United States
Securities and Exchange Commission
Washington,, D.C. 20549
FORM 10-Q
(Mark One)
| Quarterly Report Pursuant to Section 13 or 15(d) of the |
For the quarterly period ended |
| 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 registrant as specified in its charter)
Oklahoma | 34-1991436 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
7633 East 63rd Place, Suite 230
Tulsa, Oklahoma 74133-1246
(Address of principal executive offices)
(918) 249-2438
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for 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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).
Yes ☑ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” "accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer: ☐ | Accelerated filer: ☐ | Non-accelerated filer: ☐ | Smaller reporting company: ☑ |
Emerging growth company: ☐ |
|
If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
State the number of shares outstanding of each of the issuer’sissuer’s classes of common equity, as of the latest practicable date: CommonAs of May 8, 2020, the registrant had 7,854,912 shares of Class A common stock, .01 par value, asoutstanding and 116,547 shares of November 6, 2017: 7,802,593 sharesClass B common stock, .01 par value, outstanding.
Securities registered pursuant to section 12(b) of the Act: None.
FIRST TRINITY FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED SEPTEMBERMARCH 31, 20 3020, 2017
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | Page Number | |
Item 1. Consolidated Financial Statements | ||
Consolidated Statements of Financial Position as of | 3 | |
Consolidated Statements of Operations for the Three | 4 | |
Consolidated Statements of Comprehensive Income (Loss) for the Three | 5 | |
Consolidated Statements of Changes in | 6 | |
Consolidated Statements of Cash Flows for the | 7 | |
Notes to Consolidated Financial Statements (Unaudited) | 9 | |
Item 2. | ||
Item 4. Controls and Procedures | 55 | |
Part II. OTHER INFORMATION | ||
Item | 55 | |
| ||
| ||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 56 | |
Item 3. Defaults upon Senior Securities | 56 | |
Item 4. Mine Safety Disclosures | 56 | |
Item 5. Other Information | 56 | |
Item 6. Exhibits | 56 | |
Signatures | 57 | |
Exhibit No. 31.1 | ||
Exhibit No. 31.2 | ||
Exhibit No. 32.1 | ||
Exhibit No. 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 I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
First Trinity Financial Corporation and Subsidiaries | |||||||
Consolidated Statements of Financial Position |
(Unaudited) | (Unaudited) | |||||||||||||||
September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | |||||||||||||
Assets | ||||||||||||||||
Investments | ||||||||||||||||
Available-for-sale fixed maturity securities at fair value (amortized cost: $142,612,677 and $128,310,265 as of September 30, 2017 and December 31, 2016, respectively) | $ | 148,042,788 | $ | 129,311,155 | ||||||||||||
Available-for-sale equity securities at fair value (cost: $602,232 and $599,400 as of September 30, 2017 and December 31, 2016, respectively) | 672,358 | 638,407 | ||||||||||||||
Available-for-sale fixed maturity securities at fair value (amortized cost: $162,916,429 and $166,760,448 as of March 31, 2020 and December 31, 2019, respectively) | $ | 161,876,414 | $ | 178,951,324 | ||||||||||||
Available-for-sale preferred stock at fair value (cost: $49,945 as of March 31, 2020 and December 31, 2019) | 49,600 | 51,900 | ||||||||||||||
Equity securities at fair value (cost: $182,375 and $180,194 as of March 31, 2020 and December 31, 2019, respectively) | 164,788 | 201,024 | ||||||||||||||
Mortgage loans on real estate | 103,013,015 | 74,371,286 | 166,881,532 | 162,404,640 | ||||||||||||
Investment real estate | 2,354,311 | 2,506,673 | 2,659,478 | 1,951,759 | ||||||||||||
Policy loans | 1,626,771 | 1,598,116 | 2,087,602 | 2,026,301 | ||||||||||||
Short-term investments | 1,832,872 | 1,831,087 | ||||||||||||||
Other long-term investments | 57,675,405 | 46,788,873 | 73,146,105 | 71,824,480 | ||||||||||||
Total investments | 313,384,648 | 255,214,510 | 408,698,391 | 419,242,515 | ||||||||||||
Cash and cash equivalents | 28,959,503 | 34,223,945 | 16,728,153 | 23,212,170 | ||||||||||||
Accrued investment income | 2,618,245 | 2,176,770 | 5,348,548 | 5,207,823 | ||||||||||||
Recoverable from reinsurers | 1,157,109 | 1,258,938 | 3,455,756 | 1,244,733 | ||||||||||||
Assets held in trust under coinsurance agreement | 100,291,192 | 105,089,240 | ||||||||||||||
Agents' balances and due premiums | 1,602,599 | 1,419,250 | 1,980,608 | 1,618,115 | ||||||||||||
Deferred policy acquisition costs | 23,164,372 | 18,191,990 | 39,199,188 | 38,005,639 | ||||||||||||
Value of insurance business acquired | 5,610,747 | 5,908,835 | 4,811,474 | 4,891,448 | ||||||||||||
Other assets | 10,059,398 | 14,858,375 | 11,018,287 | 6,424,691 | ||||||||||||
Total assets | $ | 386,556,621 | $ | 333,252,613 | $ | 591,531,597 | $ | 604,936,374 | ||||||||
Liabilities and Shareholders' Equity | ||||||||||||||||
Policy liabilities | ||||||||||||||||
Policyholders' account balances | $ | 292,128,688 | $ | 245,346,489 | $ | 362,198,197 | $ | 363,083,838 | ||||||||
Future policy benefits | 48,002,489 | 44,266,227 | 67,807,951 | 65,015,390 | ||||||||||||
Policy claims | 1,027,121 | 997,814 | 1,139,262 | 1,399,393 | ||||||||||||
Other policy liabilities | 90,487 | 69,854 | 84,921 | 132,975 | ||||||||||||
Total policy liabilities | 341,248,785 | 290,680,384 | 431,230,331 | 429,631,596 | ||||||||||||
Funds withheld under coinsurance agreement | 101,038,693 | 105,638,974 | ||||||||||||||
Deferred federal income taxes | 2,071,174 | 693,470 | 3,752,091 | 6,345,918 | ||||||||||||
Other liabilities | 1,395,790 | 5,598,484 | 5,993,680 | 5,901,624 | ||||||||||||
Total liabilities | 344,715,749 | 296,972,338 | 542,014,795 | 547,518,112 | ||||||||||||
Shareholders' equity | ||||||||||||||||
Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 issued as of September 30, 2017 and December 31, 2016 and 7,802,593 outstanding as of September 30, 2017 and December 31, 2016) | 80,502 | 80,502 | ||||||||||||||
Class A common stock, par value $.01 per share (40,000,000 and 20,000,000 shares authorized as of March 31, 2020 and December 31, 2019, respectively, 8,102,492 and 8,050,173 issued as of March 31, 2020 and December 31, 2019, respectively, 7,854,912 and 7,802,593 outstanding as of March 31, 2020 and December 31, 2019, respectively) | 81,025 | 80,502 | ||||||||||||||
Class B common stock, par value $.01 per share (10,000,000 shares authorized, 116,547 issued and outstanding as of March 31, 2020) | 1,165 | - | ||||||||||||||
Additional paid-in capital | 28,684,598 | 28,684,598 | 30,429,150 | 28,684,598 | ||||||||||||
Treasury stock, at cost (247,580 shares as of September 30, 2017 and December 31, 2016) | (893,947 | ) | (893,947 | ) | ||||||||||||
Accumulated other comprehensive income | 4,323,099 | 818,676 | ||||||||||||||
Treasury stock, at cost (247,580 shares as of March 31, 2020 and December 31, 2019) | (893,947 | ) | (893,947 | ) | ||||||||||||
Accumulated other comprehensive income (loss) | (820,296 | ) | 9,616,660 | |||||||||||||
Accumulated earnings | 9,646,620 | 7,590,446 | 20,719,705 | 19,930,449 | ||||||||||||
Total shareholders' equity | 41,840,872 | 36,280,275 | 49,516,802 | 57,418,262 | ||||||||||||
Total liabilities and shareholders' equity | $ | 386,556,621 | $ | 333,252,613 | $ | 591,531,597 | $ | 604,936,374 |
See notes to consolidated financial statements (unaudited). |
See notes to consolidated financial statements (unaudited).
First Trinity Financial Corporation and Subsidiaries | ||||||||||
Consolidated Statements of Operations | ||||||||||
(Unaudited) |
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | |||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Premiums | $ | 4,058,629 | $ | 3,197,228 | $ | 11,560,664 | $ | 9,426,803 | $ | 6,365,876 | $ | 5,530,806 | ||||||||||||
Net investment income | 4,631,892 | 3,303,980 | 12,296,827 | 9,922,817 | 6,269,843 | 5,573,456 | ||||||||||||||||||
Net realized investment gains (losses) | (3,486 | ) | 160,308 | 254,108 | 307,250 | |||||||||||||||||||
Loss on other-than-temporary impairments | - | - | (224,250 | ) | - | |||||||||||||||||||
Net realized investment gains | 23,502 | 53,720 | ||||||||||||||||||||||
Service fees | 10,871 | 427,734 | ||||||||||||||||||||||
Other income | 25,249 | 10,053 | 92,376 | 25,259 | 13,414 | 38,984 | ||||||||||||||||||
Total revenues | 8,712,284 | 6,671,569 | 23,979,725 | 19,682,129 | 12,683,506 | 11,624,700 | ||||||||||||||||||
Benefits, Claims and Expenses | ||||||||||||||||||||||||
Benefits and claims | ||||||||||||||||||||||||
Increase in future policy benefits | 1,291,943 | 1,357,212 | 3,733,907 | 3,995,230 | 2,641,119 | 2,151,600 | ||||||||||||||||||
Death benefits | 1,310,697 | 881,928 | 3,744,278 | 2,868,216 | 1,611,780 | 1,632,780 | ||||||||||||||||||
Surrenders | 186,202 | 205,356 | 717,790 | 541,725 | 410,364 | 350,407 | ||||||||||||||||||
Interest credited to policyholders | 2,293,419 | 1,754,941 | 6,530,403 | 5,090,162 | 3,063,245 | 2,550,672 | ||||||||||||||||||
Dividend, endowment and supplementary life contract benefits | 68,492 | 81,040 | 200,260 | 214,552 | 82,699 | 68,669 | ||||||||||||||||||
Total benefits and claims | 5,150,753 | 4,280,477 | 14,926,638 | 12,709,885 | 7,809,207 | 6,754,128 | ||||||||||||||||||
Policy acquisition costs deferred | (2,369,432 | ) | (2,023,246 | ) | (7,370,469 | ) | (5,142,381 | ) | (2,384,968 | ) | (3,615,460 | ) | ||||||||||||
Amortization of deferred policy acquisition costs | 890,135 | 536,901 | 2,318,277 | 1,588,938 | 1,213,274 | 764,346 | ||||||||||||||||||
Amortization of value of insurance business acquired | 88,625 | 91,966 | 298,089 | 281,175 | 79,974 | 81,447 | ||||||||||||||||||
Commissions | 2,051,910 | 1,954,586 | 6,641,883 | 4,783,307 | 2,308,163 | 3,572,572 | ||||||||||||||||||
Other underwriting, insurance and acquisition expenses | 1,362,524 | 1,244,013 | 4,588,947 | 4,123,540 | 2,641,472 | 2,265,575 | ||||||||||||||||||
Total expenses | 2,023,762 | 1,804,220 | 6,476,727 | 5,634,579 | 3,857,915 | 3,068,480 | ||||||||||||||||||
Total benefits, claims and expenses | 7,174,515 | 6,084,697 | 21,403,365 | 18,344,464 | 11,667,122 | 9,822,608 | ||||||||||||||||||
Income before total federal income tax expense | 1,537,769 | 586,872 | 2,576,360 | 1,337,665 | 1,016,384 | 1,802,092 | ||||||||||||||||||
Current federal income tax expense (benefit) | (1,320 | ) | 4,472 | 18,589 | 41,982 | |||||||||||||||||||
Current federal income tax expense | 46,575 | 303,002 | ||||||||||||||||||||||
Deferred federal income tax expense | 294,437 | 83,814 | 501,597 | 163,685 | 180,553 | 76,894 | ||||||||||||||||||
Total federal income tax expense | 293,117 | 88,286 | 520,186 | 205,667 | 227,128 | 379,896 | ||||||||||||||||||
Net income | $ | 1,244,652 | $ | 498,586 | $ | 2,056,174 | $ | 1,131,998 | $ | 789,256 | $ | 1,422,196 | ||||||||||||
Net income per common share basic and diluted | $ | 0.16 | $ | 0.06 | $ | 0.26 | $ | 0.15 | ||||||||||||||||
Class A common stock | $ | 0.0992 | $ | 0.1823 | ||||||||||||||||||||
Class B common stock | $ | 0.0843 | $ | - |
See notes to consolidated financial statements (unaudited). |
See notes to consolidated financial statements (unaudited).
