competitive with those of other life insurance companies selling similar types of products.
Governmental Regulation
TLIC and Family Benefit Life, respectively, are subject to regulation and supervision by the Oklahoma Insurance Department (“OID”) and the Missouri Department of Insurance (“MDOI”). The insurance laws of Oklahoma and Missouri give the OID and MDOI broad regulatory authority, including powers to: (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus; and (x) regulate the type and amount of permitted investments.
TLIC and Family Benefit Life can be required, under the solvency or guaranty laws of most states in which it does business, to pay assessments (up to prescribed limits) to fund policyholder losses or liabilities of other insurance companies that become insolvent. These assessments may be deferred or foregone under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes.
TLIC is subject to Oklahoma and Missouri have enacted legislation which regulates insurance holding company systems, including acquisitions, extraordinary dividends, terms of affiliate transactions, and other related matters. Under the Oklahoma and Missouri statutes, TLIClaws and Family Benefit Life is subject to Missouri laws that limit the amount of dividends insurance companies can pay to stockholders without approval of the respective Departments of Insurance. The maximum dividend, which may not duringbe paid in any year pay dividends on common stocktwelve-month period without notification or approval, is limited to the parent company in excesslesser of 10% of statutory surplus as of December 31 of the lesser ofpreceding year or the net gain from operations for the preceding year or 10% of capital and surplus at the end of the preceding year, without the consent of the Oklahoma Commissioner of Insurance or Missouri Director of Insurance.calendar year. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is no capacity for TLIC to pay a dividend up to $377,777 in 20122013 without prior approval. However,In addition, based on thesethose limitations, there is the capacity for Family Benefit Life to pay a dividend up to $934,675$887,520 in 20122013 without prior approval. There were noFamily Benefit Life paid $1,515,975 of dividends paid or a returnto TLIC in 2012 and received permission from the Missouri Department of capitalInsurance to pay $581,300 of dividends in excess of the parent company in 2011 and 2010.$934,675 limitation.
There are certain factors particular to the life insurance business which may have an adverse effect on the statutory operating results of TLIC and Family Benefit Life. One such factor is that the costs associated with issuing a new policy in force is usually greater than the first year’s policy premium. Accordingly, in the early years of a new life insurance company, these initial costs and the required provisions for reserves often have an adverse effect on statutory operating results.
Premium Finance Operations
The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continues to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
The premium finance subsidiary, FTCC, provideshas provided premium financing to individuals and businesses. Many casualty insurance carriers require their premiums to be paid on an annual or lump sum basis. A premium finance company finances these casualty premiums. A typical premium finance contract requires the insured to pay 25% of the premium up front and the balance is paid over a nine month period. Premium financing is unique in that the unpaid balance due the company is lower than the unearned premium, which has in effect been assigned to the company in the event of non-payment, thus, the element of risk is minimized.
FTCC was capitalized with $4,000,000 from FTFC. The Company engages in the premium finance business, independent of its life insurance business. FTCC is licensed to conduct premium finance business in Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. Until the May 16, 2012 announcement discussed above, FTCC hashad historically contracted with over 200 insurance agencies to finance their casualty insurance premiums but is nowtwo years ago focused on financing with approximately 30 agencies primarily in Oklahoma. There iswas no guarantee that thesethose agencies willwould write premium financing contracts with FTCC. FTCC iswas not dependent on a single customer or a few major customers. During 2011, FTCC returned $1,000,000 of capital to FTFC. During 2012, FTCC returned $650,000 of capital to FTFC.
Premium finance companies are regulated by the individual states with no uniformity among state regulations. Commercial insurance premium finance transactions are not regulated directly in Oklahoma. Consumer insurance premium finance transactions are considered a consumer credit sale and are subject to the Oklahoma Uniform Consumer Credit Code. Therefore the regulation of the transaction is by the Oklahoma Department of Consumer Credit under the consumer credit laws. FTCC is regulated by the Department of Banking in Mississippi.
Finance companies are subject to interest rate fluctuations. An increase in the cost of funds or a decrease in interest rates that FTCC can chargecharged could affect the net return.profitability.
The premium financing business is highly competitive in every channel in which FTCC competes.competed. FTCC competescompeted with large financial institutions most of which may have greater financial, marketing and other resources than FTCC. FTCC has targeted the niche market of small businesses and individual consumers needing casualty insurance financing and facesfaced competition with many specialty financing businesses. Some competitors arewere affiliated with property and casualty writing agencies and may have advantageous marketing relationships with their affiliates.
SIS, a property and casualty insurance agency acquired in 2009, wrote commercial and personal lines of insurance, primarily in the state of Mississippi. SIS is no longer operating as a property and casualty insurance agency and currently has no operations.
Employees
As of March 26, 2012,11, 2013, the Company had thirteennine full-time employees and twoone part-time employees.employee.
The Company leased approximately 2,517leases 6,769 square feet of office space in Tulsa, Oklahoma pursuant to a three-yearfive-year lease that began JulyOctober 1, 20082010 and leased 950 square feet of office space effective December 15, 2009 that terminated 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,lease, the monthly rent expense for the 2,517 square feet was $3,041 through June 30, 2009, $3,146 from July 1, 2009 through June 30, 2010, $3,251 from July 1, 2010 through September 30, 2010 andis $7,897 from October 1, 2010 through September 30, 2015. The 950 square feet lease was $1,225 per month. The Company incurred rent expense of $72,809$76,136 and $73,155$72,809 for the years ended December 31, 2012 and 2011, respectively, under this lease and 2010, respectively.other minor leases. The Company received a $120,000 leasehold improvement allowance from the lessor that is being amortized over the non-cancellable lease term that reduced incurred rent expense by $25,263 for each of the years ended December 31, 2012 and 2011. Future minimum lease payments to be paid under non cancelable lease agreements are $94,764 for each of the years 2012 through2013 and 2014 and $71,073 in 2015.
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.
On December 24, 2009, TLIC entered into a five year lease of approximately 7,500 square feet of its building in Topeka, Kansas with an option for the lessee to renew the lease for five additional years. The monthly lease payments are as follows: $8,888 in 2010, $9,130 in 2011 and 2012 and $9,371 in 2013 and 2014.
TLIC has also leased 10,000 square feet in the Topeka, Kansas office building 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. This lease was renewed on July 1, 2011 to run through May 31, 2016. Beginning July 1, 2014, the lessee can terminate the lease with a 180 day written notice. The lease agreement calls for minimum monthly base lease payments of $17,535 beginning on July 1, 2011.$17,535.
Effective August 29, 2005, TLIC executed a lease agreement for 2,500 square feet of the Topeka, Kansas office building. The base lease period commenced on September 1, 2005 and ended on August 31, 2010. The lease automatically renewed on August 15, 2010, for another five years with a 90 day notice by the lessee to terminate the lease. The lease agreement called for minimum monthly base lease payments of $4,332 through August 31, 2010. The lease payments decreased 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 $360,072, $360,072, $235,220 and $87,675 for the years 2013 through 2016, respectively.
Family Benefit Life ownsowned approximately one and one-half acres of land located in Jefferson City, Missouri. A 6,100 square foot building (serving as Family Benefit Life’s headquarters) and a 2,200 square foot building (leased to a third party) have been constructedare on one acre of this land and the other 0.5 acreshalf acre is held for sale. In October 2012, both of the buildings were sold.
With respect to the 2,200 square foot building, located in Jefferson City Missouri, Family Benefit Life entered into a one-year lease beginning August 1, 2010 and ending July 31, 2011. The lease can becould have been renewed annually if no termination notice iswas given by either party on or before May 1. No notice was given by either party on May 1, 2011 or May 1, 2012 and therefore the lease was renewed for an additional one-year period.periods. The tenant payspaid Family Benefit Life $15,000 per year in monthly installments of $1,250.
In connection with the October 2012 sale of the two buildings, the underlying third party lease was transferred to the new owner. The future minimum lease payments to be received undernew owner also charged the above non cancelable lease agreements are $357,180, $360,072, $360,072, $235,220 and $87,675 forCompany $12,152 of rent during the years 2012 through 2016, respectively.last three months of 2012.
Item 3. Legal Proceedings
There are no material legal proceedings pending against the Company or its subsidiaries or of which any of their property is the subject. There are no proceedings in which any director, officer, affiliate or shareholder of the Company, or any of their associates, is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.
Item 4. Mine Safety Disclosures
Not applicable.None
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
Trading of the Company’s common stock is limited and an established public market does not exist.
(i) Holders
As of March 12, 2012 there were approximately 4,000 shareholders of the Company’s outstanding common stock.
(ii) Dividends
The Company has not paid any cash dividends since inception (April 19, 2004). The Board of Directors of the Company has not adopted a dividend payment policy; however, dividends must necessarily depend upon the Company's earnings and financial condition, applicable legal restrictions, and other factors relevant at the time the Board of Directors considers a dividend policy. Cash available for dividends to shareholders of the Company must initially come from income and capital gains earned on its investment portfolio and dividends paid by the Company’s subsidiaries.
Provisions of the Oklahoma Insurance Code relating to insurance holding companies subject transactions between the Company and TLIC and the Company and Family Benefit Life, including dividend payments, to certain standards generally intended to prevent such transactions from adversely affecting the adequacy of life insurance subsidiaries' capital and surplus available to support policyholder obligations. In addition, under the Oklahoma General Corporation Act, the Company may not pay dividends if, after giving effect to a dividend, it would not be able to pay its debts as they become due in the usual course of business or if its total liabilities would exceed its total assets.
On January 10, 2011, the Company’s Board of Directors approved a 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold. The dividend was payable to the holders of shares of the CorporationCompany as of March 10, 2011. Fractional shares were rounded to the nearest whole number of shares. The Company issued 323,777 shares in connection with the stock dividend that resulted in accumulated deficitearnings being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital.
On January 11, 2012, the Company’s Board of Directors approved another 5% share dividend by which shareholders will receivewhichshareholders received a share of Common Stockcommon stock for each 20 shares of common stock of the Company they hold.theyhold. The dividend iswas payable to the holders of shares of the CorporationCompany as of March 10, 2012. Fractional shares will bewere rounded to the nearest whole number of shares. It is anticipated that approximately 378,000The Company issued 378,928 shares will be issued in connection with the stock dividend that will resultresulted in accumulated deficitearnings being charged by approximately $2,835,000$2,841,960 with an offsetting credit of approximately $2,835,000$2,841,960 to common stock and additional paid-in capital.
(iii) Securities Authorized for Issuance Under Equity Compensation Plans
There are no plans under which equity securities are authorized for issuance.
(b) None
(c)No share repurchases were made.The Company repurchased 185,313 shares of its common stock from former members of the Board of Directors at a cost of $648,595 during 2012.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation and Liquidity and Capital ResourcesOperations
Overview
First Trinity Financial Corporation (“we” “us”, “our”, or the Company) conducts operations as an insurance holding company emphasizing ordinary life insurance products in niche markets and a premium finance company, financing casualty insurance premiums.
As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core TLIC operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense, term and annuity products to predominately middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas through independent agents. With the acquisition of Family Benefit Life in late 2011, we will be expandingexpanded into Arizona, Colorado, Missouri and New MexicoMexico. In late 2012, Family Benefit Life was initially licensed in 2012.Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia.
We also realize revenues from our investment portfolio, which is a key component of our operations. The revenues we collect as premiums from policyholders are invested to ensure future benefit payments under the policy contracts. Life insurance companies earn profits on the investment spread, which reflects the investment income earned on the premiums paid to the insurer between the time of receipt and the time benefits are paid out under policies. Changes in interest rates, changes in economic conditions and volatility in the capital markets can all impact the amount of earnings that we realize from our investment portfolio.
We provide financing for casualty insurance premiums through independent property and casualty insurance agents. We are licensed in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma.
The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continues to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
Recent Acquisitions
The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance business. In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of First Life America Corporation, included in the life insurance segment, for $2,500,000 and had additional acquisition related expenses of $195,000.
In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of Family Benefit Life Insurance Company, included in the life insurance segment, for $13,855,129. Given that the Family Benefit Life acquisition occurred in late December 2011, the acquisition only impacts the Company’s consolidated statement of financial position as of December 31, 2011 and not the Company’s consolidated statement of operations for the year ended December 31, 2011. Family Benefit Life’s 2012 operating results are reflected in the Company’s consolidated statement of operations for the year ended December 31, 2012.
Our profitability in the life insurance segment is a function of our ability to accurately price the policies that we write, adequately value life insurance business acquired and administer life insurance company acquisitions at an expense level that validates the acquisition cost. Profitability in the premium financing segment is dependent on the Company’s ability to compete in that sector, maintain low administrative costs and minimize losses. However, as introduced above, the Company has discontinued its premium financing operations and will completely exit that segment of the business on approximately July 1, 2013.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition, results of operations and liquidity and capital resources is based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We evaluate our estimates and assumptions continually, including those related to investments, deferred acquisition costs, loans from premium financing, allowance for loans losses from premium financing, value of insurance business acquired, policy liabilities, income taxes, regulatory requirements, contingencies and litigation. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies, judgments and estimates are the most critical to the preparation of our consolidated financial statements.
Investments in Fixed Maturities and Equity Securities
We hold fixed maturities and equity interests in a variety of companies. We continuously evaluate all of our investments based on current economic conditions, credit loss experience and other developments. We evaluate the difference between the cost/amortized cost and estimated fair value of our investments to determine whether any decline in fair value is other-than-temporary in nature. This determination involves a degree of uncertainty. If a decline in the fair value of a security is determined to be temporary, the decline is recognized in other comprehensive income (loss) within shareholders’ equity. If a decline in a security’s fair value is considered to be other-than-temporary, we then determine the proper treatment for the other-than-temporary impairment.
For fixed maturities, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security. The amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security. For equity securities, the amount of any other-than temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security.
The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security. It is not possible to accurately predict when it may be determined that a specific security will become impaired. Future adverse changes in market conditions, poor operating results of underlying investments and defaults on interest and principal payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future. In addition, if a change occurs in our intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that we will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result. If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, we amortize the reduced book value back to the security’s expected recovery value over the remaining term of the bond. We continue to review the security for further impairment that would prompt another write-down in the book value.
Deferred Policy Acquisition Costs
Commissions and other acquisition costs which vary with and are primarily related to the successful production of new and renewal insurance contracts are deferred and amortized in a systematic manner based on the related contract revenues or gross profits as appropriate. The recovery of deferred acquisition costs is dependent on the future profitability of the underlying business for which acquisition costs were incurred. Each reporting period, we evaluate the recoverability of the unamortized balance of deferred acquisition costs. We consider estimated future gross profits or future premiums; expected mortality or morbidity; interest earned and credited rates; persistency and expenses in determining whether the balance is recoverable.
If we determine a portion of the unamortized balance is not recoverable, it is immediately charged to amortization expense. The assumptions we use to amortize and evaluate the recoverability of the deferred acquisition costs involve significant judgment. A revision to these assumptions may impact future financial results.
Deferred acquisition costs related to the successful production of new and renewal insurance business for traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities.
Deferred acquisition costs related to the successful production of new and renewal insurance and annuity products 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 (i.e., limited-payment long-duration annuity contracts) are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies. To the extent that realized gains and losses on securities result in adjustments to deferred acquisition costs related to insurance and annuity products, such adjustments are reflected as a component of the amortization of deferred acquisition costs.
Deferred acquisition costs related to limited-payment long-duration insurance and annuity contracts are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from 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.
Loans from Premium Financing and Allowance for 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 78s 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. 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.
The allowance for possible loan losses from financing property and 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 and reduces the carrying value of 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 our control, including the performance of the 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 we 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 us 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. We determine 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-loan basis.
Value of Insurance Business Acquired
As a result of our purchases of FLAC and Family Benefit Life, 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 is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. The recovery of the value of insurance business acquired is dependent on the future profitability of the underlying business that was initially recorded in the purchases of FLAC and Family Benefit Life. Each reporting period, we evaluate the recoverability of the unamortized balance of the value of insurance business acquired.
For the amortization of the value of acquired insurance in force, the Company reviews its estimates of gross profits each reporting period. The most significant assumptions involved in the estimation of gross profits include interest rate spreads; future financial market performance; business surrender and 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.
As of December 31, 20112012 and 20102011 there was $827,409$1,230,982 and $604,958,$827,409, respectively, of accumulated amortization of the value of insurance business acquired due to the purchases of FLAC purchase that occurred at the end of 2008. We expectand Family Benefit Life. The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years: $463,663 in 2012, $445,656$414,820 in 2013, $429,468$421,829 in 2014, $412,077$409,016 in 2015, $395,025 in 2016 and $395,047$381,246 in 2016. As of December 31, 2011, there was no amortization of the value of insurance business acquired due to the purchase of Family Benefit Life that occurred at the end of 2011.2017.
Future Policy Benefits
Our 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.
Estimating liabilities for our long-duration insurance contracts requires management to make various assumptions, including policyholder persistency; mortality rates; investment yields; discretionary benefit increases; new business pricing and operating expense levels. We evaluate historical experience for these factors when assessing the need for changing current assumptions. However, since many of these factors are interdependent and subject to short-term volatility during the long-duration contract period, substantial judgment is required. Actual experience may emerge differently from that originally estimated. Any such difference would be recognized in the current year’s consolidated statement of income.
Federal Income Taxes
We use 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 basis. 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.
We evaluate our deferred income tax assets, which partially offset our deferred tax liabilities, for any necessary valuation allowances. In doing so, we consider our ability and potential for recovering income taxes associated with such assets, which involve significant judgment. Revisions to the assumptions associated with any necessary valuation allowances would be recognized in the financial statements in the period in which such revisions are made.
Recent Accounting Pronouncements
Fair Value Measurements and Disclosures
In January 2010,May 2011, the FinancialFASB issued new guidance concerning fair value measurements and disclosure. The new guidance is the result of joint efforts by the FASB and the International Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06, Fair Value Measurements (Topic 820 - Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). The new guidance requires entities to separately disclose information relative to transfers in and out of Levels 1 and 2 in thedevelop a single, converged fair value hierarchy. In addition, ASU 2010-06 requires separate presentation of transfers in, transfers out, purchases, sales, issuances and settlements of Level 3 investments in the tabular reconciliation of Level 3 activity. ASU 2010-06 also clarifies the level of disaggregation for whichframework on how to measure fair value measurements should be disclosed and requires that information about input and valuation techniques be disclosed for Level 2 and Level 3 assets and liabilities. The Company adopted thisthe necessary disclosures concerning fair value measurements. This guidance effective for the first quarter of 2010.
In October 2010, the FASB issued Accounting Standards Update No. 2010-26, Financial Services – Insurance (Topic 944), Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU 2010-26”). The new guidance requires that an insurance entity capitalize only the following as acquisition costs related directly to the successful 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 all other general overhead costs are considered indirect costs and should be charged to expense as incurred. ASU 2010-26 isbecame effective for interim and annual reporting periods beginning after December 15, 2011. Early
The Company’s adoption is permitted,of this guidance resulted in a change in certain fair value footnote disclosures but only at the beginning of an entity’s annual reporting period. The Company will adopt ASU 2010-26 in first quarter 2012. The Company has assessed the guidance and has determined that it willdid not have a significant financial impact since the Company utilizes a dynamic model whereby deferred acquisition costsany effect on the statementCompany’s results of operations, 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, the above defined acquisition costs will only be capitalized directly related to the 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.liquidity.
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurements (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). The new pronouncement ensures that fair value has the same meaning in U.S. GAAP and International Financial Reporting Standards (“IFRS”) and that their respective fair value measurements and disclosure requirements are the same (except for minor differences in wording and style). The amendments in ASU 2011-04 change the wording used to describe the requirements in U.S. GAAP for measuring and disclosing information about fair value measurements. The amendments clarify the following:Presentation of Comprehensive Income
| 1. | The concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets and liabilities. |
| 2. | Requirements specific to measuring the fair value of an instrument classified in shareholders’ equity. |
| 3. | Quantitative information about the observable inputs used in a fair value measurement of items categorized within Level 3 of the fair value hierarchy should be disclosed. |
The amendments also change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements. The amendments change the following:
| 1. | Measuring the fair value of financial instruments that are managed within a portfolio. |
| 2. | In the absence of Level 1 input, premiums or discounts should be applied if market participants would do so when pricing an asset or liability. |
| 3. | Expanded the disclosures about fair value instruments. |
| a. | Within Level 3 of the fair value hierarchy. |
| b. | Use of nonfinancial assets in a way that differs from the assets highest and best use. |
| c. | Categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position but for which fair value is required to be disclosed. |
ASU 2011-04 is effective for public companies for interim and annual periods beginning on or after December 15, 2011 and shall be applied prospectively. Early application is not permitted. The Company will adopt this guidance in first quarter 2012.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income (“ASU 2011-05”). The new pronouncement improves the comparability, consistency and transparency of financial reporting by increasingupdated guidance to increase the prominence of items reported in other comprehensive income and facilitates the convergence of U.S. GAAP and IFRS. ASU 2011-05 eliminatesby eliminating the option of presenting components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU 2011-05The updated guidance requires that all nonowner changes in shareholders’ equity be presented either inas a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance was effective for the quarter ended March 31, 2012 and was applied retrospectively.
The Company’s adoption of the updated guidance resulted in a change in the presentation of the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued updated guidance to address diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a single continuous statement,cost must be directly related to the following shallsuccessful acquisition of a new or renewal insurance contract in order to be presented: componentsdeferred. If application of net income, net income, componentsthis guidance would result in the capitalization of comprehensive income, totalacquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs.
The updated guidance was effective for the quarter ended March 31, 2012. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.
Intangibles - Goodwill and Other
In September 2011, the FASB issued updated guidance that modifies the manner in which the two-step impairment test of goodwill is applied. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology, or customers) that may impact a reporting unit’s fair value and lead to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If an entity determines that it is more likely than not, it must perform an impairment test.
The first step of the impairment test involves comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If the carrying value of a reporting unit exceeds the estimated fair value, a second step must be performed to measure the amount of goodwill impairment, if any. In the second step, the implied fair value of the reporting unit’s goodwill is determined in the same manner as goodwill is measured in a business combination (i.e., by measuring the fair value of the reporting unit’s assets, liabilities and unrecognized intangible assets and determining the remaining amount ascribed to goodwill) and comparing the amount of the implied goodwill to the carrying amount of the goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
The updated guidance was effective for the quarter ended March 31, 2012. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.
Testing Indefinite-Lived Intangible Assets for Impairment
In July 2012, the FASB issued updated guidance regarding the impairment test applicable to indefinite-lived intangible assets that is similar to the impairment guidance applicable to goodwill. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact the fair value of the indefinite-lived intangible asset and lead to the determination that it is more likely than not that the fair value of the asset is less than its carrying value. If an entity determines that it is more likely than not that the fair value of the intangible asset is less than its carrying value, an impairment test must be performed. The impairment test requires an entity to calculate the estimated fair value of the indefinite-lived intangible asset. If the carrying value of the indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess.
The updated guidance is effective for the quarter ending March 31, 2013. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued updated guidance to improve the reporting of reclassifications out of accumulated other comprehensive income and the total of comprehensive income. In the two-statement approach, the first statement shouldThe guidance requires an entity to present, total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. ASU 2011-05 indicates that regardless of whether comprehensive income is presented in a single continuous statement or in two separate but consecutive statements, reclassification adjustments between net income and other comprehensive income are required to be presentedeither on the face of the financial statements. ASU 2011-05 is effectivestatement of income or in the notes, separately for public companies for interim and annual periods beginning on or after December 15, 2011. Early adoption is permitted.
In December 2011,each component of comprehensive income, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220 - Deferral of Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”). ASU 2011-12 indefinitely defers the requirement to present reclassification adjustmentscurrent period reclassifications out of accumulated other comprehensive income by components in both the statement in whichrespective line items of net income affected by the reclassification.
The updated guidance is presented andeffective prospectively for reporting periods beginning after December 15, 2012. The updated guidance will not have any effect on the statement in which other comprehensive income is presented.Company's results of operations, financial position or liquidity.
Business Segments
FASB guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units. The discussion of segment operating results that follows is being provided based on segment data prepared in accordance with this methodology.
Our business segments are as follows:
| | · | Life and annuity insurance operations, consisting of the operations of TLIC and Family Benefit Life; |
| | · | Premium finance operations, consisting of the operations of FTCC and SIS; and |
| | · | Corporate operations, which includes the results of the parent company after the elimination of intercompany amounts. |
Please see Note 12 to the Consolidated Financial Statements for additional information regarding segment data.
The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources.
FINANCIAL HIGHLIGHTS
Consolidated Condensed Results of Operations for the Year Ended December 31, 2012
| | | Year Ended December 31, | | | | | | Percentage Change | | Family Benefit Life | | | | |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 | | 2012 Results | | | 2012 less 2011 | |
| Premiums | | $ | 8,024,901 | | | $ | 6,229,383 | | | $ | 1,795,518 | | | | 28.8 | % | | $ | 1,177,106 | | | $ | 618,412 | |
| Net investment income | | | 5,920,278 | | | | 2,291,761 | | | | 3,628,517 | | | | 158.3 | % | | | 2,547,865 | | | | 1,080,652 | |
| Net realized investment gains | | | 746,889 | | | | 604,784 | | | | 142,105 | | | | 23.5 | % | | | 199,216 | | | | (57,111 | ) |
| Gain from acquisition of Family Benefit Life | | | - | | | | 6,915,479 | | | | (6,915,479 | ) | | | -100.0 | % | | | - | | | | (6,915,479 | ) |
| Other revenues | | | 116,452 | | | | 182,852 | | | | (66,400 | ) | | | -36.3 | % | | | 140 | | | | (66,540 | ) |
| Total revenues | | | 14,808,520 | | | | 16,224,259 | | | | (1,415,739 | ) | | | -8.7 | % | | | 3,924,327 | | | | (5,340,066 | ) |
| Benefits and claims | | | 9,242,052 | | | | 5,308,825 | | | | 3,933,227 | | | | 74.1 | % | | | 2,408,286 | | | | 1,524,941 | |
| Expenses | | | 4,608,655 | | | | 3,425,163 | | | | 1,183,492 | | | | 34.6 | % | | | 1,268,967 | | | | (85,475 | ) |
| Total benefits, claims and expenses | | | 13,850,707 | | | | 8,733,988 | | | | 5,116,719 | | | | 58.6 | % | | | 3,677,253 | | | | 1,439,466 | |
| Income before federal income tax expense (benefit) | | | 957,813 | | | | 7,490,271 | | | | (6,532,458 | ) | | | -87.2 | % | | | 247,074 | | | | (6,779,532 | ) |
| Federal income tax expense (benefit) | | | (144,068 | ) | | | 130,278 | | | | (274,346 | ) | | | -210.6 | % | | | (119,032 | ) | | | (155,314 | ) |
| Net income | | $ | 1,101,881 | | | $ | 7,359,993 | | | $ | (6,258,112 | ) | | | -85.0 | % | | $ | 366,106 | | | $ | (6,624,218 | ) |
Net income per common share basic and diluted | | $ | 0.14 | | | $ | 1.00 | | | $ | (0.86 | ) | | | | | | | | | | | | |
Consolidated Condensed Financial Position as of December 31, 2012
| | | December 31, 2012 | | | December 31, 2011 | | | Increase (Decrease) 2012 to 2011 | | | Percentage Change 2012 to 2011 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Investment assets | | $ | 133,846,664 | | | $ | 98,750,416 | | | $ | 35,096,248 | | | | 35.5 | % |
| Other assets | | | 31,603,653 | | | | 45,997,239 | | | | (14,393,586 | ) | | | -31.3 | % |
| Total assets | | $ | 165,450,317 | | | $ | 144,747,655 | | | $ | 20,702,662 | | | | 14.3 | % |
| | | | | | | | | | | | | | | | | |
| Policy liabilities | | $ | 126,966,173 | | | $ | 111,269,643 | | | $ | 15,696,530 | | | | 14.1 | % |
| Deferred federal income taxes | | | 3,301,524 | | | | 2,622,711 | | | | 678,813 | | | | 25.9 | % |
| Other liabilities | | | 1,460,508 | | | | 2,457,188 | | | | (996,680 | ) | | | -40.6 | % |
| Total liabilities | | | 131,728,205 | | | | 116,349,542 | | | | 15,378,663 | | | | 13.2 | % |
| Shareholders' equity | | | 33,722,112 | | | | 28,398,113 | | | | 5,323,999 | | | | 18.7 | % |
| Total liabilities and shareholders' equity | | $ | 165,450,317 | | | $ | 144,747,655 | | | $ | 20,702,662 | | | | 14.3 | % |
| | | | | | | | | | | | | | | | | |
| Shareholders' equity per common share | | $ | 4.29 | | | $ | 3.67 | | | $ | 0.62 | | | | 17.0 | % |
Results of Operations – Years Ended December 31, 2012 and 2011
Revenues
Our primary sources of revenue are life insurance premium income and investment income. Premium payments are classified as first-year, renewal and single. In addition, realized gains and losses on investment holdings can significantly impact revenues from period to period. During 2011, we experienced a gain from the acquisitionThe impact on total revenues of Family Benefit Life.
Total consolidatedLife total revenues, increased 83.9% from $8,821,306acquired on December 28, 2011, for the year ended December 31, 2010 to $16,224,2592012 is summarized in the tables below.
Our revenues for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Years Ended December 31, | | | | | | Percentage Change | | Family Benefit Life | | | | |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 | | 2012 Results | | | 2012 less 2011 | |
| Premiums | | $ | 8,024,901 | | | $ | 6,229,383 | | | $ | 1,795,518 | | | | 28.8 | % | | $ | 1,177,106 | | | $ | 618,412 | |
| Income from premium financing | | | 102,491 | | | | 168,124 | | | | (65,633 | ) | | | -39.0 | % | | | - | | | | (65,633 | ) |
| Net investment income | | | 5,920,278 | | | | 2,291,761 | | | | 3,628,517 | | | | 158.3 | % | | | 2,547,865 | | | | 1,080,652 | |
| Net realized investment gains | | | 746,889 | | | | 604,784 | | | | 142,105 | | | | 23.5 | % | | | 199,216 | | | | (57,111 | ) |
| Gain from acquisition of Family benefit Life | | | - | | | | 6,915,479 | | | | (6,915,479 | ) | | | -100.0 | % | | | - | | | | (6,915,479 | ) |
| Other income | | | 13,961 | | | | 14,728 | | | | (767 | ) | | | -5.2 | % | | | 140 | | | | (907 | ) |
| Total revenues | | $ | 14,808,520 | | | $ | 16,224,259 | | | $ | (1,415,739 | ) | | | -8.7 | % | | $ | 3,924,327 | | | $ | (5,340,066 | ) |
The decrease of $5,340,066 in total revenues for the year ended December 31, 2011, an increase of $7,402,953.2012, excluding Family Benefit Life revenues, is discussed below.
Premiums
Premiums increased 5.7% from $5,895,030Our premiums for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Years Ended December 31, | | | Increase (Decrease) | | | Percentage Change |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 |
| Family Benefit Life | | $ | 1,177,106 | | | $ | - | | | $ | 1,177,106 | | | | - | |
| Whole life and term first year | | | 226,835 | | | | 62,722 | | | | 164,113 | | | | 261.7 | % |
| Whole life and term renewal | | | 2,214,485 | | | | 2,356,464 | | | | (141,979 | ) | | | -6.0 | % |
| Final expense first year | | | 1,058,505 | | | | 1,105,504 | | | | (46,999 | ) | | | -4.3 | % |
| Final expense renewal | | | 3,347,970 | | | | 2,704,693 | | | | 643,277 | | | | 23.8 | % |
| Total premiums | | $ | 8,024,901 | | | $ | 6,229,383 | | | $ | 1,795,518 | | | | 28.8 | % |
The $618,412 increase in premiums for the year ended December 31, 2010 to $6,229,383 for the year ended December 31, 2011, an increase of $334,353. The increase was2012, excluding Family Benefit Life premiums, is primarily due to the following:
| · | $338,463 increase in final expense first year premium production. |
| · | $431,401 increase in final expense renewal premium production. |
| · | $15,553 decrease in whole life and term renewal premium production |
| · | $419,958 decrease in first year production of whole life and term premiums due to the focus of our captive agents on the public stock offering that began on June 29, 2010. |
a $643,277 increase in final expense renewal premiums.
Income from Premium Financing
Income from premium financing decreased 35.2% from $259,296 for the year ended December 31, 2010 to $168,124 for the year ended December 31, 2011, a decrease of $91,172. The income from premium financing has steadily decreased during the past two years. Premium financing operations are mostly basedThere was a decrease of $65,633 for the year ended December 31, 2012.
As introduced above, the Company’s management has decided to focus on the production of loan agreements with Oklahoma agents although weCompany’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continues to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are issuing a limited number of loans in Louisiana and Mississippi with profitable agencies but currently have no production in Alabama and Arkansas.force. The Company is closely evaluatingestimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations to determine if it can continue based almost entirely on Oklahoma production.since resources will be redeployed into its growing life and annuity insurance operations.
Net Investment Income
NetThe major components of our net investment income decreased 6.1% from $2,441,334for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Years Ended December 31, | | | | | | Percentage Change | | Family Benefit Life | | | | |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 | | 2012 Results | | | 2012 less 2011 | |
| Fixed maturity securities | | $ | 4,194,409 | | | $ | 1,718,804 | | | $ | 2,475,605 | | | | 144.0 | % | | $ | 2,218,935 | | | $ | 256,670 | |
| Equity securities | | | 49,235 | | | | 55,725 | | | | (6,490 | ) | | | -11.6 | % | | | 18,369 | | | | (24,859 | ) |
| Other long-term investments | | | 1,188,323 | | | | 599,468 | | | | 588,855 | | | | 98.2 | % | | | 333,739 | | | | 255,116 | |
| Mortgage loans | | | 544,567 | | | | 116,219 | | | | 428,348 | | | | 368.6 | % | | | 6,057 | | | | 422,291 | |
| Real estate | | | 370,620 | | | | 348,002 | | | | 22,618 | | | | 6.5 | % | | | 11,250 | | | | 11,368 | |
| Policy loans | | | 100,120 | | | | 32,233 | | | | 67,887 | | | | 210.6 | % | | | 62,458 | | | | 5,429 | |
| Short-term and other investments | | | 21,939 | | | | 22,763 | | | | (824 | ) | | | -3.6 | % | | | 5,650 | | | | (6,474 | ) |
| Gross investment income | | | 6,469,213 | | | | 2,893,214 | | | | 3,575,999 | | | | 123.6 | % | | | 2,656,458 | | | | 919,541 | |
| Investment expenses | | | (548,935 | ) | | | (601,453 | ) | | | (52,518 | ) | | | 8.7 | % | | | (108,593 | ) | | | (161,111 | ) |
| Net investment income | | $ | 5,920,278 | | | $ | 2,291,761 | | | $ | 3,628,517 | | | | 158.3 | % | | $ | 2,547,865 | | | $ | 1,080,652 | |
The $919,541 increase in gross investment income for the year ended December 31, 20102012, excluding Family Benefit Life gross investment income, is due to $2,291,761the 2012 investment of excess cash primarily in fixed maturity securities, other long-term investments (lottery receivables) and mortgage loans.
The $161,111 decrease in investment expenses for the year ended December 31, 2011, a decrease of $149,573.
Gross investment income increased 10.1% from $2,627,127 for the year ended December 31, 2010 to $2,893,214 for the year ended December 31, 2011, an increase of $266,087. The cash provided by continued insurance operations has provided a larger invested asset base that the company has continued to invest. However, it has been difficult throughout 2011 to locate adequate yield in investment grade securities.
Investment expenses, however, increased 223.7% from $185,793 for the year ended December 31, 2010 to $601,453 for the year ended December 31, 2011, an increase of $415,660. The increased2012, excluding Family Benefit Life investment expenses, are primarily attributedis due to the following increases: $187,000 increase in real estate taxes, $130,000 increase in$117,000 of decreased investment advisory management servicesservice fees and a $94,000 increase in depreciation$72,000 of thedecreased investment real estate held for investment due to the change on January 1, 2011expenses that more than offset $28,000 of the useful life of the building from 39 year to 19 years. The Company engaged a new investment advisory management firm in late 2011 with the goal of reducing these expenses in 2012.
increased loan origination fees.