First Trinity Financial Corporation and Subsidiaries
| |||||||
Consolidated Statements of Comprehensive Income (Loss) | |||||||
(Unaudited) |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 1,244,652 | $ | 498,586 | $ | 2,056,174 | $ | 1,131,998 | ||||||||
Other comprehensive income | ||||||||||||||||
Total net unrealized investment gains arising during the period | 703,274 | 1,058,518 | 4,423,541 | 9,440,894 | ||||||||||||
Less net realized investment gains (losses) | (3,486 | ) | 206,890 | (36,799 | ) | 335,841 | ||||||||||
Net unrealized investment gains | 706,760 | 851,628 | 4,460,340 | 9,105,053 | ||||||||||||
Less adjustment to deferred acquisition costs | 10,532 | 19,392 | 79,810 | 146,605 | ||||||||||||
Other comprehensive income before federal income tax expense | 696,228 | 832,236 | 4,380,530 | 8,958,448 | ||||||||||||
Federal income tax expense | 139,246 | 166,449 | 876,107 | 1,791,689 | ||||||||||||
Total other comprehensive income | 556,982 | 665,787 | 3,504,423 | 7,166,759 | ||||||||||||
Total comprehensive income | $ | 1,801,634 | $ | 1,164,373 | $ | 5,560,597 | $ | 8,298,757 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Net income | $ | 789,256 | $ | 1,422,196 | ||||
Other comprehensive income (loss) | ||||||||
Total net unrealized gains (losses) arising during the period | (13,171,272 | ) | 5,127,250 | |||||
Less net realized investment gains having no credit losses | 61,919 | 40,075 | ||||||
Net unrealized gains (losses) | (13,233,191 | ) | 5,087,175 | |||||
Less adjustment to deferred acquisition costs | (21,855 | ) | 12,497 | |||||
Other comprehensive income (loss) before income tax expense (benefit) | (13,211,336 | ) | 5,074,678 | |||||
Income tax expense (benefit) | (2,774,380 | ) | 1,065,684 | |||||
Total other comprehensive income (loss) | (10,436,956 | ) | 4,008,994 | |||||
Total comprehensive income (loss) | $ | (9,647,700 | ) | $ | 5,431,190 |
See notes to consolidated financial statements (unaudited). |
First Trinity Financial Corporation and Subsidiaries
| ||||||||||||||||
Consolidated Statements of Changes in Shareholders' Equity | ||||||||||||||||
Three Months Ended March 31, 2020 and 2019 | ||||||||||||||||
(Unaudited) |
Accumulated | Class A | Class B | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||
Common | Additional | Other | Total | Common | Common | Additional | Other | Total | ||||||||||||||||||||||||||||||||||||||||||||
Stock | Paid-in | Treasury | Comprehensive | Accumulated | Shareholders' | Stock | Stock | Paid-in | Treasury | Comprehensive | Accumulated | Shareholders' | ||||||||||||||||||||||||||||||||||||||||
$.01 Par Value | Capital | Stock | Income (Loss) | Earnings | Equity | $.01 Par Value | $.01 Par Value | Capital | Stock | Income (Loss) | Earnings | Equity | ||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2016 | $ | 80,502 | $ | 28,684,598 | $ | (893,947 | ) | $ | (2,655,817 | ) | $ | 4,999,707 | $ | 30,215,043 | ||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2019 | $ | 80,502 | $ | - | $ | 28,684,598 | $ | (893,947 | ) | $ | (2,576,631 | ) | $ | 13,830,729 | $ | 39,125,251 | ||||||||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | 1,131,998 | 1,131,998 | - | - | - | - | - | 1,422,196 | 1,422,196 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income | - | - | - | 7,166,759 | - | 7,166,759 | - | - | - | - | 4,008,994 | - | 4,008,994 | |||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2016 | $ | 80,502 | $ | 28,684,598 | $ | (893,947 | ) | $ | 4,510,942 | $ | 6,131,705 | $ | 38,513,800 | |||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2019 | $ | 80,502 | $ | - | $ | 28,684,598 | $ | (893,947 | ) | $ | 1,432,363 | $ | 15,252,925 | $ | 44,556,441 | |||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2017 | $ | 80,502 | $ | 28,684,598 | $ | (893,947 | ) | $ | 818,676 | $ | 7,590,446 | $ | 36,280,275 | |||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2020 | $ | 80,502 | $ | - | $ | 28,684,598 | $ | (893,947 | ) | $ | 9,616,660 | $ | 19,930,449 | $ | 57,418,262 | |||||||||||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | 2,056,174 | 2,056,174 | - | - | - | - | - | 789,256 | 789,256 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income | - | - | - | 3,504,423 | - | 3,504,423 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2017 | $ | 80,502 | $ | 28,684,598 | $ | (893,947 | ) | $ | 4,323,099 | $ | 9,646,620 | $ | 41,840,872 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (10,436,956 | ) | - | (10,436,956 | ) | |||||||||||||||||||||||||||||||||||||||||||
Acquisition of K-TENN Insurance Company | 1,688 | - | 1,744,552 | - | - | - | 1,746,240 | |||||||||||||||||||||||||||||||||||||||||||||
Recapitalization | (1,165 | ) | 1,165 | - | �� | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2020 | $ | 81,025 | $ | 1,165 | $ | 30,429,150 | $ | (893,947 | ) | $ | (820,296 | ) | $ | 20,719,705 | $ | 49,516,802 |
See notes to consolidated financial statements (unaudited). |
First Trinity Financial Corporation and Subsidiaries
| ||||||
Consolidated Statements of Cash Flows | ||||||
(Unaudited) |
Nine Months Ended September 30, | Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
Operating activities | ||||||||||||||||
Net income | $ | 2,056,174 | $ | 1,131,998 | $ | 789,256 | $ | 1,422,196 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||
Provision for depreciation | 109,435 | 109,587 | 36,372 | 36,372 | ||||||||||||
Accretion of discount on investments | (2,298,768 | ) | (1,278,028 | ) | (1,253,547 | ) | (1,167,169 | ) | ||||||||
Net realized investment gains | (254,108 | ) | (307,250 | ) | (23,502 | ) | (53,720 | ) | ||||||||
Loss on other-than-temporary impairment | 224,250 | - | ||||||||||||||
Amortization of policy acquisition cost | 2,318,277 | 1,588,938 | 1,213,274 | 764,346 | ||||||||||||
Policy acquisition cost deferred | (7,370,469 | ) | (5,142,381 | ) | (2,384,968 | ) | (3,615,460 | ) | ||||||||
Mortgage loan origination fees deferred | - | (4,530 | ) | |||||||||||||
Amortization of loan origination fees | 44,351 | 54,032 | 5,117 | 7,460 | ||||||||||||
Amortization of value of insurance business acquired | 298,089 | 281,175 | 79,974 | 81,447 | ||||||||||||
Allowance for mortgage loan losses | 105,024 | 36,096 | (1,860 | ) | 33,217 | |||||||||||
Provision for deferred federal income tax expense | 501,597 | 163,685 | 180,553 | 76,894 | ||||||||||||
Interest credited to policyholders | 6,530,403 | 5,090,162 | 3,063,245 | 2,550,672 | ||||||||||||
Change in assets and liabilities: | ||||||||||||||||
Accrued investment income | (441,475 | ) | 56,974 | |||||||||||||
Policy loans | (28,655 | ) | (75,655 | ) | (60,256 | ) | (25,467 | ) | ||||||||
Short-term investments | - | 549,850 | (1,785 | ) | (914,153 | ) | ||||||||||
Accrued investment income | (140,235 | ) | (509,603 | ) | ||||||||||||
Recoverable from reinsurers | 101,829 | (37,538 | ) | (2,211,023 | ) | (149,010 | ) | |||||||||
Assets held in trust under coinsurance agreement | 4,798,048 | (19,715,191 | ) | |||||||||||||
Agents' balances and due premiums | (183,349 | ) | (344,558 | ) | (358,507 | ) | (102,830 | ) | ||||||||
Other assets (excludes depreciation of $320 in 2017 and change in receivable for securities sold of $5,738,274 and ($44,068) in 2017 and 2016, respectively). | (939,617 | ) | (3,998,677 | ) | ||||||||||||
Other assets (excludes change in receivable for securities sold of $33,600 in 2019) | (4,593,135 | ) | (1,152,822 | ) | ||||||||||||
Future policy benefits | 3,736,262 | 4,002,756 | 2,641,978 | 2,115,019 | ||||||||||||
Policy claims | 29,307 | 94,291 | (260,131 | ) | 347,272 | |||||||||||
Other policy liabilities | 20,633 | 5,631 | (57,266 | ) | 5,338 | |||||||||||
Other liabilities (excludes change in payable for securities purchased of ($57,976) and $15,424 in 2017 and 2016, respectively). | (4,144,719 | ) | 2,252,361 | |||||||||||||
Net cash provided by operating activities | 414,471 | 4,228,919 | ||||||||||||||
Other liabilities (exclude change in payable for securities purchased of $575,435 and ($124,160) in 2020 and 2019, respectively) | (493,625 | ) | 16,749,404 | |||||||||||||
Net cash provided by (used in) operating activities | 967,977 | (3,215,788 | ) | |||||||||||||
Investing activities | ||||||||||||||||
Purchases of fixed maturity securities | (32,830,057 | ) | (6,163,564 | ) | (1,005,000 | ) | (6,536,434 | ) | ||||||||
Maturities of fixed maturity securities | 6,762,000 | 4,657,000 | 200,000 | 2,600,000 | ||||||||||||
Sales of fixed maturity securities | 10,378,173 | 10,205,935 | 5,350,987 | 799,846 | ||||||||||||
Purchases of equity securities | (2,832 | ) | (14,480 | ) | (29,220 | ) | (27,784 | ) | ||||||||
Sales of equity securities | - | 128,010 | ||||||||||||||
Acquisition of K-TENN Insurance Company | 1,110,299 | - | ||||||||||||||
Joint venture distribution | 27,039 | 23,824 | ||||||||||||||
Purchases of mortgage loans | (44,857,137 | ) | (20,669,087 | ) | (19,403,227 | ) | (21,818,443 | ) | ||||||||
Payments on mortgage loans | 16,129,739 | 11,317,427 | 14,244,785 | 8,694,982 | ||||||||||||
Purchases of other long-term investments | (14,036,084 | ) | (11,340,463 | ) | (3,258,188 | ) | (5,629,292 | ) | ||||||||
Payments on other long-term investments | 5,863,095 | 3,114,728 | 3,284,263 | 2,850,460 | ||||||||||||
Sale of other long-term investments | 792,012 | - | ||||||||||||||
Sales of real estate | 190,084 | - | ||||||||||||||
Net change in receivable and payable for securities sold and purchased | 5,680,298 | (28,644 | ) | 575,435 | (90,560 | ) | ||||||||||
Net cash used in investing activities | (45,930,709 | ) | (8,793,138 | ) | ||||||||||||
Net cash provided by (used in) investing activities | 1,097,173 | (19,133,401 | ) | |||||||||||||
Financing activities | ||||||||||||||||
Policyholders' account deposits | 54,296,750 | 32,177,094 | 1,769,421 | 70,719,584 | ||||||||||||
Policyholders' account withdrawals | (14,044,954 | ) | (9,957,150 | ) | (10,318,588 | ) | (8,740,280 | ) | ||||||||
Net cash provided by financing activities | 40,251,796 | 22,219,944 | ||||||||||||||
Net cash provided by (used in) financing activities | (8,549,167 | ) | 61,979,304 | |||||||||||||
Increase (decrease) in cash | (5,264,442 | ) | 17,655,725 | |||||||||||||
Increase (decrease) in cash and cash equivalents | (6,484,017 | ) | 39,630,115 | |||||||||||||
Cash and cash equivalents, beginning of period | 34,223,945 | 9,047,586 | 23,212,170 | 29,665,605 | ||||||||||||
Cash and cash equivalents, end of period | $ | 28,959,503 | $ | 26,703,311 | $ | 16,728,153 | $ | 69,295,720 |
See notes to consolidated financial statements (unaudited). |
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Supplemental Disclosure – Cash and Non-Cash Impact on Operating, Investing and Financing Activities
(Unaudited)
During 2017 the Company reclassified an available-for-sale fixed maturity security totaling $729,737 to other long-term investments due to a recent third party information change indicating the security does not qualify for available-for-sale treatment.
In conjunction with this reclassification, the non-cash impact on investing activities is summarized as follows:
Nine Months Ended | ||||
September 30, 2017 | ||||
Reduction in available-for-securities fixed maturity securities | $ | 729,737 | ||
Other long-term invesments | (729,737 | ) | ||
Net cash provided (used) in investing activities | $ | - |
During 2017three months ended March 31, 2020 and 2016,2019, the Company foreclosed on residential mortgage loans of real estate totaling $142,455$744,091 and $198,622,$99,218, respectively and transferred those propertiesthat property to investment real estate that areis now held for sale. The Company reduced the carrying value of this residential real estate obtained through foreclosure to the lower of acquisition cost or net realizable value.
In conjunction with these foreclosures,this foreclosure, the non-cash impact on investing activities is summarized as follows:
Nine Months Ended | Nine Months Ended | Three Months Ended | Three Months Ended | |||||||||||||
September 30, 2017 | September 30, 2016 | March 31, 2020 | March 31, 2019 | |||||||||||||
Reductions in mortgage loans due to foreclosure | $ | 142,455 | $ | 198,622 | $ | 744,091 | $ | 99,218 | ||||||||
Investment real estate held-for-sale acquired through foreclosure | (142,455 | ) | (198,622 | ) | (744,091 | ) | (99,218 | ) | ||||||||
Net cash provided (used) in investing activities | $ | - | $ | - | ||||||||||||
Net cash used in investing activities | $ | - | $ | - |
On January 1, 2020, the Company acquired K-TENN Insurance Company. The Company acquired assets of $1,916,281 (including cash) and assumed liabilities of $170,041.
In conjunction with this 2020 acquisition, the cash and non-cash impact on operating, investing and financing activities is summarized as follows.
March 31, 2020 | ||||
Cash used in acquisition of K-TENN Insurance Company | $ | - | ||
Cash provided in acquisition of K-TENN Insurance Company | 1,110,299 | |||
Increase in cash from acquisition of K-TENN Insurance Company | 1,110,299 | |||
Fair value of assets acquired in acquisition of K-TENN Insurance Company (excluding cash) | ||||
Available-for-sale fixed maturity securities | 800,000 | |||
Policy loans | 1,045 | |||
Accrued investment income | 490 | |||
Due premiums | 3,986 | |||
Other assets | 461 | |||
Total fair value of assets acquired (excluding cash) | 805,982 | |||
Fair value of liabilities assumed in acquisition of K-TENN Insurance Company | ||||
Future policy benefits | 150,583 | |||
Other policy liabilities | 9,212 | |||
Other liabilities | 10,246 | |||
Total fair value of liabilities assumed | 170,041 | |||
Fair value of net assets acquired in acquisition of K-TENN Insurance Company (excluding cash) | 635,941 | |||
Fair value of net assets acquired in acquisition of K-TENN Insurance Company (including cash) | $ | 1,746,240 |
See notes to consolidated financial statements (unaudited). |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
1. Organization and Significant Accounting Policies
Nature of Operations
First Trinity Financial Corporation (the “Company”“Company” or “FTFC”) is the parent holding company of Trinity Life Insurance Company (“TLIC”), Family Benefit Life Insurance Company (“FBLIC”) and, First Trinity Capital Corporation (“FTCC”) and Trinity American, Inc. (“TAI”). The Company was incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a life insurance subsidiary.
The Company owns 100% of TLIC. TLIC owns 100% of FBLIC.FBLIC. TLIC and FBLIC are primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life insurance and annuity products to individuals. TLIC’s and FBLIC’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. The TLIC and FBLIC products are sold through independent agents. TLIC is licensed in the states of Illinois, Kansas, Kentucky, Montana, Nebraska, North Dakota, Ohio, Oklahoma, Tennessee and Texas. FBLIC is licensed in the states of Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia.
The Company owns 100% of FTCC that was incorporatedincorporated in 2006, and began operations in January 2007. FTCC provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC has made no premium financing loans since June 30, 2012.
The Company owns 100% of TAI (formerly known as Citizens American Life, Inc.). TAI was incorporated in Barbados, West Indies on March 24, 2016 for the primary purpose of forming a life insurance company producing United States (U.S.) dollar denominated life insurance policies and annuity contracts outside of the United States and Barbados. TAI is licensed as an Exempt Insurance Company under the Exempt Insurance Act of Barbados. TAI was initially involved in developing life insurance and annuity contracts through an association with distribution channels but is now issuing life insurance policies and annuity contracts. The Company’s acquisition of TAI was formally approved by Barbados regulators and the certifications were received in 2019.
Company Capitalization
The Company raised $1,450,000 from two private placement stock offerings during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 20122012 and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings. The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital.2012.
The Company has alsoalso purchased 247,580 shares of treasury stock at a cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’s Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.
Acquisitions
On December 23, 2008, FTFC acquired 100% of the outstanding common stock of First Life America CorporationCorporation (“FLAC”) from an unaffiliated company. The acquisition of FLAC was accounted for as a purchase. The aggregate purchase price for FLAC was $2,695,234 including direct costscost associated with the acquisition of $195,234. The acquisition of FLAC was financed with the working capital of FTFC.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2020
(Unaudited)
1. Organization and Significant Accounting Policies(continued)
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 (“OID”). This surplus note is eliminated in consolidation.
On August 31, 2009, two of the Company’sCompany’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 TLIC.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
1. Organization and Significant Accounting Policies(continued)
On December 28, 2011, TLIC acquired 100% of the outstanding common stock of FBLIC from FBLIC’sFBLIC’s shareholders. The acquisition of FBLIC was accounted for as a purchase. The aggregate purchase price for the acquisition of FBLIC was $13,855,129. The acquisition of FBLIC was financed with the working capital of TLIC.
On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement. The Company acquired assets of $3,644,839 (including cash), assumed liabilities of $3,055,916 and recorded a gain on reinsurance assumption of $588,923.
On April 3, 2018, FTFC acquired 100% of the outstanding stock of TAI domiciled in Barbados, West Indies. The Barbados regulators approved the acquisition and supplied certifications during 2019. The aggregate purchase price for the acquisition of TAI was $250,000. The acquisition of TAI was financed with the working capital of FTFC.
Effective January 1, 2020, the Company acquired 100% of the outstanding common stock of K-TENN Insurance Company (“K-TENN”) from its sole shareholder in exchange for 168,866 shares of FTFC’s common stock. The acquisition of K-TENN was accounted for as a purchase. The aggregate purchase price of K-TENN was $1,746,240. Immediately subsequent to this acquisition, the $1,746,240 of net assets and liabilities of K-TENN along with the related life insurance business operations were contributed to TLIC.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included.
The results of operations for the ninethree months ended September 30, 2017March 31, 2020 are not necessarily indicative of the results to be expected for the year ended December 31, 20172020 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to consolidated financial statements prepared in accordance with U.S. GAAP, but which is not required for interim reporting purposes, has been condensed or omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 2016.2019.
As a result of Coronavirus Disease 2019, which was declared a pandemic on March 11, 2020, the United States Federal, State and Local Governments, and other countries around the world have taken measures that have suddenly limited economic output. Due to the decline in economic activity, the Company is faced with a sudden uncertainty as of the date of this report on its operations when considering its revenue sources and potential future liquidity needs. Management is actively monitoring the situation and the impact to the Company’s operations. As the pandemic continues, should liquidity conditions worsen in the short-term, management will work with its financial institutions to assist with liquidity needs.
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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2020
(Unaudited)
1. Organization and Significant Accounting Policies(continued)
Reclassifications
Certain reclassifications have been made in the prior year and prior quarter financial statements to conform to current year and current quarter classifications. These reclassifications had no effect on previously reported net income or shareholders' 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.
Common Stock
Common stock is fully paid, non-assessable and has a par value of $.01 per share.
On October 2, 2019, at the Company Annual Shareholders’ Meeting, FTFC’s shareholders approved the following proposals subject to regulatory approval and adoption by FTFC’s Board of Directors:
1. | An amendment and restatement of FTFC’s Certificate of Incorporation to authorize 40,000,000 shares of Class A common stock and 10,000,000 shares of Class B common stock and to establish the relative rights, preferences and privileges of, and the restrictions and limitations on, the Class A common Stock and the Class B common stock. |
2. | An amendment and restatement of FTFC’s Certificate of Incorporation to automatically reclassify each issued and outstanding share of our existing common stock as one (1) share of Class A common stock or, at the shareholder’s election, into one (1) share of new Class B common stock. |
These proposals received Form A regulatory approval from the OID on February 27, 2020 and the Missouri Department of Commerce and Insurance on December 31, 2019. These proposals have been fully implemented after formal adoption by FTFC’s Board of Directors on March 12, 2020. Effective March 12, 2020, FTFC’s Class B shareholders are entitled to elect a majority of FTFC’s Board of Directors (one-half plus one) but will only receive, compared to FTFC’s Class A shareholders, 85% of cash dividends, stock dividends or amounts due upon any FTFC merger, sale or liquidation event. FTFC’s Class B shareholders may also convert one share of FTFC’s Class B common stock for a .85 share of FTFC’s Class A common stock. FTFC’s Class A shareholders will elect the remaining Board of Directors members and will receive 100% of cash dividends, stock dividends or amounts due upon any Company merger, sale or liquidation event.
Treasury Stock
Treasury stock,, representing shares of the Company’s common stock that have been reacquired after having been issued and fully paid, is recorded at the reacquisition cost and the shares are no longer outstanding.
Subsequent Events
Effective April 1, 2020, the Company and an offshore annuity and life insurance company mutually agreed that the Quota Share under its existing reinsurance agreement shall be 0% for future business instead of the original contractual amount of 90%.
Management has evaluated all events subsequent to March 31, 2020 through the date that these financial statements have been issued.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
Subsequent Events
Management has evaluated all events subsequent to September 30, 2017 through the date that these financial statements have been issued.
Recent Accounting Pronouncements
Revenue from Contracts with CustomersLeases
In May 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing services will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, the entity satisfies a performance obligation.
In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognitionby one year to the quarter ending March 31, 2018. The adoption of this guidance is not expected to have a material effect on the Company’s result of operations, financial position or liquidity.
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
In August 2014, the FASB issued guidance to address the diversity in practice in determining when there is substantial doubt about an entity's ability to continue as a going concern and when an entity must disclose certain relevant conditions and events. The new guidance requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The new guidance allows the entity to consider the mitigating effects of management's plans that will alleviate the substantial doubt and requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans.
If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations and management's plans that are intended to mitigate those conditions. The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity since there are no uncertainties about the Company’s ability to continue as a going concern.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued updated guidance regarding financial instruments. This guidance intends to enhance reporting for financial instruments and addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The significant amendments in this update generally require equity investments to be measured at fair value with changes in fair value recognized in net income, require the use of an exit price notion when measuring the fair value of financial instruments for disclosure purposes and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. This guidance also intends to enhance the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
This guidance is effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance will be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and early adoption is not permitted. The Company is evaluating this guidance but expects the primary impact will be the recognition of unrealized gains and losses on available-for-sale equity securities in net income. Currently, all unrealized gains and losses on available-for-sale equity securities are recognized in other comprehensive income (loss). The effect of the adoption of this guidance on the Company’s results of operations, financial position and liquidity is primarily dependent on the fair value of the available-for-sale equity securities in future periods, the existence of a deferred tax asset related to available-for-sale securities in future periods and the economic conditions at the time of that future adoption.
Leases
In February 2016, the FASB issued updated guidance regarding leases that generally requires the lessee and lessor(Accounting Standards Update 2016-02) to recognize lease assets and lease liabilities on the statement of financial position. A lessee should recognize on the statement of financial position a liability to make lease payments and an asset representing its right-to-use the underlying assets for the lease term. Optional payments to extend the lease or purchase the underlying leased asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise the option(s).
If the lease has a term of 12 months or less, a lessee can make an election to recognize lease expenses for such leases on a straight-line basis over the lease term. There is a differentiation between finance leases and operating leases for the lessee in the statements of operations and cash flows. Finance leases recognize interest on the lease liability separately from the right-to-use the asset whereas an operating lease recognizes a single lease cost allocated over the lease term on a generally straight-line basis. All cash payments are within operating activities in the statement of cash flows except finance leases classify repayments of the principal portion of the lease liability within financing activities.
The accounting applied by the lessor is largely unchanged from that applied under previous U.S. GAAP. Key aspects of the lessor accounting model, however, were aligned with the revenue recognition guidance of Codification Topic 606. The previous accounting model for leverage leases continues to apply only to those leveraged leases that commenced before the effective date of Codification Update 2016-02 Leases (Topic 842).
Entities will generally continue to account for leases that commenced before the effective date of this update in accordance with previous U.S. GAAP unless the lease is modified. Lessees are requiredrequire lessees to recognize a right-of-use asset and a lease liability for allleases with terms of more than 12 months. The updated guidance retains the two classifications of a lease as either an operating leases at each reporting dateor finance lease (previously referred to as a capital lease). Both lease classifications require the lessee to record the right-of-use asset and the lease liability based onupon the present value of cash flows. Finance leases will reflect the remaining minimal rental payments that were tracked and disclosed under previous U.S. GAAP.financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The accounting by lessors is not significantly changed by the updated guidance. The updated guidance is to be applied using a modified retrospective approach effective for annualrequires expanded qualitative and interim periods beginning after December 15, 2018. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect onquantitative disclosures, including additional information about the Company’s results of operations,amounts recorded in the financial position or liquidity.
Investments — Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accountingstatements.
In March 2016,July 2018, the FASB issuedamended the updated guidance that eliminates the requirement to retroactively apply the equity method of accounting when an investmenton leases that was previously accounted for using anotherissued in February 2016 (Accounting Standards Update 2018-11) and provided an additional transition method with which to adopt the updated guidance. Under the additional transition method, entities may elect to recognize a cumulative-effect adjustment to the opening balance of accounting becomes qualified to apply the equity method due to an increaseretained earnings in the levelyear of ownership interest or degree of influence. If the investment was previously accounted for asadoption
Consequently, if this transition method is elected, an available-for-sale security, any related unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualifiedentity’s reporting for the equity method is recognized through earnings.comparative periods prior to adoption presented in the financial statements would continue to be in accordance with current lease guidance. The amendments also provide lessors with a practical expedient to combine non-lease components (e.g., a fee for common area maintenance when leasing office space) with the associated lease component rather than accounting for those components separately if certain criteria are met. The updated guidance requires entities to recognize a right-of-use asset and lease liability equal to the present value of lease payments for all leases other than those that are less than one year. The updated guidance, as amended, is effective for reporting periods beginning after December 15, 2016,2018.
In December 2018, the FASB issued additional guidance (Accounting Standards Update 2018-20) that permits an accounting policy election for lessors to not evaluate whether certain sales taxes and isother similar taxes are lessor costs or lessee costs. A lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration of the contract all collections from lessees of certain sales taxes and other similar taxes and to be applied prospectively. Early adoption was permitted.provide certain disclosures.
The Company adopted this guidance in first quarter 2019. The adoption of this guidance in 2019 did not have a material effect on the Company’s results of operations, financial position or liquidity.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments
In March 2016, the FASB issued updated guidance clarifying that when a call (put) option in a debt instrument is contingently exercisable, the event that triggers the ability to exercise the option is considered to be clearly and closely related to the debt instrument (i.e., the economic characteristics and risks of the option are related to interest rates or credit risks) and the entity does not have to assess whether the option should be accounted for separately. The updated guidance is effective for reporting periods beginning after December 15, 2016. Early adoption was permitted. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Financial Instruments —- Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued updated guidance (Accounting Standards Update 2016-13) for the accounting for credit losses for financial instruments. The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance amounts recoverable)recoverables, including structured settlements that are recorded as part of reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2020
(Unaudited)
1. Organization and Significant Accounting Policies(continued)
The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’ssecurity’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.
The updated guidance iswas effective for reporting periods beginning after December 15, 2019. As a Smaller Reporting Company, the effective date was recently changed and the delayed effective date is now for reporting periods beginning after December 15, 2022. Early adoption is permitted for reporting periods beginning after December 15, 2018. Based on the financial instruments currently held by the Company, there would not be a material effect on the Company’s results of operations, financial position or liquidity if the new guidance were able to behad been adopted in the current accounting period. The impact on the Company’s results of operations, financial position or liquidity at the date of adoption of the updated guidance will be determined by the financial instruments held by the Company and the economic conditions at that time.
Intangibles - Goodwill and Other
In January 2017, the FASB issued updated guidance (Accounting Standards Update 2017-04) that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge by comparing a reporting unit’s fair value with its carrying amount and recognizing an impairment charge for the excess of the carrying amount over estimated fair value (i.e., Step 1 of current guidance).
The implied fair value of goodwill is currently determined in Step 2 by deducting the fair value of all assets and liabilities of the reporting unit (determined in the same manner as a business combination) from the reporting unit’s fair value as determined in Step 1 (including any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unit in Step 1). The updated guidance requires an entity to perform its annual, or interim, impairment test by either: (1) an initial qualitative assessment of 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 reporting unit’s fair value is less than its carrying value, including goodwill (consistent with current guidance), or (2) applying Step 1.
The Company adopted this guidance in first quarter 2020. The adoption of this guidance in 2020 did not have a material effect on the Company’s results of operations, financial position or liquidity.
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash PaymentsTargeted Improvements to the Accounting for Long-Duration Contracts
In August 2016,2018, the FASB issued specificupdated guidance (Accounting Standards Update 2018-12) to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. This update improves the timeliness of recognizing changes in the liability for future policy benefits, modifies the rate used to discount future cash flows, simplifies and improves accounting for certain market-based options or guarantees associated with deposit (i.e., account balance) contracts, simplifies the amortization of deferred acquisitions costs and expands required disclosures. The expanded disclosure requires an insurance entity to provide disaggregated roll forwards of beginning to ending balances of the following: liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities and deferred acquisition costs including disclosure about, changes to and effect of changes for significant inputs, judgments, assumptions and methods used in measurements.
The updated guidance was effective for reporting periods beginning after December 15, 2020. As a Smaller Reporting Company, the effective date was recently changed and the delayed effective date is now for reporting periods beginning after December 15, 2023. Early adoption is permitted. With respect to the liability for future policyholder benefits for traditional and limited-payment contracts and deferred acquisition costs, an insurance entity may elect to apply the amendments retrospectively as of the beginning of the earliest period presented.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2020
(Unaudited)
1. Organization and Significant Accounting Policies(continued)
With respect to the market risk benefits, an insurance entity should apply the amendments retrospectively as of the beginning of the earliest period presented. The Company expects that the impact on the Company’s results of operations, financial position and liquidity at the date of adoption of the updated guidance in 2024 will be determined by the long-duration contracts then held by the Company and the economic conditions at that time.
Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued amendments (Accounting Standards Update 2018-13) to modify the disclosure requirements related to fair value measurements including the consideration of costs and benefits of producing the modified disclosures.
The Company adopted this guidance in first quarter 2020. The adoption of this guidance in 2020 did not have a material effect on the Company’s results of operations, financial position or liquidity.
Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued updated guidance (Accounting Standards Update 2019-12) for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to reduce the existing diversity in practice in how eight specific cash flow issues of certain cash receipts and cash payments are presented and classified in the statement of cash flows.simplify several other income tax accounting matters. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively.the quarter ending March 31, 2021. 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.
Consolidation – Interests Held through Related Parties that Are Under Common Control
In October 2016, the FASB issued further guidance that makes targeted amendments to consolidation accounting. This update changes how a reporting entity that is the primary beneficiary of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The updated guidance is effective for annual and interim periods beginning after December 15, 2016, and is to be applied retrospectively. Early adoption was permitted. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments
In November 2016, the FASB issued specific guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents when there are transfers between cash, cash equivalents and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. 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.
Business Combinations – Clarifying the Definition of a Business
In January 2017, the FASB issued guidance to clarify the definition of a business to assist reporting entities in evaluating whether transactions should be accounted for as an acquisition or disposal of assets or businesses. This update provides a screen to determine when an integrated set of assets or activities is not a business and the requirements to be met to be considered a business.
The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted in certain situations. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Intangibles – Goodwill and Other - Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued guidance to modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Reporting entities will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Compensation — Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued updated guidance to improve the presentation of net periodic pension cost and net periodic post retirement cost (net benefit costs). Net benefit costs comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees. The update requires that the employer service cost component be reported in the same lines as other employee compensation cost and that the other components (non-service costs) be presented separately from the service cost and outside of a subtotal of income from operations if one is presented. The update also allows only the service cost component to be eligible for capitalization in assets when applicable.