Net Realized Investment Gains
Net realized investment gains were $606,935 and $159,300 for the years ended December 31, 2011 and 2010, respectively, an increased net realized investment gain of $447,635. The increasedThere was a $142,105 increase in net realized investment gains are primarily due tofor the year ended December 31, 2012.
The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $228,320 for the year ended December 31, 2012 resulted from proceeds of $9,511,967 for these securities and call activity during 2011.that had carrying values of $9,283,647 at the 2012 disposal dates.
The 2011 net realized investment gains from the sales of equity securities available-for-sale of $442,737 for the year ended December 31, 2012 resulted from proceeds of $1,114,426 for these securities that had carrying values of $671,689 at the 2012 disposal dates.
The net realized investment gains from the sale of investment real estate of $75,832 for the year ended December 31, 2012 resulted from proceeds of $512,500 for two buildings that had a carrying value of $436,668 at the 2012 disposal date.
The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $606,935 for the year ended December 31, 2011 resulted from sale proceeds of $4,671,870 on fixed maturityfor these securities available-for-sale having athat had carrying values of $4,064,935 carrying value at the 2011 disposal dates.
The 2010 net realized investment gains from the sales of fixed maturity available-for-sale securities of $139,172 resulted from sale proceeds of $1,868,930 on fixed maturity available-for-sale securities having a $1,729,758 carrying value at the 2010 disposal dates.
The 2010 net realized investment gains from the sales of two equity securities available-for-sale of $20,128 resulted from sale proceeds of $65,592 on equity securities available-for-sale having a $45,464 carrying value at the 2010 disposal dates.
There were no 2011 sales of equity securities available-for-sale.available-for-sale for the year ended December 31, 2011.
The net realized investment losses from the sale of investment real estate of $2,151 for the year ended December 31, 2011 resulted from proceeds of $49,000 for the sale of land that had a carrying value of $51,151 at the 2011 disposal date.
We have recorded no other-than-temporary impairments in 20112012 and 2010. As of December 31, 2011, we held nine fixed maturity securities available-for-sale with an unrealized loss of $84,771, fair value of $1,887,299 and amortized cost of $1,972,070. All of these fixed maturity securities available-for-sale had a fair value to cost ratio equal to or greater than 90%. As of December 31, 2010, we held five fixed maturity securities available-for-sale with an unrealized loss of $43,118, fair value of $1,467,816 and amortized cost of $1,510,934. All of these fixed maturity securities available-for-sale had a fair value to cost ratio equal to or greater than 94%.2011.
Gain from Acquisition of Family Benefit Life
In late December 2011, we acquired 100% ownership of Family Benefit Life from its shareholders for $13,855,129 paid in cash. The fair value of the net assets acquired in this transaction was $20,770,608. Since the fair value of the net assets acquired exceeded the cost paid for those assets by $6,915,479, the residual was recorded in the consolidated statements of operations as a component of revenues captioned “Gain from acquisition of Family Benefit Life” per the requirements of Financial Accounting Standards BoardFASB Codification Topic 805 “Business Combinations.” The reason for the gain from the acquisition of Family Benefit Life related primarily to that company’s management not being committed to rebuild the marketing force of that company in the current economic environment.
The total acquisition date fair value of the net assets acquired from Family Benefit Life in late December 2011 is as follows:
| Category of Net Asset Acquired | | Fair Value | |
| Available-for-sale fixed maturity securities | | $ | 56,252,307 | |
| Available-for-sale equity securities | | | 304,773 | |
| Mortgage loans on real estate | | | 79,710 | |
| Investment real estate | | | 582,560 | |
| Policy loans | | | 1,047,378 | |
| Other invested assets | | | 110 | |
| Cash and cash equivalents | | | 9,103,505 | |
| Accrued investment income | | | 775,438 | |
| Recoverable from reinsurers | | | 120,068 | |
| Agents' balances and due premiums | | | 16,476 | |
| Value of insurance business acquired | | | 5,627,662 | |
| Other assets | | | 10,336 | |
| Policyholders' account balances | | | (36,746,133 | ) |
| Future policy benefits | | | (13,502,833 | ) |
| Policy claims | | | (166,593 | ) |
| Premiums paid in advance | | | (12,214 | ) |
| Deferred federal income taxes | | | (2,188,650 | ) |
| Current federal taxes payable | | | (36,720 | ) |
| Other liabilities | | | (496,572 | ) |
| Fair value of net assets acquired | | $ | 20,770,608 | |
| Cash paid as purchase consideration | | $ | (13,855,129 | ) |
| Gain from acquisition of Family Benefit Life | | $ | 6,915,479 | |
Other Income
OtherThe $907 decrease in other income was $12,577 and $66,346 for the yearsyear ended December 31, 2011 and 2010, a decrease of $53,769. The decrease2012, excluding Family Benefit Life other income, is primarily due to a decrease in service fees in 2011.fees.
Total Benefits, Claims and Expenses
Our benefits, claims and expenses are primarily generated from benefit payments, surrenders, interest credited to policyholders, change in reserves, commissions and other underwriting, insurance and acquisition expenses. Benefit payments can significantly impact expenses from period to period.
Total consolidatedThe impact on total benefits, claims and expenses decreased 2.3% from $8,936,496of Family Benefit Life total benefits, claims and expenses, acquired on December 28, 2011, for the year ended December 31, 2010 to $8,733,9882012 is summarized in the tables below.
Our benefits, claims and expenses for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Years Ended December 31, | | | | | | Percentage Change | | Family Benefit Life | | | | |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 | | 2012 Results | | | 2012 less 2011 | |
| Benefits and claims | | | | | | | | | | | | | | | | | | |
| Increase (decrease) in future policy benefits | | $ | 2,054,925 | | | $ | 1,982,865 | | | $ | 72,060 | | | | 3.6 | % | | $ | (407,069 | ) | | $ | 479,129 | |
| Death benefits | | | 2,863,555 | | | | 1,479,188 | | | | 1,384,367 | | | | 93.6 | % | | | 852,322 | | | | 532,045 | |
| Surrenders | | | 583,498 | | | | 336,062 | | | | 247,436 | | | | 73.6 | % | | | 310,827 | | | | (63,391 | ) |
| Interest credited to policyholders | | | 3,330,592 | | | | 1,510,710 | | | | 1,819,882 | | | | 120.5 | % | | | 1,242,724 | | | | 577,158 | |
| Dividend and supplementary life contract benefits | | | 409,482 | | | | - | | | | 409,482 | | | | - | | | | 409,482 | | | | - | |
| Total benefits and claims | | | 9,242,052 | | | | 5,308,825 | | | | 3,933,227 | | | | 74.1 | % | | | 2,408,286 | | | | 1,524,941 | |
| Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Policy acquisition costs deferred | | | (2,302,070 | ) | | | (2,262,751 | ) | | | (39,319 | ) | | | 1.7 | % | | | - | | | | (39,319 | ) |
| Amortization of deferred policy acquisition costs | | | 512,546 | | | | 230,284 | | | | 282,262 | | | | 122.6 | % | | | - | | | | 282,262 | |
| Amortization of value of insurance business acquired | | | 403,573 | | | | 222,451 | | | | 181,122 | | | | 81.4 | % | | | 225,106 | | | | (43,984 | ) |
| Commissions | | | 2,324,073 | | | | 2,281,934 | | | | 42,139 | | | | 1.8 | % | | | 32,053 | | | | 10,086 | |
| Other underwriting, insurance and acquisition expenses | | | 3,670,533 | | | | 2,953,245 | | | | 717,288 | | | | 24.3 | % | | | 1,011,808 | | | | (294,520 | ) |
| Total expenses | | | 4,608,655 | | | | 3,425,163 | | | | 1,183,492 | | | | 34.6 | % | | | 1,268,967 | | | | (85,475 | ) |
| Total benefits, claims and expenses | | $ | 13,850,707 | | | $ | 8,733,988 | | | $ | 5,116,719 | | | | 58.6 | % | | $ | 3,677,253 | | | $ | 1,439,466 | |
The increase of $1,439,466 in total benefits, claims and expenses for the year ended December 31, 2011, a decrease of $202,508.2012, excluding Family Benefit Life benefits, claims and expenses, is discussed below.
Benefits and ClaimsPremium Finance Operations
BenefitsThe Company’s management has decided to focus on the Company’s core life and claims increased 4.8%annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continues to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
The premium finance subsidiary, FTCC, has provided premium financing to individuals and businesses. Many casualty insurance carriers require their premiums to be paid on an annual or lump sum basis. A premium finance company finances these casualty premiums. A typical premium finance contract requires the insured to pay 25% of the premium up front and the balance is paid over a nine month period. Premium financing is unique in that the unpaid balance due the company is lower than the unearned premium, which has in effect been assigned to the company in the event of non-payment, thus, the element of risk is minimized.
FTCC was capitalized with $4,000,000 from $5,063,553FTFC. The Company engages in the premium finance business, independent of its life insurance business. FTCC is licensed to conduct premium finance business in Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. Until the May 16, 2012 announcement discussed above, FTCC had historically contracted with over 200 insurance agencies to finance their casualty insurance premiums but two years ago focused on financing with approximately 30 agencies primarily in Oklahoma. There was no guarantee that those agencies would write premium financing contracts with FTCC. FTCC was not dependent on a single customer or a few major customers. During 2011, FTCC returned $1,000,000 of capital to FTFC. During 2012, FTCC returned $650,000 of capital to FTFC.
Premium finance companies are regulated by the individual states with no uniformity among state regulations. Commercial insurance premium finance transactions are not regulated directly in Oklahoma. Consumer insurance premium finance transactions are considered a consumer credit sale and are subject to the Oklahoma Uniform Consumer Credit Code. Therefore the regulation of the transaction is by the Oklahoma Department of Consumer Credit under the consumer credit laws. FTCC is regulated by the Department of Banking in Mississippi.
Finance companies are subject to interest rate fluctuations. An increase in the cost of funds or a decrease in interest rates that FTCC charged could affect profitability.
The premium financing business is highly competitive in every channel in which FTCC competed. FTCC competed with large financial institutions most of which may have greater financial, marketing and other resources than FTCC. FTCC targeted the niche market of small businesses and individual consumers needing casualty insurance financing and faced competition with many specialty financing businesses. Some competitors were affiliated with property and casualty writing agencies and may have advantageous marketing relationships with their affiliates.
SIS, a property and casualty insurance agency acquired in 2009, wrote commercial and personal lines of insurance, primarily in the state of Mississippi. SIS is no longer operating as a property and casualty insurance agency and currently has no operations.
Employees
As of March 11, 2013, the Company had nine full-time employees and one part-time employee.
The Company leases 6,769 square feet of office space pursuant to a five-year lease that began October 1, 2010 and leased 950 square feet of office space effective December 15, 2009 that terminated 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 lease, the monthly rent is $7,897 from October 1, 2010 through September 30, 2015. The Company incurred rent expense of $76,136 and $72,809 for the years ended December 31, 2012 and 2011, respectively, under this lease and other minor leases. The Company received a $120,000 leasehold improvement allowance from the lessor that is being amortized over the non-cancellable lease term that reduced incurred rent expense by $25,263 for each of the years ended December 31, 2012 and 2011. Future minimum lease payments to be paid under non cancelable lease agreements are $94,764 for 2013 and 2014 and $71,073 in 2015.
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. On December 24, 2009, TLIC entered into a five year lease of approximately 7,500 square feet of its building in Topeka, Kansas with an option for the lessee to renew the lease for five additional years. The monthly lease payments are as follows: $9,130 in 2011 and 2012 and $9,371 in 2013 and 2014.
TLIC has also leased 10,000 square feet in the Topeka, Kansas office building 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. This lease was renewed on July 1, 2011 to run through May 31, 2016. Beginning July 1, 2014, the lessee can terminate the lease with a 180 day written notice. The lease agreement calls for minimum monthly base lease payments of $17,535.
Effective August 29, 2005, TLIC executed a lease agreement for 2,500 square feet of the Topeka, Kansas office building. The base lease period commenced on September 1, 2005 and ended on August 31, 2010. The lease automatically renewed on August 15, 2010, for another five years with a 90 day notice by the lessee to terminate the lease. The lease agreement called for minimum monthly base lease payments of $4,332 through August 31, 2010. The lease payments decreased 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 $360,072, $360,072, $235,220 and $87,675 for the years 2013 through 2016, respectively.
Family Benefit Life owned approximately one and one-half acres of land located in Jefferson City, Missouri. A 6,100 square foot building (serving as Family Benefit Life’s headquarters) and a 2,200 square foot building (leased to a third party) are on one acre of this land and the other half acre is held for sale. In October 2012, both of the buildings were sold.
With respect to the 2,200 square foot building, Family Benefit Life entered into a one-year lease beginning August 1, 2010 and ending July 31, 2011. The lease could have been renewed annually if no termination notice was given by either party on or before May 1. No notice was given by either party on May 1, 2011 or May 1, 2012 and therefore the lease was renewed for additional one-year periods. The tenant paid Family Benefit Life $15,000 per year in monthly installments of $1,250. In connection with the October 2012 sale of the two buildings, the underlying third party lease was transferred to the new owner. The new owner also charged the Company $12,152 of rent during the last three months of 2012.
Item 3. Legal Proceedings
There are no material legal proceedings pending against the Company or its subsidiaries or of which any of their property is the subject. There are no proceedings in which any director, officer, affiliate or shareholder of the Company, or any of their associates, is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.
Item 4. Mine Safety Disclosures
None
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
Trading of the Company’s common stock is limited and an established public market does not exist.
(i) Holders
As of March 12, 2012 there were approximately 4,000 shareholders of the Company’s outstanding common stock.
(ii) Dividends
The Company has not paid any cash dividends since inception (April 19, 2004). The Board of Directors of the Company has not adopted a dividend payment policy; however, dividends must necessarily depend upon the Company's earnings and financial condition, applicable legal restrictions, and other factors relevant at the time the Board of Directors considers a dividend policy. Cash available for dividends to shareholders of the Company must initially come from income and capital gains earned on its investment portfolio and dividends paid by the Company’s subsidiaries.
Provisions of the Oklahoma Insurance Code relating to insurance holding companies subject transactions between the Company and TLIC and the Company and Family Benefit Life, including dividend payments, to certain standards generally intended to prevent such transactions from adversely affecting the adequacy of life insurance subsidiaries' capital and surplus available to support policyholder obligations. In addition, under the Oklahoma General Corporation Act, the Company may not pay dividends if, after giving effect to a dividend, it would not be able to pay its debts as they become due in the usual course of business or if its total liabilities would exceed its total assets.
On January 10, 2011, the Company’s Board of Directors approved a 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold. The dividend was payable to the holders of shares of the Company as of March 10, 2011. Fractional shares were rounded to the nearest whole number of shares. The Company issued 323,777 shares in connection with the stock dividend that resulted in accumulated earnings being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital.
On January 11, 2012, the Company’s Board of Directors approved another 5% share dividend by whichshareholders received a share of common stock for each 20 shares of common stock of the Company theyhold. The dividend was payable to the holders of shares of the Company as of March 10, 2012. Fractional shares were rounded to the nearest whole number of shares. The Company issued 378,928 shares in connection with the stock dividend that resulted in accumulated earnings being charged $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital.
(iii) Securities Authorized for Issuance Under Equity Compensation Plans
There are no plans under which equity securities are authorized for issuance.
(b) None
(c) The Company repurchased 185,313 shares of its common stock from former members of the Board of Directors at a cost of $648,595 during 2012.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
First Trinity Financial Corporation (“we” “us”, “our”, or the Company) conducts operations as an insurance holding company emphasizing ordinary life insurance products in niche markets and a premium finance company, financing casualty insurance premiums.
As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core TLIC operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense, term and annuity products to predominately middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas through independent agents. With the acquisition of Family Benefit Life in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico. In late 2012, Family Benefit Life was initially licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia.
We also realize revenues from our investment portfolio, which is a key component of our operations. The revenues we collect as premiums from policyholders are invested to ensure future benefit payments under the policy contracts. Life insurance companies earn profits on the investment spread, which reflects the investment income earned on the premiums paid to the insurer between the time of receipt and the time benefits are paid out under policies. Changes in interest rates, changes in economic conditions and volatility in the capital markets can all impact the amount of earnings that we realize from our investment portfolio.
We provide financing for casualty insurance premiums through independent property and casualty insurance agents. We are licensed in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma.
The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continues to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
Recent Acquisitions
The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance business. In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of First Life America Corporation, included in the life insurance segment, for $2,500,000 and had additional acquisition related expenses of $195,000.
In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of Family Benefit Life Insurance Company, included in the life insurance segment, for $13,855,129. Given that the Family Benefit Life acquisition occurred in late December 2011, the acquisition only impacts the Company’s consolidated statement of financial position as of December 31, 2011 and not the Company’s consolidated statement of operations for the year ended December 31, 2010 to $5,308,8252011. Family Benefit Life’s 2012 operating results are reflected in the Company’s consolidated statement of operations for the year ended December 31, 2011,2012.
Our profitability in the life insurance segment is a function of our ability to accurately price the policies that we write, adequately value life insurance business acquired and administer life insurance company acquisitions at an increaseexpense level that validates the acquisition cost. Profitability in the premium financing segment is dependent on the Company’s ability to compete in that sector, maintain low administrative costs and minimize losses. However, as introduced above, the Company has discontinued its premium financing operations and will completely exit that segment of $245,272.the business on approximately July 1, 2013.
Critical Accounting Policies and Estimates
The increasediscussion and analysis of our financial condition, results of operations and liquidity and capital resources is based on our consolidated financial statements that have been prepared in benefitsaccordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and claims is primarily dueassumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We evaluate our estimates and assumptions continually, including those related to investments, deferred acquisition costs, loans from premium financing, allowance for loans losses from premium financing, value of insurance business acquired, policy liabilities, income taxes, regulatory requirements, contingencies and litigation. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies, judgments and estimates are the most critical to the following:preparation of our consolidated financial statements.
| · | $278,598 increase in interest credited to policyholders primarily due to an increase in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits in excess of withdrawals). |
Investments in Fixed Maturities and Equity Securities
| · | $56,522 increase in death benefits primarily due to an increase in the number of claims incurred, increase in the average claim amount and an increase in the amount and number of claims in course of settlement. |
We hold fixed maturities and equity interests in a variety of companies. We continuously evaluate all of our investments based on current economic conditions, credit loss experience and other developments. We evaluate the difference between the cost/amortized cost and estimated fair value of our investments to determine whether any decline in fair value is other-than-temporary in nature. This determination involves a degree of uncertainty. If a decline in the fair value of a security is determined to be temporary, the decline is recognized in other comprehensive income (loss) within shareholders’ equity. If a decline in a security’s fair value is considered to be other-than-temporary, we then determine the proper treatment for the other-than-temporary impairment.
| · | $58,252 decrease in the change in reserves. |
For fixed maturities, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security. The amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security. For equity securities, the amount of any other-than temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security.
| · | $31,596 decrease in surrenders primarily related to improved persistency. |
The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security. It is not possible to accurately predict when it may be determined that a specific security will become impaired. Future adverse changes in market conditions, poor operating results of underlying investments and defaults on interest and principal payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future. In addition, if a change occurs in our intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that we will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result. If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, we amortize the reduced book value back to the security’s expected recovery value over the remaining term of the bond. We continue to review the security for further impairment that would prompt another write-down in the book value.
Deferral and of Deferred Policy Acquisition Costs
CertainCommissions and other acquisition costs which vary with and are primarily related to the successful production of new and renewal insurance contracts are deferred and amortized in a systematic manner based on the related contract revenues or gross profits as appropriate. The recovery of deferred acquisition costs is dependent on the future profitability of the underlying business for which acquisition costs were incurred. Each reporting period, we evaluate the recoverability of the unamortized balance of deferred acquisition costs. We consider estimated future gross profits or future premiums; expected mortality or morbidity; interest earned and credited rates; persistency and expenses in determining whether the balance is recoverable.
If we determine a portion of the unamortized balance is not recoverable, it is immediately charged to amortization expense. The assumptions we use to amortize and evaluate the recoverability of the deferred acquisition costs involve significant judgment. A revision to these assumptions may impact future financial results. Deferred acquisition costs related to the successful acquisitionproduction of new and renewal insurance business for traditional life insurance policiescontracts are capitalizeddeferred to the extent deemed recoverable and amortized over the premium-payingpremium paying period of the policies. Certainrelated policies using assumptions consistent with those used in computing future policy benefit liabilities.
Deferred acquisition costs related to the successful acquisitionproduction of new and renewal insurance and annuity policiesproducts 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 (i.e., limited-payment long-duration annuity contracts) are capitalizeddeferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies. TheseTo the extent that realized gains and losses on securities result in adjustments to deferred acquisition costs which are referred to as deferred policy acquisition costs, include commissions and other successful costs of acquiring life insurance, which vary with, and are primarily related to the production of new and renewal insurance and annuity contracts.
For the years ended December 31, 2011 and 2010, capitalized costs were $2,262,751 and $1,773,199, respectively. Amortizationproducts, such adjustments are reflected as a component of deferred policy acquisition costs for the years ended December 31, 2011 and 2010 was $230,284 and $451,349, respectively. The $489,552 increase in the acquisition costs deferred primarily relates to increased new business production of final expense policies and annuity contracts. In addition, there was a 2011 change in the methodology of deferring and amortizing deferred acquisition costs that is explained below.
The $221,065 decrease in the amortization of deferred acquisition costs.
Deferred acquisition costs primarily reflectsrelated to limited-payment long-duration insurance and annuity contracts are also adjusted, net of tax, for the impact of a 2011 change in amortization that would have been recorded if the methodologyunrealized gains (losses) from 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 deferring and amortizing deferred acquisition costs as explained below.“Accumulated Other Comprehensive Income” in the shareholders’ equity section of the statement of financial position.
During 2011 $358,740Loans from Premium Financing and Allowance for Loans from Premium Financing
Loans from premium financing are carried at their outstanding unpaid principal balances, net of deferrable acquisitionunearned 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 78s 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. 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 associated with policies that were issuedare charged to expense as incurred.
The allowance for possible loan losses from financing property and lapsedcasualty insurance premiums is a reserve established through a provision for possible loan losses charged to expense which represents, in 2011 weremanagement’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 and reduces the carrying value of 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 our control, including the performance of the 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 deferred and were not amortized. During 2010, $299,158 of deferrable acquisition costs associated with policies that were issued and lapsed in 2010 were deferred and were amortized during 2010.specifically identified loans.
A summaryloan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the impactloan agreement. Factors considered by us in determining impairment include payment status, collateral value, and the probability of this 2011 methodology changecollecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the deferralcircumstances surrounding the loan and amortizationthe borrower, including the length of deferred acquisition coststhe delay, the reasons for the year ended December 31, 2011delay, the borrower’s prior payment record, and 2010the amount of the shortfall in relation to the principal and interest owed. Impairment is as follows:measured on a loan-by-loan basis.
| | | 2011 Methodology | | | 2010 Methodology | |
| Year ended Decenber 31, 2011 | | | | | | |
| Deferrred | | $ | (2,262,751 | ) | | $ | (2,621,491 | ) |
| Amortized | | | 230,284 | | | | 589,024 | |
| | | | | | | | | |
| Year ended Decenber 31, 2010 | | | | | | | | |
| Deferrred | | $ | (1,474,041 | ) | | $ | (1,773,199 | ) |
| Amortized | | | 152,191 | | | | 451,349 | |
Amortization of Value of Insurance Business Acquired
As a result of our purchases of FLAC and Family Benefit Life, an asset was recorded in the application of purchase accounting to recognize the value of acquired insurance in force. The costCompany’s value of acquiringacquired insurance businessin 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 is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. AmortizationThe recovery of the value of insurance business acquired is dependent on the future profitability of the underlying business that was $222,451 and $271,465 for the years ended December 31, 2011 and 2010, respectively. The decreaseinitially recorded in the amortizationpurchases of FLAC and Family Benefit Life. Each reporting period, we evaluate the recoverability of the unamortized balance of the value of insurance business acquired.
For the amortization of the value of acquired insurance in force, the Company reviews its estimates of $49,014 reflects improved persistencygross profits each reporting period. The most significant assumptions involved in the whole life, termestimation of gross profits include interest rate spreads; future financial market performance; business surrender and annuity businesslapse rates; mortality and morbidity; expenses and the impact of FLAC acquiredrealized 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 late 2008. which an adjustment is made.
As of December 31, 2012 and 2011 there was no$1,230,982 and $827,409, respectively, of accumulated amortization of the value of insurance business acquired due to the purchasepurchases of FLAC and Family Benefit LifeLife. The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years: $414,820 in 2013, $421,829 in 2014, $409,016 in 2015, $395,025 in 2016 and $381,246 in 2017.
Future Policy Benefits
Our 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.
Estimating liabilities for our long-duration insurance contracts requires management to make various assumptions, including policyholder persistency; mortality rates; investment yields; discretionary benefit increases; new business pricing and operating expense levels. We evaluate historical experience for these factors when assessing the need for changing current assumptions. However, since many of these factors are interdependent and subject to short-term volatility during the long-duration contract period, substantial judgment is required. Actual experience may emerge differently from that occurred atoriginally estimated. Any such difference would be recognized in the endcurrent year’s consolidated statement of income.
Federal Income Taxes
We use 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 basis. 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.
We evaluate our deferred income tax assets, which partially offset our deferred tax liabilities, for any necessary valuation allowances. In doing so, we consider our ability and potential for recovering income taxes associated with such assets, which involve significant judgment. Revisions to the assumptions associated with any necessary valuation allowances would be recognized in the financial statements in the period in which such revisions are made.
Recent Accounting Pronouncements
Fair Value Measurements and Disclosures
In May 2011, the FASB issued new guidance concerning fair value measurements and disclosure. The new guidance is the result of joint efforts by the FASB and the International Accounting Standards Board to develop a single, converged fair value framework on how to measure fair value and the necessary disclosures concerning fair value measurements. This guidance became effective for interim and annual periods beginning after December 15, 2011.
CommissionsThe Company’s adoption of this guidance resulted in a change in certain fair value footnote disclosures but did not have any effect on the Company’s results of operations, financial position or liquidity.
Commissions increased 36.3% from $1,673,975Presentation of Comprehensive Income
In June 2011, the FASB issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in shareholders’ equity. The updated guidance requires that all nonowner changes in shareholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance was effective for the yearquarter ended December 30,March 31, 2012 and was applied retrospectively.
The Company’s adoption of the updated guidance resulted in a change in the presentation of the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued updated guidance to $2,281,934address diversity in practice for the yearaccounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs.
The updated guidance was effective for the quarter ended March 31, 2012. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.
Intangibles - Goodwill and Other
In September 2011, the FASB issued updated guidance that modifies the manner in which the two-step impairment test of goodwill is applied. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology, or customers) that may impact a reporting unit’s fair value and lead to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If an entity determines that it is more likely than not, it must perform an impairment test.
The first step of the impairment test involves comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If the carrying value of a reporting unit exceeds the estimated fair value, a second step must be performed to measure the amount of goodwill impairment, if any. In the second step, the implied fair value of the reporting unit’s goodwill is determined in the same manner as goodwill is measured in a business combination (i.e., by measuring the fair value of the reporting unit’s assets, liabilities and unrecognized intangible assets and determining the remaining amount ascribed to goodwill) and comparing the amount of the implied goodwill to the carrying amount of the goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
The updated guidance was effective for the quarter ended March 31, 2012. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.
Testing Indefinite-Lived Intangible Assets for Impairment
In July 2012, the FASB issued updated guidance regarding the impairment test applicable to indefinite-lived intangible assets that is similar to the impairment guidance applicable to goodwill. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact the fair value of the indefinite-lived intangible asset and lead to the determination that it is more likely than not that the fair value of the asset is less than its carrying value. If an entity determines that it is more likely than not that the fair value of the intangible asset is less than its carrying value, an impairment test must be performed. The impairment test requires an entity to calculate the estimated fair value of the indefinite-lived intangible asset. If the carrying value of the indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess.
The updated guidance is effective for the quarter ending March 31, 2013. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued updated guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement of income or in the notes, separately for each component of comprehensive income, the current period reclassifications out of accumulated other comprehensive income by the respective line items of net income affected by the reclassification.
The updated guidance is effective prospectively for reporting periods beginning after December 31, 2011, an increase15, 2012. The updated guidance will not have any effect on the Company's results of $607,959.operations, financial position or liquidity.
Business Segments
FASB guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units. The increasediscussion of segment operating results that follows is primarily due to:being provided based on segment data prepared in accordance with this methodology. Our business segments are as follows:
| | · | $410,025 increase in final expense first year commissions that corresponds toLife and annuity insurance operations, consisting of the $338,463 increase in final expense first year premiums.operations of TLIC and Family Benefit Life; |
| | · | $378,283 increase in annuity first year, singlePremium finance operations, consisting of the operations of FTCC and renewal commissions that corresponds to the $8,853,768 of increased 2011 annuity considerations deposited.SIS; and |
| | · | $46,091 increase in final expense renewal commissions that corresponds toCorporate operations, which includes the $431,401 increase in final expense renewal year premiums. |
| · | $218,728 decrease in first year whole life and term commissions that corresponds toresults of the $419,958 decrease in other first year premiums due toparent company after the focuselimination of our captive agents on the public stock offering that began on June 29, 2010.intercompany amounts. |
| · | $7,712 decrease in renewal whole life and term commissions that corresponds to a $15,553 decrease in renewal whole life and term premiums due to the focus of our captive agents on the public stock offering that began on June 29, 2010. |
Please see Note 12 to the Consolidated Financial Statements for additional information regarding segment data.
Other Underwriting, Insurance and Acquisition Expenses
Other underwriting,The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources.
FINANCIAL HIGHLIGHTS
Consolidated Condensed Results of Operations for the Year Ended December 31, 2012
| | | Year Ended December 31, | | | | | | Percentage Change | | Family Benefit Life | | | | |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 | | 2012 Results | | | 2012 less 2011 | |
| Premiums | | $ | 8,024,901 | | | $ | 6,229,383 | | | $ | 1,795,518 | | | | 28.8 | % | | $ | 1,177,106 | | | $ | 618,412 | |
| Net investment income | | | 5,920,278 | | | | 2,291,761 | | | | 3,628,517 | | | | 158.3 | % | | | 2,547,865 | | | | 1,080,652 | |
| Net realized investment gains | | | 746,889 | | | | 604,784 | | | | 142,105 | | | | 23.5 | % | | | 199,216 | | | | (57,111 | ) |
| Gain from acquisition of Family Benefit Life | | | - | | | | 6,915,479 | | | | (6,915,479 | ) | | | -100.0 | % | | | - | | | | (6,915,479 | ) |
| Other revenues | | | 116,452 | | | | 182,852 | | | | (66,400 | ) | | | -36.3 | % | | | 140 | | | | (66,540 | ) |
| Total revenues | | | 14,808,520 | | | | 16,224,259 | | | | (1,415,739 | ) | | | -8.7 | % | | | 3,924,327 | | | | (5,340,066 | ) |
| Benefits and claims | | | 9,242,052 | | | | 5,308,825 | | | | 3,933,227 | | | | 74.1 | % | | | 2,408,286 | | | | 1,524,941 | |
| Expenses | | | 4,608,655 | | | | 3,425,163 | | | | 1,183,492 | | | | 34.6 | % | | | 1,268,967 | | | | (85,475 | ) |
| Total benefits, claims and expenses | | | 13,850,707 | | | | 8,733,988 | | | | 5,116,719 | | | | 58.6 | % | | | 3,677,253 | | | | 1,439,466 | |
| Income before federal income tax expense (benefit) | | | 957,813 | | | | 7,490,271 | | | | (6,532,458 | ) | | | -87.2 | % | | | 247,074 | | | | (6,779,532 | ) |
| Federal income tax expense (benefit) | | | (144,068 | ) | | | 130,278 | | | | (274,346 | ) | | | -210.6 | % | | | (119,032 | ) | | | (155,314 | ) |
| Net income | | $ | 1,101,881 | | | $ | 7,359,993 | | | $ | (6,258,112 | ) | | | -85.0 | % | | $ | 366,106 | | | $ | (6,624,218 | ) |
Net income per common share basic and diluted | | $ | 0.14 | | | $ | 1.00 | | | $ | (0.86 | ) | | | | | | | | | | | | |
Consolidated Condensed Financial Position as of December 31, 2012
| | | December 31, 2012 | | | December 31, 2011 | | | Increase (Decrease) 2012 to 2011 | | | Percentage Change 2012 to 2011 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Investment assets | | $ | 133,846,664 | | | $ | 98,750,416 | | | $ | 35,096,248 | | | | 35.5 | % |
| Other assets | | | 31,603,653 | | | | 45,997,239 | | | | (14,393,586 | ) | | | -31.3 | % |
| Total assets | | $ | 165,450,317 | | | $ | 144,747,655 | | | $ | 20,702,662 | | | | 14.3 | % |
| | | | | | | | | | | | | | | | | |
| Policy liabilities | | $ | 126,966,173 | | | $ | 111,269,643 | | | $ | 15,696,530 | | | | 14.1 | % |
| Deferred federal income taxes | | | 3,301,524 | | | | 2,622,711 | | | | 678,813 | | | | 25.9 | % |
| Other liabilities | | | 1,460,508 | | | | 2,457,188 | | | | (996,680 | ) | | | -40.6 | % |
| Total liabilities | | | 131,728,205 | | | | 116,349,542 | | | | 15,378,663 | | | | 13.2 | % |
| Shareholders' equity | | | 33,722,112 | | | | 28,398,113 | | | | 5,323,999 | | | | 18.7 | % |
| Total liabilities and shareholders' equity | | $ | 165,450,317 | | | $ | 144,747,655 | | | $ | 20,702,662 | | | | 14.3 | % |
| | | | | | | | | | | | | | | | | |
| Shareholders' equity per common share | | $ | 4.29 | | | $ | 3.67 | | | $ | 0.62 | | | | 17.0 | % |
Results of Operations – Years Ended December 31, 2012 and 2011
Revenues
Our primary sources of revenue are life insurance premium income and acquisition expenses decreased 9.1%investment income. Premium payments are classified as first-year, renewal and single. In addition, realized gains and losses on investment holdings can significantly impact revenues from period to $3,249,353period. The impact on total revenues of Family Benefit Life total revenues, acquired on December 28, 2011, for the year ended December 31, 2010 to $2,953,2452012 is summarized in the tables below.
Our revenues for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Years Ended December 31, | | | | | | Percentage Change | | Family Benefit Life | | | | |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 | | 2012 Results | | | 2012 less 2011 | |
| Premiums | | $ | 8,024,901 | | | $ | 6,229,383 | | | $ | 1,795,518 | | | | 28.8 | % | | $ | 1,177,106 | | | $ | 618,412 | |
| Income from premium financing | | | 102,491 | | | | 168,124 | | | | (65,633 | ) | | | -39.0 | % | | | - | | | | (65,633 | ) |
| Net investment income | | | 5,920,278 | | | | 2,291,761 | | | | 3,628,517 | | | | 158.3 | % | | | 2,547,865 | | | | 1,080,652 | |
| Net realized investment gains | | | 746,889 | | | | 604,784 | | | | 142,105 | | | | 23.5 | % | | | 199,216 | | | | (57,111 | ) |
| Gain from acquisition of Family benefit Life | | | - | | | | 6,915,479 | | | | (6,915,479 | ) | | | -100.0 | % | | | - | | | | (6,915,479 | ) |
| Other income | | | 13,961 | | | | 14,728 | | | | (767 | ) | | | -5.2 | % | | | 140 | | | | (907 | ) |
| Total revenues | | $ | 14,808,520 | | | $ | 16,224,259 | | | $ | (1,415,739 | ) | | | -8.7 | % | | $ | 3,924,327 | | | $ | (5,340,066 | ) |
The decrease of $5,340,066 in total revenues for the year ended December 31, 2012, excluding Family Benefit Life revenues, is discussed below.