The updated guidance is effective for reporting periods beginning after December 15, 2017. The update is to be applied retrospectively with respect to the presentation of service cost and non-service cost and prospectively with respect to applying the service cost only eligible for capitalization in assets guidance. Early adoption is permitted as of the first interim period of an annual period if an entity issues interim financial statements. This pronouncement will not impact the Company since it does not have any pension or postretirement benefit plans and has no intention to adopt such plans.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
1. Organization and Significant Accounting Policies2. (continued)Investments
Compensation — Stock Compensation: ScopeInvestments in fixed maturity and preferred stock available-for-sale and equity securities as of Modification Accounting
In May 2017, the FASB issued updated guidance related to a change to the terms or conditions (modification) of a share-based payment award. The updated guidance provides that an entity should account for the effects of a modification unless the fair valueMarch 31, 2020 and vesting conditions of the modified award and the classification of the modified award (equity or liability instrument)December 31, 2019 are the samesummarized as the original award immediately before the modification.follows:
The updated guidance is effective for the quarter ending March 31, 2018. The update is to be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted in any interim periods for which financial statements have not yet been made available for issuance. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Gross | Gross | |||||||||||||||
Amortized Cost | Unrealized | Unrealized | Fair | |||||||||||||
or Cost | Gains | Losses | Value | |||||||||||||
March 31, 2020 (Unaudited) | ||||||||||||||||
Fixed maturity securities | ||||||||||||||||
U.S. government and U.S. government agencies | $ | 1,679,790 | $ | 3,497 | $ | - | $ | 1,683,287 | ||||||||
States and political subdivisions | 9,317,430 | 720,408 | - | 10,037,838 | ||||||||||||
Residential mortgage-backed securities | 18,043 | 15,291 | - | 33,334 | ||||||||||||
Corporate bonds | 117,044,796 | 5,155,796 | 5,415,004 | 116,785,588 | ||||||||||||
Asset-backed securities | 2,082,445 | 8,330 | 107,083 | 1,983,692 | ||||||||||||
Exchange traded securities | 500,000 | - | 200,000 | 300,000 | ||||||||||||
Foreign bonds | 31,473,925 | 973,199 | 2,194,449 | 30,252,675 | ||||||||||||
Certificate of deposits | 800,000 | - | - | 800,000 | ||||||||||||
Total fixed maturity securities | 162,916,429 | 6,876,521 | 7,916,536 | 161,876,414 | ||||||||||||
Preferred stock | 49,945 | - | 345 | 49,600 | ||||||||||||
Equity securities | ||||||||||||||||
Mutual funds | 91,981 | - | 21,713 | 70,268 | ||||||||||||
Corporate common stock | 90,394 | 4,126 | - | 94,520 | ||||||||||||
Total equity securities | 182,375 | 4,126 | 21,713 | 164,788 | ||||||||||||
Total fixed maturity, preferred stock and equity securities | $ | 163,148,749 | $ | 6,880,647 | $ | 7,938,594 | $ | 162,090,802 | ||||||||
December 31, 2019 | ||||||||||||||||
Fixed maturity securities | ||||||||||||||||
U.S. government and U.S. government agencies | $ | 1,679,731 | $ | 431 | $ | 11,129 | $ | 1,669,033 | ||||||||
States and political subdivisions | 9,536,120 | 617,063 | 2,252 | 10,150,931 | ||||||||||||
Residential mortgage-backed securities | 20,289 | 22,167 | - | 42,456 | ||||||||||||
Corporate bonds | 121,143,923 | 9,528,168 | 144,337 | 130,527,754 | ||||||||||||
Asset-backed securities | 2,116,056 | 68,395 | - | 2,184,451 | ||||||||||||
Exchange traded securities | 500,000 | 48,400 | - | 548,400 | ||||||||||||
Foreign bonds | 31,764,329 | 2,427,523 | 363,553 | 33,828,299 | ||||||||||||
Total fixed maturity securities | 166,760,448 | 12,712,147 | 521,271 | 178,951,324 | ||||||||||||
Preferred stock | 49,945 | 1,955 | - | 51,900 | ||||||||||||
Equity securities | ||||||||||||||||
Mutual funds | 91,981 | - | 2,629 | 89,352 | ||||||||||||
Corporate common stock | 88,213 | 23,459 | - | 111,672 | ||||||||||||
Total equity securities | 180,194 | 23,459 | 2,629 | 201,024 | ||||||||||||
Total fixed maturity, preferred stock and equity securities | $ | 166,990,587 | $ | 12,737,561 | $ | 523,900 | $ | 179,204,248 |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
2. Investments
Fixed Maturity and Equity Securities Available-For-Sale(continued)
Investments in fixed maturity and equity securities available-for-sale as of September 30, 2017 and December 31, 2016 are summarized as follows:
Gross | Gross | |||||||||||||||
Amortized Cost | Unrealized | Unrealized | Fair | |||||||||||||
or Cost | Gains | Losses | Value | |||||||||||||
September 30, 2017 (Unaudited) | ||||||||||||||||
Fixed maturity securities | ||||||||||||||||
U.S. government and U.S. government agencies | $ | 2,976,500 | $ | 62,463 | $ | 57,498 | $ | 2,981,465 | ||||||||
States and political subdivisions | 9,386,211 | 310,486 | 27,856 | 9,668,841 | ||||||||||||
Residential mortgage-backed securities | 29,190 | 42,635 | - | 71,825 | ||||||||||||
Corporate bonds | 109,002,252 | 4,696,310 | 504,634 | 113,193,928 | ||||||||||||
Foreign bonds | 21,218,524 | 1,008,329 | 100,124 | 22,126,729 | ||||||||||||
Total fixed maturity securities | 142,612,677 | 6,120,223 | 690,112 | 148,042,788 | ||||||||||||
Equity securities | ||||||||||||||||
Mutual funds | 347,311 | 2,162 | - | 349,473 | ||||||||||||
Corporate preferred stock | 99,945 | 2,075 | - | 102,020 | ||||||||||||
Corporate common stock | 154,976 | 65,889 | - | 220,865 | ||||||||||||
Total equity securities | 602,232 | 70,126 | - | 672,358 | ||||||||||||
Total fixed maturity and equity securities | $ | 143,214,909 | $ | 6,190,349 | $ | 690,112 | $ | 148,715,146 | ||||||||
December 31, 2016 | ||||||||||||||||
Fixed maturity securities | ||||||||||||||||
U.S. government and U.S. government agencies | $ | 3,157,889 | $ | 99,086 | $ | 71,592 | $ | 3,185,383 | ||||||||
States and political subdivisions | 9,172,533 | 144,947 | 66,584 | 9,250,896 | ||||||||||||
Residential mortgage-backed securities | 33,970 | 36,757 | - | 70,727 | ||||||||||||
Corporate bonds | 100,268,424 | 2,324,712 | 1,613,095 | 100,980,041 | ||||||||||||
Foreign bonds | 15,677,449 | 394,742 | 248,083 | 15,824,108 | ||||||||||||
Total fixed maturity securities | 128,310,265 | 3,000,244 | 1,999,354 | 129,311,155 | ||||||||||||
Equity securities | ||||||||||||||||
Mutual funds | 344,783 | - | 2,869 | 341,914 | ||||||||||||
Corporate preferred stock | 99,945 | - | 3,585 | 96,360 | ||||||||||||
Corporate common stock | 154,672 | 45,461 | - | 200,133 | ||||||||||||
Total equity securities | 599,400 | 45,461 | 6,454 | 638,407 | ||||||||||||
Total fixed maturity and equity securities | $ | 128,909,665 | $ | 3,045,705 | $ | 2,005,808 | $ | 129,949,562 |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
2. Investments (continued)
AllAll 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 September 30, 2017March 31, 2020 and December 31, 20162019 are summarized as follows:
Unrealized | Number of | |||||||||||
Fair Value | Loss | Securities | ||||||||||
September 30, 2017 (Unaudited) | ||||||||||||
Fixed maturity securities | ||||||||||||
Less than 12 months | ||||||||||||
U.S. government and U.S. government agencies | $ | 476,388 | $ | 4,294 | 4 | |||||||
States and political subdivisions | 1,409,461 | 27,856 | 8 | |||||||||
Corporate bonds | 4,658,050 | 94,634 | 19 | |||||||||
Foreign bonds | 1,557,436 | 39,316 | 5 | |||||||||
Total less than 12 months | 8,101,335 | 166,100 | 36 | |||||||||
More than 12 months | ||||||||||||
U.S. government and U.S. government agencies | 1,196,274 | 53,204 | 3 | |||||||||
Corporate bonds | 4,783,721 | 410,000 | 18 | |||||||||
Foreign bonds | 516,695 | 60,808 | 3 | |||||||||
Total more than 12 months | 6,496,690 | 524,012 | 24 | |||||||||
Total fixed maturity securities in an unrealized loss position | $ | 14,598,025 | $ | 690,112 | 60 | |||||||
December 31, 2016 | ||||||||||||
Fixed maturity securities | ||||||||||||
Less than 12 months | ||||||||||||
U.S. government and U.S. government agencies | $ | 1,878,308 | $ | 71,592 | 6 | |||||||
States and political subdivisions | 2,532,653 | 66,584 | 14 | |||||||||
Corporate bonds | 23,721,217 | 696,066 | 92 | |||||||||
Foreign bonds | 5,087,133 | 155,833 | 16 | |||||||||
Total less than 12 months | 33,219,311 | 990,075 | 128 | |||||||||
More than 12 months | ||||||||||||
Corporate bonds | 8,004,923 | 917,029 | 36 | |||||||||
Foreign bonds | 1,024,548 | 92,250 | 6 | |||||||||
Total more than 12 months | 9,029,471 | 1,009,279 | 42 | |||||||||
Total fixed maturity securities in an unrealized loss position | 42,248,782 | 1,999,354 | 170 | |||||||||
Equity securities | ||||||||||||
Less than 12 months | ||||||||||||
Corporate preferred stock | 96,360 | 3,585 | 2 | |||||||||
Total less than 12 months | 96,360 | 3,585 | 2 | |||||||||
More than 12 months | ||||||||||||
Mutual funds | 89,113 | 2,869 | 1 | |||||||||
Total more than 12 months | 89,113 | 2,869 | 1 | |||||||||
Total equity securities in an unrealized loss position | 185,473 | 6,454 | 3 | |||||||||
Total fixed maturity and equity securities in an unrealized loss position | $ | 42,434,255 | $ | 2,005,808 | 173 |
As of September 30, 2017, the Company held 60 available-for-sale fixed maturity securities with an unrealized loss of $690,112, fair value of $14,598,025 and amortized cost of $15,288,137. These unrealized losses were primarily due to market interest rate movements in the bond market as of September 30, 2017. The ratio of the fair value to the amortized cost of these 60 securities is 95%.
Unrealized | Number of | |||||||||||
Fair Value | Loss | Securities | ||||||||||
March 31, 2020 (Unaudited) | ||||||||||||
Fixed maturity securities | ||||||||||||
Less than 12 months in an unrealized loss position | ||||||||||||
Corporate bonds | $ | 46,202,498 | $ | 4,859,166 | 159 | |||||||
Asset-backed securities | 1,270,692 | 107,083 | 4 | |||||||||
Exchange traded securities | 300,000 | 200,000 | 2 | |||||||||
Foreign bonds | 12,033,032 | 1,393,462 | 38 | |||||||||
Total less than 12 months in an unrealized loss position | 59,806,222 | 6,559,711 | 203 | |||||||||
More than 12 months in an unrealized loss position | ||||||||||||
Corporate bonds | 523,430 | 555,838 | 5 | |||||||||
Foreign bonds | 623,575 | 800,987 | 4 | |||||||||
Total more than 12 months in an unrealized loss position | 1,147,005 | 1,356,825 | 9 | |||||||||
Total fixed maturity securities in an unrealized loss position | 60,953,227 | 7,916,536 | 212 | |||||||||
Preferred stock, less than 12 months in an unrealized loss position | 49,600 | 345 | 1 | |||||||||
Equity securities (mutual funds), less than 12 months in an unrealized loss position | 70,268 | 21,713 | 1 | |||||||||
Total fixed maturity, preferred stock and equity securities in an unrealized loss position | $ | 61,073,095 | $ | 7,938,594 | $ | 214 | ||||||
December 31, 2019 | ||||||||||||
Fixed maturity securities | ||||||||||||
Less than 12 months in an unrealized loss position | ||||||||||||
U.S. government and U.S. government agencies | $ | 1,097,626 | $ | 6,841 | 3 | |||||||
States and political subdivisions | 103,007 | 2,252 | 1 | |||||||||
Corporate bonds | 3,049,765 | 59,915 | 7 | |||||||||
Foreign bonds | 345,243 | 7,857 | 1 | |||||||||
Total less than 12 months in an unrealized loss position | 4,595,641 | 76,865 | 12 | |||||||||
More than 12 months in an unrealized loss position | ||||||||||||
U.S. government and U.S. government agencies | 445,943 | 4,288 | 2 | |||||||||
Corporate bonds | 1,245,410 | 84,422 | 6 | |||||||||
Foreign bonds | 1,070,459 | 355,696 | 4 | |||||||||
Total more than 12 months in an unrealized loss position | 2,761,812 | 444,406 | 12 | |||||||||
Total fixed maturity securities in an unrealized loss position | 7,357,453 | 521,271 | 24 | |||||||||
Equity securities (mutual funds), greater than 12 months in an unrealized loss position | 89,352 | 2,629 | 1 | |||||||||
Total fixed maturity, preferred stock and equity securities in an unrealized loss position | $ | 7,446,805 | $ | 523,900 | $ | 25 |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
2. Investments (continued)
As of March 31, 2020, the Company held 212 available-for-sale fixed maturity securities with an unrealized loss of $7,916,536, fair value of $60,953,227 and amortized cost of $68,869,763. These unrealized losses were primarily due to the Coronavirus pandemic impact on the bond market as of March 31, 2020. The ratio of the fair value to the amortized cost of these 212 securities is 89%.
As of December 31, 2016,2019, the Company held 17024 available-for-sale fixed maturity securities with an unrealized loss of $1,999,354,$521,271, fair value of $42,248,782$7,357,453 and amortized cost of $44,248,136.$7,878,724. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2016.2019. The ratio of the fair value to the amortized cost of these 17024 securities is 95%93%.
As of DecemberMarch 31, 2016,2020, the Company had three available-for-saleheld one equity securitiessecurity with an unrealized loss of $6,454,$21,713, fair value of $185,473$70,268 and cost of $191,927.$91,981. The ratio of fair value to cost of these securitiesthis security is 76%.
As of December 31, 2019, the Company held one equity security with an unrealized loss of $2,629, fair value of $89,352 and cost of $91,981. The ratio of fair value to cost of this security is 97%.
As of March 31, 2020, the Company held one preferred stock with an unrealized loss of $345, fair value of $49,600 and cost of $49,945. The ratio of fair value to cost of this preferred stock is 99%.
Fixed maturity securities were 93% and 92%97% investment grade as rated by Standard & Poor’s as of September 30, 2017March 31, 2020 and December 31, 2016, respectively.2019.
The Company’sCompany’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.
The Company has recordedThere were no other-than-temporary impairments on its fixed maturity available-for-sale investment in an energy corporation with a total par value of $650,000 as a result of continuing unrealized losses. During fourth quarter 2016 this security was initially impaired by a $207,450 charge to the statement of operations. During second quarter 2017 this security was further impaired by a $224,250 charge to the statement of operations. These impairments were considered fully credit-related and represent the difference between the amortized cost basis of the security and its fair value. The Company experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securities forduring the three and nine months ended September 30, 2017March 31, 2020 and the year ended December 31, 2016.2019.
Management believes that the Company will fully recover its cost basis in the securities held as of September 30, 2017,March 31, 2020, 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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
2. Investments (continued)
Net unrealized gains (losses) included in other comprehensive income (loss) for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation (depreciation) had been realized as of September 30, 2017March 31, 2020 and December 31, 2016,2019, are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||
September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | |||||||||||||
Unrealized appreciation on available-for-sale securities | $ | 5,500,237 | $ | 1,039,897 | ||||||||||||
Unrealized appreciation (depreciation) on available-for-sale securities | $ | (1,040,360 | ) | $ | 12,192,831 | |||||||||||
Adjustment to deferred acquisition costs | (96,363 | ) | (16,553 | ) | 2,011 | (19,844 | ) | |||||||||
Deferred income taxes | (1,080,775 | ) | (204,668 | ) | 218,053 | (2,556,327 | ) | |||||||||
Net unrealized appreciation on available-for-sale securities | $ | 4,323,099 | $ | 818,676 | ||||||||||||
Net unrealized appreciation (depreciation) on available-for-sale securities | $ | (820,296 | ) | $ | 9,616,660 |
The Company’sCompany’s investment in lottery prize cash flows categorized as other long-term investments in the statement of financial position was $57,675,405$73,146,105 and $46,788,873$71,824,480 as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. The lottery prize cash flows are assignments of the future rights from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries.
The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of September 30, 2017,March 31, 2020, by contractual maturity, are summarized as follows:
September 30, 2017 (Unaudited) | March 31, 2020 (Unaudited) | |||||||||||||||||||||||||||||||
Fixed Maturity Available-For-Sale Securities | Other Long-Term Investments | Fixed Maturity Available-For-Sale Securities | Other Long-Term Investments | |||||||||||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||||||||
Due in one year or less | $ | 7,267,264 | $ | 7,331,950 | $ | 8,248,410 | $ | 8,361,971 | $ | 2,664,450 | $ | 2,655,860 | $ | 11,233,730 | $ | 11,466,462 | ||||||||||||||||
Due after one year through five years | 30,208,994 | 31,312,939 | 23,377,949 | 25,433,045 | 26,292,616 | 24,761,240 | 35,104,570 | 39,433,436 | ||||||||||||||||||||||||
Due after five years through ten years | 38,476,332 | 39,833,033 | 16,190,560 | 19,790,751 | 55,372,399 | 54,289,104 | 19,387,198 | 25,495,424 | ||||||||||||||||||||||||
Due after ten years | 66,630,897 | 69,493,041 | 9,858,486 | 15,836,022 | 78,568,921 | 80,136,876 | 7,420,607 | 13,500,163 | ||||||||||||||||||||||||
Due at multiple maturity dates | 29,190 | 71,825 | - | - | 18,043 | 33,334 | - | - | ||||||||||||||||||||||||
$ | 142,612,677 | $ | 148,042,788 | $ | 57,675,405 | $ | 69,421,789 | $ | 162,916,429 | $ | 161,876,414 | $ | 73,146,105 | $ | 89,895,485 |
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
September 30, 2017March 31, 2020
(Unaudited)
2. Investments (continued)
Proceeds and gross realized gains (losses) from the sales, calls and maturitiesmaturities of fixed maturity securities available-for-sale equity securities available-for-sale, mortgage loans on real estate, investment real estate and other long-term investments for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
Three Months Ended September 30, (Unaudited) | Three Months Ended March 31, (Unaudited) | |||||||||||||||||||||||||||||||||||||||
Fixed Maturity Securities | Equity Securities | Mortgage Loans on Real Estate | Investment Real Estate | Fixed Maturity Securities | ||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||||
Proceeds | $ | 4,536,924 | $ | 7,368,724 | $ | - | $ | - | $ | 5,405,626 | $ | 7,655,905 | $ | - | $ | - | $ | 5,550,987 | $ | 3,399,846 | ||||||||||||||||||||
Gross realized gains | 37,337 | 242,910 | - | - | - | - | - | - | 65,309 | 44,555 | ||||||||||||||||||||||||||||||
Gross realized losses | (40,823 | ) | (36,020 | ) | - | - | - | (46,582 | ) | - | - | (3,390 | ) | (4,480 | ) | |||||||||||||||||||||||||
Loss on other-than-temporary impairment | - | - | - | - | - | - | - | - |
Three Months Ended September 30, (Unaudited) | ||||||||
Other Long-Term Investments | ||||||||
2017 | 2016 | |||||||
Proceeds | $ | - | $ | - | ||||
Gross realized gains | - | - | ||||||
Gross realized losses | - | - | ||||||
Loss on other-than-temporary impairment | - | - |
The accumulated change in unrealized investment gains (losses) for fixed maturity and preferred stock available-for-sale for the three months ended March 31, 2020 and 2019 and the amount of net realized investment gains (losses) on fixed maturity securities available-for-sale and equity securities for the three months ended March 31, 2020 and 2019 are summarized as follows:
Nine Months Ended September 30, (Unaudited) | ||||||||||||||||||||||||||||||||
Fixed Maturity Securities | Equity Securities | Mortgage Loans on Real Estate | Investment Real Estate | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
Proceeds | $ | 17,140,173 | $ | 14,862,935 | $ | - | $ | 128,010 | $ | 16,129,739 | $ | 11,317,427 | $ | 190,084 | $ | - | ||||||||||||||||
Gross realized gains | 564,589 | 405,960 | - | 8,711 | - | - | 6,050 | - | ||||||||||||||||||||||||
Gross realized losses | (377,138 | ) | (77,362 | ) | - | (1,468 | ) | - | (28,591 | ) | (1,668 | ) | - | |||||||||||||||||||
Loss on other-than-temporary impairment | (224,250 | ) | - | - | - | - | - | - | - |
Nine Months Ended September 30, (Unaudited) | ||||||||
Other Long-Term Investments | ||||||||
2017 | 2016 | |||||||
Proceeds | $ | 792,012 | $ | - | ||||
Gross realized gains | 62,275 | - | ||||||
Gross realized losses | - | - | ||||||
Loss on other-than-temporary impairment | - | - |
Three Months Ended March 31, (Unaudited) | ||||||||
2020 | 2019 | |||||||
Change in unrealized investment gains (losses): | ||||||||
Available-for-sale securities: | ||||||||
Fixed maturity securities | $ | (13,230,891 | ) | $ | 5,077,355 | |||
Preferred stock | (2,300 | ) | 9,820 | |||||
Net realized investment gains (losses): | ||||||||
Available-for-sale securities: | ||||||||
Fixed maturity securities | 61,919 | 40,075 | ||||||
Equity securities, changes in fair value | (38,417 | ) | 13,645 |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
2. Investments (continued)
The accumulated change in net unrealized investment gains (losses) for fixed maturity and equity securities available-for-sale for the three and nine months ended September 30, 2017 and 2016 and the amount of realized investment gains on fixed maturity securities available-for-sale, equity securities available-for-sale, mortgage loans on real estate, investment real estate and other long-term investments for the three and nine months ended September 30, 2017 and 2016 are summarized as follows:
Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Change in unrealized investment gains: | ||||||||||||||||
Available-for-sale securities: | ||||||||||||||||
Fixed maturity securities | $ | 694,379 | $ | 817,963 | $ | 4,429,221 | $ | 9,078,142 | ||||||||
Equity securities | 12,381 | 33,665 | 31,119 | 26,911 | ||||||||||||
Net realized investment gains (losses): | ||||||||||||||||
Available-for-sale securities: | ||||||||||||||||
Fixed maturity securities | (3,486 | ) | 206,890 | 187,451 | 328,598 | |||||||||||
Equity securities | - | - | - | 7,243 | ||||||||||||
Mortgage loans on real estate | - | (46,582 | ) | - | (28,591 | ) | ||||||||||
Investment real estate | - | - | 4,382 | - | ||||||||||||
Other long-term investments | - | - | 62,275 | - |
Major categories of net investment income for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | Three Months Ended March 31, (Unaudited) | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | |||||||||||||||||||
Fixed maturity securities | $ | 1,731,931 | $ | 1,435,041 | $ | 4,887,826 | $ | 4,535,560 | $ | 1,838,382 | $ | 1,529,476 | ||||||||||||
Equity securities | 4,382 | 6,728 | 14,540 | 20,568 | ||||||||||||||||||||
Preferred stock and equity securities | 32,323 | 34,218 | ||||||||||||||||||||||
Other long-term investments | 967,959 | 687,042 | 2,707,438 | 1,857,366 | 1,347,138 | 1,150,757 | ||||||||||||||||||
Mortgage loans | 2,379,176 | 1,417,445 | 5,923,207 | 4,098,943 | 3,570,405 | 3,182,848 | ||||||||||||||||||
Policy loans | 28,640 | 27,348 | 84,657 | 79,937 | 37,707 | 32,273 | ||||||||||||||||||
Real estate | 93,943 | 62,391 | 281,366 | 246,327 | 68,682 | 64,296 | ||||||||||||||||||
Short-term and other investments | 72,935 | 56,806 | 296,019 | 198,950 | 24,537 | 244,840 | ||||||||||||||||||
Gross investment income | 5,278,966 | 3,692,801 | 14,195,053 | 11,037,651 | 6,919,174 | 6,238,708 | ||||||||||||||||||
Investment expenses | (647,074 | ) | (388,821 | ) | (1,898,226 | ) | (1,114,834 | ) | (649,331 | ) | (665,252 | ) | ||||||||||||
Net investment income | $ | 4,631,892 | $ | 3,303,980 | $ | 12,296,827 | $ | 9,922,817 | $ | 6,269,843 | $ | 5,573,456 |
TLIC and FBLIC are required to hold assets on deposit with various state insurance departments for the benefit of policyholders and other special deposits in accordance with statutory rules and regulations. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, these required deposits, included in investment assets, had amortized costs that totaled $3,702,658$4,798,357 and $4,099,405,$4,434,662, respectively. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, these required deposits had fair values that totaled $3,726,812$4,844,525 and $4,125,116,$4,468,783, respectively.
The Company’s mortgage loans by property type as of March 31, 2020 and December 31, 2019 are summarized as follows:
(Unaudited) | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
Residential mortgage loans | $ | 153,328,603 | $ | 150,002,865 | ||||
Commercial mortgage loans by property type | ||||||||
Apartment | 964,351 | 1,604,934 | ||||||
Industrial | 1,605,214 | 1,619,250 | ||||||
Lodging | 729,042 | 729,603 | ||||||
Office building | 4,322,652 | 3,676,396 | ||||||
Retail | 5,931,670 | 4,771,592 | ||||||
Total commercial mortgage loans by property type | 13,552,929 | 12,401,775 | ||||||
Total mortgage loans | $ | 166,881,532 | $ | 162,404,640 |
There were 35 loans with a remaining principal balance of $5,727,927 that were more than 90 days past due as of March 31, 2020. There were 23 loans with a remaining principal balance of $4,427,317 that were more than 90 days past due as of December 31, 2019.
There were no mortgage loans in default and in the foreclosure process as of March 31, 2020. There were $1,691,980 of mortgage loans in default and foreclosure as of December 31, 2019 and the Company estimates that it will not incur losses on these foreclosures due to the anticipated sales prices less disposal costs exceeding the carrying values of these foreclosed mortgage loans.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
2. Investments (continued)
The Company’s mortgage loans by property type as of September 30, 2017 and December 31, 2016 are summarized as follows:
(Unaudited) | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
Commercial and industrial mortgage loans | ||||||||
Retail stores | $ | 1,250,052 | $ | 1,075,324 | ||||
Office buildings | 138,463 | 179,484 | ||||||
Industrial | 432,351 | - | ||||||
Total commercial and industrial mortgage loans | 1,820,866 | 1,254,808 | ||||||
Residential mortgage loans | 101,192,149 | 73,116,478 | ||||||
Total mortgage loans | $ | 103,013,015 | $ | 74,371,286 |
The Company’sCompany’s investment real estate as of September 30, 2017March 31, 2020 and December 31, 20162019 is summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||
September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | |||||||||||||
Land - held for the production of income | $ | 213,160 | $ | 213,160 | $ | 213,160 | $ | 213,160 | ||||||||
Land - held for investment | 745,155 | 745,155 | 745,155 | 745,155 | ||||||||||||
Total land | 958,315 | 958,315 | 958,315 | 958,315 | ||||||||||||
Building - held for the production of income | 2,267,557 | 2,267,557 | 2,267,557 | 2,267,557 | ||||||||||||
Less - accumulated depreciation | (1,158,810 | ) | (1,049,695 | ) | (1,522,531 | ) | (1,486,159 | ) | ||||||||
Buildings net of accumulated depreciation | 1,108,747 | 1,217,862 | 745,026 | 781,398 | ||||||||||||
Residential real estate - held for sale | 287,249 | 330,496 | 956,137 | 212,046 | ||||||||||||
Total residential real estate | 287,249 | 330,496 | 956,137 | 212,046 | ||||||||||||
Investment real estate, net of accumulated depreciation | $ | 2,354,311 | $ | 2,506,673 | $ | 2,659,478 | $ | 1,951,759 |
TLIC owns approximately six and one-half acres of land located in Topeka, Kansas that includes a 20,000 square foot office building on approximately one-fourth of this land. This building and land on one of the four lots is held for the production of income. The other three lots of land owned in Topeka, Kansas are held for investment. In addition, FBLIC owns one-half acre of undeveloped land located in Jefferson City, Missouri. During fourth quarter 2016 management impaired the undeveloped land by $4,892 from its carrying value to its net realizable value expected at the time of ultimate resale.
During 2017 and 2016,2020 the Company foreclosed on two residential mortgage loans of real estate totaling $142,455 and $198,622, respectively,$744,091 and transferred those properties to investment real estate held for sale. During 2019, the Company foreclosed on one residential mortgage loans of real estate totaling $99,218 and transferred that areproperty to investment real estate that is now held for sale.
During 2017, the Company sold investment real estate property with an aggregate carrying value of $185,702. The Company recorded a gross realized investment gain on sale of $4,382 based on an aggregate sales price of $190,084.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
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, preferred stock and equity securities that are measured and reported at fair market value on theconsolidated 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 include preferred stock and equity securities that are traded in an active exchange 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,government, U.S. government agencies, state and political subdivisionsubdivisions, mortgage-backed securities, corporate debtbonds, asset-backed securities, exchange traded securities, foreign bonds and foreign debt securities.certificate of deposits.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2020
(Unaudited)
3. Fair Value Measurements (continued)
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 where independent pricing information was not able to be obtained for a significant portion of the underlying assets.