Premiums
Our premiums for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Years Ended December 31, | | | Increase (Decrease) | | | Percentage Change |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 |
| Family Benefit Life | | $ | 1,177,106 | | | $ | - | | | $ | 1,177,106 | | | | - | |
| Whole life and term first year | | | 226,835 | | | | 62,722 | | | | 164,113 | | | | 261.7 | % |
| Whole life and term renewal | | | 2,214,485 | | | | 2,356,464 | | | | (141,979 | ) | | | -6.0 | % |
| Final expense first year | | | 1,058,505 | | | | 1,105,504 | | | | (46,999 | ) | | | -4.3 | % |
| Final expense renewal | | | 3,347,970 | | | | 2,704,693 | | | | 643,277 | | | | 23.8 | % |
| Total premiums | | $ | 8,024,901 | | | $ | 6,229,383 | | | $ | 1,795,518 | | | | 28.8 | % |
The $618,412 increase in premiums for the year ended December 31, 2012, excluding Family Benefit Life premiums, is primarily due to a $643,277 increase in final expense renewal premiums.
Income from Premium Financing
The income from premium financing has steadily decreased during the past two years. There was a decrease of $296,108. The decrease is primarily due to:$65,633 for the year ended December 31, 2012.
| · | $304,000 decrease in salaries and wages primarily due to decreased 2011 staffing levels and 2011 staffing resources utilized on the public stock offering that were capitalized as offering costs that reduced additional paid in capital in the shareholders’ equity section of the statement of financial position. |
As introduced above, the Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continues to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
| · | $175,000 decrease in loan losses and other operating expenses in the premium finance operations due to the decline in production of new loans and our focus on business in Oklahoma and with profitable agencies. |
Net Investment Income
| · | $98,000 decrease in agency costs due to the focus of our captive agents on the public stock offering where those agency costs are capitalized as offering costs that reduced additional paid in capital in the shareholders’ equity section of the statement of financial position. |
The major components of our net investment income for the years ended December 31, 2012 and 2011 are summarized as follows:| | | Years Ended December 31, | | | | | | Percentage Change | | Family Benefit Life | | | | |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 | | 2012 Results | | | 2012 less 2011 | |
| Fixed maturity securities | | $ | 4,194,409 | | | $ | 1,718,804 | | | $ | 2,475,605 | | | | 144.0 | % | | $ | 2,218,935 | | | $ | 256,670 | |
| Equity securities | | | 49,235 | | | | 55,725 | | | | (6,490 | ) | | | -11.6 | % | | | 18,369 | | | | (24,859 | ) |
| Other long-term investments | | | 1,188,323 | | | | 599,468 | | | | 588,855 | | | | 98.2 | % | | | 333,739 | | | | 255,116 | |
| Mortgage loans | | | 544,567 | | | | 116,219 | | | | 428,348 | | | | 368.6 | % | | | 6,057 | | | | 422,291 | |
| Real estate | | | 370,620 | | | | 348,002 | | | | 22,618 | | | | 6.5 | % | | | 11,250 | | | | 11,368 | |
| Policy loans | | | 100,120 | | | | 32,233 | | | | 67,887 | | | | 210.6 | % | | | 62,458 | | | | 5,429 | |
| Short-term and other investments | | | 21,939 | | | | 22,763 | | | | (824 | ) | | | -3.6 | % | | | 5,650 | | | | (6,474 | ) |
| Gross investment income | | | 6,469,213 | | | | 2,893,214 | | | | 3,575,999 | | | | 123.6 | % | | | 2,656,458 | | | | 919,541 | |
| Investment expenses | | | (548,935 | ) | | | (601,453 | ) | | | (52,518 | ) | | | 8.7 | % | | | (108,593 | ) | | | (161,111 | ) |
| Net investment income | | $ | 5,920,278 | | | $ | 2,291,761 | | | $ | 3,628,517 | | | | 158.3 | % | | $ | 2,547,865 | | | $ | 1,080,652 | |
The $919,541 increase in gross investment income for the year ended December 31, 2012, excluding Family Benefit Life gross investment income, is due to the 2012 investment of excess cash primarily in fixed maturity securities, other long-term investments (lottery receivables) and mortgage loans.
| · | $93,000 decrease in travel and entertainment and other home office expenses related to a 2011 cost containment program. |
The $161,111 decrease in investment expenses for the year ended December 31, 2012, excluding Family Benefit Life investment expenses, is due to $117,000 of decreased investment advisory management service fees and $72,000 of decreased investment real estate expenses that more than offset $28,000 of increased loan origination fees.Net Realized Investment Gains
| · | $41,000 decrease in employee benefits primarily due to decreased staffing levels. |
There was a $142,105 increase in net realized investment gains for the year ended December 31, 2012.
| · | $303,000 increase in professional fees primarily related to engagement of actuaries, lawyers and other professionals to assist with due diligence and other acquisition activities and stock dividend fees. |
The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $228,320 for the year ended December 31, 2012 resulted from proceeds of $9,511,967 for these securities that had carrying values of $9,283,647 at the 2012 disposal dates.
| · | $93,000 increase in third party administration fees related to an increase in services provided, increased number of policies administered and increased underwriting and new business services related to increased final expense production. |
The net realized investment gains from the sales of equity securities available-for-sale of $442,737 for the year ended December 31, 2012 resulted from proceeds of $1,114,426 for these securities that had carrying values of $671,689 at the 2012 disposal dates.
| · | $19,000 increase in other underwriting, insurance and acquisition expenses. |
The net realized investment gains from the sale of investment real estate of $75,832 for the year ended December 31, 2012 resulted from proceeds of $512,500 for two buildings that had a carrying value of $436,668 at the 2012 disposal date.
Federal Income Taxes
FTFC files a consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC or Family Benefit Life. TLIC and Family Benefit Life are taxed as a life insurance companies under the provisions of the Internal Revenue Code and must file separate tax returns until they have been a member of the consolidated filing group for five years. Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes. For the years ended December 31, 2011 and 2010, deferred income tax expense (benefit) was $96,183 and ($206,526), respectively. Current income taxes were $34,095 for the year ended December 31, 2011. There were no current income taxes for the year ended December 31, 2010.
Net Income (Loss) and Net Income (Loss) Per Common Share Basic and Diluted
For the years ended December 31, 2011 and 2010, respectively, there was net income of $7,359,993 and $91,336.
Net income 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, 2011 and 2010 were 7,349,296 and 6,547,177, respectively. These weighted average shares reflect the retrospective adjustment for the impacts of the 5% stock dividend declared by the Company on January 10, 2011 and January 11, 2012 and payable to holders of shares of the Company as of March 10, 2011 and March 10, 2012.
The Company issued 323,777 shares in connection withnet realized investment gains from the 2011 stock dividend that resulted in accumulated deficit being charged $2,428,328 with an offsetting creditsales and maturities of $2,428,328 to common stock and additional paid-in capital. This was a non-cash investing and financing activity. It is anticipated that approximately 378,000 shares will be issued in connection with the 2012 stock dividend that will result in accumulated deficit being charged by approximately $2,835,000 with an offsetting creditfixed maturity securities available-for-sale of approximately $2,835,000 to common stock and additional paid-in capital. This will also be a non-cash investing and financing activity.
Business Segments
Life and Annuity Insurance Operations
Revenues from Life and Annuity Insurance Operations increased 88.5% from $8,495,479 for year ended December 31, 2010 to $16,011,386$606,935 for the year ended December 31, 2011 an increaseresulted from proceeds of $7,515,907. $4,671,870 for these securities that had carrying values of $4,064,935 at the 2011 disposal dates.
There were no sales of equity securities available-for-sale for the year ended December 31, 2011.
The increasenet realized investment losses from the sale of investment real estate of $2,151 for the year ended December 31, 2011 resulted from proceeds of $49,000 for the sale of land that had a carrying value of $51,151 at the 2011 disposal date.
We have recorded no other-than-temporary impairments in revenue2012 and 2011.
Gain from 2010 toAcquisition of Family Benefit Life
In late December 2011, primarily relates towe acquired 100% ownership of Family Benefit Life from its shareholders for $13,855,129 paid in cash. The fair value of the net assets acquired in this transaction was $20,770,608. Since the fair value of the net assets acquired exceeded the cost paid for those assets by $6,915,479, the residual was recorded in the consolidated statements of operations as a component of revenues captioned “Gain from acquisition of Family Benefit Life” per the requirements of FASB Codification Topic 805 “Business Combinations.” The reason for the gain from the acquisition of Family Benefit Life and $447,635related primarily to that company’s management not being committed to rebuild the marketing force of increased net realized investment gains.that company in the current economic environment.
The total acquisition date fair value of the net assets acquired from Family Benefit Life in late December 2011 is as follows:
| Category of Net Asset Acquired | | Fair Value | |
| Available-for-sale fixed maturity securities | | $ | 56,252,307 | |
| Available-for-sale equity securities | | | 304,773 | |
| Mortgage loans on real estate | | | 79,710 | |
| Investment real estate | | | 582,560 | |
| Policy loans | | | 1,047,378 | |
| Other invested assets | | | 110 | |
| Cash and cash equivalents | | | 9,103,505 | |
| Accrued investment income | | | 775,438 | |
| Recoverable from reinsurers | | | 120,068 | |
| Agents' balances and due premiums | | | 16,476 | |
| Value of insurance business acquired | | | 5,627,662 | |
| Other assets | | | 10,336 | |
| Policyholders' account balances | | | (36,746,133 | ) |
| Future policy benefits | | | (13,502,833 | ) |
| Policy claims | | | (166,593 | ) |
| Premiums paid in advance | | | (12,214 | ) |
| Deferred federal income taxes | | | (2,188,650 | ) |
| Current federal taxes payable | | | (36,720 | ) |
| Other liabilities | | | (496,572 | ) |
| Fair value of net assets acquired | | $ | 20,770,608 | |
| Cash paid as purchase consideration | | $ | (13,855,129 | ) |
| Gain from acquisition of Family Benefit Life | | $ | 6,915,479 | |
Other Income
The $907 decrease in other income beforefor the year ended December 31, 2012, excluding Family Benefit Life other income, is primarily due to decrease service fees.
Total Benefits, Claims and Expenses
Our benefits, claims and expenses are primarily generated from benefit payments, surrenders, interest credited to policyholders, change in reserves, commissions and other underwriting, insurance and acquisition expenses. Benefit payments can significantly impact expenses from period to period.
The impact on total federal income taxes frombenefits, claims and expenses of Family Benefit Life total benefits, claims and Annuity Insurance Operations was $8,238,255expenses, acquired on December 28, 2011, for the year ended December 31, 2012 is summarized in the tables below.
Our benefits, claims and $736,035, respectively,expenses for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Years Ended December 31, | | | | | | Percentage Change | | Family Benefit Life | | | | |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 | | 2012 Results | | | 2012 less 2011 | |
| Benefits and claims | | | | | | | | | | | | | | | | | | |
| Increase (decrease) in future policy benefits | | $ | 2,054,925 | | | $ | 1,982,865 | | | $ | 72,060 | | | | 3.6 | % | | $ | (407,069 | ) | | $ | 479,129 | |
| Death benefits | | | 2,863,555 | | | | 1,479,188 | | | | 1,384,367 | | | | 93.6 | % | | | 852,322 | | | | 532,045 | |
| Surrenders | | | 583,498 | | | | 336,062 | | | | 247,436 | | | | 73.6 | % | | | 310,827 | | | | (63,391 | ) |
| Interest credited to policyholders | | | 3,330,592 | | | | 1,510,710 | | | | 1,819,882 | | | | 120.5 | % | | | 1,242,724 | | | | 577,158 | |
| Dividend and supplementary life contract benefits | | | 409,482 | | | | - | | | | 409,482 | | | | - | | | | 409,482 | | | | - | |
| Total benefits and claims | | | 9,242,052 | | | | 5,308,825 | | | | 3,933,227 | | | | 74.1 | % | | | 2,408,286 | | | | 1,524,941 | |
| Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Policy acquisition costs deferred | | | (2,302,070 | ) | | | (2,262,751 | ) | | | (39,319 | ) | | | 1.7 | % | | | - | | | | (39,319 | ) |
| Amortization of deferred policy acquisition costs | | | 512,546 | | | | 230,284 | | | | 282,262 | | | | 122.6 | % | | | - | | | | 282,262 | |
| Amortization of value of insurance business acquired | | | 403,573 | | | | 222,451 | | | | 181,122 | | | | 81.4 | % | | | 225,106 | | | | (43,984 | ) |
| Commissions | | | 2,324,073 | | | | 2,281,934 | | | | 42,139 | | | | 1.8 | % | | | 32,053 | | | | 10,086 | |
| Other underwriting, insurance and acquisition expenses | | | 3,670,533 | | | | 2,953,245 | | | | 717,288 | | | | 24.3 | % | | | 1,011,808 | | | | (294,520 | ) |
| Total expenses | | | 4,608,655 | | | | 3,425,163 | | | | 1,183,492 | | | | 34.6 | % | | | 1,268,967 | | | | (85,475 | ) |
| Total benefits, claims and expenses | | $ | 13,850,707 | | | $ | 8,733,988 | | | $ | 5,116,719 | | | | 58.6 | % | | $ | 3,677,253 | | | $ | 1,439,466 | |
The increase of $1,439,466 in total benefits, claims and 2010. The $7,502,220 increased profitabilityexpenses for 2011 compared to 2010 is primarily due to the $6,915,479 gain from the acquisition ofyear ended December 31, 2012, excluding Family Benefit Life benefits, claims and $447,635 of increased net realized investment gains.expenses, is discussed below.
Premium Finance Operations
RevenuesThe Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continues to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
The premium finance subsidiary, FTCC, has provided premium financing to individuals and businesses. Many casualty insurance carriers require their premiums to be paid on an annual or lump sum basis. A premium finance company finances these casualty premiums. A typical premium finance contract requires the insured to pay 25% of the premium up front and the balance is paid over a nine month period. Premium financing is unique in that the unpaid balance due the company is lower than the unearned premium, which has in effect been assigned to the company in the event of non-payment, thus, the element of risk is minimized.
FTCC was capitalized with $4,000,000 from FTFC. The Company engages in the premium finance business, independent of its life insurance business. FTCC is licensed to conduct premium finance business in Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. Until the May 16, 2012 announcement discussed above, FTCC had historically contracted with over 200 insurance agencies to finance their casualty insurance premiums but two years ago focused on financing with approximately 30 agencies primarily in Oklahoma. There was no guarantee that those agencies would write premium financing contracts with FTCC. FTCC was not dependent on a single customer or a few major customers. During 2011, FTCC returned $1,000,000 of capital to FTFC. During 2012, FTCC returned $650,000 of capital to FTFC.
Premium finance companies are regulated by the individual states with no uniformity among state regulations. Commercial insurance premium finance transactions are not regulated directly in Oklahoma. Consumer insurance premium finance transactions are considered a consumer credit sale and are subject to the Oklahoma Uniform Consumer Credit Code. Therefore the regulation of the transaction is by the Oklahoma Department of Consumer Credit under the consumer credit laws. FTCC is regulated by the Department of Banking in Mississippi.
Finance Operationscompanies are subject to interest rate fluctuations. An increase in the cost of funds or a decrease in interest rates that FTCC charged could affect profitability.
The premium financing business is highly competitive in every channel in which FTCC competed. FTCC competed with large financial institutions most of which may have greater financial, marketing and other resources than FTCC. FTCC targeted the niche market of small businesses and individual consumers needing casualty insurance financing and faced competition with many specialty financing businesses. Some competitors were affiliated with property and casualty writing agencies and may have advantageous marketing relationships with their affiliates.
SIS, a property and casualty insurance agency acquired in 2009, wrote commercial and personal lines of insurance, primarily in the state of Mississippi. SIS is no longer operating as a property and casualty insurance agency and currently has no operations.
Employees
As of March 11, 2013, the Company had nine full-time employees and one part-time employee.
The Company leases 6,769 square feet of office space pursuant to a five-year lease that began October 1, 2010 and leased 950 square feet of office space effective December 15, 2009 that terminated 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 lease, the monthly rent is $7,897 from October 1, 2010 through September 30, 2015. The Company incurred rent expense of $76,136 and $72,809 for the years ended December 31, 2012 and 2011, respectively, under this lease and other minor leases. The Company received a $120,000 leasehold improvement allowance from the lessor that is being amortized over the non-cancellable lease term that reduced incurred rent expense by $25,263 for each of the years ended December 31, 2012 and 2011. Future minimum lease payments to be paid under non cancelable lease agreements are $94,764 for 2013 and 2014 and $71,073 in 2015.
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. On December 24, 2009, TLIC entered into a five year lease of approximately 7,500 square feet of its building in Topeka, Kansas with an option for the lessee to renew the lease for five additional years. The monthly lease payments are as follows: $9,130 in 2011 and 2012 and $9,371 in 2013 and 2014.
TLIC has also leased 10,000 square feet in the Topeka, Kansas office building 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. This lease was renewed on July 1, 2011 to run through May 31, 2016. Beginning July 1, 2014, the lessee can terminate the lease with a 180 day written notice. The lease agreement calls for minimum monthly base lease payments of $17,535.
Effective August 29, 2005, TLIC executed a lease agreement for 2,500 square feet of the Topeka, Kansas office building. The base lease period commenced on September 1, 2005 and ended on August 31, 2010. The lease automatically renewed on August 15, 2010, for another five years with a 90 day notice by the lessee to terminate the lease. The lease agreement called for minimum monthly base lease payments of $4,332 through August 31, 2010. The lease payments decreased 48.5%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 $360,072, $360,072, $235,220 and $87,675 for the years 2013 through 2016, respectively.
Family Benefit Life owned approximately one and one-half acres of land located in Jefferson City, Missouri. A 6,100 square foot building (serving as Family Benefit Life’s headquarters) and a 2,200 square foot building (leased to a third party) are on one acre of this land and the other half acre is held for sale. In October 2012, both of the buildings were sold.
With respect to the 2,200 square foot building, Family Benefit Life entered into a one-year lease beginning August 1, 2010 and ending July 31, 2011. The lease could have been renewed annually if no termination notice was given by either party on or before May 1. No notice was given by either party on May 1, 2011 or May 1, 2012 and therefore the lease was renewed for additional one-year periods. The tenant paid Family Benefit Life $15,000 per year in monthly installments of $1,250. In connection with the October 2012 sale of the two buildings, the underlying third party lease was transferred to the new owner. The new owner also charged the Company $12,152 of rent during the last three months of 2012.
Item 3. Legal Proceedings
There are no material legal proceedings pending against the Company or its subsidiaries or of which any of their property is the subject. There are no proceedings in which any director, officer, affiliate or shareholder of the Company, or any of their associates, is a party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.
Item 4. Mine Safety Disclosures
None
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
Trading of the Company’s common stock is limited and an established public market does not exist.
(i) Holders
As of March 12, 2012 there were approximately 4,000 shareholders of the Company’s outstanding common stock.
(ii) Dividends
The Company has not paid any cash dividends since inception (April 19, 2004). The Board of Directors of the Company has not adopted a dividend payment policy; however, dividends must necessarily depend upon the Company's earnings and financial condition, applicable legal restrictions, and other factors relevant at the time the Board of Directors considers a dividend policy. Cash available for dividends to shareholders of the Company must initially come from $323,816income and capital gains earned on its investment portfolio and dividends paid by the Company’s subsidiaries.
Provisions of the Oklahoma Insurance Code relating to insurance holding companies subject transactions between the Company and TLIC and the Company and Family Benefit Life, including dividend payments, to certain standards generally intended to prevent such transactions from adversely affecting the adequacy of life insurance subsidiaries' capital and surplus available to support policyholder obligations. In addition, under the Oklahoma General Corporation Act, the Company may not pay dividends if, after giving effect to a dividend, it would not be able to pay its debts as they become due in the usual course of business or if its total liabilities would exceed its total assets.
On January 10, 2011, the Company’s Board of Directors approved a 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold. The dividend was payable to the holders of shares of the Company as of March 10, 2011. Fractional shares were rounded to the nearest whole number of shares. The Company issued 323,777 shares in connection with the stock dividend that resulted in accumulated earnings being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital.
On January 11, 2012, the Company’s Board of Directors approved another 5% share dividend by whichshareholders received a share of common stock for each 20 shares of common stock of the Company theyhold. The dividend was payable to the holders of shares of the Company as of March 10, 2012. Fractional shares were rounded to the nearest whole number of shares. The Company issued 378,928 shares in connection with the stock dividend that resulted in accumulated earnings being charged $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital.
(iii) Securities Authorized for Issuance Under Equity Compensation Plans
There are no plans under which equity securities are authorized for issuance.
(b) None
(c) The Company repurchased 185,313 shares of its common stock from former members of the Board of Directors at a cost of $648,595 during 2012.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
First Trinity Financial Corporation (“we” “us”, “our”, or the Company) conducts operations as an insurance holding company emphasizing ordinary life insurance products in niche markets and a premium finance company, financing casualty insurance premiums.
As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core TLIC operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense, term and annuity products to predominately middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas through independent agents. With the acquisition of Family Benefit Life in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico. In late 2012, Family Benefit Life was initially licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia.
We also realize revenues from our investment portfolio, which is a key component of our operations. The revenues we collect as premiums from policyholders are invested to ensure future benefit payments under the policy contracts. Life insurance companies earn profits on the investment spread, which reflects the investment income earned on the premiums paid to the insurer between the time of receipt and the time benefits are paid out under policies. Changes in interest rates, changes in economic conditions and volatility in the capital markets can all impact the amount of earnings that we realize from our investment portfolio.
We provide financing for casualty insurance premiums through independent property and casualty insurance agents. We are licensed in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma.
The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continues to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
Recent Acquisitions
The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance business. In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of First Life America Corporation, included in the life insurance segment, for $2,500,000 and had additional acquisition related expenses of $195,000.
In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of Family Benefit Life Insurance Company, included in the life insurance segment, for $13,855,129. Given that the Family Benefit Life acquisition occurred in late December 2011, the acquisition only impacts the Company’s consolidated statement of financial position as of December 31, 2011 and not the Company’s consolidated statement of operations for the year ended December 31, 2011. Family Benefit Life’s 2012 operating results are reflected in the Company’s consolidated statement of operations for the year ended December 31, 2012.
Our profitability in the life insurance segment is a function of our ability to accurately price the policies that we write, adequately value life insurance business acquired and administer life insurance company acquisitions at an expense level that validates the acquisition cost. Profitability in the premium financing segment is dependent on the Company’s ability to compete in that sector, maintain low administrative costs and minimize losses. However, as introduced above, the Company has discontinued its premium financing operations and will completely exit that segment of the business on approximately July 1, 2013.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition, results of operations and liquidity and capital resources is based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We evaluate our estimates and assumptions continually, including those related to investments, deferred acquisition costs, loans from premium financing, allowance for loans losses from premium financing, value of insurance business acquired, policy liabilities, income taxes, regulatory requirements, contingencies and litigation. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies, judgments and estimates are the most critical to the preparation of our consolidated financial statements.
Investments in Fixed Maturities and Equity Securities
We hold fixed maturities and equity interests in a variety of companies. We continuously evaluate all of our investments based on current economic conditions, credit loss experience and other developments. We evaluate the difference between the cost/amortized cost and estimated fair value of our investments to determine whether any decline in fair value is other-than-temporary in nature. This determination involves a degree of uncertainty. If a decline in the fair value of a security is determined to be temporary, the decline is recognized in other comprehensive income (loss) within shareholders’ equity. If a decline in a security’s fair value is considered to be other-than-temporary, we then determine the proper treatment for the other-than-temporary impairment.
For fixed maturities, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security. The amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security. For equity securities, the amount of any other-than temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security.
The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security. It is not possible to accurately predict when it may be determined that a specific security will become impaired. Future adverse changes in market conditions, poor operating results of underlying investments and defaults on interest and principal payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future. In addition, if a change occurs in our intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that we will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result. If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, we amortize the reduced book value back to the security’s expected recovery value over the remaining term of the bond. We continue to review the security for further impairment that would prompt another write-down in the book value.
Deferred Policy Acquisition Costs
Commissions and other acquisition costs which vary with and are primarily related to the successful production of new and renewal insurance contracts are deferred and amortized in a systematic manner based on the related contract revenues or gross profits as appropriate. The recovery of deferred acquisition costs is dependent on the future profitability of the underlying business for which acquisition costs were incurred. Each reporting period, we evaluate the recoverability of the unamortized balance of deferred acquisition costs. We consider estimated future gross profits or future premiums; expected mortality or morbidity; interest earned and credited rates; persistency and expenses in determining whether the balance is recoverable.
If we determine a portion of the unamortized balance is not recoverable, it is immediately charged to amortization expense. The assumptions we use to amortize and evaluate the recoverability of the deferred acquisition costs involve significant judgment. A revision to these assumptions may impact future financial results. Deferred acquisition costs related to the successful production of new and renewal insurance business for traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities.
Deferred acquisition costs related to the successful production of new and renewal insurance and annuity products 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 (i.e., limited-payment long-duration annuity contracts) are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies. To the extent that realized gains and losses on securities result in adjustments to deferred acquisition costs related to insurance and annuity products, such adjustments are reflected as a component of the amortization of deferred acquisition costs.
Deferred acquisition costs related to limited-payment long-duration insurance and annuity contracts are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from 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.
Loans from Premium Financing and Allowance for 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 78s 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. 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.
The allowance for possible loan losses from financing property and 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 and reduces the carrying value of 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 our control, including the performance of the 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 we 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 us 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. We determine 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-loan basis.
Value of Insurance Business Acquired
As a result of our purchases of FLAC and Family Benefit Life, 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 is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. The recovery of the value of insurance business acquired is dependent on the future profitability of the underlying business that was initially recorded in the purchases of FLAC and Family Benefit Life. Each reporting period, we evaluate the recoverability of the unamortized balance of the value of insurance business acquired.
For the amortization of the value of acquired insurance in force, the Company reviews its estimates of gross profits each reporting period. The most significant assumptions involved in the estimation of gross profits include interest rate spreads; future financial market performance; business surrender and 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.
As of December 31, 2012 and 2011 there was $1,230,982 and $827,409, respectively, of accumulated amortization of the value of insurance business acquired due to the purchases of FLAC and Family Benefit Life. The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years: $414,820 in 2013, $421,829 in 2014, $409,016 in 2015, $395,025 in 2016 and $381,246 in 2017.
Future Policy Benefits
Our 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.
Estimating liabilities for our long-duration insurance contracts requires management to make various assumptions, including policyholder persistency; mortality rates; investment yields; discretionary benefit increases; new business pricing and operating expense levels. We evaluate historical experience for these factors when assessing the need for changing current assumptions. However, since many of these factors are interdependent and subject to short-term volatility during the long-duration contract period, substantial judgment is required. Actual experience may emerge differently from that originally estimated. Any such difference would be recognized in the current year’s consolidated statement of income.
Federal Income Taxes
We use 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 basis. 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.
We evaluate our deferred income tax assets, which partially offset our deferred tax liabilities, for any necessary valuation allowances. In doing so, we consider our ability and potential for recovering income taxes associated with such assets, which involve significant judgment. Revisions to the assumptions associated with any necessary valuation allowances would be recognized in the financial statements in the period in which such revisions are made.
Recent Accounting Pronouncements
Fair Value Measurements and Disclosures
In May 2011, the FASB issued new guidance concerning fair value measurements and disclosure. The new guidance is the result of joint efforts by the FASB and the International Accounting Standards Board to develop a single, converged fair value framework on how to measure fair value and the necessary disclosures concerning fair value measurements. This guidance became effective for interim and annual periods beginning after December 15, 2011.
The Company’s adoption of this guidance resulted in a change in certain fair value footnote disclosures but did not have any effect on the Company’s results of operations, financial position or liquidity.
Presentation of Comprehensive Income
In June 2011, the FASB issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in shareholders’ equity. The updated guidance requires that all nonowner changes in shareholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance was effective for the quarter ended March 31, 2012 and was applied retrospectively.
The Company’s adoption of the updated guidance resulted in a change in the presentation of the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued updated guidance to $166,919address diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs.
The updated guidance was effective for the quarter ended March 31, 2012. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.
Intangibles - Goodwill and Other
In September 2011, the FASB issued updated guidance that modifies the manner in which the two-step impairment test of goodwill is applied. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology, or customers) that may impact a reporting unit’s fair value and lead to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If an entity determines that it is more likely than not, it must perform an impairment test.
The first step of the impairment test involves comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If the carrying value of a reporting unit exceeds the estimated fair value, a second step must be performed to measure the amount of goodwill impairment, if any. In the second step, the implied fair value of the reporting unit’s goodwill is determined in the same manner as goodwill is measured in a business combination (i.e., by measuring the fair value of the reporting unit’s assets, liabilities and unrecognized intangible assets and determining the remaining amount ascribed to goodwill) and comparing the amount of the implied goodwill to the carrying amount of the goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
The updated guidance was effective for the quarter ended March 31, 2012. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.
Testing Indefinite-Lived Intangible Assets for Impairment
In July 2012, the FASB issued updated guidance regarding the impairment test applicable to indefinite-lived intangible assets that is similar to the impairment guidance applicable to goodwill. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact the fair value of the indefinite-lived intangible asset and lead to the determination that it is more likely than not that the fair value of the asset is less than its carrying value. If an entity determines that it is more likely than not that the fair value of the intangible asset is less than its carrying value, an impairment test must be performed. The impairment test requires an entity to calculate the estimated fair value of the indefinite-lived intangible asset. If the carrying value of the indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess.
The updated guidance is effective for the quarter ending March 31, 2013. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued updated guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement of income or in the notes, separately for each component of comprehensive income, the current period reclassifications out of accumulated other comprehensive income by the respective line items of net income affected by the reclassification.
The updated guidance is effective prospectively for reporting periods beginning after December 15, 2012. The updated guidance will not have any effect on the Company's results of operations, financial position or liquidity.
Business Segments
FASB guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units. The discussion of segment operating results that follows is being provided based on segment data prepared in accordance with this methodology. Our business segments are as follows:
| · | Life and annuity insurance operations, consisting of the operations of TLIC and Family Benefit Life; |
| · | Premium finance operations, consisting of the operations of FTCC and SIS; and |
| · | Corporate operations, which includes the results of the parent company after the elimination of intercompany amounts. |
Please see Note 12 to the Consolidated Financial Statements for additional information regarding segment data.
The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources.
FINANCIAL HIGHLIGHTS
Consolidated Condensed Results of Operations for the Year Ended December 31, 2012
| | | Year Ended December 31, | | | | | | Percentage Change | | Family Benefit Life | | | | |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 | | 2012 Results | | | 2012 less 2011 | |
| Premiums | | $ | 8,024,901 | | | $ | 6,229,383 | | | $ | 1,795,518 | | | | 28.8 | % | | $ | 1,177,106 | | | $ | 618,412 | |
| Net investment income | | | 5,920,278 | | | | 2,291,761 | | | | 3,628,517 | | | | 158.3 | % | | | 2,547,865 | | | | 1,080,652 | |
| Net realized investment gains | | | 746,889 | | | | 604,784 | | | | 142,105 | | | | 23.5 | % | | | 199,216 | | | | (57,111 | ) |
| Gain from acquisition of Family Benefit Life | | | - | | | | 6,915,479 | | | | (6,915,479 | ) | | | -100.0 | % | | | - | | | | (6,915,479 | ) |
| Other revenues | | | 116,452 | | | | 182,852 | | | | (66,400 | ) | | | -36.3 | % | | | 140 | | | | (66,540 | ) |
| Total revenues | | | 14,808,520 | | | | 16,224,259 | | | | (1,415,739 | ) | | | -8.7 | % | | | 3,924,327 | | | | (5,340,066 | ) |
| Benefits and claims | | | 9,242,052 | | | | 5,308,825 | | | | 3,933,227 | | | | 74.1 | % | | | 2,408,286 | | | | 1,524,941 | |
| Expenses | | | 4,608,655 | | | | 3,425,163 | | | | 1,183,492 | | | | 34.6 | % | | | 1,268,967 | | | | (85,475 | ) |
| Total benefits, claims and expenses | | | 13,850,707 | | | | 8,733,988 | | | | 5,116,719 | | | | 58.6 | % | | | 3,677,253 | | | | 1,439,466 | |
| Income before federal income tax expense (benefit) | | | 957,813 | | | | 7,490,271 | | | | (6,532,458 | ) | | | -87.2 | % | | | 247,074 | | | | (6,779,532 | ) |
| Federal income tax expense (benefit) | | | (144,068 | ) | | | 130,278 | | | | (274,346 | ) | | | -210.6 | % | | | (119,032 | ) | | | (155,314 | ) |
| Net income | | $ | 1,101,881 | | | $ | 7,359,993 | | | $ | (6,258,112 | ) | | | -85.0 | % | | $ | 366,106 | | | $ | (6,624,218 | ) |
Net income per common share basic and diluted | | $ | 0.14 | | | $ | 1.00 | | | $ | (0.86 | ) | | | | | | | | | | | | |
Consolidated Condensed Financial Position as of December 31, 2012
| | | December 31, 2012 | | | December 31, 2011 | | | Increase (Decrease) 2012 to 2011 | | | Percentage Change 2012 to 2011 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Investment assets | | $ | 133,846,664 | | | $ | 98,750,416 | | | $ | 35,096,248 | | | | 35.5 | % |
| Other assets | | | 31,603,653 | | | | 45,997,239 | | | | (14,393,586 | ) | | | -31.3 | % |
| Total assets | | $ | 165,450,317 | | | $ | 144,747,655 | | | $ | 20,702,662 | | | | 14.3 | % |
| | | | | | | | | | | | | | | | | |
| Policy liabilities | | $ | 126,966,173 | | | $ | 111,269,643 | | | $ | 15,696,530 | | | | 14.1 | % |
| Deferred federal income taxes | | | 3,301,524 | | | | 2,622,711 | | | | 678,813 | | | | 25.9 | % |
| Other liabilities | | | 1,460,508 | | | | 2,457,188 | | | | (996,680 | ) | | | -40.6 | % |
| Total liabilities | | | 131,728,205 | | | | 116,349,542 | | | | 15,378,663 | | | | 13.2 | % |
| Shareholders' equity | | | 33,722,112 | | | | 28,398,113 | | | | 5,323,999 | | | | 18.7 | % |
| Total liabilities and shareholders' equity | | $ | 165,450,317 | | | $ | 144,747,655 | | | $ | 20,702,662 | | | | 14.3 | % |
| | | | | | | | | | | | | | | | | |
| Shareholders' equity per common share | | $ | 4.29 | | | $ | 3.67 | | | $ | 0.62 | | | | 17.0 | % |
Results of Operations – Years Ended December 31, 2012 and 2011
Revenues
Our primary sources of revenue are life insurance premium income and investment income. Premium payments are classified as first-year, renewal and single. In addition, realized gains and losses on investment holdings can significantly impact revenues from period to period. The impact on total revenues of Family Benefit Life total revenues, acquired on December 28, 2011, for the year ended December 31, 2012 is summarized in the tables below.
Our revenues for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Years Ended December 31, | | | | | | Percentage Change | | Family Benefit Life | | | | |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 | | 2012 Results | | | 2012 less 2011 | |
| Premiums | | $ | 8,024,901 | | | $ | 6,229,383 | | | $ | 1,795,518 | | | | 28.8 | % | | $ | 1,177,106 | | | $ | 618,412 | |
| Income from premium financing | | | 102,491 | | | | 168,124 | | | | (65,633 | ) | | | -39.0 | % | | | - | | | | (65,633 | ) |
| Net investment income | | | 5,920,278 | | | | 2,291,761 | | | | 3,628,517 | | | | 158.3 | % | | | 2,547,865 | | | | 1,080,652 | |
| Net realized investment gains | | | 746,889 | | | | 604,784 | | | | 142,105 | | | | 23.5 | % | | | 199,216 | | | | (57,111 | ) |
| Gain from acquisition of Family benefit Life | | | - | | | | 6,915,479 | | | | (6,915,479 | ) | | | -100.0 | % | | | - | | | | (6,915,479 | ) |
| Other income | | | 13,961 | | | | 14,728 | | | | (767 | ) | | | -5.2 | % | | | 140 | | | | (907 | ) |
| Total revenues | | $ | 14,808,520 | | | $ | 16,224,259 | | | $ | (1,415,739 | ) | | | -8.7 | % | | $ | 3,924,327 | | | $ | (5,340,066 | ) |
The decrease of $5,340,066 in total revenues for the year ended December 31, 2012, excluding Family Benefit Life revenues, is discussed below.