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 and out of the Level 3 category as of the beginning of the period in which the reclassifications occur.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
3. Fair Value Measurements (continued)
The Company’sCompany’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of September 30, 2017March 31, 2020 and December 31, 20162019 is summarized as follows:
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
September 30, 2017 (Unaudited) | March 31, 2020 (Unaudited) | |||||||||||||||||||||||||||||||
Fixed maturity securities, available-for-sale | ||||||||||||||||||||||||||||||||
U.S. government and U.S. government agencies | $ | - | $ | 2,981,465 | $ | - | $ | 2,981,465 | $ | - | $ | 1,683,287 | $ | - | $ | 1,683,287 | ||||||||||||||||
States and political subdivisions | - | 9,668,841 | - | 9,668,841 | - | 10,037,838 | - | 10,037,838 | ||||||||||||||||||||||||
Residential mortgage-backed securities | - | 71,825 | - | 71,825 | - | 33,334 | - | 33,334 | ||||||||||||||||||||||||
Corporate bonds | - | 113,193,928 | - | 113,193,928 | - | 116,785,588 | - | 116,785,588 | ||||||||||||||||||||||||
Asset-backed securities | - | 1,983,692 | - | 1,983,692 | ||||||||||||||||||||||||||||
Exchange traded securities | - | 300,000 | - | 300,000 | ||||||||||||||||||||||||||||
Foreign bonds | - | 22,126,729 | - | 22,126,729 | - | 30,252,675 | - | 30,252,675 | ||||||||||||||||||||||||
Certificate of deposits | - | 800,000 | - | 800,000 | ||||||||||||||||||||||||||||
Total fixed maturity securities | $ | - | $ | 148,042,788 | $ | - | $ | 148,042,788 | $ | - | $ | 161,876,414 | $ | - | $ | 161,876,414 | ||||||||||||||||
Equity securities, available-for-sale | ||||||||||||||||||||||||||||||||
Preferred stock, available-for-sale | $ | 49,600 | $ | - | $ | - | $ | 49,600 | ||||||||||||||||||||||||
Equity securities | ||||||||||||||||||||||||||||||||
Mutual funds | $ | - | $ | 349,473 | $ | - | $ | 349,473 | $ | - | $ | 70,268 | $ | - | $ | 70,268 | ||||||||||||||||
Corporate preferred stock | 102,020 | - | - | 102,020 | ||||||||||||||||||||||||||||
Corporate common stock | 159,365 | - | 61,500 | 220,865 | 28,232 | - | 66,288 | 94,520 | ||||||||||||||||||||||||
Total equity securities | $ | 261,385 | $ | 349,473 | $ | 61,500 | $ | 672,358 | $ | 28,232 | $ | 70,268 | $ | 66,288 | $ | 164,788 | ||||||||||||||||
December 31, 2016 | December 31, 2019 | |||||||||||||||||||||||||||||||
Fixed maturity securities, available-for-sale | ||||||||||||||||||||||||||||||||
U.S. government and U.S. government agencies | $ | - | $ | 3,185,383 | $ | - | $ | 3,185,383 | $ | - | $ | 1,669,033 | $ | - | $ | 1,669,033 | ||||||||||||||||
States and political subdivisions | - | 9,250,896 | - | 9,250,896 | - | 10,150,931 | - | 10,150,931 | ||||||||||||||||||||||||
Residential mortgage-backed securities | - | 70,727 | - | 70,727 | - | 42,456 | - | 42,456 | ||||||||||||||||||||||||
Corporate bonds | - | 100,980,041 | - | 100,980,041 | - | 130,527,754 | - | 130,527,754 | ||||||||||||||||||||||||
Asset-backed securities | - | 2,184,451 | - | 2,184,451 | ||||||||||||||||||||||||||||
Exchange traded securities | - | 548,400 | - | 548,400 | ||||||||||||||||||||||||||||
Foreign bonds | - | 15,824,108 | - | 15,824,108 | - | 33,828,299 | - | 33,828,299 | ||||||||||||||||||||||||
Total fixed maturity securities | $ | - | $ | 129,311,155 | $ | - | $ | 129,311,155 | $ | - | $ | 178,951,324 | $ | - | $ | 178,951,324 | ||||||||||||||||
Preferred stock, available-for-sale | $ | 51,900 | $ | - | $ | - | $ | 51,900 | ||||||||||||||||||||||||
Equity securities, available-for-sale | ||||||||||||||||||||||||||||||||
Equity securities | ||||||||||||||||||||||||||||||||
Mutual funds | $ | - | $ | 341,914 | $ | - | $ | 341,914 | $ | - | $ | 89,352 | $ | - | $ | 89,352 | ||||||||||||||||
Corporate preferred stock | 96,360 | - | - | 96,360 | ||||||||||||||||||||||||||||
Corporate common stock | 138,633 | - | 61,500 | 200,133 | 47,565 | - | 64,107 | 111,672 | ||||||||||||||||||||||||
Total equity securities | $ | 234,993 | $ | 341,914 | $ | 61,500 | $ | 638,407 | $ | 47,565 | $ | 89,352 | $ | 64,107 | $ | 201,024 |
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, Level 3 financial instruments consisted of two private placement common stocks that have no active trading.trading and a joint venture investment with a mortgage loan originator.
These private placement common stocks represent investments in small 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.paid until such time as these small insurance holding companies commence significant operations. The joint venture investment with a mortgage loan originator is accounted for under the equity method of accounting.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
3. Fair Value Measurements (continued)
Fair values for Level 1 and Level 2 assets for the Company’s fixed maturity and preferred stock available-for-sale and equity securities available-for-sale are primarily based on prices supplied by a third party investment service. The third party investment service provides 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 third party investment service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing. As the fair value estimates of the Company’sCompany’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, U.S. government agencies, state and political subdivisions, mortgage-backed securities, corporate bonds, asset-backed securities, exchange traded securities, foreign bonds and foreign bonds.certificate of deposits.
The Company’sCompany’s preferred stock is included in Level 1 and equity securities are included in Level 1 and Level 2 and the private placement common stocks and joint venture investment are included in Level 3. Level 1 for the preferred stock and those 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 those equity securities classified as such is appropriate since they are not actively traded.
The Company’sCompany’s fixed maturity and preferred stock available-for-sale securities and equity securities available-for-sale portfolio isare 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 three months ended March 31, 2020 and March 31, 2019 is summarized as follows:
Unaudited | ||||||||
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Beginning balance | $ | 64,107 | $ | 64,036 | ||||
Joint venture net income | 29,220 | 27,784 | ||||||
Joint venture distribution | (27,039 | ) | (23,824 | ) | ||||
Ending balance | $ | 66,288 | $ | 67,996 |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
3. Fair Value Measurements (continued)
TheThe carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of September 30, 2017March 31, 2020 and December 31, 2016,2019, and the 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,instruments disclosed, but not carried, at Fair Value:fair value:
Carrying | Fair | Carrying | Fair | |||||||||||||||||||||||||||||||||||||
Amount | Value | Level 1 | Level 2 | Level 3 | Amount | Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||
September 30, 2017 (Unaudited) | March 31, 2020 (Unaudited) | |||||||||||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||||||||||
Mortgage loans on real estate | ||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 1,820,866 | $ | 1,823,474 | $ | - | $ | - | $ | 1,823,474 | ||||||||||||||||||||||||||||||
Commercial | $ | 13,552,929 | $ | 13,043,147 | $ | - | $ | - | $ | 13,043,147 | ||||||||||||||||||||||||||||||
Residential | 101,192,149 | 103,364,612 | - | - | 103,364,612 | 153,328,603 | 166,202,080 | - | - | 166,202,080 | ||||||||||||||||||||||||||||||
Policy loans | 1,626,771 | 1,626,771 | - | - | 1,626,771 | 2,087,602 | 2,087,602 | - | - | 2,087,602 | ||||||||||||||||||||||||||||||
Short-term investments | 1,832,872 | 1,832,872 | 1,832,872 | - | - | |||||||||||||||||||||||||||||||||||
Other long-term investments | 57,675,405 | 69,421,789 | - | - | 69,421,789 | 73,146,105 | 89,895,485 | - | - | 89,895,485 | ||||||||||||||||||||||||||||||
Cash and cash equivalents | 28,959,503 | 28,959,503 | 28,959,503 | - | - | 16,728,153 | 16,728,153 | 16,728,153 | - | - | ||||||||||||||||||||||||||||||
Accrued investment income | 2,618,245 | 2,618,245 | - | - | 2,618,245 | 5,348,548 | 5,348,548 | - | - | 5,348,548 | ||||||||||||||||||||||||||||||
Total financial assets | $ | 193,892,939 | $ | 205,973,290 | $ | 28,959,503 | $ | - | $ | 177,013,787 | $ | 266,024,812 | $ | 295,137,887 | $ | 18,561,025 | $ | - | $ | 276,576,862 | ||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||
Policyholders' account balances | $ | 292,128,688 | $ | 239,162,237 | $ | - | $ | - | $ | 239,162,237 | $ | 362,198,197 | $ | 383,873,719 | $ | - | $ | - | $ | 383,873,719 | ||||||||||||||||||||
Policy claims | 1,027,121 | 1,027,121 | - | - | 1,027,121 | 1,139,262 | 1,139,262 | - | - | 1,139,262 | ||||||||||||||||||||||||||||||
Total financial liabilities | $ | 293,155,809 | $ | 240,189,358 | $ | - | $ | - | $ | 240,189,358 | $ | 363,337,459 | $ | 385,012,981 | $ | - | $ | - | $ | 385,012,981 | ||||||||||||||||||||
December 31, 2016 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||||||||||
Mortgage loans on real estate | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 1,254,808 | $ | 1,268,140 | $ | - | $ | - | $ | 1,268,140 | $ | 12,401,775 | $ | 12,280,704 | $ | - | $ | - | $ | 12,280,704 | ||||||||||||||||||||
Residential | 73,116,478 | 70,383,661 | - | - | 70,383,661 | 150,002,865 | 152,443,349 | - | - | 152,443,349 | ||||||||||||||||||||||||||||||
Policy loans | 1,598,116 | 1,598,116 | - | - | 1,598,116 | 2,026,301 | 2,026,301 | - | - | 2,026,301 | ||||||||||||||||||||||||||||||
Short-term investments | 1,831,087 | 1,831,087 | 1,831,087 | - | - | |||||||||||||||||||||||||||||||||||
Other long-term investments | 46,788,873 | 55,890,429 | - | - | 55,890,429 | 71,824,480 | 88,235,019 | - | - | 88,235,019 | ||||||||||||||||||||||||||||||
Cash and cash equivalents | 34,223,945 | 34,223,945 | 34,223,945 | - | - | 23,212,170 | 23,212,170 | 23,212,170 | - | - | ||||||||||||||||||||||||||||||
Accrued investment income | 2,176,770 | 2,176,770 | - | - | 2,176,770 | 5,207,823 | 5,207,823 | - | - | 5,207,823 | ||||||||||||||||||||||||||||||
Total financial assets | $ | 159,158,990 | $ | 165,541,061 | $ | 34,223,945 | $ | - | $ | 131,317,116 | $ | 266,506,501 | $ | 285,236,453 | $ | 25,043,257 | $ | - | $ | 260,193,196 | ||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||
Policyholders' account balances | $ | 245,346,489 | $ | 206,541,702 | $ | - | $ | - | $ | 206,541,702 | $ | 363,083,838 | $ | 355,557,123 | $ | - | $ | - | $ | 355,557,123 | ||||||||||||||||||||
Policy claims | 997,814 | 997,814 | - | - | 997,814 | 1,399,393 | 1,399,393 | - | - | 1,399,393 | ||||||||||||||||||||||||||||||
Total financial liabilities | $ | 246,344,303 | $ | 207,539,516 | $ | - | $ | - | $ | 207,539,516 | $ | 364,483,231 | $ | 356,956,516 | $ | - | $ | - | $ | 356,956,516 |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
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 disclosures for financial instruments in the accompanying financial statements and notes thereto:
Fixed Maturity Securities, Preferred Stock and Equity Securities
The fair value of fixed maturity securities 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. For residential mortgage loans, the discount rate used was indexed to the LIBOR yield curve adjusted for an appropriate credit spread. For commercial (includes apartment, industrial, lodging, office building and industrialretail) mortgage loans, the discount rate used was assumed to be the interest rate on the last commercial mortgage acquired by the Company.
Cash and Cash Equivalents, Short-Term Investments, Accrued Investment Income and Policy Loans
The carrying value of these financial instruments approximates their fair values. Cash and cash equivalents and short-term investments 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 the average CitigroupFTSE Pension Liability Index in effect at the end of each period.
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
September 30, 2017March 31, 2020
(Unaudited)
4.4. Segment Data
TheThe Company has a life insurance segment, consisting of the life insurance operations of TLIC and FBLIC, an annuity segment, consisting of the annuity operations of TLIC and FBLIC and a corporate segment. Results for the parent company and the operations of FTCC, after elimination of intercompany amounts, are allocated to the corporate segment. These segments as of September 30, 2017March 31, 2020 and December 31, 20162019 and for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | Three Months Ended March 31, (Unaudited) | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Life insurance operations | $ | 4,723,138 | $ | 3,720,401 | $ | 13,321,087 | $ | 11,068,191 | $ | 7,325,468 | $ | 6,471,048 | ||||||||||||
Annuity operations | 3,903,408 | 2,802,934 | 10,377,974 | 8,158,645 | 5,220,251 | 4,970,032 | ||||||||||||||||||
Corporate operations | 85,738 | 148,234 | 280,664 | 455,293 | 137,787 | 183,620 | ||||||||||||||||||
Total | $ | 8,712,284 | $ | 6,671,569 | $ | 23,979,725 | $ | 19,682,129 | $ | 12,683,506 | $ | 11,624,700 | ||||||||||||
Income before income taxes: | ||||||||||||||||||||||||
Life insurance operations | $ | 345,522 | $ | 35,230 | $ | 899,547 | $ | 87,745 | $ | 64,404 | $ | 197,559 | ||||||||||||
Annuity operations | 1,141,492 | 436,051 | 1,488,848 | 1,014,476 | 911,918 | 1,502,612 | ||||||||||||||||||
Corporate operations | 50,755 | 115,591 | 187,965 | 235,444 | 40,062 | 101,921 | ||||||||||||||||||
Total | $ | 1,537,769 | $ | 586,872 | $ | 2,576,360 | $ | 1,337,665 | $ | 1,016,384 | $ | 1,802,092 | ||||||||||||
Depreciation and amortization expense: | ||||||||||||||||||||||||
Life insurance operations | $ | 858,012 | $ | 541,995 | $ | 1,828,933 | $ | 1,540,582 | $ | 1,032,387 | $ | 830,461 | ||||||||||||
Annuity operations | 178,063 | 154,648 | 941,219 | 493,151 | 302,350 | 59,164 | ||||||||||||||||||
Corporate operations | - | - | - | - | ||||||||||||||||||||
Total | $ | 1,036,075 | $ | 696,643 | $ | 2,770,152 | $ | 2,033,733 | $ | 1,334,737 | $ | 889,625 |
(Unaudited) | (Unaudited) | ||||||||||||||||
September 30, 2017 | December 31, 2016 | March 31, 2020 | December 31, 2019 | ||||||||||||||
Assets: | |||||||||||||||||
Life insurance operations | $ | 54,305,804 | $ | 50,577,282 | $ | 100,203,463 | $ | 99,612,420 | |||||||||
Annuity operations | 325,089,923 | 275,745,766 | 487,458,536 | 500,738,949 | |||||||||||||
Corporate operations | 7,160,894 | 6,929,565 | 3,869,598 | 4,585,005 | |||||||||||||
Total | $ | 386,556,621 | $ | 333,252,613 | $ | 591,531,597 | $ | 604,936,374 |
5. Federal Income Taxes
The provision for federal income taxes is based on the asset and liability method of accounting for income taxes. Deferred income taxes are provided for the cumulative temporary differences between balances of assets and liabilities determined under GAAP and the balances using tax bases.
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 openopen tax years and, therefore, has not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 20142016 through 20162019 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
September 30, 2017March 31, 2020
(Unaudited)
6.6. Legal Matters and Contingent Liabilities
A lawsuit filed by the Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, in 2013 against former Company Board of Directors member WayneWayne Pettigrew and Mr. Pettigrew's company, Group & Pension Planners, Inc. (the "Defendants"), concluded on February 17, 2017. The lawsuit was filed in the District Court of Tulsa County, Oklahoma (Case No. CJ-2013-03385). In the lawsuit, the Company alleged that Mr. Pettigrew had defamed the Company by making untrue statements to certain shareholders of the Company, to the press and to regulators of the state of Oklahoma and had breached his fiduciary duties. Mr. Pettigrew denied the allegations.
The jury concluded that Mr. Pettigrew, while still a member of the Company’s Board of Directors, did, in fact, make untrue statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company and the jury awarded itthe Company $800,000 of damages against Mr. Pettigrew. In addition, the jury found that Mr. Pettigrew had defamed Mr. Zahn and intentionally inflicted emotional distress on Mr. Zahn and awarded Mr. Zahn $3,500,000 of damages against Mr. Pettigrew.
Mr. Pettigrew can appeal this decision by the jury that will require him to post a bond in the amount of the total judgment of $4,300,000. Should Mr. Pettigrew fail to post such a bond, the Company and Mr. Zahn will be permitted to execute on Mr. Pettigrew's assets. To date, Mr. Pettigrew has failed to post this bond and, as a consequence, the Company and Mr. Zahn are in the process of executing on the judgments against Mr. Pettigrew’s assets. While the Company and Mr. Zahn will continue to execute on the judgments, any money or property collected during the execution of the judgments would have to be returned to Mr. Pettigrew in the event the judgments are reversed by the appellate courts.
In addition to the damages awarded by the jury, the Company and Mr. Zahn have initiated steps to aggressively communicate the correctioncorrection of the untrue statements to outside parties.
PriorMr. Pettigrew appealed this decision. The appeal challenged two trial court judgments based on separate verdicts against him in the jury trial. On February 28, 2020, the Court of Civil Appeals of the state of Oklahoma reversed the judgments entered by the trial court and remanded the case for a new trial. The Court of Appeals reversal, however, is not final. The Company will request that the Court of Appeals grant a rehearing and reverse its decision. Should it not do so, the Company will petition the Oklahoma Supreme Court to its acquisition by TLIC, FBLIC developed, marketed, and sold life insurance products known as “Decreasing Term to 95” policies. On January 17,reverse the Court of Appeals decision.
In 2013, FBLIC’sthe Company’s Board of Directors, votedrepresented by independent counsel, concluded that effective March 1, 2013, itthere was not approving, and therefore was not providing, a dividend for the Decreasing Termno action to 95 policies. On November 22, 2013, three individuals who owned Decreasing Term to 95 policies filed a Petition in the Circuit Court of Greene County, Missouri asserting claimsbe taken against FBLIC relating to FBLIC’s decision to not provide a dividend under the Decreasing Term to 95 policies.
On June 18, 2015, plaintiffs filed an amended petition. Like the original Petition, the amended Petition asserts claims for breach of contract and anticipatory breach of contract, and alleges that FBLIC breached, and will anticipatorily breach, the Decreasing Term to 95 policies of insurance by not providing a dividend sufficient to purchase a one year term life insurance policy which would keep the death benefit under the Decreasing Term to 95 policies the same as that provided during the first year of coverage under the policy. It also asserts claims for negligent misrepresentation, fraud, and violation of the Missouri Merchandising Practices Act (“MMPA”). It alleges that during its sale of the Decreasing Term to 95 policies, FBLIC represented that the owners of these policies would always be entitled to dividends to purchase a one-year term life insurance policyMr. Zahn and that the ownersallegations by Mr. Pettigrew were without substance. The Company was also informed back in 2013 by the Oklahoma Insurance Department that it would have a level death benefit without an increasetake no action and was also informed in premium.
The main difference between the original Petition and the amended Petition is2013 that the amended Petition also seeks equitable relief based on two new theories: that the Decreasing Term to 95 policies should be reformed so that they will provide a level death benefit for a level premium payment until the policyholder reaches 95 yearsOklahoma Department of age; and alternatively, Count VIIISecurities, after its investigation of the amended Petition asksallegations, concluded that no proceedings were needed with respect to the Courtalleged matters. It remains the Company’s intention to (1) find thatagain vigorously prosecute this action against the dividend provisions in the Decreasing Term to 95 policies violate Missouri law, specifically, § 376.360 RSMo.; (2) order that the policies are void ab initio;Defendants for damages and (3) order that FBLIC return all premiums collected under these policies. In addition, as partfor correction of the MMPA claim, plaintiffs are now alleging that FBLIC undertook a fraudulent scheme to selldefamatory statements. In the Decreasing Term to 95 policies as a level premium for level benefit even though FBLIC never intended to pay dividends for the lifeopinion of the policies andCompany’s management, the ultimate resolution of any contingencies that part ofmay arise from this alleged fraudulent scheme included having a dividend option whichlitigation is not allowed under Missouri law. FBLIC deniesconsidered material in relation to the allegations in the amended Petition and will continue to defend against them.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
6. Legal Matters and Contingent Liabilities (continued)
On February 1, 2016, the plaintiffs asked that the Court certify the case as a class action. With their motion, Plaintiffs filed an affidavit from an actuary stating the opinion that FBLIC has collected at least $2,548,939 in premiums on the Decreasing Term to 95 policies. This presumably is the amount that Plaintiffs will seek to be refunded to policyholders if the policies are declared void. FBLIC opposed the request for class certification. On July 21, 2016, the Court certified three classes to maintain the claims for breachfinancial position or results of contract, anticipatory breach of contract, violationoperations of the MMPA, reformation, and to void the Decreasing Term to 95 policies.
On August 1, 2016, FBLIC filed a Petition for Leave to Appeal with the Missouri Court of Appeals, Southern District asking for permission to appeal the Court’s class certification. The Petition for Leave to Appeal was denied. FBLIC intends to defend vigorously against the class and individual allegations. The Company is unable to determine the potential magnitude of the claims in the event of a final certification and the plaintiffs prevailing on this substantive action. The trial in this case will be before a judge and is scheduled to begin on November 27, 2017.
On May 13, 2015, FBLIC filed a Counterclaim against Doyle Nimmo seeking indemnity and seeking damages for breach of fiduciary duty in the event FBLIC is liable under Plaintiffs’ underlying claims. In addition, on April 29, 2015, TLIC filed a lawsuit against Doyle Nimmo and Michael Teel alleging that they were liable for violations of federal and state securities laws for failing to disclose information relating to the Decreasing Term to 95 policies. This lawsuit is currently pending in the District Court for the Western District of Missouri (hereinafter the “Federal Lawsuit”). No claims have been made against TLIC in the Federal Lawsuit. The Federal Lawsuit has been stayed pending resolution of the lawsuit against FBLIC in the Circuit Court of Greene County, Missouri.
On September 28, 2015, Doyle Nimmo filed a Third-Party Petition for Declaratory Judgment (and Other Relief) against FBLIC. In this Third-Party Petition, Doyle Nimmo, a former director for FBLIC, seeks a declaratory judgment that the corporate by-laws of FBLIC require FBLIC to indemnify him for attorney’s fees, judgments, costs, fines, and amounts paid in defense of both the Counterclaim and the Federal Lawsuit and seeks a monetary judgment for the amounts expended by Doyle Nimmo in such defense. Prior to Doyle Nimmo’s filing of the Third-Party Petition, FBLIC’s Board of Directors executed a Unanimous Written Consent in Lieu of a Special Meeting in which it denied Doyle Nimmo’s tender of defense and request for indemnification finding Mr. Nimmo did not meet the applicable standard of conduct for indemnification under Missouri law.
Doyle Nimmo subsequently submitted a claim and tendered the defense of these claims to Utica Mutual Insurance Company under a policy providing Insurance Agents and Brokers Errors and Omissions Liability coverage. On November 4, 2015, Utica Mutual Insurance Company filed a lawsuit against Doyle Nimmo and other interested parties, including FBLIC and TLIC. The lawsuit was pending in the District Court for the Western District of Missouri and asked the Court to determine whether the Errors and Omissions policy provides coverage for the lawsuits filed against Doyle Nimmo. Utica Mutual Insurance Company did not seek a monetary judgment against FBLIC or TLIC.
On June 14, 2017, FBLIC and Doyle Nimmo executed a settlement to dismiss with prejudice all claims, causes of action and demands between them arising out of or in any way relating to the transactions and occurrences connected to the legal proceedings described above. The settlement proceeds included payments of $90,000 to FBLIC by Utica Mutual Insurance Company and $10,000 to FBLIC by Doyle Nimmo. The settlement also included an agreement whereby FBLIC and Doyle Nimmo bore exclusive liability for payment of their respective attorneys’ fees, lawsuit expenses, expert consulting fees and taxable costs of court incurred in connection with prosecution and/or defense of the claims, causes of action and demands related to the legal proceedings described above.Company.
Guaranty fund 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. In most states, guaranty fund assessments may be taken as a credit against premium taxes, typically over a five-year period.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
7. OtOther Comprehensive Income and Accumulated Otherher Comprehensive Income (Loss)and Accumulated Other Comprehensive Income (Loss)
The changes in the components of the Company’sCompany’s accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
Three Months Ended September 30, 2017 and 2016 (Unaudited) | ||||||||||||
Unrealized | Accumulated | |||||||||||
Appreciation on | Adjustment to | Other | ||||||||||
Available-For-Sale | Deferred Acquisition | Comprehensive | ||||||||||
Securities | Costs | Income | ||||||||||
Balance as of July 1, 2017 | $ | 3,834,781 | $ | (68,664 | ) | $ | 3,766,117 | |||||
Other comprehensive income before reclassifications, net of tax | 562,619 | (8,426 | ) | 554,193 | ||||||||
Less amounts reclassified from accumulated other comprehensive income, net of tax | (2,789 | ) | - | (2,789 | ) | |||||||
Other comprehensive income | 565,408 | (8,426 | ) | 556,982 | ||||||||
Balance as of September 30, 2017 | $ | 4,400,189 | $ | (77,090 | ) | $ | 4,323,099 | |||||
Balance as of July 1, 2016 | $ | 3,906,866 | $ | (61,711 | ) | $ | 3,845,155 | |||||
Other comprehensive income before reclassifications, net of tax | 846,814 | (15,514 | ) | 831,300 | ||||||||
Less amounts reclassified from accumulated other comprehensive income, net of tax | 165,513 | - | 165,513 | |||||||||
Other comprehensive income | 681,301 | (15,514 | ) | 665,787 | ||||||||
Balance as of September 30, 2016 | $ | 4,588,167 | $ | (77,225 | ) | $ | 4,510,942 |
Three Months Ended March 31, 2020 and 2019 (Unaudited) | ||||||||||||
Unrealized | ||||||||||||
Appreciation | Accumulated | |||||||||||
(Depreciation) on | Adjustment to | Other | ||||||||||
Available-For-Sale | Deferred Acquisition | Comprehensive | ||||||||||
Securities | Costs | Income (Loss) | ||||||||||
Balance as of January 1, 2020 | $ | 9,632,323 | $ | (15,663 | ) | $ | 9,616,660 | |||||
Other comprehensive loss before reclassifications, net of tax | (10,405,305 | ) | 17,265 | (10,388,040 | ) | |||||||
Less amounts reclassified from accumulated other comprehensive loss having no credit losses, net of tax | 48,916 | - | 48,916 | |||||||||
Other comprehensive loss | (10,454,221 | ) | 17,265 | (10,436,956 | ) | |||||||
Balance as of March 31, 2020 | $ | (821,898 | ) | $ | 1,602 | $ | (820,296 | ) | ||||
Balance as of January 1, 2019 | $ | (2,584,643 | ) | $ | 8,012 | $ | (2,576,631 | ) | ||||
Other comprehensive income before reclassifications, net of tax | 4,050,528 | (9,874 | ) | 4,040,654 | ||||||||
Less amounts reclassified from accumulated other comprehensive income having no credit losses, net of tax | 31,660 | - | 31,660 | |||||||||
Other comprehensive income | 4,018,868 | (9,874 | ) | 4,008,994 | ||||||||
Balance as of March 31, 2019 | $ | 1,434,225 | $ | (1,862 | ) | $ | 1,432,363 |
Nine Months Ended September 30, 2017 and 2016 (Unaudited) | ||||||||||||
Unrealized | ||||||||||||
Appreciation | Accumulated | |||||||||||
(Depreciation) on | Adjustment to | Other | ||||||||||
Available-For-Sale | Deferred Acquisition | Comprehensive | ||||||||||
Securities | Costs | Income (Loss) | ||||||||||
Balance as of January 1, 2017 | $ | 831,917 | $ | (13,241 | ) | $ | 818,676 | |||||
Other comprehensive income before reclassifications, net of tax | 3,538,833 | (63,849 | ) | 3,474,984 | ||||||||
Less amounts reclassified from accumulated other comprehensive income, net of tax | (29,439 | ) | - | (29,439 | ) | |||||||
Other comprehensive income | 3,568,272 | (63,849 | ) | 3,504,423 | ||||||||
Balance as of September 30, 2017 | $ | 4,400,189 | $ | (77,090 | ) | $ | 4,323,099 | |||||
Balance as of January 1, 2016 | $ | (2,695,876 | ) | $ | 40,059 | $ | (2,655,817 | ) | ||||
Other comprehensive income before reclassifications, net of tax | 7,552,715 | (117,284 | ) | 7,435,431 | ||||||||
Less amounts reclassified from accumulated other comprehensive loss, net of tax | 268,672 | - | 268,672 | |||||||||
Other comprehensive income | 7,284,043 | (117,284 | ) | 7,166,759 | ||||||||
Balance as of September 30, 2016 | $ | 4,588,167 | $ | (77,225 | ) | $ | 4,510,942 |
The pretax components of the Company’s other comprehensive income (loss) and the related income tax expense (benefit) for each component for the three months ended March 31, 2020 and 2019 are summarized as follows:
Income Tax | ||||||||||||
Pretax | Expense (Benefit) | Net of Tax | ||||||||||
Three Months Ended March 31, 2020 (Unaudited) | ||||||||||||
Other comprehensive loss: | ||||||||||||
Change in net unrealized losses on available-for-sale securities: | ||||||||||||
Unrealized holding losses arising during the period | $ | (13,171,272 | ) | $ | (2,765,967 | ) | $ | (10,405,305 | ) | |||
Reclassification adjustment for net gains included in operations having no credit losses | 61,919 | 13,003 | 48,916 | |||||||||