Premiums
Our premiums for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Years Ended December 31, | | | Increase (Decrease) | | | Percentage Change |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 |
| Family Benefit Life | | $ | 1,177,106 | | | $ | - | | | $ | 1,177,106 | | | | - | |
| Whole life and term first year | | | 226,835 | | | | 62,722 | | | | 164,113 | | | | 261.7 | % |
| Whole life and term renewal | | | 2,214,485 | | | | 2,356,464 | | | | (141,979 | ) | | | -6.0 | % |
| Final expense first year | | | 1,058,505 | | | | 1,105,504 | | | | (46,999 | ) | | | -4.3 | % |
| Final expense renewal | | | 3,347,970 | | | | 2,704,693 | | | | 643,277 | | | | 23.8 | % |
| Total premiums | | $ | 8,024,901 | | | $ | 6,229,383 | | | $ | 1,795,518 | | | | 28.8 | % |
The $618,412 increase in premiums for the year ended December 31, 2012, excluding Family Benefit Life premiums, is primarily due to a $643,277 increase in final expense renewal premiums.
Income from Premium Financing
The income from premium financing has steadily decreased during the past two years. There was a decrease of $65,633 for the year ended December 31, 2012.
As introduced above, the Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continues to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
Net Investment Income
The major components of our net investment income for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Years Ended December 31, | | | | | | Percentage Change | | Family Benefit Life | | | | |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 | | 2012 Results | | | 2012 less 2011 | |
| Fixed maturity securities | | $ | 4,194,409 | | | $ | 1,718,804 | | | $ | 2,475,605 | | | | 144.0 | % | | $ | 2,218,935 | | | $ | 256,670 | |
| Equity securities | | | 49,235 | | | | 55,725 | | | | (6,490 | ) | | | -11.6 | % | | | 18,369 | | | | (24,859 | ) |
| Other long-term investments | | | 1,188,323 | | | | 599,468 | | | | 588,855 | | | | 98.2 | % | | | 333,739 | | | | 255,116 | |
| Mortgage loans | | | 544,567 | | | | 116,219 | | | | 428,348 | | | | 368.6 | % | | | 6,057 | | | | 422,291 | |
| Real estate | | | 370,620 | | | | 348,002 | | | | 22,618 | | | | 6.5 | % | | | 11,250 | | | | 11,368 | |
| Policy loans | | | 100,120 | | | | 32,233 | | | | 67,887 | | | | 210.6 | % | | | 62,458 | | | | 5,429 | |
| Short-term and other investments | | | 21,939 | | | | 22,763 | | | | (824 | ) | | | -3.6 | % | | | 5,650 | | | | (6,474 | ) |
| Gross investment income | | | 6,469,213 | | | | 2,893,214 | | | | 3,575,999 | | | | 123.6 | % | | | 2,656,458 | | | | 919,541 | |
| Investment expenses | | | (548,935 | ) | | | (601,453 | ) | | | (52,518 | ) | | | 8.7 | % | | | (108,593 | ) | | | (161,111 | ) |
| Net investment income | | $ | 5,920,278 | | | $ | 2,291,761 | | | $ | 3,628,517 | | | | 158.3 | % | | $ | 2,547,865 | | | $ | 1,080,652 | |
The $919,541 increase in gross investment income for the year ended December 31, 2012, excluding Family Benefit Life gross investment income, is due to the 2012 investment of excess cash primarily in fixed maturity securities, other long-term investments (lottery receivables) and mortgage loans.
The $161,111 decrease in investment expenses for the year ended December 31, 2012, excluding Family Benefit Life investment expenses, is due to $117,000 of decreased investment advisory management service fees and $72,000 of decreased investment real estate expenses that more than offset $28,000 of increased loan origination fees.
Net Realized Investment Gains
There was a $142,105 increase in net realized investment gains for the year ended December 31, 2012.
The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $228,320 for the year ended December 31, 2012 resulted from proceeds of $9,511,967 for these securities that had carrying values of $9,283,647 at the 2012 disposal dates.
The net realized investment gains from the sales of equity securities available-for-sale of $442,737 for the year ended December 31, 2012 resulted from proceeds of $1,114,426 for these securities that had carrying values of $671,689 at the 2012 disposal dates.
The net realized investment gains from the sale of investment real estate of $75,832 for the year ended December 31, 2012 resulted from proceeds of $512,500 for two buildings that had a carrying value of $436,668 at the 2012 disposal date.
The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $606,935 for the year ended December 31, 2011 a decreaseresulted from proceeds of $156,897. The decrease relates to a decrease in production$4,671,870 for these securities that had carrying values of loan agreements as management focuses on business primarily with Oklahoma profitable agents.$4,064,935 at the 2011 disposal dates.
There were no sales of equity securities available-for-sale for the year ended December 31, 2011.
The loss before total federal income taxesnet realized investment losses from Premium Finance Operations was $212,706 and $340,395the sale of investment real estate of $2,151 for the yearsyear ended December 31, 2011 resulted from proceeds of $49,000 for the sale of land that had a carrying value of $51,151 at the 2011 disposal date.
We have recorded no other-than-temporary impairments in 2012 and 2010, respectively.2011.
Gain from Acquisition of Family Benefit Life
In late December 2011, we acquired 100% ownership of Family Benefit Life from its shareholders for $13,855,129 paid in cash. The $127,689 decreased lossfair value of the net assets acquired in this transaction was $20,770,608. Since the fair value of the net assets acquired exceeded the cost paid for those assets by $6,915,479, the residual was recorded in the consolidated statements of operations as a component of revenues captioned “Gain from 2010acquisition of Family Benefit Life” per the requirements of FASB Codification Topic 805 “Business Combinations.” The reason for the gain from the acquisition of Family Benefit Life related primarily to that company’s management not being committed to rebuild the marketing force of that company in the current economic environment.
The total acquisition date fair value of the net assets acquired from Family Benefit Life in late December 2011 is primarily attributable to a decrease in allowance for loan losses, 2011 loan production intentionally decreased with reduced loan issuance made through profitable agencies primarily in Oklahoma and decreased 2011 costs to operate our premium finance operations.as follows:
| Category of Net Asset Acquired | | Fair Value | |
| Available-for-sale fixed maturity securities | | $ | 56,252,307 | |
| Available-for-sale equity securities | | | 304,773 | |
| Mortgage loans on real estate | | | 79,710 | |
| Investment real estate | | | 582,560 | |
| Policy loans | | | 1,047,378 | |
| Other invested assets | | | 110 | |
| Cash and cash equivalents | | | 9,103,505 | |
| Accrued investment income | | | 775,438 | |
| Recoverable from reinsurers | | | 120,068 | |
| Agents' balances and due premiums | | | 16,476 | |
| Value of insurance business acquired | | | 5,627,662 | |
| Other assets | | | 10,336 | |
| Policyholders' account balances | | | (36,746,133 | ) |
| Future policy benefits | | | (13,502,833 | ) |
| Policy claims | | | (166,593 | ) |
| Premiums paid in advance | | | (12,214 | ) |
| Deferred federal income taxes | | | (2,188,650 | ) |
| Current federal taxes payable | | | (36,720 | ) |
| Other liabilities | | | (496,572 | ) |
| Fair value of net assets acquired | | $ | 20,770,608 | |
| Cash paid as purchase consideration | | $ | (13,855,129 | ) |
| Gain from acquisition of Family Benefit Life | | $ | 6,915,479 | |
Corporate OperationsOther Income
RevenuesThe $907 decrease in other income for the year ended December 31, 2012, excluding Family Benefit Life other income, is primarily due to decrease service fees.
Total Benefits, Claims and Expenses
Our benefits, claims and expenses are primarily generated from Corporate Operations were $45,954benefit payments, surrenders, interest credited to policyholders, change in reserves, commissions and $2,011other underwriting, insurance and acquisition expenses. Benefit payments can significantly impact expenses from period to period.
The impact on total benefits, claims and expenses of Family Benefit Life total benefits, claims and expenses, acquired on December 28, 2011, for the year ended December 31, 2012 is summarized in the tables below.
Our benefits, claims and expenses for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Years Ended December 31, | | | | | | Percentage Change | | Family Benefit Life | | | | |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 | | 2012 Results | | | 2012 less 2011 | |
| Benefits and claims | | | | | | | | | | | | | | | | | | |
| Increase (decrease) in future policy benefits | | $ | 2,054,925 | | | $ | 1,982,865 | | | $ | 72,060 | | | | 3.6 | % | | $ | (407,069 | ) | | $ | 479,129 | |
| Death benefits | | | 2,863,555 | | | | 1,479,188 | | | | 1,384,367 | | | | 93.6 | % | | | 852,322 | | | | 532,045 | |
| Surrenders | | | 583,498 | | | | 336,062 | | | | 247,436 | | | | 73.6 | % | | | 310,827 | | | | (63,391 | ) |
| Interest credited to policyholders | | | 3,330,592 | | | | 1,510,710 | | | | 1,819,882 | | | | 120.5 | % | | | 1,242,724 | | | | 577,158 | |
| Dividend and supplementary life contract benefits | | | 409,482 | | | | - | | | | 409,482 | | | | - | | | | 409,482 | | | | - | |
| Total benefits and claims | | | 9,242,052 | | | | 5,308,825 | | | | 3,933,227 | | | | 74.1 | % | | | 2,408,286 | | | | 1,524,941 | |
| Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
| Policy acquisition costs deferred | | | (2,302,070 | ) | | | (2,262,751 | ) | | | (39,319 | ) | | | 1.7 | % | | | - | | | | (39,319 | ) |
| Amortization of deferred policy acquisition costs | | | 512,546 | | | | 230,284 | | | | 282,262 | | | | 122.6 | % | | | - | | | | 282,262 | |
| Amortization of value of insurance business acquired | | | 403,573 | | | | 222,451 | | | | 181,122 | | | | 81.4 | % | | | 225,106 | | | | (43,984 | ) |
| Commissions | | | 2,324,073 | | | | 2,281,934 | | | | 42,139 | | | | 1.8 | % | | | 32,053 | | | | 10,086 | |
| Other underwriting, insurance and acquisition expenses | | | 3,670,533 | | | | 2,953,245 | | | | 717,288 | | | | 24.3 | % | | | 1,011,808 | | | | (294,520 | ) |
| Total expenses | | | 4,608,655 | | | | 3,425,163 | | | | 1,183,492 | | | | 34.6 | % | | | 1,268,967 | | | | (85,475 | ) |
| Total benefits, claims and expenses | | $ | 13,850,707 | | | $ | 8,733,988 | | | $ | 5,116,719 | | | | 58.6 | % | | $ | 3,677,253 | | | $ | 1,439,466 | |
The increase of $1,439,466 in total benefits, claims and 2010, respectively. This $43,943expenses for the year ended December 31, 2012, excluding Family Benefit Life benefits, claims and expenses, is discussed below.
Benefits and Claims
The $1,524,941 increase in benefits and claims for the year ended December 31, 2012, excluding Family Benefit Life benefits and claims, is primarily due to the following:
| · | $577,158 increase in interest credited to policyholders primarily due to an increase in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits in excess of withdrawals). |
| · | $532,045 increase in death benefits is primarily due to an increase in the number of final expense claims incurred. There was a 1,010 increase in the number of final expense policies in force from 8,063 policies as of December 31, 2011 to 9,073 policies as of December 31, 2012. Correspondingly, there was a $9,305,891 increase in the amount of final expense insurance in force from $67,693,765 as of December 31, 2011 to $76,999,656 as of December 31, 2012. This final expense policy expansion has increased our mortality exposure. |
| · | $479,129 increase in the change in future policy benefits primarily relates to an increase in the number of final expense and ordinary policies in force. |
| · | $63,391 decrease in surrenders reflects an improvement in persistency. |
Deferral and Amortization of Deferred Acquisition Costs
Certain costs related to the successful acquisition of traditional life insurance policies are capitalized and amortized over the premium-paying period of the policies. Certain costs related to the successful acquisition of insurance and annuity policies 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 (i.e., limited-payment long-duration annuity contracts) are capitalized and amortized in relation to the present value of actual and expected gross profits on the policies. These acquisition costs, which are referred to as deferred policy acquisition costs, include commissions and other successful costs of acquiring life insurance, which vary with, and are primarily related to, the production of new and renewal insurance and annuity contracts.
For the year ended December 31, 2012 and 2011, capitalized costs were $2,302,070 and $2,262,751, respectively. Amortization of deferred policy acquisition costs for the year ended December 31, 2012 and 2011 were $512,546 and $230,284, respectively.
Family Benefit Life had little impact on the deferral or amortization of deferred acquisition costs since its 2012 production of new life and annuity policies was minimal. The Company’s management is focused on reinvigorating the Family Benefit Life new business production and has filed new products for state approval that should begin being marketed in April 2013.
The $39,319 increase in the acquisition costs deferred primarily relates to increased production of ordinary policies in 2012. The $282,262 increase in the 2012 amortization of deferred acquisition costs primarily reflects the increase in final expense claims incurred and the increased annuity lapses after the surrender charge period.
Amortization of Value of Insurance Business Acquired
The cost of acquiring insurance business is amortized over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was $403,573 and $222,451 for the years ended December 31, 2012 and 2011, respectively. The $181,122 increase in the 2012 amortization of value of insurance business acquired primarily relates to the $225,106 amortization of value of insurance business acquired related to the acquisition of Family Benefit Life on December 28, 2011.
Commissions
Our commissions for the year ended December 31, 2012 and 2011 are summarized as follows:
| | | Year Ended December 31, | | | Increase (Decrease) | | | Percentage Change |
| | | 2012 | | | 2011 | | | 2012 less 2011 | | | 2012 to 2011 |
| Family Benefit Life | | $ | 32,053 | | | $ | - | | | $ | 32,053 | | | | - | |
| Annuity | | | 451,595 | | | | 542,928 | | | | (91,333 | ) | | | -16.8 | % |
| Whole life and term first year | | | 159,398 | | | | 78,784 | | | | 80,614 | | | | 102.3 | % |
| Whole life and term renewal | | | 94,283 | | | | 95,732 | | | | (1,449 | ) | | | -1.5 | % |
| Final expense first year | | | 1,273,515 | | | | 1,323,291 | | | | (49,776 | ) | | | -3.8 | % |
| Final expense renewal | | | 313,229 | | | | 241,199 | | | | 72,030 | | | | 29.9 | % |
| Total commissions | | $ | 2,324,073 | | | $ | 2,281,934 | | | $ | 42,139 | | | | 1.8 | % |
The $10,086 increase in commissions for the year ended December 31, 2012, excluding Family Benefit Life commissions, is primarily due to:
| · | $80,614 increase in first year whole life and term commissions that corresponds to $164,113 of increased first year whole life and term premiums. |
| · | $72,030 increase in final expense renewal commissions that corresponds to $643,277 of increased final expense renewal premiums. |
| · | $1,449 decrease in renewal whole life and term commissions that corresponds to a $141,979 decrease in renewal whole life and term premiums. |
| · | $49,776 decrease in final expense first year commissions that correspond to the $46,999 decrease in final expense first year premiums. |
| · | $91,333 decrease in annuity first year, single and renewal commissions that corresponds to $507,750 of decreased annuity considerations deposited. |
Other Underwriting, Insurance and Acquisition Expenses
The $294,520 decrease in other underwriting, insurance and acquisition expenses for the year ended December 31, 2012, excluding Family Benefit Life expenses, is primarily attributed to third party legal, accounting, actuarial and other costs incurred in 2011 associated with the acquisition of Family Benefit Life. The 2012 costs paid to third parties related to the synergy and conversion of Family Benefit Life into our operations were accumulated in Family Benefit Life and for the year ended December 31, 2012 totaled approximately $200,000.
Federal Income Taxes
FTFC files a consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC or Family Benefit Life. TLIC and Family Benefit Life are taxed as life insurance companies under the provisions of the Internal Revenue Code. Life insurance companies must file separate tax returns until they have been a member of the consolidated filing group for five years. However, for 2012, we intend to file a combined life insurance company federal tax return for TLIC and Family Benefit Life. Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes.
For the years ended December 31, 2012 and 2011, deferred income tax expense (benefit) was ($417,122) and $96,183, respectively. Current income tax expense was $273,054 and $34,095 for the years ended December 31, 2012 and 2011, respectively.
Net Income Per Common Share Basic and Diluted
Net income was $1,101,881 ($0.14 per common share basic and diluted) and $7,359,993 ($1.00 per common share basic and diluted) for the years ended December 31, 2012 and 2011, respectively.
Net income 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 year ended December 31, 2012 and 2011 were 7,883,901 and 7,349,296, respectively. These weighted average shares reflect the retrospective adjustment for the impacts of the 5% stock dividend declared by the Company on January 11, 2012 and issued to holders of shares of the Company as of March 10, 2012.
Business Segments
The revenues and income (loss) before federal income taxes from our business segments for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Year Ended December 31, | | | Increase (Decrease) | | | Percentage Change |
| | | 2012 | | | 2011 | | | 2012 to 2011 | | | 2012 to 2011 |
| Revenues: | | | | | | | | | | | | |
| Life and annuity insurance operations | | $ | 14,275,397 | | | $ | 16,011,386 | | | $ | (1,735,989 | ) | | | -10.8 | % |
| Premium finance operations | | | 102,734 | | | | 166,919 | | | | (64,185 | ) | | | -38.5 | % |
| Corporate operations | | | 430,389 | | | | 45,954 | | | | 384,435 | | | | 836.6 | % |
| Total | | $ | 14,808,520 | | | $ | 16,224,259 | | | $ | (1,415,739 | ) | | | -8.7 | % |
| Income (loss) before income taxes: | | | | | | | | | | | | | | | | |
| Life and annuity insurance operations | | $ | 1,332,546 | | | $ | 8,238,255 | | | $ | (6,905,709 | ) | | | -83.8 | % |
| Premium finance operations | | | (224,951 | ) | | | (212,706 | ) | | | (12,245 | ) | | | 5.8 | % |
| Corporate operations | | | (149,782 | ) | | | (535,278 | ) | | | 385,496 | | | | -72.0 | % |
| Total | | $ | 957,813 | | | $ | 7,490,271 | | | $ | (6,532,458 | ) | | | -87.2 | % |
Life and Annuity Insurance Operations
The $1,735,989 decrease in revenues from Life and Annuity Insurance Operations for the year ended December 31, 2012 is primarily due to the following:
| · | $6,915,479 gain from the acquisition of Family benefit Life recognized in 2011 |
| · | $412,627 decrease in net realized investment gains |
| · | $618,412 increase in premiums |
| · | $1,048,257 increase in net investment income |
| · | $3,924,327 of revenues due to the acquisition of Family Benefit Life on December 28, 2011 |
The $6,905,709 decreased profitability from Life and Annuity Insurance Operations for the year ended December 31, 2012 is primarily due to the following:
| · | $6,915,479 gain from the acquisition of Family benefit Life recognized in 2011 |
| · | $1,524,941 increase in benefits and claims |
| · | $412,627 decrease in net realized investment gains |
| · | $242,943 decrease in policy acquisition costs deferred net of amortization |
| · | $10,086 increase in commissions |
| · | $43,984 decrease in amortization of value of insurance business acquired |
| · | $242,953 decrease in other underwriting, insurance and acquisition expenses |
| · | $247,074 of Family Benefit Life income before income taxes |
| · | $618,412 increase in premiums |
| · | $1,048,257 increase in net investment income |
Premium Finance Operations
The $64,185 decrease in revenues from Premium Finance Operations for the year ended December 31, 2012 is due to decreased fee income as we discontinued offering premium finance contracts on July 1, 2012.
The $12,245 decreased profitability from Premium Finance Operations for the year ended December 31, 2012 is primarily due to $64,185 of decreased fee income and $52,000 of decreased operating expenses.
Corporate Operations
The $384,435 increase in revenues from Corporate Operations for the year ended December 31, 2012 is primarily due to a $350,000 realized investment gain from the sale of equity securities available-for-sale and $33,000 of increased net investment income.
The loss before total federal income taxes from$385,496 increased Corporate Operations was $535,278 and $510,830profitability for the yearsyear ended December 31, 2011 and 2010, respectively. The $24,448 increased loss from 2010 to 20112012 is primarily due to increased operating expenses related to the 2011 stock dividend processing and transferring.
$384,435 increase in revenues discussed above.
Consolidated Financial Condition
As of December 31, 2011, our available-for-sale fixed maturity securities had a fair value of $81,051,207 and amortized cost of $78,128,103 compared to a fair value of $26,623,318 and an amortized cost of $23,183,633Our invested assets as of December 31, 2010. 2012 and 2011 are summarized as follows:
| | | | | | | | | Increase (Decrease) | | | Percentage Change |
| | | December 31, 2012 | | | December 31, 2011 | | | 2012 to 2011 | | | 2012 to 2011 |
| Assets | | | | | | | | | | | | |
| Investments | | | | | | | | | | | | |
Available-for-sale fixed maturity securities at fair value (amortized cost: $91,543,308 and $78,128,103 as of December 31, 2012 and December 31, 2012 and 2011, respectively) | | $ | 98,659,797 | | | $ | 81,051,207 | | | $ | 17,608,590 | | | | 21.7 | % |
Available-for-sale equity securities at fair value (cost: $695,846 and $750,941 as of December 31, 2012 and 2011, respectively) | | | 843,497 | | | | 898,893 | | | | (55,396 | ) | | | -6.2 | % |
| Mortgage loans on real estate | | | 10,435,776 | | | | 1,985,394 | | | | 8,450,382 | | | | 425.6 | % |
| Investment real estate | | | 2,858,765 | | | | 3,466,581 | | | | (607,816 | ) | | | -17.5 | % |
| Policy loans | | | 1,488,035 | | | | 1,472,666 | | | | 15,369 | | | | 1.0 | % |
| Other long-term investments | | | 19,560,794 | | | | 9,875,675 | | | | 9,685,119 | | | | 98.1 | % |
| Total investments | | $ | 133,846,664 | | | $ | 98,750,416 | | | $ | 35,096,248 | | | | 35.5 | % |
The $17,608,590 increase in available for sale fixed maturity securities for the year ended December 31, 2012 is primarily due to the $56,252,307purchases of $23,432,839 in fair valueexcess of the available-for-sale fixed maturity securities acquiredsales and maturities of $9,511,967, net realized investment gains of $228,320, $4,193,385 increase in the Family Benefit Life acquisition.unrealized appreciation and premium amortization of $733,987. This portfolio is reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.” The available-for-sale fixed maturity securities portfolio is invested primarily in a variety of companies and U. S. Governmentgovernment and foreign securities.
As of December 31, 2012, we held 35 available-for-sale fixed maturity securities with an unrealized loss of $133,611, fair value of $7,386,902 and amortized cost of $7,520,513.
As of December 31, 2011, ourwe held nine fixed maturity securities available-for-sale equity securities had awith an unrealized loss of $84,771, fair value of $898,893 compared to a$1,887,299 and amortized cost of $1,972,070. Since the Family Benefit Life available-for-sale fixed maturity securities were acquired on December 28, 2011, the amortized cost equaled the fair value of $529,314 as of December 31, 2010. 2011.
The cost of$55,396 decrease in available-for-sale equity securities were $750,941 as offor the year ended December 31, 2011 and $347,353 as of December 31, 2010. The increase2012 is primarily due to the $304,773sales of $1,114,426, purchases of $616,594, net realized investment gains of $442,737 and a $301 decrease in fair valueunrealized appreciation of the available-for-sale equity securities acquired in the Family Benefit Life acquisition.securities. This portfolio is also reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.” The available-for-sale equity securities portfolio is invested in a variety of companies.
As of both December 31, 2012 and December 31, 2011 we held the following additional invested assets:there were no available-for-sale equity securities in an unrealized loss position.
The $8,450,382 increase in mortgage loans on real estatefor the year ended December 31, 2012 is primarily due to the origination of $1,985,394; investment real estate$9,143,326 of $3,466,581; policymortgage loans, $168,641 capitalization of $1,472,666loan origination fees less principal payments of $899,180 and discount accretion of $37,595. There was one loan more than 90 days past due as of December 31, 2012 with a remaining principal balance of $141,150. We have had discussions with the borrower and anticipate this loan being current in April 2013.
The $9,685,119 increase in other long-term investments (comprised of lottery receivables) for the year ended December 31, 2012 is primarily due to the purchases of $11,188,607, $1,188,321 of accretion of discount less principal payments of $2,691,809.
Our assets other than invested assets as of December 31, 2012 and December 31, 2011 are summarized as follows:
| | | December 31, 2012 | | | December 31, 2011 | | | Increase (Decrease) 2012 to 2011 | | | Percentage Change 2012 to 2011 |
| | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 10,947,474 | | | $ | 27,705,711 | | | $ | (16,758,237 | ) | | | -60.5 | % |
| Accrued investment income | | | 1,417,218 | | | | 1,122,574 | | | | 294,644 | | | | 26.2 | % |
| Recoverable from reinsurers | | | 1,188,371 | | | | 1,132,121 | | | | 56,250 | | | | 5.0 | % |
| Agents' balances and due premiums | | | 358,729 | | | | 381,901 | | | | (23,172 | ) | | | -6.1 | % |
| Loans from premium financing, net | | | 261,072 | | | | 1,022,416 | | | | (761,344 | ) | | | -74.5 | % |
| Deferred policy acquisition costs | | | 7,028,820 | | | | 5,251,999 | | | | 1,776,821 | | | | 33.8 | % |
| Value of insurance business acquired | | | 7,508,895 | | | | 7,912,469 | | | | (403,574 | ) | | | -5.1 | % |
| Property and equipment, net | | | 124,558 | | | | 170,843 | | | | (46,285 | ) | | | -27.1 | % |
| Other assets | | | 2,768,516 | | | | 1,297,205 | | | | 1,471,311 | | | | 113.4 | % |
| Assets other than investment assets | | $ | 31,603,653 | | | $ | 45,997,239 | | | $ | (14,393,586 | ) | | | -31.3 | % |
The $16,758,237 decrease in cash is primarily due to the company investing these funds in fixed maturity securities, mortgage loans and other long-term investments of $9,875,675. The other long-term investments are comprised of(i.e., lottery prize receivables.
As of December 31, 2010, we held the following additional invested assets: mortgage loans on real estate of $1,156,812; investment real estate of $3,077,520; policy loans of $367,284 and other long-term investments of $6,886,529. The other long-term investments are comprised of lottery prize receivables.
Please see the summary of total acquisition date fair value of the net assets acquired from Family Benefit Life summarized previously to ascertain the amount of increased investments derived from this acquisition.
Total investments were $98,750,416 and $38,640,777 as of December 31, 2011 and December 31, 2010, respectively. Please see the summary of total acquisition date fair value of the net assets acquired from Family Benefit Life summarized previously to ascertain the amount of increased investments derived from this acquisition.
Deferred policy acquisition costs were $5,251,999 and $3,234,285 as of December 31, 2011 and December 31, 2010, respectively. Policy acquisition expenses related to new insurance sales were capitalized in the amount of $2,262,751 and $1,773,199 for the years ended December 31, 2011 and 2010, respectively. Amortization of deferred acquisition costs for the years ended December 31, 2011 and 2010 was $230,284 and $451,349, respectively.receivables).
The value of insurance business acquired was $7,912,469 and $2,507,258 as of December 31, 2011 and December 31, 2010, respectively. Amortization of value of insurance business acquired for the years ended December 31, 2011 and 2010 was $222,451 and $271,465, respectively. The value of insurance business acquired recorded$761,344 decrease in connection with the Family Benefit Life acquisition was $5,627,662.
As of December 31, 2011 and December 31, 2010, we held loans from premium financing is related to normal loan collections and our May 16, 2012 decision to discontinue offering premium finance contracts effective July 1, 2012.
Other assets consist primarily of $1,022,416prepaid expenses, recoverable federal and $1,143,977, respectively.state income taxes, guaranty funds, notes receivable, customer account balances receivable and receivables for securities sold with trade dates in 2012 and settlement dates in 2013. The loan balances as$1,471,311 increase in other assets is primarily due to $601,530 of December 31, 2011receivables for securities sold with trade dates in 2012 and December 31, 2010, respectively, are netsettlement dates in 2013, $489,098 of unearned interestincreased recoverable federal and state income taxes, increased receivables of $23,287$143,408 and $35,519 and allowance for loan losses of $229,004 and $443,071.a $96,373 increase in guaranty funds.
The progression of the Company’s loans from premium financing for the years ended December 31, 20112012 and December 31, 20102011 is summarized as follows:
| | | | Years Ended December 31, | |
| | | December 31, 2011 | | | December 31, 2010 | | | 2012 | | | 2011 | |
| Balance, beginning of year | | $ | 1,622,567 | | | $ | 3,140,800 | | | $ | 1,274,707 | | | $ | 1,622,567 | |
| Loans financed | | | 2,341,126 | | | | 3,486,083 | | | | 847,845 | | | | 2,341,126 | |
| Unearned interest | | | 136,189 | | | | 36,624 | | | | 51,525 | | | | 136,189 | |
| Capitalized fees and interest | | | 52,155 | | | | (4,208 | ) | | | 12,827 | | | | 52,155 | |
| Payment of loans and unearned interest | | | (2,877,330 | ) | | | (5,036,732 | ) | | | (1,695,444 | ) | | | (2,877,330 | ) |
| Ending loan balance including unearned interest | | | 1,274,707 | | | | 1,622,567 | | | | 491,460 | | | | 1,274,707 | |
| Unearned interest included in ending loan balances | | | (23,287 | ) | | | (35,519 | ) | | | (1,389 | ) | | | (23,287 | ) |
| Loan balance net of unearned interest | | | 1,251,420 | | | | 1,587,048 | | | | 490,071 | | | | 1,251,420 | |
| Less allowance for loan loss | | | (229,004 | ) | | | (443,071 | ) | | | (228,999 | ) | | | (229,004 | ) |
Loan balance net of unearned interest and allowance for loan losses at the end of the year | | $ | 1,022,416 | | | $ | 1,143,977 | | |
Loan balance net of unearned interest and allowance for loan losses | | | $ | 261,072 | | | $ | 1,022,416 | |
As of December 31, 2011, we held the following additional assets (excluding cash and cash equivalents and certificates of deposit that are discussed below under “Liquidity and Capital Resources”): amounts recoverable from reinsurers of $1,132,121; accrued investment income of $1,122,574; agents’ balances and due premiums of $381,901; property and equipment of $170,843 and other assets of $1,297,205. Other assets include federal and state incomes taxes recoverable, prepaid expenses, notes receivable and customer account balances receivable.
As of December 31, 2010, we held the following additional assets (excluding cash and cash equivalents and certificates of deposit that are discussed below under “Liquidity and Capital Resources”): amounts recoverable from reinsurers of $977,397; accrued investment income of $385,948; agent balances and due premiums of $357,979; property and equipment of $102,374 and other assets of $1,151,315. Other assets include federal and state incomes taxes recoverable, prepaid expenses, notes receivable and customer account balances receivable. Please see the summary of total acquisition date fair value of the net assets acquired from Family Benefit Life summarized previously to ascertain the amount of increased assets derived from this acquisition.
TotalOur liabilities as of December 31, 2012 and 2011 are summarized as follows:
| | | December 31, 2012 | | | December 31, 2011 | | | Increase (Decrease) 2012 to 2011 | | | Percentage Change 2012 to 2011 |
| | | | | | | | | | | | | |
| Policy liabilities | | | | | | | | | | | | |
| Policyholders' account balances | | $ | 95,043,370 | | | $ | 81,730,322 | | | $ | 13,313,048 | | | | 16.3 | % |
| Future policy benefits | | | 31,065,560 | | | | 28,977,186 | | | | 2,088,374 | | | | 7.2 | % |
| Policy claims | | | 717,521 | | | | 515,522 | | | | 201,999 | | | | 39.2 | % |
| Other policy liabilities | | | 139,722 | | | | 46,613 | | | | 93,109 | | | | 199.7 | % |
| Total policy liabilities | | | 126,966,173 | | | | 111,269,643 | | | | 15,696,530 | | | | 14.1 | % |
| Deferred federal income taxes | | | 3,301,524 | | | | 2,622,711 | | | | 678,813 | | | | 25.9 | % |
| Other liabilities | | | 1,460,508 | | | | 2,457,188 | | | | (996,680 | ) | | | -40.6 | % |
| Total liabilities | | $ | 131,728,205 | | | $ | 116,349,542 | | | $ | 15,378,663 | | | | 13.2 | % |
Other liabilities consist primarily of accrued expenses, account payables, deposits on pending policy applications, unearned investment income and December 31, 2010 were $116,349,542payable for securities purchased with trade dates in 2012 and $44,932,914, respectively. Please see the summarysettlement dates in 2013.
The $15,696,530 increase in policy liabilities is primarily due to deposits on annuity and deposit-type contracts exceeding withdrawals by $9,982,456, $3,330,592 of total acquisition date fair valueinterest credited to policyholder account deposits, $2,088,374 of the net assets acquired from Family Benefit Life summarized previously to ascertain the amountincreased future policy benefit reserves, $201,999 of increased liabilities derived from this acquisition.
Total policy liabilities as of December 31, 2011 were $111,269,643 and were composed of policyholders’ account balances of $81,730,322; future policy benefits of $28,977,186;for policy claims of $515,522 and premiums paid in advance of $46,613. Please see the summary of total acquisition date fair value of the net assets acquired from Family Benefit Life summarized previously to ascertain the amount$93,109 of increased liabilities derived from this acquisition.
Totalother policy liabilities as of December 31, 2010 were $44,115,568 and were composed of policyholders’ account balances of $30,261,070; future policy benefits of $13,444,284; policy claims of $367,306 and premiums paid in advance of $42,908. Please see the summary of total acquisition date fair value of the net assets acquired from Family Benefit Life summarized previously to ascertain the amount of increased liabilities derived from this acquisition.liabilities.
The liability for deferred federal income taxes was $2,622,711 and $294,705 as of December 31, 2011 and December 31, 2010, respectively, an increase of $2,328,006. $2,258,650 of the$678,813 increase in deferred federal income taxes relatesduring the year ended December 31, 2012 was due to $1,095,935 of increased deferred federal income taxes on the Family Benefit Life acquisition. $1,222,984unrealized appreciation of theavailable-for-sale fixed maturity and equity securities. This increase was partially offset by $417,122 of operating deferred tax benefits.
The $996,680 decrease in other liabilities is due to net unrealized gainsa $1,226,000 decrease in deposits on available-for-sale securities. The remaining $965,666 of the increase ispending applications and a $400,000 reduction in accrued liabilities due to the net deferred taxes arising from the temporary differencespayment of the U.S. GAAP fair value of the net assets acquired compared to the carrying value for tax purposes.
Other liabilitiesand reduction in bonuses accrued as of December 31, 20112011. This decrease is partially offset by a $600,000 payable for securities purchased with trade dates in 2012 and December 31, 2010 were $2,457,188settlement dates in 2013 and $523,271, respectively. Other liabilities include deposits on pending policy applications, accrued expenses, accounts payable and unearned investment income. The $1,933,917a $29,000 increase in other liabilities during 2011 is primarily due to a $1,100,000 increase in deposits on pending applications; $95,000 representing the remaining unearned liability for a $120,000 leasehold improvement credit granted by a lessor in December 2010 that is being amortized to rental expense over the remaining lease term; $86,000 of liabilities for estimated future guaranty fund assessments, $497,000 related to the acquisition of Family Benefit Life and $156,000 of accrued liabilities and other payables.expenses.
Liquidity and Capital Resources
Our operations have been financed primarily through the private placement of equity securities and an intrastate public stock offering. Through December 31, 2011,2012, we have received $24,746,215$27,011,105 from the sale of our shares. Our operations have been profitable and have generated $3,970,422$5,072,303 of net income from operations since we were incorporated in 2004 as shown in the accumulated earnings (deficit) balance in the December 31, 20112012 consolidated statement of financial position. The Company issued 323,777 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2011, however, that resulted in accumulated earnings being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital. The Company also issued 378,928 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2012, that resulted in accumulated earnings being charged an additional $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital. The impact of thisthese two stock dividend chargecharges of $2,428,328$5,270,288 to accumulated earnings (deficit) decreased the balance of accumulated deficit as of December 31, 20112012 to $1,542,094.$197,985.
As of December 31, 2011,2012, we had cash and cash equivalents totaling $27,705,711 with $9,103,505 acquired in the acquisition of Family Benefit Life. Some of our excess funds have been invested in money market mutual funds.$10,947,474. As of December 31, 2011,2012, cash and cash equivalents of $14,383,877$3,124,376 and $9,103,505,$2,752,713, respectively, of the total $27,705,711$10,947,474 were held by TLIC and Family Benefit Life and may not be available for use by FTFC due to the required pre-approval by the Oklahoma Insurance Department and Missouri Department of Insurance of any dividend or intercompany transaction to transfer funds to FTFC. 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 for TLIC to pay a dividend up to $377,777 in 20112013 without prior approval. However,In addition, based on those limitations, there is the capacity for Family Benefit Life to pay a dividend up to $934,675$887,520 in 20122013 without prior approval. There were noFamily Benefit Life paid $1,515,975 of dividends paid or a returnto TLIC in 2012 and received permission from the Missouri Department of capitalInsurance to pay $581,300 of dividends in excess of the parent company in 2010.$934,675 limitation.
The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation currently insures all non-interest bearing accounts.accounts up to $250,000. Uninsured balances aggregate $2,514,836 as of December 31, 2012. Other funds are invested in mutual funds that invest in U.S. government securities. We monitor the solvency of all financial institutions in which we have funds to minimize the exposure for loss. We doThe Company has not believe we are at significant risk forexperienced any losses in such a loss.accounts.
DuringOur cash flows for the years ended December 31, 2012 and 2011 are summarized as follows:
| | | Years Ended December 31, | | | Increase (Decrease) | | | Percentage Change |
| | | 2012 | | | 2011 | | | 2012 to 2011 | | | 2012 to 2011 |
| Net cash provided by operating activities | | $ | 1,006,770 | | | $ | 1,945,347 | | | $ | (938,577 | ) | | | -48.2 | % |
| Net cash used in investing activities | | | (28,885,135 | ) | | | (5,428,643 | ) | | | (23,456,492 | ) | | | 432.1 | % |
| Net cash provided by financing activities | | | 11,120,128 | | | | 18,203,729 | | | | (7,083,601 | ) | | | -38.9 | % |
| Increase (decrease) in cash | | | (16,758,237 | ) | | | 14,720,433 | | | | (31,478,670 | ) | | | -213.8 | % |
| Cash and cash equivalents, beginning of period | | | 27,705,711 | | | | 12,985,278 | | | | 14,720,433 | | | | 113.4 | % |
| Cash and cash equivalents, end of period | | $ | 10,947,474 | | | $ | 27,705,711 | | | $ | (16,758,237 | ) | | | -60.5 | % |
The $938,577 decrease in cash provided by operating activities during the year ended December 31, 2012 is primarily due to increased benefits and 2010, cashclaims and cash equivalents increased $14,720,433decreases in premiums that exceeded increases in net investment income and $5,904,586, respectively.decreases in other underwriting, insurance and acquisition expenses.
Our operatingThe $23,456,492 of increased cash used for investing activities during the year ended December 31, 2012 was primarily related to the purchase of investments in fixed maturity securities, equity securities, mortgage loans and other long-term investments ( lottery receivables) in excess of maturities, sales and repayments of those investment types.
The $7,083,601 decrease in cash provided by financing activities for the year ended December 31, 2011 provided $1,948,7082012 resulted from $3,229,954 of cash compared to $1,220,685 of cash provided by operations during the year ended December 31, 2010. The $728,023 increase in cash provided by operations in 2011 is primarily due to increased premiums and decreased expensespolicyholder account deposits in excess of increased benefits, claimswithdrawals; $3,205,052 of decreased net proceeds from the public and commissions.private placement stock offerings and $648,595 for purchasing treasury shares.
Cash used by investing activities for the years endedOur shareholders’ equity as of December 31, 2012 and 2011 and 2010 was $5,428,643 and $2,809,417, respectively. The $2,619,226 of increased cash used was primarily utilized to purchase Family Benefit Life that required the net use of $4,751,624 of cash ($13,855,129 of cash consideration to purchase 1,287,640 shares of Family Benefit Life Common Stock from shareholders that is offset by $9,103,505 of cash acquired with the Family Benefit Life net assets).summarized as follows:
Net cash provided by financing activities for the years ended December 31, 2011 and 2010 was $18,200,368 and $7,493,318, respectively. | | | | | | | | | Increase (Decrease) | | | Percentage Change |
| | | December 31, 2012 | | | December 31, 2011 | | | 2012 to 2011 | | | 2012 to 2011 |
| | | | | | | | | | | | | |
Common stock, par value $.01 per share, 20,000,000 shares authorized, and 7,974,373 and 6,798,535 issued and 7,789,060 and 6,798,535 outstanding as of December 31, 2012 and 2011, respectively, and 63,070 and 566,404 subscribed as of December 31, 2012 and 2011, respectively | | $ | 80,374 | | | $ | 73,649 | | | $ | 6,725 | | | | 9.1 | % |
| Additional paid-in capital | | | 28,707,648 | | | | 24,086,146 | | | | 4,621,502 | | | | 19.2 | % |
| Treasury stock, at cost (185,313 shares as of December 31, 2012) | | | (648,595 | ) | | | - | | | | (648,595 | ) | | | - | |
| Accumulated other comprehensive income | | | 5,780,670 | | | | 2,696,224 | | | | 3,084,446 | | | | 114.4 | % |
| Accumulated earnings (deficit) | | | (197,985 | ) | | | 1,542,094 | | | | (1,740,079 | ) | | | -112.8 | % |
| Total shareholders' equity | | $ | 33,722,112 | | | $ | 28,398,113 | | | $ | 5,323,999 | | | | 18.7 | % |
The 2011 increase in cashshareholders’ equity of $10,707,050 provided by financing activities resulted from a net increase in policy deposits of $8,591,326$5,323,999 for the year ended December 31, 2011 and a net increase of $2,115,724 in the net proceeds from the public stock offering.
Shareholders’ equity at December 31, 2011 was $28,398,113 compared to $16,655,947 as of December 31, 2010. The increase of $11,742,1662012 is due primarily to the net income in 2011$1,786,267 of $7,359,993 and the net proceeds of $4,991,319generated from the public stock offering that commenced on June 29, 2010 less a $609,146 decrease in the unrealized appreciation of available-for-sale securities. For the year ended December 31, 2011, the public stock offering generated(gross proceeds of $5,908,890$2,264,890 and offering expenses of $478,623), $3,084,446 of other comprehensive income, $1,101,881 of net income less $917,571$648,595 for purchases of offering costs.185,313 shares of treasury stock from former members of the Board of Directors.
Equity per common share outstanding and subscribed increased 51.7%16.9% to $4.29 as of December 31, 2012 compared to $3.67 per share as of December 31, 2011, compared to $2.42 per share atbased upon 7,852,130 common shares outstanding and subscribed as of December 30, 2012 and 7,743,867 outstanding common shares as of December 31, 2010, based upon 7,733,1862011. The common shares outstanding and subscribed as of December 31, 2011 and 6,894,275 outstanding common shares as of December 31, 2010. These common shares outstanding and subscribed reflect the retrospective adjustment for the impact of the 2011 and 2012 5% stock dividends declared by the Company on January 10, 201111, 2012 and paidissued to holders of shares of the Company as of March 10, 2012.
The Company issued 323,777 shares in connection with the 2011 stock dividend that resulted in accumulated deficit being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and declared byadditional paid-in capital. The Company issued 378,928 shares in connection with the Company on January 11, 2012 stock dividend that resulted in accumulated deficit being charged $2,841,960 with an offsetting credit of $2,841,960 to common stock and payable to holdersadditional paid-in capital. The issuance of shares on the Company as of March 10, 2012.these stock dividends were non-cash investing and financing activities.
The liquidity requirements of our life insurance company are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. There were no liquidity issues in 20112012 or 2010.2011. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.
We are subject to various market risks. The quality of our investment portfolio and the current level of shareholders’ equity continue to provide a sound financial base as we strive to expand our marketing to offer competitive products. Our investment portfolio recovered from the disruptions in the capital markets and had unrealized appreciation on available-for-sale securities of $3,071,056$7,264,140 and $3,621,646$3,071,056 as of December 31, 20112012 and December 31, 2010,2011, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. This $550,590 decrease$4,939,973 increase in unrealized gain arising for the year ended December 31, 2011 is2012 has been offset by the net realized investment gain of $606,935$746,889 due to the sale and call activity for available-for-sale fixed maturity securities, sale of available-for-sale equity securities and sale of investment real estate during 2011.2012.
A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy. We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds.
One of theour significant risks relates to the fluctuations in interest rates. Regarding interest rates, the value of our available-for-sale fixed maturity securities investment portfolio will increase or decrease in an inverse relationship with fluctuations in interest rates, while net investment income earned on newly acquired available-for-sale fixed maturity securities increases or decreases in direct relationship with interest rate changes. From an income perspective, we are exposed to rising interest rates which could be a significant risk, as TLIC's and Family Benefit Life’s annuity business is subject to variable interest rates. The lifeLife insurance company's life insurancecompany policy liabilities bear fixed rates. From a liquidity perspective, our fixed rate policy liabilities are relatively insensitive to interest rate fluctuations.
We believe gradual increases in interest rates do not present a significant liquidity exposure for the life insurance policies. We maintain conservative durations in our fixed maturity portfolio. As of December 31, 2011,2012, cash and the fair value of fixed maturity available-for-sale securities with maturities of less than one year and the fair value of lottery receivables with maturities of less than one year equaled 28.4%13.9% of total policy liabilities. If interest rates rise significantly in a short time frame, there can be no assurance that the life insurance industry, including the Company, would not experience increased levels of surrenders and reduced sales, and thereby be materially adversely affected.
In addition to the measures described above, TLIC and Family Benefit Life must comply with the NAIC promulgated Standard Valuation Law ("SVL") which specifies minimum reserve levels and prescribes methods for determining them, with the intent of enhancing solvency. Upon meeting certain tests, which TLIC and Family Benefit Life met during 20112012 and 2010,2011, the SVL also requires the Company to perform annual cash flow testing for TLIC and Family Benefit Life. This testing is designed to ensure that statutory reserve levels will maintain adequate protection in a variety of potential interest rate scenarios. The Actuarial Standards Board of the American Academy of Actuaries also requires cash flow testing as a basis for the actuarial opinion on the adequacy of the reserves which is a required part of the annual statutory reporting process.
Our marketing plan could be modified to emphasize certain product types and reduce others. New business levels could be varied in order to find the optimum level. We believe that our current liquidity, current bond portfolio maturity distribution and cash position give us substantial resources to administer our existing business and fund growth generated by direct sales.
We will service other expenses and commitments by: (1) using available cash, (2) dividends from TLIC and Family Benefit Life that are limited by law to the lesser of prior year net operating income or 10% of prior year-end surplus unless specifically approved by the controlling insurance department, (3) dividendsreturn of invested capital from FTCC as those operations are discontinued, (4) public and (4)private offerings of our common stock and (5) corporate borrowings, if necessary.
We will use the majority of our capital provided from the public stock offerings to expand life insurance operations and acquire life insurance companies. The operations of TLIC and Family Benefit Life may require additional capital contributions to meet statutory capital and surplus requirements mandated by state insurance departments. Life insurance contract liabilities are generally long term in nature and are generally paid from future cash flows.
On March 12, 2009, we entered into a senior revolving loan with a bank to loan up to $3,000,000 to provide working capital and funds for expansion. The loan was renewed on April 30, 2009 and modified to increase the revolving loan amount to $3,600,000. The loan agreement terminated on May 31, 2010 and was not renewed at our election. On July 21, 2009, FTCC borrowed $100,000 under the loan agreement and repaid $99,999 on November 4, 2009. The remaining $1 was repaid on May 31, 2010.
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 was completed April 30, 2012. The Company raised $11,000,010 from this offering and incurred $1,650,001 in offering costs resulting in $9,350,009 in net proceeds.
On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas, Missouri and South Dakota. The private placement is for 1,333,334600,000 shares of the Company’s common stock for $7.50$8.50 per share. All theseIf all shares were sold, as of February 17, 2012 and the Company has nowwould have received $8.5 million$4,335,000 after reduction for estimated offering expenses and sales commissions. The Company has registered an additional 133,334 shares of its common stock to cover over subscriptions. The Company is now selling these oversubscriptions. 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 was extended on June 28, 2011 and will end on June 28, 2012 unless all the Company’s shares are sold before then.expenses. As of December 31, 2011,2012, the Company hashad received gross proceeds of $9,271,215$536,095 from the subscription of 1,236,16263,070 shares of its common stock in this offeringprivate placement and incurred $1,404,300$232,921 in offering costs. The proceeds were originally deposited in an escrow account thatThis offerring was released from escrow by the Oklahoma Department of Securities in August 2010 after the offering exceeded $1,000,000suspended on March 8, 2013 and resulted in gross proceeds. Those proceeds were made available to the Company in August 2010. Proceedsof $620,245 from the salesubscription of 72,970 shares of the Company’sits common stock and incurred $290,163 in this public offering after August 2010 were available to the Company without being held in escrow.costs.
We are not aware of any commitments or unusual events that could materially affect our capital resources. We are not aware of any current recommendations by any regulatory authority which, if implemented, would have a material adverse effect on our liquidity, capital resources or operations.
We believe that our existing cash and cash equivalents as of December 31, 20112012 will be sufficient to fund our anticipated operating expenses.
Loans outstanding from premium financing declined during 2010 and have continued to decline during 2011 as we have decreased production of premium financing contracts. The growth of the premium finance subsidiary is uncertain and may require additional capital. The premium financing operations have steadily decreased during the past two years. Premium financing loan operations is now based on the production of loan agreements with Oklahoma agents. We are only writing business in Louisiana and Mississippi with profitable agencies and currently have no production in Alabama and Arkansas. The Company is closely evaluating premium financing loan operations to determine if it can continue based almost entirely on Oklahoma production.
Funds will not be available to continue the expansion of the Company’s subsidiaries without borrowing funds or raising additional capital. As introduced above, we have begun a public offering to generate additional funding. We intend to use the proceeds to finance future acquisitions of life insurance companies or blocks of life insurance business, provide up to $3.0 million of capital and/or surplus to TLIC as needed to maintain adequate capital and increase working capital. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements. The forward-looking statements are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning; and include, but are not limited to, statements regarding the outlook of our business and financial performance. These forward-looking statements are subject to change and uncertainty, which are, in many instances, beyond our control and have been made based upon our expectations and beliefs concerning future developments and their potential effect upon us. There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be as anticipated. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. These factors include among others:
| • | general economic conditions and financial factors, including the performance and fluctuations of fixed income, equity, real estate, credit capital and other financial markets; |
| • | differences between actual experience regarding mortality, morbidity, persistency, surrenders, investment returns, and our pricing assumptions establishing liabilities and reserves or for other purposes; |
| • | the effect of increased claims activity from natural or man-made catastrophes, pandemic disease, or other events resulting in catastrophic loss of life; |
| • | adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including and in connection with our divestiture or winding down of businesses such as FTCC; |
| • | inherent uncertainties in the determination of investment allowances and impairments and in the determination of the valuation allowance on the deferred income tax asset; |
| • | investment losses and defaults; |
| • | competition in our product lines; |
| • | attraction and retention of qualified employees and agents; |
| • | ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; |
| • | the availability, affordability and adequacy of reinsurance protection; |
| • | the effects of emerging claim and coverage issues; |
| • | the cyclical nature of the insurance business; |
| • | interest rate fluctuations; |
| • | changes in our experiences related to deferred policy acquisition costs; |
| • | the ability and willingness of counterparties to our reinsurance arrangements and derivative instruments to pay balances due to us; |
| • | rating agencies’ actions; |
| • | domestic or international military actions; |
| • | the effects of extensive government regulation of the insurance industry; |
| • | changes in tax and securities law; |
| • | changes in statutory or U.S. generally accepted accounting principles (“GAAP”), practices or policies; |
| • | regulatory or legislative changes or developments; |
| • | the effects of unanticipated events on our disaster recovery and business continuity planning; |
| • | failures or limitations of our computer, data security and administration systems; |
| • | risks of employee error or misconduct; |
| • | the introduction of alternative healthcare solutions; |
| • | the assimilation of life insurance businesses we acquire and the sound management of these businesses; and |
| • | the availability of capital to expand our business. |
It is not our corporate policy to make specific projections relating to future earnings, and we do not endorse any projections regarding future performance made by others. In addition, we do not publicly update or revise forward-looking statements based on the outcome of various foreseeable or unforeseeable developments.
Forward Looking Information
We caution readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Statements using verbs such as "expect", "anticipate", "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent our beliefs concerning future levels of sales and redemptions of our products, investment spreads and yields or the earnings and profitability of our activities.
Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable factors and developments. Some of these may be national in scope, such as general economic conditions, changes in tax laws and changes in interest rates. Some may be related to the insurance industry generally, such as pricing competition, regulatory developments, industry consolidation and the effects of competition in the insurance business from other insurance companies and other financial institutions operating in our market area and elsewhere. Others may relate to the Company specifically, such as credit, volatility and other risks associated with our investment portfolio. We caution that such factors are not exclusive. We disclaim any obligation to update forward-looking information.
Item 8. Financial Statements
FIRST TRINITY FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 and 2010
| Consolidated Financial Statements | | Page Numbers |
| | |
| | |
| Report of Independent Registered Public Accounting Firm | 29 | 34 |
| | |
| Consolidated Statements of Financial Position | 30 | 35 |
| | |
| Consolidated Statements of Operations | 31 | 36 |
| | |
| Consolidated Statements of Comprehensive Income | | 37 |
| | |
| Consolidated Statements of Changes in Shareholders’ Equity | 32 | 38 |
| | |
| Consolidated Statements of Cash Flows | 33 | 39 |
| | |
| Notes to Consolidated Financial Statements | 35 | 41 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of First Trinity Financial Corporation
We have audited the accompanying consolidated statements of financial position of First Trinity Financial Corporation and Subsidiaries (the Company) as of December 31, 20112012 and 2010,2011, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Trinity Financial Corporation and Subsidiaries as of December 31, 20112012 and 2010,2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
| | | /s/ Kerber, Eck & Braeckel LLP | |
Springfield, Illinois
March 24, 201213, 2013
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Financial Position
| | | December 31, 2011 | | | December 31, 2010 | | | December 31, 2012 | | | December 31, 2011 | |
| Assets | | | | | | | | | | | | |
| Investments | | | | | | | | | | | | |
Available-for-sale fixed maturity securities at fair value (amortized cost: $78,128,103 and $23,183,633 as of December 31, 2011 and December 31, 2010, respectively) | | $ | 81,051,207 | | | $ | 26,623,318 | | |
Available-for-sale equity securities at fair value (cost: $750,941 and $347,353 as of December 31, 2011 and December 31, 2010, respectively) | | | 898,893 | | | | 529,314 | | |
Available-for-sale fixed maturity securities at fair value (amortized cost: $91,543,308 and $78,128,103 as of December 31, 2012 and 2011, respectively) | | | $ | 98,659,797 | | | $ | 81,051,207 | |
Available-for-sale equity securities at fair value (cost: $695,846 and $750,941 as of December 31, 2012 and 2011, respectively) | | | | 843,497 | | | | 898,893 | |
| Mortgage loans on real estate | | | 1,985,394 | | | | 1,156,812 | | | | 10,435,776 | | | | 1,985,394 | |
| Investment real estate | | | 3,466,581 | | | | 3,077,520 | | | | 2,858,765 | | | | 3,466,581 | |
| Policy loans | | | 1,472,666 | | | | 367,284 | | | | 1,488,035 | | | | 1,472,666 | |
| Other long-term investments | | | 9,875,675 | | | | 6,886,529 | | | | 19,560,794 | | | | 9,875,675 | |
| Total investments | | | 98,750,416 | | | | 38,640,777 | | | | 133,846,664 | | | | 98,750,416 | |
| | | | | | | | | | |
| Cash and cash equivalents | | | 27,705,711 | | | | 12,985,278 | | | | 10,947,474 | | | | 27,705,711 | |
| Certificate of deposit (restricted) | | | - | | | | 102,273 | | |
| Accrued investment income | | | 1,122,574 | | | | 385,948 | | | | 1,417,218 | | | | 1,122,574 | |
| Recoverable from reinsurers | | | 1,132,121 | | | | 977,397 | | | | 1,188,371 | | | | 1,132,121 | |
| Agents' balances and due premiums | | | 381,901 | | | | 357,979 | | | | 358,729 | | | | 381,901 | |
| Loans from premium financing, net | | | 1,022,416 | | | | 1,143,977 | | | | 261,072 | | | | 1,022,416 | |
| Deferred policy acquisition costs | | | 5,251,999 | | | | 3,234,285 | | | | 7,028,820 | | | | 5,251,999 | |
| Value of insurance business acquired | | | 7,912,469 | | | | 2,507,258 | | | | 7,508,895 | | | | 7,912,469 | |
| Property and equipment, net | | | 170,843 | | | | 102,374 | | | | 124,558 | | | | 170,843 | |
| Other assets | | | 1,297,205 | | | | 1,151,315 | | | | 2,768,516 | | | | 1,297,205 | |
| Total assets | | $ | 144,747,655 | | | $ | 61,588,861 | | | $ | 165,450,317 | | | $ | 144,747,655 | |
| Liabilities and Shareholders' Equity | | | | | | | | | | | | | | | | |
| Policy liabilities | | | | | | | | | | | | | | | | |
| Policyholders' account balances | | $ | 81,730,322 | | | $ | 30,261,070 | | | $ | 95,043,370 | | | $ | 81,730,322 | |
| Future policy benefits | | | 28,977,186 | | | | 13,444,284 | | | | 31,065,560 | | | | 28,977,186 | |
| Policy claims | | | 515,522 | | | | 367,306 | | | | 717,521 | | | | 515,522 | |
| Premiums paid in advance | | | 46,613 | | | | 42,908 | | |
| Other policy liabilities | | | | 139,722 | | | | 46,613 | |
| Total policy liabilities | | | 111,269,643 | | | | 44,115,568 | | | | 126,966,173 | | | | 111,269,643 | |
| Deferred federal income taxes | | | 2,622,711 | | | | 294,075 | | | | 3,301,524 | | | | 2,622,711 | |
| Other liabilities | | | 2,457,188 | | | | 523,271 | | | | 1,460,508 | | | | 2,457,188 | |
| Total liabilities | | | 116,349,542 | | | | 44,932,914 | | | | 131,728,205 | | | | 116,349,542 | |
| Shareholders' equity | | | | | | | | | | | | | | | | |
Common stock, par value $.01 per share, 20,000,000 shares authorized, 6,798,535 and 5,805,000 issued and outstanding as of December 31, 2011 and 2010, respectively and 566,404 and 448,310 subscribed as of December 31, 2011 and 2010, respectively | | | 73,649 | | | | 62,533 | | |
Common stock, par value $.01 per share, 20,000,000 shares authorized, and 7,974,373 and 6,798,535 issued and 7,789,060 and 6,798,535 outstanding as of December 31, 2012 and 2011, respectively, and 63,070 and 566,404 subscribed as of December 31, 2012 and 2011, respectively | | | | 80,374 | | | | 73,649 | |
| Additional paid-in capital | | | 24,086,146 | | | | 16,677,615 | | | | 28,707,648 | | | | 24,086,146 | |
| Treasury stock, at cost (185,313 shares as of December 31, 2012) | | | | (648,595 | ) | | | - | |
| Accumulated other comprehensive income | | | 2,696,224 | | | | 3,305,370 | | | | 5,780,670 | | | | 2,696,224 | |
| Accumulated earnings (deficit) | | | 1,542,094 | | | | (3,389,571 | ) | | | (197,985 | ) | | | 1,542,094 | |
| Total shareholders' equity | | | 28,398,113 | | | | 16,655,947 | | | | 33,722,112 | | | | 28,398,113 | |
| Total liabilities and shareholders' equity | | $ | 144,747,655 | | | $ | 61,588,861 | | | $ | 165,450,317 | | | $ | 144,747,655 | |
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Operations
| | | Years Ended December 31, | |
| | | 2012 | | | 2011 | |
| Revenues | | | | | | |
| Premiums | | $ | 8,024,901 | | | $ | 6,229,383 | |
| Income from premium financing | | | 102,491 | | | | 168,124 | |
| Net investment income | | | 5,920,278 | | | | 2,291,761 | |
| Net realized investment gains | | | 746,889 | | | | 604,784 | |
| Gain from acquisition of Family Benefit Life | | | - | | | | 6,915,479 | |
| Other income | | | 13,961 | | | | 14,728 | |
| Total revenues | | | 14,808,520 | | | | 16,224,259 | |
| Benefits, Claims and Expenses | | | | | | | | |
| Benefits and claims | | | | | | | | |
| Increase in future policy benefits | | | 2,054,925 | | | | 1,982,865 | |
| Death benefits | | | 2,863,555 | | | | 1,479,188 | |
| Surrenders | | | 583,498 | | | | 336,062 | |
| Interest credited to policyholders | | | 3,330,592 | | | | 1,510,710 | |
| Dividend and supplementary life contract benefits | | | 409,482 | | | | - | |
| Total benefits and claims | | | 9,242,052 | | | | 5,308,825 | |
| Policy acquisition costs deferred | | | (2,302,070 | ) | | | (2,262,751 | ) |
| Amortization of deferred policy acquisition costs | | | 512,546 | | | | 230,284 | |
| Amortization of value of insurance business acquired | | | 403,573 | | | | 222,451 | |
| Commissions | | | 2,324,073 | | | | 2,281,934 | |
| Other underwriting, insurance and acquisition expenses | | | 3,670,533 | | | | 2,953,245 | |
| Total expenses | | | 4,608,655 | | | | 3,425,163 | |
| Total benefits, claims and expenses | | | 13,850,707 | | | | 8,733,988 | |
| Income before total federal income tax expense (benefit) | | | 957,813 | | | | 7,490,271 | |
| Current federal income tax expense | | | 273,054 | | | | 34,095 | |
| Deferred federal income tax expense (benefit) | | | (417,122 | ) | | | 96,183 | |
| Total federal income tax expense (benefit) | | | (144,068 | ) | | | 130,278 | |
| Net income | | $ | 1,101,881 | | | $ | 7,359,993 | |
| Net income per common share basic and diluted | | $ | 0.14 | | | $ | 1.00 | |
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
| | | Years Ended December 31, | |
| | | 2012 | | | 2011 | |
| Net income | | $ | 1,101,881 | | | $ | 7,359,993 | |
| Other comprehensive income (loss) | | | | | | | | |
| Total net unrealized gains arising during the period | | | 4,939,973 | | | | 54,194 | |
| Less: Net realized investment gains | | | 746,889 | | | | 604,784 | |
| Net unrealized gains (losses) | | | 4,193,084 | | | | (550,590 | ) |
| Adjustment to deferred acquisition costs | | | (12,703 | ) | | | (14,753 | ) |
| Other comprehensive income (loss) before income tax expense | | | 4,180,381 | | | | (565,343 | ) |
| Income tax expense | | | 1,095,935 | | | | 43,803 | |
| Total other comprehensive income (loss) | | | 3,084,446 | | | | (609,146 | ) |
| Total comprehensive income | | $ | 4,186,327 | | | $ | 6,750,847 | |
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 30, 2012 and 2011
| | | Year Ended December 31, | |
| | | 2011 | | | 2010 | |
| Revenues | | | | | | |
| Premiums | | $ | 6,229,383 | | | $ | 5,895,030 | |
| Income from premium financing | | | 168,124 | | | | 259,296 | |
| Net investment income | | | 2,291,761 | | | | 2,441,334 | |
| Net realized investment gains | | | 606,935 | | | | 159,300 | |
| Gain from acquisition of Family Benefit Life | | | 6,915,479 | | | | - | |
| Other income | | | 12,577 | | | | 66,346 | |
| Total revenues | | | 16,224,259 | | | | 8,821,306 | |
| Benefits, Claims and Expenses | | | | | | | | |
| Benefits and claims | | | | | | | | |
| Increase in future policy benefits | | | 1,982,865 | | | | 2,041,117 | |
| Death benefits | | | 1,479,188 | | | | 1,422,666 | |
| Surrenders | | | 336,062 | | | | 367,658 | |
| Interest credited to policyholders | | | 1,510,710 | | | | 1,232,112 | |
| Total benefits and claims | | | 5,308,825 | | | | 5,063,553 | |
| Policy acquisition costs deferred | | | (2,262,751 | ) | | | (1,773,199 | ) |
| Amortization of deferred policy acquisition costs | | | 230,284 | | | | 451,349 | |
| Amortization of value of insurance business acquired | | | 222,451 | | | | 271,465 | |
| Commissions | | | 2,281,934 | | | | 1,673,975 | |
| Other underwriting, insurance and acquisition expenses | | | 2,953,245 | | | | 3,249,353 | |
| Total benefits, claims and expenses | | | 8,733,988 | | | | 8,936,496 | |
| Income (loss) before total federal income tax expense (benefit) | | | 7,490,271 | | | | (115,190 | ) |
| Current federal income tax expense | | | 34,095 | | | | - | |
| Deferred federal income tax expense (benefit) | | | 96,183 | | | | (206,526 | ) |
| Total federal income tax expense (benefit) | | | 130,278 | | | | (206,526 | ) |
| Net income | | $ | 7,359,993 | | | $ | 91,336 | |
| Net income per common share basic and diluted | | $ | 1.00 | | | $ | 0.01 | |
| | | | | | | | | | | | | | | | | | | |
| Balance as of January 1, 2011 | | $ | 62,533 | | | $ | 16,677,615 | | | $ | - | | | $ | 3,305,370 | | | $ | (3,389,571 | ) | | $ | 16,655,947 | |
| Stock dividend | | | 3,238 | | | | 2,425,090 | | | | - | | | | - | | | | (2,428,328 | ) | | | - | |
| Subscriptions of common stock | | | 7,878 | | | | 4,983,441 | | | | - | | | | - | | | | - | | | | 4,991,319 | |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | 7,359,993 | | | | 7,359,993 | |
| Other comprehensive loss | | | - | | | | - | | | | - | | | | (609,146 | ) | | | - | | | | (609,146 | ) |
| Balance as of December 31, 2011 | | $ | 73,649 | | | $ | 24,086,146 | | | $ | - | | | $ | 2,696,224 | | | $ | 1,542,094 | | | $ | 28,398,113 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock dividend | | | 3,789 | | | | 2,838,171 | | | | - | | | | - | | | | (2,841,960 | ) | | | - | |
| Subscriptions of common stock | | | 2,936 | | | | 1,783,331 | | | | - | | | | - | | | | - | | | | 1,786,267 | |
| Repurchase of common stock | | | - | | | | - | | | | (648,595 | ) | | | - | | | | - | | | | (648,595 | ) |
| Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | - | | | | - | | | | 1,101,881 | | | | 1,101,881 | |
| Other comprehensive income | | | - | | | | - | | | | - | | | | 3,084,446 | | | | - | | | | 3,084,446 | |
| Balance as of December 31, 2012 | | $ | 80,374 | | | $ | 28,707,648 | | | $ | (648,595 | ) | | $ | 5,780,670 | | | $ | (197,985 | ) | | $ | 33,722,112 | |
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
| | | Common Stock $.01 Par Value | | | Additional Paid-in Capital | | | Accumulated Other Comprehensive Income | | | Accumulated Earnings (Deficit) | | | Total Shareholders' Equity | |
| Balance at January 1, 2010 | | $ | 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 | |
| Stock dividend | | | 3,238 | | | | 2,425,090 | | | | - | | | | (2,428,328 | ) | | | - | |
| Subscriptions of common stock | | | 7,878 | | | | 4,983,441 | | | | - | | | | - | | | | 4,991,319 | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | |
| Net income | | | - | | | | - | | | | - | | | | 7,359,993 | | | | 7,359,993 | |
Change in net unrealized appreciation on available-for-sale securities | | | - | | | | - | | | | (609,146 | ) | | | - | | | | (609,146 | ) |
| Total comprehensive income | | | - | | | | - | | | | - | | | | - | | | | 6,750,847 | |
| Balance at December 31, 2011 | | $ | 73,649 | | | $ | 24,086,146 | | | $ | 2,696,224 | | | $ | 1,542,094 | | | $ | 28,398,113 | |
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| | | Year Ended December 31, | | | Years Ended December 31, | |
| | | 2011 | | | 2010 | | | 2012 | | | 2011 | |
| Operating activities | | | | | | | | | | | | |
| Net income | | $ | 7,359,993 | | | $ | 91,336 | | | $ | 1,101,881 | | | $ | 7,359,993 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
| Provision for depreciation | | | 213,434 | | | | 81,768 | | | | 215,367 | | | | 213,434 | |
| Accretion of discount on investments | | | (895,526 | ) | | | (692,415 | ) | | | (491,928 | ) | | | (895,526 | ) |
| Realized investment gains | | | (606,935 | ) | | | (159,300 | ) | |
| Gain on acquisition of Family Benefit Life | | | (6,915,479 | ) | | | - | | |
| Net realized investment gains | | | | (746,889 | ) | | | (604,784 | ) |
| Gain from acquisition of Family Benefit Life | | | | - | | | | (6,915,479 | ) |
| Gain on sale of fixed asset | | | (2,171 | ) | | | - | | | | (2,934 | ) | | | (2,171 | ) |
| Loss on sale of invested real estate | | | 2,151 | | | | - | | |
| Amortization of policy acquisition cost | | | 230,284 | | | | 451,349 | | | | 512,546 | | | | 230,284 | |
| Policy acquisition cost deferred | | | (2,262,751 | ) | | | (1,773,199 | ) | | | (2,302,070 | ) | | | (2,262,751 | ) |
| Mortgage loan origination fees deferred | | | | (168,641 | ) | | | - | |
| Amortization of value of insurance business acquired | | | 222,451 | | | | 271,465 | | | | 403,573 | | | | 222,451 | |
| Provision for deferred federal income taxes | | | 96,183 | | | | (206,526 | ) | |
| Interest credited on policyholder deposits | | | 1,514,071 | | | | 1,225,864 | | |
| Provision for deferred federal income tax expense (benefit) | | | | (417,122 | ) | | | 96,183 | |
| Interest credited to policyholders | | | | 3,330,592 | | | | 1,510,710 | |
| Change in assets and liabilities: | | | | | | | | | | | | | | | | |
| Accrued investment income | | | 38,812 | | | | (45,564 | ) | | | (294,644 | ) | | | 38,812 | |
| Policy loans | | | (58,004 | ) | | | (32,262 | ) | | | (15,369 | ) | | | (58,004 | ) |
| Allowance for loan losses | | | (214,067 | ) | | | 124,245 | | | | (5 | ) | | | (214,067 | ) |
| Recoverable from reinsurers | | | (34,656 | ) | | | (107,103 | ) | | | (56,250 | ) | | | (34,656 | ) |
| Agents' balances and due premiums | | | (7,446 | ) | | | (84,136 | ) | | | 23,172 | | | | (7,446 | ) |
| Other assets | | | (172,164 | ) | | | (314,105 | ) | | | (1,471,311 | ) | | | (172,164 | ) |
| Future policy benefits | | | 2,030,069 | | | | 2,094,644 | | | | 2,088,374 | | | | 2,030,069 | |
| Policy claims | | | (18,377 | ) | | | 78,033 | | | | 201,999 | | | | (18,377 | ) |
| Premiums paid in advance | | | (8,509 | ) | | | 23,967 | | |
| Other policy liabilities | | | | 93,109 | | | | (8,509 | ) |
| Other liabilities | | | 1,437,345 | | | | 192,624 | | | | (996,680 | ) | | | 1,437,345 | |
| Net cash provided by operating activities | | | 1,948,708 | | | | 1,220,685 | | | | 1,006,770 | | | | 1,945,347 | |
| | | | | | | | | | |
| Investing activities | | | | | | | | | | | | | | | | |
| Purchase of fixed maturity securities | | | (2,494,847 | ) | | | (4,859,909 | ) | | | (23,432,839 | ) | | | (2,494,847 | ) |
| Maturities of fixed maturity securities | | | | 1,678,000 | | | | 700,000 | |
| Sales of fixed maturity securities | | | 3,971,870 | | | | 1,868,930 | | | | 7,833,967 | | | | 3,971,870 | |
| Maturities of fixed maturity securities | | | 700,000 | | | | - | | |
| Purchase of equity securities | | | (98,815 | ) | | | (42,500 | ) | | | (616,594 | ) | | | (98,815 | ) |
| Sale of equity securities | | | - | | | | 65,592 | | |
| Acquistion of Family Benefit Life | | | (4,751,624 | ) | | | - | | |
| Sales of equity securities | | | | 1,114,426 | | | | - | |
| Acquisition of Family Benefit Life | | | | - | | | | (4,751,624 | ) |
| Purchase of mortgage loans | | | (962,500 | ) | | | - | | | | (9,143,326 | ) | | | (962,500 | ) |
| Reduction in mortgage loans | | | 213,628 | | | | 209,141 | | |
| Purchase of real estate | | | (18,434 | ) | | | (117,873 | ) | |
| Sale of real estate | | | 49,000 | | | | 123,500 | | |
| Purchase of other long term investments | | | (3,867,415 | ) | | | (2,724,500 | ) | |
| Payments on other long term investments | | | 1,511,541 | | | | 1,224,591 | | |
| Payments on mortgage loans | | | | 899,180 | | | | 213,628 | |
| Purchase of invested real estate | | | | - | | | | (18,434 | ) |
| Sale of invested real estate | | | | 512,500 | | | | 49,000 | |
| Purchase of other long-term investments | | | | (11,188,607 | ) | | | (3,867,415 | ) |
| Payments on other long-term investments | | | | 2,691,809 | | | | 1,511,541 | |
| Maturity of certificate of deposit | | | 102,273 | | | | - | | | | - | | | | 102,273 | |
| Loans made for premiums financed | | | (2,541,702 | ) | | | (3,628,294 | ) | | | (934,095 | ) | | | (2,541,702 | ) |
| Loans repaid for premiums financed | | | 2,877,330 | | | | 5,109,902 | | | | 1,695,444 | | | | 2,877,330 | |
| Purchases of furniture and equipment, net | | | (118,948 | ) | | | (37,997 | ) | |
| Sales of furniture and equipment | | | | 5,000 | | | | 2,300 | |
| Purchases of furniture and equipment | | | | - | | | | (121,248 | ) |
| Net cash used in investing activities | | | (5,428,643 | ) | | | (2,809,417 | ) | | | (28,885,135 | ) | | | (5,428,643 | ) |
| | | | | | | | | | |
| Financing activities | | | | | | | | | | | | | | | | |
| Policyholder account deposits | | | 15,236,644 | | | | 6,382,876 | | |
| Policyholder account withdrawals | | | (2,027,595 | ) | | | (1,765,153 | ) | |
| Proceeds from public stock offering | | | 4,991,319 | | | | 2,875,595 | | |
| Policyholders' account deposits | | | | 14,732,255 | | | | 15,240,005 | |
| Policyholders' account withdrawals | | | | (4,749,799 | ) | | | (2,027,595 | ) |
| Purchases of treasury stock | | | | (648,595 | ) | | | - | |
| Proceeds from public and private stock offerings | | | | 1,786,267 | | | | 4,991,319 | |
| Net cash provided by financing activities | | | 18,200,368 | | | | 7,493,318 | | | | 11,120,128 | | | | 18,203,729 | |
| Increase in cash | | | 14,720,433 | | | | 5,904,586 | | |
| | | | | | | | | | |
| Increase (decrease) in cash | | | | (16,758,237 | ) | | | 14,720,433 | |
| Cash and cash equivalents, beginning of period | | | 12,985,278 | | | | 7,080,692 | | | | 27,705,711 | | | | 12,985,278 | |
| Cash and cash equivalents, end of period | | $ | 27,705,711 | | | $ | 12,985,278 | | | $ | 10,947,474 | | | $ | 27,705,711 | |
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Supplemental Disclosures
In 2011, the Company issued 323,777 shares in connection with a 5% share dividend payable to the holders of shares of the Company as of March 10, 2011. In 2012, the Company issued 378,928 shares in connection with another 5% share dividend payable to the holders of shares of the Company as of March 10, 2012. In conjunction with the 2011 and 2012 stock dividends, the non-cash impact on investing and financing activities is summarized as follows:
| | | Years Ended December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
Fair value of shares issued in connection with the stock dividend (378,928 and 323,777 shares issued in 2012 and 2011, respectively) | | $ | 2,841,960 | | | $ | 2,428,328 | |
| Reduction in accumulated earnings (deficit) due to stock dividend | | | (2,841,960 | ) | | | (2,428,328 | ) |
| Increase in common stock, par value $.01 due to stock dividend | | | 3,789 | | | | 3,238 | |
| Increase in additional paid-in-capital due to the stock dividend | | | 2,838,171 | | | | 2,425,090 | |
| Change in shareholders' equity due to the stock dividend | | $ | - | | | $ | - | |
On December 28, 2011, the Company acquired Family Benefit Life Insurance Company. In conjunction with this acquisition, the cash impact on operating, investing and financing activities is summarized as follows:
| | | Year Ended December 31, 2011 | |
| Cash used in Family Benefit Life acquisition | | $ | 13,855,129 | |
| Cash provided in Family Benefit Life acquisition | | | 9,103,505 | |
| Decrease in cash from Family Benefit Life acquisition | | | 4,751,624 | |
| Fair value of assets acquired in Family Benefit Life Acquisition (excluding cash) | | | | |
| Available-for-sale fixed maturity securities | | | 56,252,307 | |
| Available-for-sale equity securities | | | 304,773 | |
| Mortgage loans on real estate | | | 79,710 | |
| Investment real estate | | | 582,560 | |
| Policy loans | | | 1,047,378 | |
| Accrued investment income | | | 775,438 | |
| Recoverable from reinsurers | | | 120,068 | |
| Agents' balances and due premiums | | | 16,476 | |
| Value of insurance business acquired | | | 5,627,662 | |
| Other assets (includes reclassification of $36,720 of current taxes payable) | | | (26,274 | ) |
| Total fair value of assets acquired (excluding cash) | | | 64,780,098 | |
| Fair value of liabilities assumed in Family Benefit Life acquisition | | | | |
| Policyholders' account balances | | | 36,746,133 | |
| Future policy benefits | | | 13,502,833 | |
| Policy claims | | | 166,593 | |
| Premiums paid in advance | | | 12,214 | |
| Deferred federal income taxes | | | 2,188,650 | |
| Other liabilities | | | 496,572 | |
| Total fair value of liabilities assumed | | | 53,112,995 | |
| Fair value of net assets acquired in Family Benefit Life acquisition (excluding cash) | | | 11,667,103 | |
| Fair value of net assets acquired (including cash) in excess of purchase price | | $ | 6,915,479 | |
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows (continued)
Supplemental Disclosure: Cash Investing Activity for Acquisition of Family Benefit Life Insurance Company
December 31, 2012 and 2011
| | | Year Ended December 31, | |
| | | 2011 | |
| Cash used in Family Benefit Life acquisition | | $ | 13,855,129 | |
| Cash provided in Family Benefit Life acquisition | | | 9,103,505 | |
| Decrease in cash from Family Benefit Life acquisition | | | 4,751,624 | |
| Fair value of assets acquired in Family Benefit Life Acquisition (excluding cash) | | | | |
| Available-for-sale fixed maturity securities | | | 56,252,307 | |
| Available-for-sale equity securities | | | 304,773 | |
| Mortgage loans on real estate | | | 79,710 | |
| Investment real estate | | | 582,560 | |
| Policy loans | | | 1,047,378 | |
| Accrued investment income | | | 775,438 | |
| Recoverable from reinsurers | | | 120,068 | |
| Agents' balances and due premiums | | | 16,476 | |
| Value of insurance business acquired | | | 5,627,662 | |
| Other assets (includes reclassification of $36,720 of current taxes payable) | | | (26,274 | ) |
| Total fair value of assets acquired (excluding cash) | | | 64,780,098 | |
| Fair value of liabilities assumed in Family Benefit Life acquisition | | | | |
| Policyholders' account balances | | | 36,746,133 | |
| Future policy benefits | | | 13,502,833 | |
| Policy claims | | | 166,593 | |
| Premiums paid in advance | | | 12,214 | |
| Deferred federal income taxes | | | 2,188,650 | |
| Other liabilities | | | 496,572 | |
| Total fair value of liabilities assumed | | | 53,112,995 | |
| Fair value of net assets acquired in Family Benefit Life acquisition (excluding cash) | | | 11,667,103 | |
| Fair value of net assets acquired (including cash) in excess of purchase price | | $ | 6,915,479 | |
See notes to consolidated financial statements.
1. Organization and Significant Accounting Policies
Nature of Operations
First Trinity Financial Corporation (the “Company”) is the parent holding company of Trinity Life Insurance Company, Family Benefit Life Insurance Company, First Trinity Capital Corporation and Southern Insurance Services, LLC. 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 $12,750,000, which included a 10% "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 was completed April 30, 2012. The Company raised $11,000,010 from this offering. On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas, Missouri and South Dakota. The private placement is for 1,333,334600,000 shares of the Company’s common stock for $7.50$8.50 per share. All theseIf all shares were sold, as of February 17, 2012 and the Company has nowwould have received $8.5 million$4,335,000 after reduction for estimated offering expenses and sales commissions. The Company has registered an additional 133,334 shares of its common stock to cover over subscriptions. The Company is now selling these oversubscriptions. 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 was extended on June 28, 2011 and will end on June 28, 2012, unless all the Company’s shares are sold before then.expenses. As of December 31, 2011,2012, the Company hashad received gross proceeds of $9,271,215$536,095 from the subscription of 1,236,16263,070 shares of its common stock in this offeringprivate placement and incurred $1,404,300$232,921 in offering costs. The proceeds were originally deposited in an escrow account thatThis offering was released from escrow by the Oklahoma Department of Securities in August 2010 after the offering exceeded $1,000,000suspended on March 8, 2013 and resulted in gross proceeds. Proceedsproceeds of $620,245 from the salesubscription of 72,970 shares of the Company’sits common stock and incurred $290,163 in this public offering after August 2010 were available to the Company without being held in escrow.costs.
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”) and 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 had two wholly owned subsidiaries, First Trinity Capital Corporation (“FTCC”) and TLIC, domiciled in Oklahoma.
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 product is issued as either a simplified issue or as a graded benefit, determined by underwriting. TLIC also offers various annuity and deposit-type liability products. 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.
On October 20, 2011, Trinity Life Insurance Company announced that it had signed a transaction agreement to acquireTLIC purchased Family Benefit Life Insurance Company a life and annuity insurance company incorporated and domiciled in Missouri. Prior to October 20, 2011, the Company purchased 401,381 (“Family Benefit Life common shares. TLIC purchased all of the remaining 886,259 issued and outstanding shares of Family Benefit Life from its shareholders. The transaction price per share was $11.05 and was basedLife”) on Family Benefit Life’s statutory capital and surplus (presented in accordance with statutory accounting principles) as of September 30, 2011 and the number of common shares issued and outstanding as of September 30, 2011 plus a premium of approximately $3.7 million. The transaction was subject to completion of due diligence, the continuation of Family Benefit Life’s business in the ordinary course and certain other conditions.
1. Organization and Significant Accounting Policies (continued)
Closing of the Family Benefit Life acquisition occurred between December 13, 2011 and December 28, 2011 as Trinity Life Insurance Company purchased the Family Benefit Life’s remaining 886,259 issued and outstanding shares from the Company’s shareholders.2011. Family Benefit Life is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in seven states. Family Benefit Life’s current product portfolio consists of whole life, term, accidental death and dismemberment, annuity, endowment and group life insurance products. The products are sold through independent agents in the states of Arizona, Colorado, Kansas, Missouri, Nebraska, New Mexico and Oklahoma.
TLIC acquired 100% ownership ofIn late 2012, Family Benefit Life from its shareholders for $13,855,129 paidwas initially licensed in cash. The fair value of the net assets acquired in this transaction was $20,770,608. Since the fair value of the net assets acquired exceeded purchase price for acquiring those net assets by $6,915,479, the residual was recorded in the consolidated statements of operations as a component of revenues captioned as “Gain from acquisition of Family Benefit Life” per the requirements of Financial Accounting Standards Board Codification Topic 805 “Business Combinations.” The reason for the gain from the acquisition of Family Benefit Life related primarily to that company’s management not being committed to rebuild the marketing force of that company in the current economic environment.Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia.
FTCC was incorporated in 2006, and began operations in January 2007 providing financing for casualty insurance premiums.2007. 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.
The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC will not accept new premium financing contracts after June 30, 2012. FTCC will continue to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
1. Organization and Significant Accounting Policies (continued)
The Company also owns 100% of Southern Insurance Services, LLC, (“SIS”), a limited liability company acquired in 2010, that operated as a property and casualty insurance agency but currently has no operations.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
Principles of Consolidation
The consolidated financial statements include the accounts and operations of the Company and its 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 income or shareholders' equity.equity.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.
Investments
Fixed maturity securities are comprised of bonds that are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable income taxes, reported in accumulated other comprehensive income. The amortized cost of fixed maturity securities available-for-sale is adjusted for amortization of premium and accretion of discount to maturity.
1. Organization and Significant Accounting Policies (continued)
Interest income, as well as the related amortization of premium and accretion of discount, is included in net investment income under the effective yield method. The amortized cost of fixed maturity securities available-for-sale is written down to fair value when a decline in value is considered to be other-than-temporary.
Equity securities available-for-sale areis comprised of mutual funds, common stockstocks and preferred stocks that are carried at fair value. The associated unrealized gains and losses, net of applicable income taxes, are included in accumulated other comprehensive income. The cost of equity securities available-for-sale is written down to fair value when a decline in value is considered to be other-than-temporary. Dividends from these investments are recognized in net investment income when declared.
The Company evaluates the difference between the cost/cost or amortized cost and estimated fair value of its investments to determine whether any decline in value is other-than-temporary in nature. This determination involves a degree of uncertainty. If a decline in the fair value of a security is determined to be temporary, the decline is recorded as an unrealized loss in stockholders' equity. If a decline in a security's fair value is considered to be other-than-temporary, the Company then determines the proper treatment for the other-than-temporary impairment. For fixed maturity securities available-for-sale, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security; and the amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security. For equity securities available-for-sale, the amount of any other-than-temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
1. Organization and Significant Accounting Policies (continued)
The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management's judgment as to the financial position and future prospects of the entity issuing the security. It is not possible to accurately predict when it may be determined that a specific security will become impaired. Future adverse changes in market conditions, poor operating results of underlying investments and defaults on mortgage loan payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future.
Likewise, if a change occurs in the Company’s intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that the Company will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result.
If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, the Company amortizes the reduced book value back to the security's expected recovery value over the remaining term of the bond. The Company continues to review the security for further impairment that would prompt another write-down in the value.
Mortgage loans are carried at unpaid balances, net of unamortized premium or discounts. Interest income and the amortization of premiums or discounts are included in net investment income.
Mortgage loan fees, certain direct loan origination costs, and purchase premiums and discounts on loans are recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. In certain circumstances, prepayments may be anticipated.
Investment real estate is carried at amortized cost. Depreciation on the office building is calculated over its estimated useful life of 19 years. On January 1, 2011, the useful life of the building was changed from 39 years to 19 years.
Policy loans are carried at unpaid principal balances. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned.
Other long term investments are comprised of lottery prize receivables and are carried at amortized cost, net of unamortized premium or discount. Interest income and the accretion of discount are included in net investment income.
Cash and Cash Equivalents and Certificates of Deposit
Cash and cash equivalents include cash on hand, amounts due from banks and money market instruments.
CertificatesInvestment Income and Realized Gains and Losses on Sales of deposit are carried at cost. The Company limits its investment in certificates of deposit to accounts that are federally insured. The Company had no certificates of deposit as of December 31, 2011.
1. Organization and Significant Accounting Policies (continued)Investments
Interest and dividends earned on investments are included in net investment income. Realized gains and losses on sales of investments are recognized in operations on the specific identification basis. Interest and dividends earned on investments are included in net investment income.
Deferred Policy Acquisition Costs
Commissions and other acquisition costs which vary with and are primarily related to the successful production of new business are deferred and amortized in a systematic manner based on the related contract revenues or gross profits as appropriate. Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense.
Deferred acquisition costs for the successful production of traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities.
Deferred acquisition costs related to the successful production of insurance and annuity products that subject the Company 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 (i.e., limited-payment long-duration annuity contracts) are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
1. Organization and Significant Accounting Policies (continued)
To the extent that realized gains and losses on fixed income securities result in adjustments to deferred acquisition costs related to insurance and annuity products, such adjustments are reflected as a component of the amortization of deferred acquisition costs.
Deferred acquisition costs related to limited-payment long-duration insurance and annuity contracts are also adjusted, net of tax, for the 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
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 78s 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. 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 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.
1. Organization and Significant Accounting Policies (continued)
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-loan basis.
Property and Equipment
Property and equipment are carried at amortizedundepreciated or unamortized cost. Office furniture, equipment and equipmentcomputer software is recorded at cost or fair value at acquisition less accumulated depreciation or amortization using the straight-line method over the estimated useful life of the respective assets of 3three to 7ten years. Leasehold improvements are recorded at cost and amortizeddepreciated over the remaining non cancelablenon-cancelable lease term.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
1. Organization and Significant Accounting Policies (continued)
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 recoverable balances are reported as assets and are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts.
Value of Insurance Business Acquired
As a result of the Company’s purchase of FLAC and Family Benefit Life, 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 is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits.
For the amortization of the value of acquired insurance in force, the Company periodically reviews 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.
As of December 31, 20112012 and 20102011 there was $827,409$1,230,982 and $604,958,$827,409, respectively, of accumulated amortization of the value of insurance business acquired due to the purchasepurchases of FLAC that occurred at the end of 2008.and Family Benefit Life. The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years: $463,663 in 2012, $445,656$414,820 in 2013, $429,468$421,829 in 2014, $412,077$409,016 in 2015, $395,025 in 2016 and $395,047$381,246 in 2016. As of December 31, 2011, there was no amortization of the value of insurance business acquired due to the purchase of Family Benefit Life that occurred at the end of 2011.2017.
Other Assets and Other Liabilities
Other assets consist primarily of prepaid expenses, recoverable federal and state income taxes, guaranty funds, notes receivable, and customer account balances receivable.receivable and receivables for securities sold with trade dates in 2012 and settlement dates in 2013. Other liabilities consist primarily of accrued expenses, account payables, deposits on pending policy applications, and unearned investment income.
1. Organizationincome and Significant Accounting Policies (continued)payable for securities purchased with trade dates in 2012 and settlement dates in 2013.
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 financial 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%2.25% to 6.75%. Interest crediting rates for premium deposit fundsdeposit-type liabilities range from 3%3.00% to 4%5.25%.
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, 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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
1. Organization and Significant Accounting Policies (continued)
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.
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.
Common Stock
Common stock is fully paid, non-assessable and has a par value of $.01 per share.
On January 10, 2011, the Company’s Board of Directors approved a 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold. The dividend was payable to the holders of shares of the CorporationCompany as of March 10, 2011. Fractional shares were rounded to the nearest whole number of shares. The Company issued 323,777 shares in connection with the stock dividend that resulted in accumulated deficitearnings being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital. This was a non-cash investing and financing activity.
On January 11, 2012, the Company’s Board of Directors approved another 5% share dividend by which shareholders will receivereceived a share of Common Stockcommon stock for each 20 shares of common stock of the Company they hold. The dividend iswas payable to the holders of shares of the CorporationCompany as of March 10, 2012. Fractional shares will bewere rounded to the nearest whole number of shares. It is anticipated that approximately 378,000The Company issued 378,928 shares will be issued in connection with the stock dividend that will resultresulted in accumulated deficitearnings being charged by approximately $2,835,000$2,841,960 with an offsetting credit of approximately $2,835,000$2,841,960 to common stock and additional paid-in capital. This will also be a
These stock dividends were non-cash investing and financing activity.activities.
1. Organization and Significant Accounting Policies (continued)
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.
In addition, deferred acquisition costs related to limited-payment long-duration insurance and annuity contracts are also adjusted, net of tax, for the 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.
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 in a systematic manner based on the related contract revenues or gross profits 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 assumptions consistent with those used in computing future policy benefit liabilities. Traditional life insurance products are treated as long-duration contracts since they are ordinary whole life insurance products, which generally remain in force for the lifetime of the insured.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
1. Organization and Significant Accounting Policies (continued)
Deferred acquisition costs related to insurance and annuity products that subject the Company 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 insurance and annuity contracts 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 Income per Common Share
Net income 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, 2012 and 2011 were 7,883,901 and 2010 were 7,349,296, and 6,547,177, respectively. These weighted average shares reflect the retrospective adjustment for the impacts of the 5% stock dividend declared by the Company on January 10, 2011 and January 11, 2012 and payable to holders of shares of the Company as of March 10, 2011 and March 10, 2012.
Subsequent Events
Management has evaluated all events subsequent to December 31, 20112012 through the date that these financial statements have been issued. Please see Note 17.note 16.
Recent Accounting Pronouncements
Fair Value Measurements and Disclosures
In May 2011, the FASB issued new guidance concerning fair value measurements and disclosure. The new guidance is the result of joint efforts by the FASB and the International Accounting Standards Board to develop a single, converged fair value framework on how to measure fair value and the necessary disclosures concerning fair value measurements. This guidance became effective for interim and annual periods beginning after December 15, 2011.
The Company’s adoption of this guidance resulted in a change in certain fair value footnote disclosures but did not have any effect on the Company’s results of operations, financial position or liquidity.
Presentation of Comprehensive Income
In June 2011, the FASB issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in shareholders’ equity. The updated guidance requires that all nonowner changes in shareholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance was effective for the quarter ended March 31, 2012 and was applied retrospectively.
The Company’s adoption of the updated guidance resulted in a change in the presentation of the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued updated guidance to address diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
1. Organization and Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-06, Fair Value Measurements (Topic 820 - Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). The newIf application of this guidance requires entities to separately disclose information relative to transfers in and out of Levels 1 and 2would result in the fair value hierarchy. In addition, ASU 2010-06 requires separate presentationcapitalization of transfers in, transfers out, purchases, sales, issuances and settlements of Level 3 investments inacquisition costs that had not previously been capitalized by a reporting entity, the tabular reconciliation of Level 3 activity. ASU 2010-06 also clarifies the level of disaggregation for which fair value measurements should be disclosed and requires that information about input and valuation techniques be disclosed for Level 2 and Level 3 assets and liabilities. entity may elect not to capitalize those costs.
The Company adopted thisupdated guidance was effective for the first quarter ended March 31, 2012. The adoption of 2010.this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.
Intangibles - Goodwill and Other
In October 2010, the FASB issued Accounting Standards Update No. 2010-26, Financial Services – Insurance (Topic 944), Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU 2010-26”). The new guidance requires that an insurance entity capitalize only the following as acquisition costs related directly to the successful 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 all 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 beginning after December 15, 2011. Early adoption is permitted, but only at the beginning of an entity’s annual reporting period. The Company will 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, the above defined acquisition costs will only be capitalized directly related to the successful acquisition of new or renewal insurance contracts. After adoption, these acquisition costs will be amortized on the statement of operations.
In MaySeptember 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurements (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirementsupdated guidance that modifies the manner in U.S. GAAP and IFRS (“ASU 2011-04”). The new pronouncement ensureswhich the two-step impairment test of goodwill is applied. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology, or customers) that may impact a reporting unit’s fair value hasand lead to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If an entity determines that it is more likely than not, it must perform an impairment test.
The first step of the impairment test involves comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If the carrying value of a reporting unit exceeds the estimated fair value, a second step must be performed to measure the amount of goodwill impairment, if any. In the second step, the implied fair value of the reporting unit’s goodwill is determined in the same meaningmanner as goodwill is measured in U.S. GAAP and International Financial Reporting Standards (“IFRS”) and that their respectivea business combination (i.e., by measuring the fair value measurementsof the reporting unit’s assets, liabilities and disclosure requirements areunrecognized intangible assets and determining the same (except for minor differences in wordingremaining amount ascribed to goodwill) and style). The amendments in ASU 2011-04 changecomparing the wording usedamount of the implied goodwill to describe the requirements in U.S. GAAP for measuring and disclosing information aboutcarrying amount of the goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value measurements. of that goodwill, an impairment loss is recognized in an amount equal to the excess.
The amendments clarifyupdated guidance was effective for the following:quarter ended March 31, 2012. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.
| 1. | The concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets and liabilities. |
Testing Indefinite-Lived Intangible Assets for Impairment | 2. | Requirements specific to measuring the fair value of an instrument classified in shareholders’ equity. |
| 3. | Quantitative information about the observable inputs used in a fair value measurement of items categorized within Level 3 of the fair value hierarchy should be disclosed. |
In July 2012, the FASB issued updated guidance regarding the impairment test applicable to indefinite-lived intangible assets that is similar to the impairment guidance applicable to goodwill. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact the fair value of the indefinite-lived intangible asset and lead to the determination that it is more likely than not that the fair value of the asset is less than its carrying value. If an entity determines that it is more likely than not that the fair value of the intangible asset is less than its carrying value, an impairment test must be performed. The impairment test requires an entity to calculate the estimated fair value of the indefinite-lived intangible asset. If the carrying value of the indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess.
1. Organization and Significant Accounting Policies (continued)
The amendments also change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements. The amendments change the following:
| 1. | Measuring the fair value of financial instruments that are managed within a portfolio. |
| 2. | In the absence of Level 1 input, premiums or discounts should be applied if market participants would do so when pricing an asset or liability. |
| 3. | Expanded the disclosures about fair value instruments. |
| a. | Within Level 3 of the fair value hierarchy. |
| b. | Use of nonfinancial assets in a way that differs from the assets highest and best use. |
| c. | Categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position but for which fair value is required to be disclosed. |
ASU 2011-04updated guidance is effective for public companies for interim and annual periods beginning on or after December 15, 2011 and shall be applied prospectively.the quarter ending March 31, 2013. Early applicationadoption is permitted. The adoption of this guidance is not permitted. The Company will adopt this guidance in first quarter 2012.expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
In June 2011,February 2013, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220) - Presentationupdated guidance to improve the reporting of Comprehensive Income (“ASU 2011-05”). The new pronouncement improves the comparability, consistency and transparencyreclassifications out of financial reporting by increasing the prominence of items reported inaccumulated other comprehensive income and facilitates the convergence of U.S. GAAP and IFRS. ASU 2011-05 eliminates the option of presenting components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU 2011-05income. The guidance requires that all nonowner changes in shareholders’ equity be presentedan entity to present, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In a single continuous statement, the following shall be presented: components of net income, net income, components of comprehensive income, total for other comprehensive income and the total of comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. ASU 2011-05 indicates that regardless of whether comprehensive income is presented in a single continuous statement or in two separate but consecutive statements, reclassification adjustments between net income and other comprehensive income are required to be presented on the face of the financial statements. ASU 2011-05 is effectivestatement of income or in the notes, separately for public companies for interim and annual periods beginning on or after December 15, 2011. Early adoption is permitted.
In December 2011,each component of comprehensive income, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220 - Deferral of Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”). ASU 2011-12 indefinitely defers the requirement to present reclassification adjustmentscurrent period reclassifications out of accumulated other comprehensive income by components in both the statement in whichrespective line items of net income affected by the reclassification.
The updated guidance is presented andeffective prospectively for reporting periods beginning after December 15, 2012. The updated guidance will not have any effect on the statement in which other comprehensive income is presented.Company's results of operations, financial position or liquidity.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
2. Investments
Fixed Maturity and Equity Securities Available-For-Sale
Investments in fixed maturity and equity securities available-for-sale as of December 31, 20112012 and December 31, 20102011 are summarized as follows:
| | | | | | Gross | | | Gross | | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Fair | | |
| December 31, 2011 | | Cost | | | Gains | | | Losses | | | Value | | |
| December 31, 2012 | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government | | $ | 2,762,683 | | | $ | 46,489 | | | $ | - | | | $ | 2,809,172 | | | $ | 2,577,074 | | | $ | 256,628 | | | $ | 5,769 | | | $ | 2,827,933 | |
| States and political subdivisions | | | | 264,854 | | | | 1,970 | | | | 4,539 | | | | 262,285 | |
| Residential mortgage-backed securities | | | 135,538 | | | | 67,443 | | | | - | | | | 202,981 | | | | 107,229 | | | | 67,890 | | | | - | | | | 175,119 | |
| Corporate bonds | | | 74,473,154 | | | | 2,893,943 | | | | 40,771 | | | | 77,326,326 | | | | 84,325,622 | | | | 6,578,982 | | | | 83,812 | | | | 90,820,792 | |
| Foreign bonds | | | 756,728 | | | | - | | | | 44,000 | | | | 712,728 | | | | 4,268,529 | | | | 344,630 | | | | 39,491 | | | | 4,573,668 | |
| Total fixed maturity securities | | | 78,128,103 | | | | 3,007,875 | | | | 84,771 | | | | 81,051,207 | | | | 91,543,308 | | | | 7,250,100 | | | | 133,611 | | | | 98,659,797 | |
| | | | | | Gross | | | Gross | | | | | |
| | | | | | Unrealized | | | Unrealized | | | Fair | | |
| | | Cost | | | Gains | | | Losses | | | Value | | |
| Equity securities | | | Cost | | | | | | | | | | |
| Mutual funds | | | 150,815 | | | | 32,707 | | | | - | | | | 183,522 | | | | 162,447 | | | | 40,795 | | | | - | | | | 203,242 | |
| Corporate preferred stock | | | 247,960 | | | | - | | | | - | | | | 247,960 | | | | 347,905 | | | | 24,415 | | | | - | | | | 372,320 | |
| Corporate common stock | | | 352,166 | | | | 115,245 | | | | - | | | | 467,411 | | | | 185,494 | | | | 82,441 | | | | - | | | | 267,935 | |
| Total equity securities | | | 750,941 | | | | 147,952 | | | | - | | | | 898,893 | | | | 695,846 | | | | 147,651 | | | | - | | | | 843,497 | |
| Total fixed maturity and equity securities | | $ | 78,879,044 | | | $ | 3,155,827 | | | $ | 84,771 | | | $ | 81,950,100 | | | $ | 92,239,154 | | | $ | 7,397,751 | | | $ | 133,611 | | | $ | 99,503,294 | |
| | | | | | Gross | | | Gross | | | | | |
| | | Amortized | | | Unrealized | | | Unrealized | | | Fair | | |
| December 31, 2010 | | Cost | | | Gains | | | Losses | | | Value | | |
| December 31, 2011 | | | | | | | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government | | $ | 1,121,014 | | | $ | 19,442 | | | $ | 31,495 | | | $ | 1,108,961 | | | $ | 2,762,683 | | | $ | 46,489 | | | $ | - | | | $ | 2,809,172 | |
| Residential mortgage-backed securities | | | 153,176 | | | | 38,327 | | | | - | | | | 191,503 | | | | 135,538 | | | | 67,443 | | | | - | | | | 202,981 | |
| Corporate bonds | | | 21,700,965 | | | | 3,422,257 | | | | 11,623 | | | | 25,111,599 | | | | 74,473,154 | | | | 2,893,943 | | | | 40,771 | | | | 77,326,326 | |
| Foreign bonds | | | 208,478 | | | | 2,777 | | | | - | | | | 211,255 | | | | 756,728 | | | | - | | | | 44,000 | | | | 712,728 | |
| Total fixed maturity securities | | | 23,183,633 | | | | 3,482,803 | | | | 43,118 | | | | 26,623,318 | | | | 78,128,103 | | | | 3,007,875 | | | | 84,771 | | | | 81,051,207 | |
| | | | | | Gross | | | Gross | | | | | |
| | | | | | Unrealized | | | Unrealized | | | Fair | | |
| | | Cost | | | Gains | | | Losses | | | Value | | |
| Equity securities | | | Cost | | | | | | | | | | |
| Mutual funds | | | 52,000 | | | | 34,800 | | | | - | | | | 86,800 | | | | 150,815 | | | | 32,707 | | | | - | | | | 183,522 | |
| Corporate preferred stock | | | | 247,960 | | | | - | | | | - | | | | 247,960 | |
| Corporate common stock | | | 295,353 | | | | 147,161 | | | | - | | | | 442,514 | | | | 352,166 | | | | 115,245 | | | | - | | | | 467,411 | |
| Total equity securities | | | 347,353 | | | | 181,961 | | | | - | | | | 529,314 | | | | 750,941 | | | | 147,952 | | | | - | | | | 898,893 | |
| Total fixed maturity and equity securities | | $ | 23,530,986 | | | $ | 3,664,764 | | | $ | 43,118 | | | $ | 27,152,632 | | | $ | 78,879,044 | | | $ | 3,155,827 | | | $ | 84,771 | | | $ | 81,950,100 | |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
2. Investments (continued)
All securities in an unrealized loss position as of the financial 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 as of December 31, 20112012 and 20102011 are summarized as follows:
| | | | | | Unrealized | | | Number of | | |
| December 31, 2011 | | Fair Value | | | Loss | | | Securities | | |
| December 31, 2012 | | | Fair Value | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | | | | | | | | | | | | | | | | | |
| U.S. government | | | $ | 594,232 | | | $ | 5,769 | | | | 1 | |
| States and political subdivisions | | | | 104,243 | | | | 4,539 | | | | 1 | |
| Corporate bonds | | $ | 1,174,571 | | | $ | 40,771 | | | | 6 | | | | 5,772,021 | | | | 83,812 | | | | 28 | |
| Foreign bonds | | | 712,728 | | | | 44,000 | | | | 3 | | | | 916,406 | | | | 39,491 | | | | 5 | |
| Total fixed maturity securities | | $ | 1,887,299 | | | $ | 84,771 | | | | 9 | | | $ | 7,386,902 | | | $ | 133,611 | | | | 35 | |
| | | | | | Unrealized | | | Number of | | |
| December 31, 2010 | | Fair Value | | | Loss | | | Securities | | |
| December 31, 2011 | | | Fair Value | | | | | | | |
| Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government agency | | $ | 718,021 | | | $ | 31,495 | | | | 2 | | |
| Corporate bonds | | | 749,795 | | | | 11,623 | | | | 3 | | | $ | 1,174,571 | | | $ | 40,771 | | | | 6 | |
| Foreign bonds | | | | 712,728 | | | | 44,000 | | | | 3 | |
| Total fixed maturity securities | | $ | 1,467,816 | | | $ | 43,118 | | | | 5 | | | $ | 1,887,299 | | | $ | 84,771 | | | | 9 | |
As of December 31, 2012, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 93%. As of December 31, 2011, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 90%. As of December 31, 2010, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 94%. Fixed maturity securities were 88%95% and 87%88% investment grade as rated by Standard & Poor’s as of December 31, 20112012 and December 31, 2010,2011, respectively.
There were no equity securities in an unrealized loss position as of December 31, 20112012 and December 31, 2010.2011.
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 based on all of 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 (losses) in the consolidated statements of operations. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of operations 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, 2012 and 2011
2. Investments (continued)
Based on ourmanagement's review, the Company experienced no other-than-temporary impairments during the years ended December 31, 20112012 and December 31, 2010.2011.
Management believes that the Company will fully recover its cost basis in the securities held at December 31, 2011,2012, 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, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized as of December 31, 20112012 and 20102011 are summarized as follows:
| | | | December 31, 2012 | | | December 31, 2011 | |
| | | December 31, 2011 | | | December 31, 2010 | | | | | | | |
Unrealized appreciation on available-for-sale securities | | $ | 3,071,056 | | | $ | 3,621,646 | | | $ | 7,264,140 | | | $ | 3,071,056 | |
| Adjustment to deferred acquisition costs | | | (25,596 | ) | | | (10,843 | ) | | | (38,299 | ) | | | (25,596 | ) |
| Deferred income taxes | | | (349,236 | ) | | | (305,433 | ) | | | (1,445,171 | ) | | | (349,236 | ) |
| | | | | | | | | | |
Net unrealized appreciation on available-for-sale securities | | $ | 2,696,224 | | | $ | 3,305,370 | | | $ | 5,780,670 | | | $ | 2,696,224 | |
The amortized cost and fair value of fixed maturity available-for-sale securities as of December 31, 2011,2012, by contractual maturity, are summarized as follows:
| | | Available-for-Sale | | | December 31, 2012 | |
| | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
| Due in one year or less | | $ | 1,960,948 | | | $ | 2,032,875 | | | $ | 3,129,877 | | | $ | 3,196,565 | |
| Due in one year through five years | | | 22,007,910 | | | | 23,001,248 | | | | 30,296,048 | | | | 32,687,980 | |
| Due after five years through ten years | | | 40,275,443 | | | | 41,400,929 | | | | 47,234,367 | | | | 51,047,847 | |
| Due after ten years | | | 13,748,264 | | | | 14,413,174 | | | | 10,775,787 | | | | 11,552,286 | |
| Due at multiple maturity dates | | | 135,538 | | | | 202,981 | | | | 107,229 | | | | 175,119 | |
| | | $ | 78,128,103 | | | $ | 81,051,207 | | | $ | 91,543,308 | | | $ | 98,659,797 | |
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
2. Investments (continued)
Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity and equity securities available-for-sale securitiesand investment real estate for the years ended December 31, 20112012 and 20102011 are summarized as follows:
| | | Years Ended December 31, | |
| | | Fixed Maturity Securities | | | Equity Securities | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Proceeds | | $ | 4,671,870 | | | $ | 1,868,930 | | | $ | - | | | $ | 65,592 | |
| Gross realized gains | | | 607,730 | | | | 140,032 | | | | - | | | | 20,128 | |
| Gross realized losses | | | (795 | ) | | | (860 | ) | | | - | | | | - | |
| | | Years Ended December 31, | |
| | | Fixed Maturity Securities | | | Equity Securities | | | Investment Real Estate | |
| | | 2012 | | | 2011 | | | 2012 | | | 2011 | | | 2012 | | | 2011 | |
| Proceeds | | $ | 9,511,967 | | | $ | 4,671,870 | | | $ | 1,114,426 | | | $ | - | | | $ | 512,500 | | | $ | 49,000 | |
| Gross realized gains | | | 240,255 | | | | 607,730 | | | | 442,737 | | | | - | | | | 75,832 | | | | - | |
| Gross realized losses | | | (11,935 | ) | | | (795 | ) | | | - | | | | - | | | | - | | | | (2,151 | ) |
The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the years ended December 31, 20112012 and 20102011 and the amount of realized investment gains (losses) on fixed maturity and equity securities available-for-sale and investment real estate for the years ended December 31, 20112012 and 20102011 are summarized as follows:
| | | Years Ended December 31, | | | Years Ended December 31, | |
| | | 2011 | | | 2010 | | | 2012 | | | 2011 | |
| Change in unrealized investment gains: | | | | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | | |
| Fixed maturity securities | | $ | (516,581 | ) | | $ | 701,522 | | | $ | 4,193,385 | | | $ | (516,581 | ) |
| Equity securities | | | (34,009 | ) | | | 83,795 | | | | (301 | ) | | | (34,009 | ) |
| Other realized investment gains: | | | | | | | | | |
| | | | | | | | | | |
| Net realized investment gains (losses): | | | | | | | | | |
| Available-for-sale securities: | | | | | | | | | | | | | | | | |
| Fixed maturity securities | | | 606,935 | | | | 139,172 | | | | 228,320 | | | | 606,935 | |
| Equity securities | | | - | | | | 20,128 | | | | 442,737 | | | | - | |
| Real estate | | | | 75,832 | | | | (2,151 | ) |
Mortgage Loans on Real Estate
The Company’s mortgage loans by property type as of December 31, 20112012 and 20102011 are summarized as follows:
| | | December 31, 2011 | | | December 31, 2010 | | | December 31, 2012 | | | December 31, 2011 | |
| | | Amount | | | % of Total | | | Amount | | | % of Total | | | Amount | | | Percentage | | | Amount | | | Percentage | |
| Commercial mortgage loans | | | | | | | | | | | | | | | | | | | | | | | | |
| Retail stores | | $ | 1,624,081 | | | | 81.80 | % | | $ | 765,065 | | | | 66.14 | % | | $ | 2,043,825 | | | | 19.59 | % | | $ | 1,624,081 | | | | 81.80 | % |
| Office buildings | | | 232,079 | | | | 11.69 | % | | | 391,747 | | | | 33.86 | % | | | 223,735 | | | | 2.14 | % | | | 232,079 | | | | 11.69 | % |
| Total commercial mortgage loans | | $ | 1,856,160 | | | | 93.49 | % | | $ | 1,156,812 | | | | 100.00 | % | | $ | 2,267,560 | | | | 21.73 | % | | $ | 1,856,160 | | | | 93.49 | % |
| Residential mortgage loans | | | 129,234 | | | | 6.51 | % | | | - | | | | 0.00 | % | | | 8,168,216 | | | | 78.27 | % | | | 129,234 | | | | 6.51 | % |
| Total mortgage loans | | $ | 1,985,394 | | | | 100.00 | % | | $ | 1,156,812 | | | | 100.00 | % | | $ | 10,435,776 | | | | 100.00 | % | | $ | 1,985,394 | | | | 100.00 | % |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
2. Investments (continued)
The outstanding principal balance of mortgage loans, are geographically concentrated inby the most significant states, of Colorado (49%), Georgia (25%), Florida (20%), Missouri (4%) and Oklahoma (2%) as of December 31, 2011.2012 and 2011 are summarized as follows:
| | | December 31, 2012 | | December 31, 2011 |
| | | Amount | | | Percentage | | Amount | | | Percentage |
| Georgia | | $ | 1,960,384 | | | | 18.79 | % | | $ | 498,918 | | | | 25.13 | % |
| Missouri | | | 1,381,279 | | | | 13.24 | % | | | 79,710 | | | | 4.02 | % |
| Colorado | | | 1,089,059 | | | | 10.44 | % | | | 969,842 | | | | 48.85 | % |
| Texas | | | 1,076,014 | | | | 10.31 | % | | | - | | | | 0.00 | % |
| California | | | 995,025 | | | | 9.53 | % | | | - | | | | 0.00 | % |
| Florida | | | 940,363 | | | | 9.01 | % | | | 387,400 | | | | 19.51 | % |
| New York | | | 739,884 | | | | 7.09 | % | | | - | | | | 0.00 | % |
| Arizona | | | 337,179 | | | | 3.23 | % | | | - | | | | 0.00 | % |
| Michigan | | | 311,173 | | | | 2.98 | % | | | - | | | | 0.00 | % |
| Utah | | | 295,556 | | | | 2.83 | % | | | - | | | | 0.00 | % |
| Pennsylvania | | | 268,040 | | | | 2.57 | % | | | - | | | | 0.00 | % |
| Massachusetts | | | 206,665 | | | | 1.98 | % | | | - | | | | 0.00 | % |
| Louisiana | | | 181,357 | | | | 1.74 | % | | | - | | | | 0.00 | % |
| New Jersey | | | 158,406 | | | | 1.52 | % | | | - | | | | 0.00 | % |
| Kentucky | | | 109,748 | | | | 1.05 | % | | | - | | | | 0.00 | % |
| Minnesota | | | 103,667 | | | | 0.99 | % | | | - | | | | 0.00 | % |
| All other states | | | 281,977 | | | | 2.70 | % | | | 49,524 | | | | 2.49 | % |
| | | $ | 10,435,776 | | | | 100.00 | % | | $ | 1,985,394 | | | | 100.00 | % |
There were no loanswas one loan more than 90 days past due atas of December 31, 2011.2012 with a remaining principal balance of $141,150. There were no mortgage loans in default atas of December 31, 2012 and 2011 and there was no allowance for losses as of December 31, 20112012 and 2010.
2. Investments (continued)2011.
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. In addition, through September 30, 2012, Family Benefit Life ownsowned one and one-half acres of land located in Jefferson City, Missouri with two buildings located on one acre of the land. The two buildings owned by Family Benefit Life located on one acre of the land were sold in October 2012.
The Company’s investment real estate as of December 31, 20112012 and 20102011 is summarized as follows:
| | | December 31, 2011 | | | December 31, 2010 | | | December 31, 2012 | | | December 31, 2011 | |
| Land | | $ | 996,058 | | | $ | 792,793 | | | $ | 895,968 | | | $ | 995,968 | |
| Buildings | | $ | 2,758,207 | | | $ | 2,411,629 | | | | 2,411,629 | | | | 2,758,297 | |
| Less - accumulated depreciation | | | (287,684 | ) | | | (126,902 | ) | | | (448,832 | ) | | | (287,684 | ) |
| Investment real estate, net of accumulated depreciation | | $ | 3,466,581 | | | $ | 3,077,520 | | | $ | 2,858,765 | | | $ | 3,466,581 | |
Other Long-Term Investments
The Company’s investment in lottery prize cash flows was $9,875,675$19,560,794 and $6,886,529$9,875,675 as of December 31, 20112012 and 2010,2011, 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, 2012 and 2011
2. Investments (continued)
The amortized cost and estimated fair value of lottery prize cash flows, by contractual maturity, at December 31, 20112012 are summarized as follows:
| | | Amortized | | | Fair | | | December 31, 2012 | |
| | | Cost | | | Value | | | | | | | |
| Due in one year or less | | $ | 1,893,222 | | | $ | 1,915,967 | | | $ | 3,403,622 | | | $ | 3,458,237 | |
| Due in one year through five years | | | 4,949,397 | | | | 5,434,053 | | | | 8,752,410 | | | | 9,625,284 | |
| Due in five years through ten years | | | 2,207,499 | | | | 2,862,920 | | | | 5,267,670 | | | | 6,739,231 | |
| Due after ten years | | | 825,557 | | | | 1,397,776 | | | | 2,137,092 | | | | 3,346,242 | |
| | | $ | 9,875,675 | | | $ | 11,610,716 | | | $ | 19,560,794 | | | $ | 23,168,994 | |
The outstanding balance of lottery prize cash flows, by state lottery, as of December 31, 20112012 and 20102011 are summarized as follows:
| | | December 31, 2011 | | | December 31, 2010 | | | December 31, 2012 | | December 31, 2011 |
| | | | Amount | | | Percentage | | Amount | | | Percentage |
| New York | | | $ | 9,001,771 | | | | 46.01 | % | | $ | 4,312,142 | | | | 43.66 | % |
| Massachusetts | | | | 3,568,563 | | | | 18.24 | % | | | 2,131,982 | | | | 21.59 | % |
| Texas | | | | 1,302,576 | | | | 6.66 | % | | | 353,464 | | | | 3.58 | % |
| Georgia | | | | 1,066,346 | | | | 5.45 | % | | | 316,957 | | | | 3.21 | % |
| California | | $ | 1,004,025 | | | $ | - | | | | 952,335 | | | | 4.87 | % | | | 1,004,025 | | | | 10.17 | % |
| Connecticut | | | | 648,779 | | | | 3.32 | % | | | - | | | | 0.00 | % |
| Illinois | | | | 571,755 | | | | 2.92 | % | | | 661,767 | | | | 6.70 | % |
| Pennsylvania | | | | 507,649 | | | | 2.60 | % | | | 360,802 | | | | 3.65 | % |
| Virginia | | | | 492,241 | | | | 2.52 | % | | | - | | | | 0.00 | % |
| Ohio | | | | 365,412 | | | | 1.87 | % | | | - | | | | 0.00 | % |
| Michigan | | | | 353,487 | | | | 1.81 | % | | | - | | | | 0.00 | % |
| Florida | | | 284,286 | | | | 316,649 | | | | 250,085 | | | | 1.28 | % | | | 284,286 | | | | 2.88 | % |
| Georgia | | | 316,957 | | | | - | | |
| Illinois | | | 661,767 | | | | 863,519 | | |
| Indiana | | | 312,108 | | | | 391,451 | | | | 227,634 | | | | 1.16 | % | | | 312,108 | | | | 3.16 | % |
| Arizona | | | | 132,254 | | | | 0.68 | % | | | - | | | | 0.00 | % |
| Kentucky | | | 138,142 | | | | 165,360 | | | | 119,907 | | | | 0.61 | % | | | 138,142 | | | | 1.40 | % |
| Massachusetts | | | 2,131,982 | | | | 2,489,977 | | |
| New York | | | 4,312,142 | | | | 2,244,228 | | |
| Pennsylvania | | | 360,802 | | | | 415,345 | | |
| Texas | | | 353,464 | | | | - | | |
| | | $ | 9,875,675 | | | $ | 6,886,529 | | | $ | 19,560,794 | | | | 100.00 | % | | $ | 9,875,675 | | | | 100.00 | % |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
2. Investments (continued)
Investment Income and Investment Gains and Losses
Major categories of net investment income for the years ended December 31, 20112012 and 20102011 are summarized as follows:
| | | Years Ended December 31, | | | Years Ended December 31, | |
| | | 2011 | | | 2010 | | | 2012 | | | 2011 | |
| | | | | | | | | | | | | |
| Fixed maturity securities | | $ | 2,318,272 | | | $ | 2,107,980 | | | $ | 4,194,409 | | | $ | 1,718,804 | |
| Equity securities | | | 55,725 | | | | 14,361 | | | | 49,235 | | | | 55,725 | |
| Other long-term investments | | | | 1,188,323 | | | | 599,468 | |
| Mortgage loans | | | 116,219 | | | | 94,133 | | | | 544,567 | | | | 116,219 | |
| Policy loans | | | | 100,120 | | | | 32,233 | |
| Real estate | | | 348,002 | | | | 344,850 | | | | 370,620 | | | | 348,002 | |
| Short-term and other investments | | | 54,996 | | | | 65,803 | | | | 21,939 | | | | 22,763 | |
| Gross investment income | | | 2,893,214 | | | | 2,627,127 | | | | 6,469,213 | | | | 2,893,214 | |
| | | | | | | | | | | | | | | | | |
| Investment expenses | | | (601,453 | ) | | | (185,793 | ) | | | (548,935 | ) | | | (601,453 | ) |
| Net investment income | | $ | 2,291,761 | | | $ | 2,441,334 | | | $ | 5,920,278 | | | $ | 2,291,761 | |
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) on 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 maturity and equity securities that are measured and reported at fair market value on the 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 assets and liabilities include fixed 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.market.
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 fixed 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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
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/in and out of the Level 3 category as of the beginning of the period in which the reclassifications occur.
The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 20112012 and 20102011 is summarized as follows:
| December 31, 2011 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Fixed maturity securities, available-for-sale | | | | | | | | | | | | |
| U.S. government | | $ | - | | | $ | 2,809,172 | | | $ | - | | | $ | 2,809,172 | |
| Residential mortgage-backed securities | | | - | | | | 202,981 | | | | - | | | | 202,981 | |
| Corporate bonds | | | - | | | | 77,326,326 | | | | - | | | | 77,326,326 | |
| Foreign bonds | | | - | | | | 712,728 | | | | - | | | | 712,728 | |
| Total fixed maturity securities | | $ | - | | | $ | 81,051,207 | | | $ | - | | | $ | 81,051,207 | |
| December 31, 2012 | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Fixed maturity securities, available-for-sale | | | | | | | | | | | | | |
| U.S. government | | | $ | - | | | $ | 2,827,933 | | | $ | - | | | $ | 2,827,933 | |
| States and political subdivisions | | | | - | | | | 262,285 | | | | - | | | | 262,285 | |
| Residential mortgage-backed securities | | | | - | | | | 175,119 | | | | - | | | | 175,119 | |
| Corporate bonds | | | | - | | | | 90,820,792 | | | | - | | | | 90,820,792 | |
| Foreign bonds | | | | - | | | | 4,573,668 | | | | - | | | | 4,573,668 | |
| Total fixed maturity securities | | | $ | - | | | $ | 98,659,797 | | | $ | - | | | $ | 98,659,797 | |
| | | | | | | | | | | | | | | | | | |
| Equity securities, available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mutual funds | | $ | - | | | $ | 183,522 | | | $ | - | | | $ | 183,522 | | | $ | - | | | $ | 203,242 | | | $ | - | | | $ | 203,242 | |
| Corporate preferred stock | | | - | | | | 247,960 | | | $ | - | | | | 247,960 | | | | - | | | | 372,320 | | | | - | | | | 372,320 | |
| Corporate common stock | | | 389,911 | | | | - | | | | 77,500 | | | | 467,411 | | | | 215,435 | | | | - | | | | 52,500 | | | | 267,935 | |
| Total equity securities | | $ | 389,911 | | | $ | 431,482 | | | $ | 77,500 | | | $ | 898,893 | | | $ | 215,435 | | | $ | 575,562 | | | $ | 52,500 | | | $ | 843,497 | |
| December 31, 2010 | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Fixed maturity securities, available-for-sale | | | | | | | | | | | | |
| U.S. government | | $ | - | | | $ | 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 | |
| December 31, 2011 | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Fixed maturity securities, available-for-sale | | | | | | | | | | | | | | | | | |
| U.S. government | | | $ | - | | | $ | 2,809,172 | | | $ | - | | | $ | 2,809,172 | |
| Residential mortgage-backed securities | | | | - | | | | 202,981 | | | | - | | | | 202,981 | |
| Corporate bonds | | | | - | | | | 77,326,326 | | | | - | | | | 77,326,326 | |
| Foreign bonds | | | | - | | | | 712,728 | | | | - | | | | 712,728 | |
| Total fixed maturity securities | | | $ | - | | | $ | 81,051,207 | | | $ | - | | | $ | 81,051,207 | |
| | | | | | | | | | | | | | | | | | |
| Equity securities, available-for-sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mutual funds | | $ | - | | | $ | 86,800 | | | $ | - | | | $ | 86,800 | | | $ | - | | | $ | 183,522 | | | $ | - | | | $ | 183,522 | |
| Corporate preferred stock | | | | - | | | | 247,960 | | | $ | - | | | | 247,960 | |
| Corporate common stock | | | 365,014 | | | | - | | | | 77,500 | | | | 442,514 | | | | 389,911 | | | | - | | | | 77,500 | | | | 467,411 | |
| Total equity securities | | $ | 365,014 | | | $ | 86,800 | | | $ | 77,500 | | | $ | 529,314 | | | $ | 389,911 | | | $ | 431,482 | | | $ | 77,500 | | | $ | 898,893 | |
AtAs of December 31, 2011,2012, Level 3 financial instruments consisted of two private placement common stocks that have no active trading. During 2012, one private placement common stock was sold and another was purchased. These private placement stocks represent investments in small development stage insurance holding companies. The fair value for these 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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
3. Fair Value Measurements (continued)
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 pricinginvestment service. The third party investment service to provideprovides quoted prices in the market which use observable inputs in developing such rates.
The Company 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 daily basis, the custodian bank and the third party pricinginvestment service prepareprepares estimates of fair 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, state and political subdivisions, mortgage-backed securities, corporate bonds and foreign bonds.
The Company’s equity securities are included in Level 1 except for mutual funds and the preferred stockstocks included in Level 2 and the private placement common stocks are included in Level 3. Level 1 for thesethose equity securities classified as such is appropriate since they trade on a daily basis, are based on quoted market prices in active markets and are based upon unadjusted prices. Level 2 for the mutual funds and preferred stock is appropriate since they are not actively traded as of December 31, 2011. The mutual funds were moved from Level 1 to Level 2 during 2010. 2012.
The Company’s fixed maturity and equity securities available-for-sale 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 the Company’s Level 3 equity securities, available-for-sale for the years ended December 31, 20112012 and 20102011 is summarized as follows:
| | | Year Ended December 31, | | |
| | | 2011 | | | 2010 | | | Years Ended December 31, | |
| | | | | | | | | 2012 | | | 2011 | |
| Beginning balance | | $ | 77,500 | | | $ | 35,000 | | | $ | 77,500 | | | $ | 77,500 | |
| | | | | | | | | | |
| Sales | | | | (35,000 | ) | | | - | |
| Purchases | | | - | | | | 42,500 | | | | 10,000 | | | | - | |
| | | | | | | | | | |
| Ending balance | | $ | 77,500 | | | $ | 77,500 | | | $ | 52,500 | | | $ | 77,500 | |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
3. Fair Value Measurements (continued)
Fair Value of Financial Instruments
The estimatedcarrying amount and fair valuesvalue of the Company’s financial instruments,assets and financial liabilities disclosed, but not carried, at fair value as of December 31, 2012 and 2011, and 2010the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:
Financial Instruments Disclosed, But Not Carried, at Fair Value:
| | | December 31, 2012 | |
| | | | | | | | | Level 1 | | | Level 2 | | | Level 3 | |
| Financial assets | | | | | | | | | | | | | | | |
| Mortgage loans on real estate | | | | | | | | | | | | | | | |
| Commercial | | $ | 2,267,560 | | | $ | 2,330,004 | | | $ | - | | | $ | - | | | $ | 2,330,004 | |
| Residential | | | 8,168,216 | | | | 8,177,697 | | | | - | | | | - | | | | 8,177,697 | |
| Policy loans | | | 1,488,035 | | | | 1,488,035 | | | | - | | | | - | | | | 1,488,035 | |
| Other long-term investments | | | 19,560,794 | | | | 23,168,994 | | | | - | | | | - | | | | 23,168,994 | |
| Cash and cash equivalents | | | 10,947,474 | | | | 10,947,474 | | | | 10,947,474 | | | | - | | | | - | |
| Accrued investment income | | | 1,417,218 | | | | 1,417,218 | | | | - | | | | - | | | | 1,417,218 | |
| Loans from premium financing | | | 261,072 | | | | 261,072 | | | | - | | | | - | | | | 261,072 | |
| Total financial assets | | $ | 44,110,369 | | | $ | 47,790,494 | | | $ | 10,947,474 | | | $ | - | | | $ | 36,843,020 | |
| Financial liabilities | | | | | | | | | | | | | | | | | | | | |
| Policyholders' account balances | | $ | 95,043,370 | | | $ | 91,013,971 | | | $ | - | | | $ | - | | | $ | 91,013,971 | |
| Policy claims | | | 717,521 | | | | 717,521 | | | | - | | | | - | | | | 717,521 | |
| Total financial liabilities | | $ | 95,760,891 | | | $ | 91,731,492 | | | $ | - | | | $ | - | | | $ | 91,731,492 | |
| | | December 31, 2011 | |
| | | | | | | | | Level 1 | | | Level 2 | | | Level 3 | |
| Financial assets | | | | | | | | | | | | | | | | | | | | |
| Mortgage loans on real estate | | | | | | | | | | | | | | | | | | | | |
| Commercial | | $ | 1,856,160 | | | $ | 1,934,303 | | | $ | - | | | $ | - | | | $ | 1,934,303 | |
| Residential | | | 129,234 | | | | 131,319 | | | | - | | | | - | | | | 131,319 | |
| Policy loans | | | 1,472,666 | | | | 1,472,666 | | | | - | | | | - | | | | 1,472,666 | |
| Other long-term investments | | | 9,875,675 | | | | 11,610,716 | | | | - | | | | - | | | | 11,610,716 | |
| Cash and cash equivalents | | | 27,705,711 | | | | 27,705,711 | | | | 27,705,711 | | | | - | | | | - | |
| Accrued investment income | | | 1,122,574 | | | | 1,122,574 | | | | - | | | | - | | | | 1,122,574 | |
| Loans from premium financing | | | 1,022,416 | | | | 1,022,416 | | | | - | | | | - | | | | 1,022,416 | |
| Total financial assets | | $ | 43,184,436 | | | $ | 44,999,705 | | | $ | 27,705,711 | | | $ | - | | | $ | 17,293,994 | |
| Financial liabilities | | | | | | | | | | | | | | | | | | | | |
| Policyholders' account balances | | $ | 81,730,322 | | | $ | 80,609,804 | | | $ | - | | | $ | - | | | $ | 80,609,804 | |
| Policy claims | | | 515,522 | | | | 515,522 | | | | - | | | | - | | | | 515,522 | |
| Total financial liabilities | | $ | 82,245,844 | | | $ | 81,125,326 | | | $ | - | | | $ | - | | | $ | 81,125,326 | |
| | | December 31, 2011 | | | December 31, 2010 | |
| | | Carrying | | | Fair | | | Carrying | | | Fair | |
| | | Value | | | Value | | | Value | | | Value | |
| Assets | | | | | | | | | | | | |
| Fixed maturity securities | | $ | 81,051,207 | | | $ | 81,051,207 | | | $ | 26,623,318 | | | $ | 26,623,318 | |
| Equity securities | | | 898,893 | | | | 898,893 | | | | 529,314 | | | | 529,314 | |
| Mortgage loans on real estate | | | | | | | | | | | | | | | | |
| Residential | | | 129,234 | | | | 131,319 | | | | - | | | | - | |
| Commercial | | | 1,856,160 | | | | 1,934,303 | | | | 1,156,812 | | | | 1,192,284 | |
| Policy loans | | | 1,472,666 | | | | 1,472,666 | | | | 367,284 | | | | 367,284 | |
| Other long-term investments | | | 9,875,675 | | | | 11,610,716 | | | | 6,886,529 | | | | 7,423,119 | |
| Cash and cash equivalents | | | 27,705,711 | | | | 27,705,711 | | | | 12,985,278 | | | | 12,985,278 | |
| Loans from premium financing | | | 1,022,416 | | | | 1,022,416 | | | | 1,143,977 | | | | 1,143,977 | |
| Liabilities | | | | | | | | | | | | | | | | |
| Policyholders' account balances | | $ | 81,730,322 | | | | 80,609,804 | | | $ | 30,261,070 | | | | 28,700,425 | |
| Policy claims | | | 515,522 | | | | 515,522 | | | | 367,306 | | | | 367,306 | |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
3. Fair Value Measurements (continued)
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.
The following methods and assumptions were used in estimating the “fair value”fair value disclosures for financial instruments in the accompanying financial statements and notes thereto:
Fixed Maturity and Equity Securities
The fair value of fixed maturity and equity securities are based on the principles previously discussed as Level 1, Level 2 and Level 3.
Mortgage Loans on Real Estate
The fair values for mortgage loans are estimated using discounted cash flow analyses, using the actual spot rate yield curve in effect at the end of the period.period, as determined by recent new loan activity.
Cash and Cash Equivalents, Accrued Investment Income and Policy loansLoans
The carrying value of these financial instruments approximates their fair values. Cash and cash equivalents are included in level 1 of the fair value hierarchy due to their highly liquid nature.
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.
3. Fair Value Measurements (continued)the average Citigroup Pension Liability Index in effect at the end of each period.
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. Unearned interest was $1,389 and $23,287 as of December 31, 2012 and 2011, respectively. Estimated loan losses were $229,004$228,999 and $443,071$229,004 as of December 31, 20112012 and 2010,2011, 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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
4. Certificate of Deposit Pledged and Special Deposits
Prior to January 1, 2011, the Company pledged a certificate of deposit with a market value of $65,000 as collateral for the letter of credit with a bank. There were no amounts borrowed against this letter of credit. The letter 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”). The letter of credit in effect as of December 31, 2011 and into 2012 does not require a pledged certificate of deposit.
TLIC and Family Benefit Life are required to hold assets on deposit for the benefit of policyholders and other special deposits in accordance with statutory rules and regulations. AtAs of December 31, 20112012 and 2010,2011, these required deposits had a carrying valuevalues that totaled $2,571,669$3,981,060 and $2,643,506,$2,671,083, respectively.
As of December 31, 2012 and 2011, these required deposits had fair values that totaled $4,219,334 and $2,704,967, respectively.
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.
Unearned interest was $23,287$1,389 and $35,519$23,287 as of December 31, 20112012 and 2010,2011, respectively. Allowances for loan losses were $228,999 and $229,004 and $443,071 atas of December 31, 20112012 and 2010,2011, respectively.
The Company’s balancebalances of and changes in the company’s credit losses related to loans from premium financing as of and for the years ended December 31, 20112012 and 20102011 are summarized as follows:
| | | December 31, 2011 | | | December 31, 2010 | | | 2012 | | | 2011 | |
| Allowance at beginning of period | | $ | 443,071 | | | $ | 318,826 | | | $ | 229,004 | | | $ | 443,071 | |
| Additions charged (credited) to operations | | | (214,067 | ) | | | 124,245 | | |
| Additions credited to operations | | | | (5 | ) | | | (214,067 | ) |
| Allowance at end of period | | $ | 229,004 | | | $ | 443,071 | | | $ | 228,999 | | | $ | 229,004 | |
6. Deferred Policy Acquisition Costs
The balances of and changes in deferred acquisition costs as of and for the years ended December 31, 20112012 and 20102011 are summarized as follows:
| | | 2012 | | | 2011 | |
| Balance, beginning of year | | $ | 5,251,999 | | | $ | 3,234,285 | |
| Capitalization of commissions, sales and issue expenses | | | 2,302,070 | | | | 2,262,751 | |
| Amortization | | | (512,546 | ) | | | (230,284 | ) |
| Deferred acquisition costs allocated to investments | | | (12,703 | ) | | | (14,753 | ) |
| Balance, end of year | | $ | 7,028,820 | | | $ | 5,251,999 | |
| | | 2011 | | | 2010 | |
| Balance, beginning of year | | $ | 3,234,285 | | | $ | 1,918,994 | |
| Capitalization of commissions, sales and issue expenses | | | 2,262,751 | | | | 1,773,199 | |
| Amortization | | | (230,284 | ) | | | (451,349 | ) |
| Deferred acquisition costs allocated to investments | | | (14,753 | ) | | | (6,559 | ) |
| Balance, end of year | | $ | 5,251,999 | | | $ | 3,234,285 | |
60
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
The Company files a consolidated federal income tax return with FTCC and SIS and does not file a consolidated return with TLIC or Family Benefit Life. TLIC and Family Benefit Life are taxed as life insurance companies under the provisions of the Internal Revenue Code and must file separate tax returns until they have been members of the filing group for five years.
A reconciliation of federal income tax expense (benefit) computed by applying the federal income tax rate of 35% to income before federal income tax expense for the years ended December 31, 20112012 and 20102011 is summarized as follows:
| | | Years ended December 31, | | | Years ended December 31, | |
| | | 2011 | | | 2010 | | | 2012 | | | 2011 | |
| Expected tax expense (benefit) | | $ | 2,621,595 | | | $ | (40,317 | ) | | $ | 335,235 | | | $ | 2,621,595 | |
| | | | | | | | | | |
| Difference in book versus tax basis of Family Benefit Life | | | (2,420,418 | ) | | | - | | | | - | | | | (2,420,418 | ) |
| Small life insurance company deduction | | | (80,471 | ) | | | (16,127 | ) | | | (330,860 | ) | | | (80,471 | ) |
| Net operating loss generated (utilized) | | | 74,132 | | | | (147,893 | ) | | | 116,251 | | | | 74,132 | |
| Difference in book versus tax basis of available-for-sale fixed maturity securities | | | (60,492 | ) | | | (10,943 | ) | | | (199,626 | ) | | | (60,492 | ) |
| Adjustment of prior years' taxes | | | (6,161 | ) | | | - | | |
| Graduated rate reduction | | | (5,748 | ) | | | (1,152 | ) | |
| Alternative Minimum Tax carryforward adjustment prior years | | | | (91,478 | ) | | | - | |
| Other | | | 7,841 | | | | 9,906 | | | | 26,410 | | | | (4,068 | ) |
| | | | | | | | | | |
| Total income tax expense (benefit) | | $ | 130,278 | | | $ | (206,526 | ) | | $ | (144,068 | ) | | $ | 130,278 | |
The components of total income tax expense (benefit) for the years ended December 31, 20112012 and 20102011 is summarized as follows:
| | | Years ended December 31, | | | Years ended December 31, | |
| | | 2011 | | | 2010 | | | 2012 | | | 2011 | |
| Current tax expense | | $ | 34,095 | | | $ | - | | | $ | 273,054 | | | $ | 34,095 | |
| Deferred tax expense (benefit) | | | 96,183 | | | | (206,526 | ) | | | (417,122 | ) | | | 96,183 | |
| Total income tax expense (benefit) | | $ | 130,278 | | | $ | (206,526 | ) | | $ | (144,068 | ) | | $ | 130,278 | |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
7. Federal Income Taxes (continued)
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 as of December 31, 20112012 and 20102011 are summarized as follows:
| | | | December 31, | |
| | | 2011 | | | 2010 | | | 2012 | | | 2011 | |
| Deferred tax liabilities: | | | | | | | | | | | | |
| Net unrealized investment gains | | $ | 1,572,220 | | | $ | 305,433 | | | $ | 1,445,171 | | | $ | 349,236 | |
| Available-for-sale fixed maturity securities | | | | 809,542 | | | | 1,274,890 | |
| Deferred policy acquisition costs | | | 690,885 | | | | 386,061 | | | | 1,027,500 | | | | 690,885 | |
| Reinsurance recoverable | | | 226,061 | | | | 195,007 | | | | 236,482 | | | | 226,061 | |
| Investment real estate | | | 30,665 | | | | 31,902 | | | | 33,780 | | | | 30,665 | |
| Other long-term investments | | | - | | | | 28,275 | | | | 16,305 | | | | - | |
| Value of insurance business acquired | | | 1,582,494 | | | | 501,452 | | | | 1,501,779 | | | | 1,582,494 | |
| Property and equipment | | | 18 | | | | 878 | | | | 409 | | | | 18 | |
| Due premiums | | | 11,551 | | | | 3,578 | | | | 19,183 | | | | 11,551 | |
| Accrued liabilities | | | | 117,448 | | | | - | |
| Mortgage loans | | | | 32,513 | | | | - | |
| Other | | | 4,392 | | | | 1,034 | | | | 13 | | | | 13,265 | |
| Total deferred tax liabilities | | | 4,118,286 | | | | 1,453,620 | | | | 5,240,125 | | | | 4,179,065 | |
| Deferred tax assets: | | | | | | | | | | | | | | | | |
| Policyholders' account balance and future policy benefits | | | 816,953 | | | | 598,161 | | |
| Policyholders' account balances and future policy benefits | | | | 827,794 | | | | 816,953 | |
| Policy claims | | | 24,761 | | | | 21,588 | | | | 28,485 | | | | 24,761 | |
| Other | | | (8,873 | ) | | | 36,454 | | |
| Accrued investment income | | | | 4,603 | | | | - | |
| Accrued liabilities | | | 80,000 | | | | - | | | | - | | | | 80,000 | |
| Available-for-sale equity securities | | | | 51,906 | | | | 51,906 | |
| Alternative minimum tax carryforward | | | - | | | | 2,155 | | | | 236,328 | | | | - | |
| Net operating loss carryforward | | | 2,049,777 | | | | 1,790,233 | | | | 2,511,188 | | | | 2,049,777 | |
| Net capital loss carryforward | | | 181,483 | | | | 199,099 | | | | 127,675 | | | | 181,483 | |
| Other | | | | 2,367 | | | | - | |
| Total deferred tax assets | | | 3,144,101 | | | | 2,647,690 | | | | 3,790,346 | | | | 3,204,880 | |
| Valuation allowance | | | (1,648,526 | ) | | | (1,488,145 | ) | | | (1,851,745 | ) | | | (1,648,526 | ) |
| Net deferred tax assets | | | 1,495,575 | | | | 1,159,545 | | | | 1,938,601 | | | | 1,556,354 | |
| Net deferred tax liabilities | | $ | 2,622,711 | | | $ | 294,075 | | | $ | 3,301,524 | | | $ | 2,622,711 | |
FTFC has net operating loss carry forwards of approximately $4,848,606$5,446,309 expiring in 2019 through 2026.2027. TLIC has net operating loss carry forwards of approximately $2,006,255,$3,297,214, expiring in 2018 through 2026. Net operating loss carry forwards of $1,061,225$1,061,226 (included in the TLIC amount above), expiring in 2018 through 2023, remain from the acquisition of FLAC. The utilization of those losses is restricted by the tax laws and some or all of the losses may not be available for use.
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 20082009 through 20112012 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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
8. Reinsurance
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.
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 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.
Family Benefit Life also 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. Family Benefit Life reinsures initial amounts of risk on any one life in excess of $50,000 for individual life insurance with Optimum Re. Family Benefit Life also reinsures its accidental death benefit portion of their life policies under a bulk agreement with Optimum Re.
Family Benefit Life participates in the Servicemen Group Life Insurance Pool, administered by Prudential Life Insurance Company, in which it assumes group life insurance on a percentage based on the total in force amount of participating companies. The group plan permits conversion to permanent insurance with the initial face amount reinsured with the Office of Servicemembers Group Life Insurance.
To the extent that the reinsurance companies are unable to meet their obligations under the reinsurance agreements, TLIC remainsand Family Benefit Life remain primarily liable for the entire amount at risk.
Reinsurance assumed and ceded amounts for TLIC and Family Benefit Life for 20112012 and 20102011 are summarized as follows:
| | | 2012 | | | 2011 | |
| Premiums assumed | | $ | 371,518 | | | $ | 44,118 | |
| Commissions and expense allowances | | | (16 | ) | | | 186 | |
| Benefits assumed | | | 489,344 | | | | 33,811 | |
| Reserve credits assumed | | | 53,397 | | | | 52,250 | |
| In force amount assumed | | | 414,183,269 | | | | 23,737,668 | |
| | | | | | | | | |
| Premiums ceded | | | 470,187 | | | | 341,106 | |
| Commissions and expense allowances | | | 21,125 | | | | 22,673 | |
| Benefits ceded | | | 216,895 | | | | 275,681 | |
| Reserve credits ceded | | | 958,570 | | | | 795,619 | |
| In force amount ceded | | | 71,962,540 | | | | 40,146,708 | |
| | | 2011 | | | 2010 | |
| Premiums assumed | | $ | 44,118 | | | $ | 32,157 | |
| Commissions and expense allowances | | | 186 | | | | 120 | |
| Benefits assumed | | | 33,811 | | | | 5,593 | |
| Reserve credits assumed | | | 52,250 | | | | 50,147 | |
| Inforce amount assumed | | | 23,737,668 | | | | 24,807,969 | |
| | | | | | | | | |
| Premiums ceded | | | 341,106 | | | | 389,866 | |
| Commissions and expense allowances | | | 22,673 | | | | 26,796 | |
| Benefits ceded | | | 275,681 | | | | 238,828 | |
| Reserve credits ceded | | | 795,619 | | | | 731,031 | |
| Inforce amount ceded | | | 40,146,708 | | | | 44,869,095 | |
63
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
9. Property and Equipment
Property and equipment as of December 31, 20112012 and 20102011 is summarized as follows:
| | | December 31, 2011 | | | December 31, 2010 | | | December 31, 2012 | | | December 31, 2011 | |
| Total property and equipment | | $ | 281,996 | | | $ | 161,904 | | | $ | 272,263 | | | $ | 281,996 | |
| Less - accumulated depreciation | | | (111,153 | ) | | | (59,530 | ) | | | (147,705 | ) | | | (111,153 | ) |
| Property and equipment net of accumulated depreciation | | $ | 170,843 | | | $ | 102,374 | | | $ | 124,558 | | | $ | 170,843 | |
10. Leases
The Company leased approximately 2,517leases 6,769 square feet of office space pursuant to a three-yearfive-year lease that began JulyOctober 1, 20082010 and leased 950 square feet of office space effective December 15, 2009 that terminated 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,lease, the monthly rent expense for the 2,517 square feet was $3,041 through June 30, 2009, $3,146 from July 1, 2009 through June 30, 2010, $3,251 from July 1, 2010 through September 30, 2010 andis $7,897 from October 1, 2010 through September 30, 2015. The 950 square feet lease was $1,225 per month. The Company incurred rent expense of $72,809$76,136 and $73,155$72,809 for the years ended December 31, 2012 and 2011, respectively, under this lease and 2010, respectively.other minor leases. The Company received a $120,000 leasehold improvement allowance from the lessor that is being amortized over the non-cancellable lease term that reduced incurred rent expense by $25,263 for each of the years ended December 31, 2012 and 2011. Future minimum lease payments to be paid under non cancelable lease agreements are $94,764 for each of the years 2012 through2013 and 2014 and $71,073 in 2015.
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.
On December 24, 2009, TLIC entered into a five year lease of approximately 7,500 square feet of its building in Topeka, Kansas with an option for the lessee to renew the lease for five additional years. The monthly lease payments are as follows: $8,888 in 2010, $9,130 in 2011 and 2012 and $9,371 in 2013 and 2014.
TLIC has also leased 10,000 square feet in the Topeka, Kansas office building 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. This lease was renewed on July 1, 2011 to run through May 31, 2016. Beginning July 1, 2014, the lessee can terminate the lease with a 180 day written notice. The lease agreement calls for minimum monthly base lease payments of $17,535.
Effective August 29, 2005, TLIC executed a lease agreement for 2,500 square feet of the Topeka, Kansas office building. The base lease period commenced on September 1, 2005 and ended on August 31, 2010. The lease automatically renewed on August 15, 2010, for another five years with a 90 day notice by the lessee to terminate the lease. The lease agreement called for minimum monthly base lease payments of $4,332 through August 31, 2010. The lease payments decreased 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 $357,180, $360,072, $360,072, $235,220 and $87,675 for the years 20122013 through 2016, respectively.
Family Benefit Life owned approximately one and one-half acres of land located in Jefferson City, Missouri. A 6,100 square foot building (serving as Family Benefit Life’s headquarters) and a 2,200 square foot building (leased to a third party) are on one acre of this land and the other half acre is held for sale. In October 2012, both of the buildings were sold.
With respect to the 2,200 square foot building, Family Benefit Life entered into a one-year lease beginning August 1, 2010 and ending July 31, 2011. The lease can becould have been renewed annually if no termination notice iswas given by either party on or before May 1. No notice was given by either party on May 1, 2011 or May 1, 2012 and therefore the lease was renewed for an additional one-year period.periods. The tenant payspaid Family Benefit Life $15,000 per year in monthly installments of $1,250. In connection with the October 2012 sale of the two buildings, the underlying third party lease was transferred to the new owner. The new owner also charged the Company $12,152 of rent during the last three months of 2012.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
11. Shareholders’ Equity and Statutory Accounting Practices
TLIC is domiciled in Oklahoma and prepares its statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Oklahoma Insurance Department. Family Benefit Life is domiciled in Missouri and prepares its statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Missouri Department of Insurance. 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.
The statutory net lossincome (loss) for TLIC amounted to $831,650$1,327,798 and $449,123($831,650) for the years ended December 31, 20112012 and 2010,2011, respectively. The statutory surplus of TLIC was $4,703,946$5,277,775 and $4,316,574$4,703,946 as of December 31, 20112012 and 2010,2011, respectively. The statutory net income for Family Benefit Life amounted to $1,107,135 and $1,226,329 for the yearyears ended December 31, 2011.2012 and 2011, respectively. The statutory surplus of Family Benefit Life was $10,951,137$10,479,574 and $10,951,139 as of December 31, 2011.
11. Shareholders’ Equity2012 and Statutory Accounting Practices (continued)2011, respectively.
TLIC is subject to Oklahoma laws and Family Benefit Life is subject to Missouri laws that limit the amount of dividends insurance companies can pay to stockholders without approval of the respective Departments 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 for TLIC to pay a dividend up to $377,777 in 20122013 without prior approval. In addition, based on those limitations, there is the capacity for Family Benefit Life to pay a dividend up to $934,675$887,520 in 20122013 without prior approval. There were noFamily Benefit Life paid $1,515,975 of dividends paid or a returnto TLIC in 2012 and received permission from the Missouri Department of capitalInsurance to pay $581,300 of dividends in excess of the parent company in 2011 and 2010.$934,675 limitation.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
12. Segment Data
The Company has a life insurance segment, consisting of the operations of TLIC and Family Benefit Life, and a premium financing segment, consisting of the operations of FTCC and SIS. Results for the parent company, after elimination of intercompany amounts, are allocated to the corporate segment. These segments as of and for the years ended December 31, 20112012 and 20102011 are summarized as follows:
| | | Year Ended December 31, | |
| | | 2011 | | | 2010 | |
| Revenues: | | | | | | |
| Life and annuity insurance operations | | $ | 16,011,386 | | | $ | 8,495,479 | |
| Premium finance operations | | | 166,919 | | | | 323,816 | |
| Corporate operations | | | 45,954 | | | | 2,011 | |
| Total | | $ | 16,224,259 | | | $ | 8,821,306 | |
| Income (loss) before income taxes: | | | | | | | | |
| Life and annuity insurance operations | | $ | 8,238,255 | | | $ | 736,035 | |
| Premium finance operations | | | (212,706 | ) | | | (340,395 | ) |
| Corporate operations | | | (535,278 | ) | | | (510,830 | ) |
| Total | | $ | 7,490,271 | | | $ | (115,190 | ) |
| Depreciation and amortization expense: | | | | | | | | |
| Life and annuity insurance operations | | $ | 650,350 | | | $ | 792,490 | |
| Premium finance operations | | | 3,708 | | | | 7,363 | |
| Corporate operations | | | 12,111 | | | | 4,729 | |
| Total | | $ | 666,169 | | | $ | 804,582 | |
| | | December 31, | |
| | | 2011 | | | 2010 | |
| Assets: | | | | | | | | |
| Life and annuity insurance operations | | $ | 137,931,960 | | | $ | 55,436,841 | |
| Premium finance operations | | | 1,864,370 | | | | 3,247,530 | |
| Corporate operations | | | 4,951,325 | | | | 2,904,490 | |
| Total | | $ | 144,747,655 | | | $ | 61,588,861 | |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | |
| Revenues: | | | | | | |
| Life and annuity insurance operations | | $ | 14,275,397 | | | $ | 16,011,386 | |
| Premium finance operations | | | 102,734 | | | | 166,919 | |
| Corporate operations | | | 430,389 | | | | 45,954 | |
| Total | | $ | 14,808,520 | | | $ | 16,224,259 | |
| | | | | | | | | |
| Income (loss) before income taxes: | | | | | | | | |
| Life and annuity insurance operations | | $ | 1,332,546 | | | $ | 8,238,255 | |
| Premium finance operations | | | (224,951 | ) | | | (212,706 | ) |
| Corporate operations | | | (149,782 | ) | | | (535,278 | ) |
| Total | | $ | 957,813 | | | $ | 7,490,271 | |
| | | | | | | | | |
| Depreciation and amortization expense: | | | | | | | | |
| Life and annuity insurance operations | | $ | 1,112,688 | | | $ | 650,350 | |
| Premium finance operations | | | 3,692 | | | | 3,708 | |
| Corporate operations | | | 15,106 | | | | 12,111 | |
| Total | | $ | 1,131,486 | | | $ | 666,169 | |
| | | December 31, | |
| | | | 2012 | | | | 2011 | |
| Assets: | | | | | | | | |
| Life and annuity insurance operations | | $ | 158,151,031 | | | $ | 137,931,960 | |
| Premium finance operations | | | 979,390 | | | | 1,864,370 | |
| Corporate operations | | | 6,319,896 | | | | 4,951,325 | |
| Total | | $ | 165,450,317 | | | $ | 144,747,655 | |
13. Comprehensive Income
The components of comprehensive income, net of related federal income taxes and adjustments to deferred acquisition costs, for the years ended December 31, 2011 and 2010 are summarized as follows:
| | | Year Ended December 31, | |
| | | 2011 | | | 2010 | |
| Net income | | $ | 7,359,993 | | | $ | 91,336 | |
Total net unrealized gains (losses) arising during the period | | | (2,211 | ) | | | 597,626 | |
| Less: Net realized investment gains | | | 606,935 | | | | 159,300 | |
| Net unrealized gains (losses) | | | (609,146 | ) | | | 438,326 | |
| Total comprehensive income (loss) | | $ | 6,750,847 | | | $ | 529,662 | |
Realized gains and losses on the sales of investments are determined based upon the specific identification method and include provisions for other-than-temporary impairments where appropriate.
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 Insurance Corporation currently insures all non-interest bearings accounts.bearing accounts up to $250,000. Uninsured balances aggregate $2,514,836 as of December 31, 2012. Other funds are invested in mutual funds that invest in U.S. government securities. Uninsured balances aggregate $4,150,280 asThe Company monitors the solvency of December 31, 2011.all financial institutions in which it has funds to minimize the exposure for loss. The Company has not experienced any losses in such accounts. The company hasCompany’s lottery prize receivables due from various states and the statesgeographical distribution of New York, Massachusetts, California and Illinoisthe Company’s mortgage loans by state are summarized in the amounts of $4,312,142; $2,131,982; $1,004,025 and $661,767, respectively.Note 2.
15. Revolving Line of Credit66
On April 30, 2009, FTCC renewedFirst Trinity Financial Corporation and modified its loan agreement with the First National Bank of Muskogee,Subsidiaries
Notes to increase the revolving loan amount to $3,600,000. The loan bore 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 had a floor of no less than 5% at any time. FTFC was a guarantor on the loan. The loan matured MayConsolidated Financial Statements
December 31, 20102012 and was not renewed at the election of FTFC. The maximum amount that was borrowed when the revolving loan was effective was $100,000.2011
16.14. 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.
15. Related Party Transactions
During 2012, the Company purchased 185,313 shares of its common stock from former members of the Board of Directors at a cost of $648,595.
16. Subsequent Events
On March 8, 2013, the Company suspended the private placement of its common stock primarily in the states of Kansas, Missouri, and South Dakota. This offering began on August 15, 2012 and resulted in gross proceeds of $620,245 from the subscription of 72,970 of its common stock and incurred $290,163 in offering costs.
17. Subsequent Event
On July 26, 2011, the Company signed a definitive agreement to acquire Doctors Life Insurance Company, domiciled in California, with assets of approximately $22 million and licensed in California, Arizona, Hawaii, Montana, Nevada, Texas and Wyoming. The purchase price would have been $4,500,000, subject to adjustment based upon required statutory capital and surplus. In first quarter 2012, the stock purchase agreement was terminated since the closing was not going to take place.
18. Acquisition of Family Benefit Life Insurance Company
On December 28, 2011, the Company, through its primary insurance subsidiary, TLIC, completed the Tender Offer of Family Benefit Life by paying Family Benefit Life shareholders promptly for all the issued and outstanding common shares that satisfied the terms of the offer through the expiration of the extended Tender Offer on December 21, 2011.
During the Tender Offer, TLIC accepted tenders of 869,669 shares meeting the minimum condition requirements during the original and subsequent offers which expired on December 9, 2011 and December 21, 2011, respectively, and promptly paid for the shares tendered. The shares tendered represented 98.1% of the issued and outstanding shares not owned by TLIC. Prior to October 20, 2011, TLIC purchased 401,381 Family Benefit Life common shares. These purchases brought the aggregate shares held by TLIC to 1,271,050 shares, or 98.7% of the 1,287,640 shares issued and outstanding.
TLIC acquired the remaining 16,590 issued and outstanding shares of Family Benefit Life by initiating and completing a merger under the corporation laws of the state of Missouri. TLIC paid an aggregate of $13,855,129 for the acquisition of 100% of the issued and outstanding shares of Family Benefit Life.
The Company acquired Family Benefit Life to expand its insurance operations into additional states. The net fair value of the Family Benefit Life assets acquired is included in the consolidated statement of financial position as of December 31, 2011. The results of operations of Family Benefit Life are not included in the consolidated statement of operations for the year ended December 31, 2011 due to the late 2011 acquisition date. The Company acquired Family Benefit Life to expandLife’s financial position as of December 31, 2012 and its insurance operationsoperating results for the year ended December 31, 2012 are reflected in additional states.the Company’s 2012 consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
18.17. Acquisition of Family Benefit Life Insurance Company (continued)
The acquisition of Family Benefit Life is summarized as follows:
| Assets acquired | | | | | | |
| Available-for-sale fixed maturity securities | | $ | 56,252,307 | | | $ | 56,252,307 | |
| Available-for-sale equity securities | | | 304,773 | | | | 304,773 | |
| Mortgage loans on real estate | | | 79,710 | | | | 79,710 | |
| Investment real estate | | | 582,560 | | | | 582,560 | |
| Policy loans | | | 1,047,378 | | | | 1,047,378 | |
| Other invested assets | | | 110 | | | | 110 | |
| Cash and cash equivalents | | | 9,103,505 | | | | 9,103,505 | |
| Accrued investment income | | | 775,438 | | | | 775,438 | |
| Recoverable from reinsurers | | | 120,068 | | | | 120,068 | |
| Agents' balances and due premiums | | | 16,476 | | | | 16,476 | |
| Value of insurance business acquired | | | 5,627,662 | | | | 5,627,662 | |
| Other assets | | | 10,336 | | | | 10,336 | |
| | | | | | |
| Total assets acquired | | | 73,920,323 | | | | 73,920,323 | |
| | | | | | |
| Liabilities assumed | | | | | | | | |
| Policyholders' account balances | | $ | 36,746,133 | | | | 36,746,133 | |
| Future policy benefits | | | 13,502,833 | | | | 13,502,833 | |
| Policy claims | | | 166,593 | | | | 166,593 | |
| Premims paid in advance | | | 12,214 | | |
| Premiums paid in advance | | | | 12,214 | |
| Deferred federal income taxes | | | 2,188,650 | | | | 2,188,650 | |
| Current federal taxes payable | | | 36,720 | | | | 36,720 | |
| Other liabilities | | | 496,572 | | | | 496,572 | |
| | | | | | |
| Total liabilities assumed | | | 53,149,715 | | | | 53,149,715 | |
| | | | | | |
| Fair value of net assets acquired | | $ | 20,770,608 | | | | 20,770,608 | |
| | | | | | |
| Cash paid as purchase consideration | | $ | (13,855,129 | ) | | | (13,855,129 | ) |
| | | | | | |
| Gain from acquisition of Family Benefit Life | | $ | 6,915,479 | | | $ | 6,915,479 | |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2012 and 2011
18.17. Acquisition of Family Benefit Life Insurance Company (continued)
The following unaudited pro forma financial information has been prepared to present the results of operations of the Company assuming the acquisition of Family Benefit Life had occurred at the beginning of the yearsyear ended December 31, 2011 and 2010.2011. This pro forma information is supplemental and does not necessarily present the operations of the Company that would have occurred had the acquisition occurred on those dates and may not reflect the operations that will occur in the future.
Pro forma adjustments consist of the following: reduction in revenue due to the amortization of current market value adjustments over the life of the investments, reduction in deferred acquisition costs due to the business acquired, amortization of the value of insurance business acquired and deferred tax impact of these pro forma adjustments..adjustments.
The unaudited pro forma financial information for the yearsyear ended December 31, 2011 and 2010 is summarized as follows:
| | | Historical | | | | | | | | | Historical | | | | | | | |
| | | First Trinity | | | Family Benefit Life | | | Pro Forma Adjustments | | | Pro Forma Combined | | | First Trinity | | | Family Benefit Life | | | Pro Forma Adjustments | | | Pro Forma Combined | |
| Year ended December 31, 2011 | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Revenues | | $ | 9,308,780 | | | $ | 5,302,880 | | | $ | (150,000 | ) | | $ | 14,461,660 | | | $ | 9,308,780 | | | $ | 5,302,880 | | | $ | (150,000 | ) | | $ | 14,461,660 | |
| | | | | | | | | | | | | | | | | | |
| Net income | | $ | 444,514 | | | $ | 1,192,250 | | | $ | (256,000 | ) | | $ | 1,380,764 | | | $ | 444,514 | | | $ | 1,192,250 | | | $ | (256,000 | ) | | $ | 1,380,764 | |
| | | | | | | | | | | | | | | | | | |
| Net income per common share basic and diluted | | $ | 0.06 | | | | | | | | | | | $ | 0.19 | | | $ | 0.06 | | | | | | | | | | | $ | 0.19 | |
| Year ended December 31, 2010 | | | | | | | | | | | | |
| Revenues | | $ | 8,821,306 | | | $ | 4,688,631 | | | $ | (140,000 | ) | | $ | 13,369,937 | |
| Net income | | $ | 91,336 | | | $ | 980,520 | | | $ | (236,000 | ) | | $ | 835,856 | |
| Net income per common share basic and diluted | | $ | 0.01 | | | | | | | | | | | $ | 0.13 | |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures. (This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section).
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (“Certifying Officers”), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934 as amended (“Exchange Act”) as of the end of the fiscal period covered by this Annual Report on Form 10-K. Based upon such evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is made known to management, including our Certifying Officers, as appropriate, to allow timely decisions regarding disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operating, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. As of the end of the period covered by this annual report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Certifying Officers, of the effectiveness of the design and operation of the Company’s internal controls over financial reporting as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. The standard measures adopted by management in making its evaluation are the measures in the Internal-Control Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon such evaluation, management has determined that internal control over financial reporting was effective as of December 31, 2010.2012.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Limitations on the Effectiveness of Controls
The Company’s management, including the Certifying Officers, does not expect that the disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes to Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the twelvethree months ended December 31, 20112012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 20112013 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 20112013 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 20112013 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 20112013 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
Item 14. Principal AccountantAccounting Fees and Services
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 20112013 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
Item 15. Exhibits
The exhibits are listed in the Exhibit Index, which is incorporated herein by reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | FIRST TRINITY FINANCIAL CORPORATION | |
| | | | | |
Date | March 30, 201214, 2013 | By:By | /s/Gregg E.E. Zahn | |
| | | Gregg E. Zahn | |
| | | Chairman of the Board, | President, Chief Executive Officer and Director | |
SIGNATURES
In accordance with the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By | /s/ Gregg E. Zahn | | Date | March 30, 201214, 2013 | |
| | Gregg E. Zahn | | | | |
| | Chairman of the Board, President, Chief Executive Officer and Director | | | |
| | | | | |
| By | /s/ William S. Lay | | Date | March 30, 201214, 2013 | |
| | William S. Lay | | | | |
| | Vice President, Chief Investment Officer and Director | | | |
| | | | |
By | /s/ Scott J. Engebritson | | Date | March 30, 2012 |
| Scott J. Engebritson, | | | |
| | Vice Chairman of the Board and Director | | | |
| | | | |
By | /s/ H. Bryan Chrisman | | Date | March 30, 2012 |
| H. Bryan Chrisman, Director | | | |
| | | | | |
| By | /s/ Bill H. Hill | | Date | March 30, 201214, 2013 | |
| | Bill H. Hill, Director | | | | |
| | | | | |
| By | /s/ Will W. Klein | | Date | March 30, 201214, 2013 | |
| | Will W. Klein, Director | | | | |
| | | | | |
| By | /s/ Charles W, Owens | | Date | March 30, 201214, 2013 | |
| | Charles W. Owens, Director | | | | |
| | | | | |
| By | /s/ George E. Peintner | | Date | March 30, 201214, 2013 | |
| | George E, Peintner, Director | | | | |
| | | | | |
| By | /s/ G. Wayne Pettigrew | | Date | March 30, 201214, 2013 | |
| | G. Wayne Pettigrew, Director | | | | |
| | | | | |
| By | /s/ Gary L. Sherrer | | Date | March 30, 2012 |
| Gary L.Sherrer, Director | | 14, 2013 | |
| | Gary L. Sherrer, Director | | | |
By | /s/ Shannon B. Young | | Date | March 30, 2012 |
| Shannon B. Young, Director | | | |
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
Exhibit
Number
| | Description of Exhibit |
| | |
| 3.1 | | Amended Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 17, 2009. |
| | |
| 3.2 | | By-laws, as amended and restated, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed May 1, 2009. |
| | |
| 4.1 | | Specimen Stock Certificate, incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form 10SB12G filed April 30, 2007. |
| | |
| 5.1 | | Opinion of Cooper & Newsome PLLP, incorporated from Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1 filed June 23, 2010. |
| | |
| 5.2 | | Opinion of Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., incorporated from Pre-Effective Amendment No. 3 to the Registration Statement on Form S-1 filed March 31, 2011. |
| 5.3 | | Opinion of Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., incorporated from Pre-Effective Amendment No. 3 to the Registration Statement on Form S-1 filed March 30, 2012. |
| 10.1 | | Administrative Service Agreement between TLIC (formerly FLAC) and Investors Heritage Life Insurance Company, incorporated by reference toas Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 17, 2009. |
| | |
| 10.2 | | Lease Agreement, incorporated by reference toas Exhibit 10.2 to the Company’s Registration Statement on Form 10SB12G filed April 30, 2007. |
| | |
| 10.3 | | Reinsurance Agreement with Investors Heritage Life Insurance Company is incorporated by reference toas Exhibit 10.3 to the Company’s Registration Statement on Form 10SB12G/A filed July 23, 2007. |
| | |
| 10.4 | | Reinsurance Agreement with Munich American Reinsurance Company is incorporated by reference toas Exhibit 10.4 to the Company’s registration statement on Form 10SB12G/A filed July 23, 2007. |
| | |
| 10.5 | | First Amendment to Lease Agreement between First Trinity Financial Corporation and Amejak Limited Partnership dated July 1, 2008, incorporated by reference toas Exhibit 10.610.5 to the Company’s Annual report on Form 10-K filed April 14, 2009. |
| | |
| 10.6 | | Lease Agreement dated July 10, 2006 between First Life America Corporation and the United States of America, incorporated by reference toas Exhibit 10.710.6 of the Company’s Annual Report on Form 10-K filed April 14, 2009. |
| | |
| 10.7 | | Lease Agreement dated August 2, 2006 between First Life America Corporation and the United States of America, incorporated by reference toas Exhibit 10.810.7 of the Company’s Annual Report on Form 10-K filed April 14, 2009. |
| | |
| 10.8 | | Employment Agreement of William S. Lay, dated April 18, 2009, incorporated by reference toas Exhibit 10.110.8 to the Company’s Current Report on Form 8-K filed April 22, 2009. |
| | |
| 10.9 | | Loan agreement between First Trinity Capital Corporation and First National Bank of Muskogee dated March 12, 2009, incorporated by reference as Exhibit 10.9 to the company’s Quarterly Report on form 10-Q filed May 15, 2009. |
| | |
EXHIBIT INDEX (continued)
Exhibit
Number Description of Exhibit
| 10.10 | | Loan guaranty agreement between First Trinity Capital Corporation and First National Bank of Muskogee dated March 12, 2009, incorporated by reference as Exhibit 10.10 to the company’s Quarterly Report on form 10-Q filed May 15, 2009. |
EXHIBIT INDEX (continued)
Exhibit
Number
10.11 | | Description of Exhibit |
| | |
| | Administrative Services Agreement between First Life America Corporation and Investors Heritage Life Insurance Company dated June 16, 2009, incorporated by reference toas Exhibit 10.110.11 to the Company’s Current Report on Form 8-K filed June 17, 2009. |
| 10.12 | | |
| | First Amendment to Administrative Services Agreement between FirstTrinity Life America CorporationInsurance Company and Investors Heritage Life Insurance Company dated June 16, 2009, incorporated by reference toas Exhibit 10.110.12 to the Company’s Current Report on Form 8-K filed June 17, 2009. |
| | |
| 10.13 | | Amendment to Employment Agreement of William S. Lay dated April 23, 2010, incorporated by reference toas Exhibit 10.110.13 of the Company’s Current Report on Form 8-K filed April 28, 2010. |
| | |
| 10.14 | | Employment Agreement of Gregg E. Zahn, President, dated June 7, 2010, incorporated by reference toas Exhibit 10.110.14 of the Company’s Current Report on Form 8-K filed June 11, 2010. |
| | |
| 10.15 | | Second Amendment to Lease Agreement between First Trinity Financial Corporation and Amejak Limited Partnership dated June 16, 2010, incorporated by reference toas Exhibit 10.610.15 to the Company’s Current Report on Form 8+K8-K filed June 22, 2010. |
| | |
| 10.16 | | Amendment to Employment Agreement of Gregg E. Zahn, President, dated December 8, 2011, incorporated by reference toas Exhibit 10.610.16 of the Company’s Current Report on Form 8-K filed December 13, 2011. |
| | |
| 10.17 | | Employment Agreement of William S. Lay, dated December 8, 2011, incorporated by reference toas Exhibit 10.510.17 of the Company’s Current Report on Form 8-K filed December 13, 2011. |
| | |
| 10.18 | | Employment Agreement of Jeffrey J. Wood, dated December 8, 2011, incorporated by reference toas Exhibit 10.410.18 of the Company’s Current Report on Form 8-K filed December 13, 2011. |
| 10.19 | Amendment to Employment Agreement of Gregg E. Zahn, President, dated October 8, 2012, incorporated by reference as Exhibit 10.19 of the Company’s Current Report on Form 8-K filed December 13, 2011. |
| 17.1 | Resignation Letter of Board of Director Member Shannon B. Young dated August 5, 2012, incorporated by reference as Exhibit 17.1 of the Company’s Current Report on Form 8-K filed August 9, 2012. |
| 17.2 | Addendum 1 dated August 9, 2012 to Resignation Letter of Shannon B. Young dated August 9, 2012, incorporated by reference as Exhibit 17.2 of the Company’s Current Report on Form 8-KA filed August 10, 2012. |
| 17.3 | Addendum 2 dated August 10, 2012 to Resignation Letter of Shannon B. Young dated August 10, 2012, incorporated by reference as Exhibit 17.3 of the Company’s Current Report on Form 8-KA filed August 10, 2012. |
21.1* | | Subsidiaries of First Trinity Financial Corporation. |
| | |
* Filed herewith
EXHIBIT INDEX (continued)
Exhibit
Number Description of Exhibit
| 21.2 | | Letter to Jeffrey Reidler, Division of Corporate Finance, United States Securities and Exchange Commission.Commission, incorporated by reference as Exhibit 21.2 of the Company’s Pre-Effective Amendment No. 4 to Registration Statement on Form S-1 filed March 30, 2012. |
| | |
| 23.1 | | Consent of Cooper & Newsome PLLP (included as part of its opinion), incorporated from Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1 filed June 23, 2010. |
| | |
| 23.2 | | Consent of Kerber, Eck and Braeckel, LLP, incorporated by reference to Exhibit 23.2 of the Company’s Pre-Effective Amendment No. 1 to Registration Statement on Form S-1 filed May 17, 2010. |
| | |
| 23.3 | | Consent of Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., (included as part of its opinion), incorporated from Pre-Effective Amendment No. 3 to the Registration Statement on Form S-1 filed March 31, 2011. |
| | |
| 23.4 | | Consent of Kerber, Eck and Braeckel, LLP, incorporated by reference to Exhibit 23.4 of the Company’s Pre-Effective Amendment No. 3 to Registration Statement on Form S-1 filed March 31, 2011. |
| | |
| 23.5 | | Consent of Seaver & Forck, CPAs, incorporated by reference to Exhibit 23.1 of the Company’s Current Report on Form 8-K/A filed March 9, 2012. |
EXHIBIT INDEX (continued)
Exhibit
Number
23.6 | | Description of Exhibit |
| | |
| | Consent of Kerber, Eck and Braeckel, LLP, (included as part of its opinion filed asincorporated by reference to Exhibit 23.6 hereto). |
| | |
| 24.1* | | Powers of Attorney (included in the signature pages hereto, and incorporated herein by reference). |
| | |
| 31.1* | | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer. |
| | |
| 31.2* | | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer. |
| | |
| 32.1* | | Section 1350 Certification of Principal Executive Officer. |
| | |
| 32.2* | | Section 1350 Certification of Principal Financial Officer. |
| | |
| 99.1 | | Oklahoma Insurance Holding Company Disclaimer of Control of Gregg Zahn, incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form 10SB12G filed on April 20, 2007. |
| | |
| 99.2 | | Form of Promotional Shares Escrow Agreement (six year restriction), is incorporated by reference to Exhibit 99.2 to the Company’s Registration Statement on Form 10SB12G filed April 20, 2007. |
| | |
| 99.3 | | Form of Promotional Shares Escrow Agreement (four year restriction), is incorporated by reference to Exhibit 99.3 to the Company’s Registration Statement on Form 10SB12G filed on April 20, 2007. |
| | |
| 99.4 | | Termination of Oklahoma Insurance Holding Company Disclaimer of Control between the Oklahoma Department of Insurance and Gregg Earl Zahn dated August 2, 2007 is incorporated by reference to Exhibit 99.4 to the Company’s Form 10-K filed on March 31, 2008. |
| | |
* Filed herewith
EXHIBIT INDEX (continued)
Exhibit
Number Description of Exhibit
| 99.5 | | First Life America Corporation unaudited financial statements for the period ending September, 30, 2008, incorporated by reference to the Company’s Form 10-K filed on April 14, 2009. |
| | |
| 99.6 | | First Life America Corporation audited financial statements for the years ended December 31, 2007 and 2006, incorporated by reference to the Company’s Form 10-K filed on April 14, 2009. |
| | |
| 99.7 | | Pro forma condensed financial information for the acquisition of First Life America Corporation on December 23, 2008, incorporated by reference to the Company’s Form 10-K filed on April 14, 2009. |
| | |
| 99.8 | | Form R Oklahoma Redomestication Application of First Life America Corporation, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed June 17, 2009. |
| | |
| 99.9 | | Completion of acquisition of First Life America Corporation, , incorporated by reference to Exhibit 99.199.9 to the Company’s Current Report on Form 8-K filed January 26, 2009. |
| | |
| 99.10 | | Subscription Agreement, incorporated from Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1 filed June 23, 2010. |
| | |
| 99.11 | | Subscription Escrow Agreement, as amended on March 31, 2011, incorporated by reference to the Company’s Form 10-K filed on April 14, 2009. |
EXHIBIT INDEX (continued)
Exhibit
Number
99.12 | | Description of Exhibit |
| | |
| | Form A Application Missouri Statement Regarding the Acquisition of Control or Merger of Domestic Insurer Family Benefit Life Insurance Company on August 25, 2011, incorporated by reference to the Company’s Form 8-K filed on August 31, 2011. |
| | |
| 99.13 | | Form A Approval Missouri Statement Regarding the Acquisition of Control or Merger of Domestic Insurer Family Benefit Life Insurance Company on October 14, 2011, incorporated by reference to the Company’s Form 8-K filed on October 19, 2011. |
| | |
| 99.14 | | Completion of acquisition of Family Benefit Life Insurance Company, incorporated by reference to Exhibit 99.18 to the Company’s Current Report on Form 8-K filed December 28, 2011. |
| | | |
| 99.15 | | Family Benefit Life Insurance Company audited financial statements for the years ended December 31, 2010 and 2011, incorporated by reference to the Company’s Form 8-K/A filed on March 9, 2012. |
| | |
| 99.16 | | Unaudited Pro forma financial statements for the acquisition of Family Benefit Life Insurance Company as of and for the year ended December 31, 2011, incorporated by reference to the Company’s Form 8-K/A filed on March 9, 2012. |
EXHIBIT INDEX (continued)
Exhibit
Number Description of Exhibit
| | * Filed herewith |
| | | |
| 101.INS** | | XBRL Instance |
| | | |
| 101.SCH** | | XBRL Taxonomy Extension Schema |
| | | |
| | 101.CAL** | | XBRL Taxonomy Extension Calculation |
| | | |
| | 101.DEF** | | XBRL Taxonomy Extension Definition |
| | | |
| | 101.LAB** | | XBRL Taxonomy Extension Labels |
| | | |
| | 101.PRE** | | XBRL Taxonomy Extension Presentation |
| | | |
| | **XBRL | | Information is furnished and not filed as part of a registration statement or prospectus for purposes of SectionsofSections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under These sections. |
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