Net unrealized losses on investments | (13,233,191 | ) | (2,778,970 | ) | (10,454,221 | ) | ||||||
Adjustment to deferred acquisition costs | 21,855 | 4,590 | 17,265 | |||||||||
Total other comprehensive loss | $ | (13,211,336 | ) | $ | (2,774,380 | ) | $ | (10,436,956 | ) | |||
Three Months Ended March 31, 2019 (Unaudited) | ||||||||||||
Other comprehensive income: | ||||||||||||
Change in net unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains arising during the period | $ | 5,127,250 | $ | 1,076,722 | $ | 4,050,528 | ||||||
Reclassification adjustment for net gains included in operations having no credit losses | 40,075 | 8,415 | 31,660 | |||||||||
Net unrealized gains on investments | 5,087,175 | 1,068,307 | 4,018,868 | |||||||||
Adjustment to deferred acquisition costs | (12,497 | ) | (2,623 | ) | (9,874 | ) | ||||||
Total other comprehensive income | $ | 5,074,678 | $ | 1,065,684 | $ | 4,008,994 |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
7. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income(Loss)(continued)
The pretax components of the Company’s other comprehensive income and the related income tax expense (benefit) for each component for the three and nine months ended September 30, 2017 and 2016 are summarized as follows:
Three Months Ended September 30, 2017 (Unaudited) | ||||||||||||
Income Tax | ||||||||||||
Pretax | Expense | Net of Tax | ||||||||||
Other comprehensive income: | ||||||||||||
Change in net unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains arising during the period | $ | 703,274 | $ | 140,655 | $ | 562,619 | ||||||
Reclassification adjustment for net losses included in operations | (3,486 | ) | (697 | ) | (2,789 | ) | ||||||
Net unrealized gains on investments | 706,760 | 141,352 | 565,408 | |||||||||
Adjustment to deferred acquisition costs | (10,532 | ) | (2,106 | ) | (8,426 | ) | ||||||
Total other comprehensive income | $ | 696,228 | $ | 139,246 | $ | 556,982 |
Three Months Ended September 30, 2016 (Unaudited) | ||||||||||||
Income Tax | ||||||||||||
Expense | ||||||||||||
Pretax | (Benefit) | Net of Tax | ||||||||||
Other comprehensive income: | ||||||||||||
Change in net unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains arising during the period | $ | 1,058,518 | $ | 211,704 | $ | 846,814 | ||||||
Reclassification adjustment for net gains included in operations | 206,890 | 41,377 | 165,513 | |||||||||
Net unrealized gains on investments | 851,628 | 170,327 | 681,301 | |||||||||
Adjustment to deferred acquisition costs | (19,392 | ) | (3,878 | ) | (15,514 | ) | ||||||
Total other comprehensive income | $ | 832,236 | $ | 166,449 | $ | 665,787 |
Nine Months Ended September 30, 2017 (Unaudited) | ||||||||||||
Income Tax | ||||||||||||
Pretax | Expense | Net of Tax | ||||||||||
Other comprehensive income: | ||||||||||||
Change in net unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains arising during the period | $ | 4,423,541 | $ | 884,708 | $ | 3,538,833 | ||||||
Reclassification adjustment for net losses included in operations | (36,799 | ) | (7,360 | ) | (29,439 | ) | ||||||
Net unrealized gains on investments | 4,460,340 | 892,068 | 3,568,272 | |||||||||
Adjustment to deferred acquisition costs | (79,810 | ) | (15,961 | ) | (63,849 | ) | ||||||
Total other comprehensive income | $ | 4,380,530 | $ | 876,107 | $ | 3,504,423 |
Nine Months Ended September 30, 2016 (Unaudited) | ||||||||||||
Income Tax | ||||||||||||
Expense | ||||||||||||
Pretax | (Benefit) | Net of Tax | ||||||||||
Other comprehensive income: | ||||||||||||
Change in net unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains arising during the period | $ | 9,440,894 | $ | 1,888,179 | $ | 7,552,715 | ||||||
Reclassification adjustment for net gains included in operations | 335,841 | 67,169 | 268,672 | |||||||||
Net unrealized gains on investments | 9,105,053 | 1,821,010 | 7,284,043 | |||||||||
Adjustment to deferred acquisition costs | (146,605 | ) | (29,321 | ) | (117,284 | ) | ||||||
Total other comprehensive income | $ | 8,958,448 | $ | 1,791,689 | $ | 7,166,759 |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
7. Other Comprehensive Income and Accumulated Other Comprehensive Income (Loss)(continued)
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.
The pretax and the related income tax components of the amounts reclassified from the Company’sCompany’s accumulated other comprehensive income (loss) to the Company’s consolidated statement of operations for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | |||||||||||||||
Reclassification Adjustments | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Unrealized gains on available-for-sale securities: | ||||||||||||||||
Realized gains (losses) on sales of securities (a) | $ | (3,486 | ) | $ | 206,890 | $ | (36,799 | ) | $ | 335,841 | ||||||
Income tax expense (benefit) (b) | (697 | ) | 41,377 | (7,360 | ) | 67,169 | ||||||||||
Total reclassification adjustments | $ | (2,789 | ) | $ | 165,513 | $ | (29,439 | ) | $ | 268,672 |
Three Months Ended March 31, (Unaudited) | ||||||||
Reclassification Adjustments | 2020 | 2019 | ||||||
Unrealized gains (losses) on available-for-sale securities having no credit losses: | ||||||||
Realized gains on sales of securities (a) | $ | 61,919 | $ | 40,075 | ||||
Income tax expense (b) | 13,003 | 8,415 | ||||||
Total reclassification adjustments | $ | 48,916 | $ | 31,660 |
(a) | These items appear within net realized investment gains |
(b) These items appear within federal income taxes in the consolidated statements of operations. |
8. Allowance for Loan Losses from Mortgage Loans on Real Estate and Loans from Premium Financing
The allowance for possible loan losses from investments in mortgage loans on real estate and loans from premium financing is a reserve established through a provision for possible loan losses charged to expense which represents, in the Company’sCompany’s judgment, the known and inherent credit losses existing in the residential and commercial and industrial mortgage loan and premium financing loan portfolios.portfolio. The allowance, in the judgment of the Company, is necessary to reserve for estimated loan losses inherent in the residential and commercial mortgage loan and premium finance loan portfoliosportfolio and reduces the carrying value of investments in mortgage loans on real estate and premium finance loans to the estimated net realizable value on the consolidated statement of financial position.
While the Company utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’sCompany’s control, including the performance of the residential and commercial and industrial mortgage loan and premium finance loan portfolios,portfolio, the economy and changes in interest rates. The Company’s allowance for possible mortgage loan and premium finance 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.
Mortgage loans and premium finance loans are 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 mortgage loan or premium finance loan agreement. Factors considered by the Company in determining impairment include payment status, collateral value of the real estate subject to the mortgage loan, and the probability of collecting scheduled principal and interest payments when due. Mortgage loans and premium finance loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the mortgage loan or premium finance loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’sborrower’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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2020
(Unaudited)
8. Allowance for Loan Losses from Mortgage Loans on Real Estate (continued)
As of September 30, 2017, $559,570of March 31, 2020, $808,028 of independent residential mortgage loans on real estate are held in escrow by a third party for the benefit of the Company. As of September 30, 2017, $161,907March 31, 2020, $480,196 of that escrow amount is available to the Company for possible lossesas additional collateral on $4,717,541 of advances to the loan originator. The remaining March 31, 2020 escrow amount of $327,832 is available to the Company as additional collateral on its investment of $32,381,460$66,609,678 in residential mortgage loans on real estate with one loan originator.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
8. Allowance for Loan Losses from Mortgage Loans on Real Estate and Loans from Premium Financing(continued)
estate. In addition, the Company has an additional $349,451$503,518 allowance for possible loan losses in the remaining $70,631,555$100,271,854 of investments in mortgage loans on real estate as of September 30, 2017.March 31, 2020.
As of December 31, 2016, $525,0632019, $798,753 of independent residential mortgage loan balances wereloans on real estate are held in escrow by a third party for the benefit of the Company. As of December 31, 2019, $489,965 of that escrow amount is available to the Company relatedas additional collateral on $4,436,787 of advances to the loan originator. The remaining December 31, 2019 escrow amount of $308,788 is available to the Company as additional collateral on its investment of $61,757,602 in $25,523,757 ofresidential mortgage loans on real estate with one loan originator.estate. In addition, the Company hadhas an additional $244,427$505,378 allowance for possible loan losses in the remaining $48,847,529$100,647,038 of investments in mortgage loans on real estate as of December 31, 2016.
Through June 30, 2012, FTCC financed amounts up to 80% of the premium on property and casualty insurance policies after a 20% or greater down payment was made by the policy owner. The premiums financed were collateralized by the amount of the unearned premium of the insurance policy. Policies that became delinquent were submitted for cancellation and recovery of the unearned premium, up to the amount of the loan balance, 25 days after a payment became delinquent. As of December 31, 2016 the Company established a full allowance for uncollectible receivables against the premium financing asset. In late December of 2016, the Company wrote off the asset by netting the allowance for uncollectible receivables against the premium financing asset. The Company has made no premium financing loans since June 30, 2012.2019.
The balances of and changes in the Company’sCompany’s credit losses related to mortgage loans on real estate and loans from premium financing as of and for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows (excluding $32,381,460$66,609,678 and $23,962,879$51,127,965 of mortgage loans on real estate as of September 30, 2017March 31, 2020 and 2016,2019, respectively, with one loan originator where independent mortgage loan balances are held in escrow by a third party for the benefit of the Company):
(Unaudited) | As of and for the Three Months Ended March 31, (Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of and for the Three Months Ended September 30, | Residential Mortgage Loans | Commercial Mortgage Loans | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential Mortgage Loans | Commercial and Industrial Mortgage Loans | Premium Finance Loans | Total | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||
Allowance, beginning: | $ | 336,180 | $ | 191,332 | $ | 9,278 | $ | 6,532 | $ | - | $ | 279,662 | $ | 345,458 | $ | 477,526 | ||||||||||||||||||||||||||||||||||||||||
Allowance, beginning | $ | 443,057 | $ | 374,209 | $ | 62,321 | $ | 49,957 | $ | 505,378 | $ | 424,166 | ||||||||||||||||||||||||||||||||||||||||||||
Charge offs | - | - | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Provision | 4,121 | 21,690 | (128 | ) | (110 | ) | - | - | 3,993 | 21,580 | (7,644 | ) | 31,339 | 5,784 | 1,878 | (1,860 | ) | 33,217 | ||||||||||||||||||||||||||||||||||||||
Allowance, ending | $ | 340,301 | $ | 213,022 | $ | 9,150 | $ | 6,422 | $ | - | $ | 279,662 | $ | 349,451 | $ | 499,106 | $ | 435,413 | $ | 405,548 | $ | 68,105 | $ | 51,835 | $ | 503,518 | $ | 457,383 | ||||||||||||||||||||||||||||
Allowance, ending: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 279,662 | $ | - | $ | 279,662 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||
Collectively evaluated | $ | 340,301 | $ | 213,022 | $ | 9,150 | $ | 6,422 | $ | - | $ | - | $ | 349,451 | $ | 219,444 | $ | 435,413 | $ | 405,548 | $ | 68,105 | $ | 51,835 | $ | 503,518 | $ | 457,383 | ||||||||||||||||||||||||||||
Carrying Values: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 347,885 | $ | - | $ | 347,885 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||||||
Collectively evaluated | $ | 68,810,689 | $ | 42,656,344 | $ | 1,820,866 | $ | 1,278,080 | $ | - | $ | - | $ | 70,631,555 | $ | 43,934,424 | $ | 86,718,925 | $ | 81,739,302 | $ | 13,552,929 | $ | 10,315,019 | $ | 100,271,854 | $ | 92,054,321 |
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017March 31, 2020
(Unaudited)
8. Allowance for Loan Losses from Mortgage Loans on Real Estate and Loans from Premium Financing(continued)
(Unaudited) | ||||||||||||||||||||||||||||||||
As of and for the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
Residential Mortgage Loans | Commercial and Industrial Mortgage Loans | Premium Finance Loans | Total | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
Allowance, beginning: | $ | 238,121 | $ | 175,988 | $ | 6,306 | $ | 7,360 | $ | - | $ | 197,172 | $ | 244,427 | $ | 380,520 | ||||||||||||||||
Charge offs | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Provision | 102,180 | 37,034 | 2,844 | (938 | ) | - | 82,490 | 105,024 | 118,586 | |||||||||||||||||||||||
Allowance, ending | $ | 340,301 | $ | 213,022 | $ | 9,150 | $ | 6,422 | $ | - | $ | 279,662 | $ | 349,451 | $ | 499,106 | ||||||||||||||||
Allowance, ending: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 279,662 | $ | - | $ | 279,662 | ||||||||||||||||
Collectively evaluated for impairment | $ | 340,301 | $ | 213,022 | $ | 9,150 | $ | 6,422 | $ | - | $ | - | $ | 349,451 | $ | 219,444 | ||||||||||||||||
Carrying Values: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 347,885 | $ | - | $ | 347,885 | ||||||||||||||||
Collectively evaluated for impairment | $ | 68,810,689 | $ | 42,656,344 | $ | 1,820,866 | $ | 1,278,080 | $ | - | $ | - | $ | 70,631,555 | $ | 43,934,424 |
The Company utilizes the ratio of the carrying value of individual residential and commercial and industrial mortgage loans compared to the individual appraisal value to evaluate the credit quality of its mortgage loans on real estate (commonly referred to as the loan-to-value ratio). The Company’s residential and commercial and industrial mortgage loans on real estate by credit quality using this ratio as of September 30, 2017March 31, 2020 and December 31, 20162019 are summarized as follows:
Residential Mortgage Loans | Commercial and Industrial Mortgage Loans | Total Mortgage Loans | ||||||||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||||
Loan-To-Value Ratio | September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | ||||||||||||||||||||
Over 70% | to | 80% | $ | 19,116,003 | $ | 14,559,541 | $ | - | $ | - | $ | 19,116,003 | $ | 14,559,541 | ||||||||||||
Over 60% | to | 70% | 35,351,370 | 29,738,887 | - | - | 35,351,370 | 29,738,887 | ||||||||||||||||||
Over 50% | to | 60% | 25,489,059 | 15,440,364 | 844,438 | 1,051,155 | 26,333,497 | 16,491,519 | ||||||||||||||||||
Over 40% | to | 50% | 13,520,426 | 10,399,031 | - | - | 13,520,426 | 10,399,031 | ||||||||||||||||||
Over 30% | to | 40% | 4,628,716 | 2,184,351 | 661,367 | 203,653 | 5,290,083 | 2,388,004 | ||||||||||||||||||
Over 20% | to | 30% | 2,287,087 | 467,410 | 170,935 | - | 2,458,022 | 467,410 | ||||||||||||||||||
Over 10% | to | 20% | 755,782 | 317,936 | 144,126 | - | 899,908 | 317,936 | ||||||||||||||||||
10% | or | less | 43,706 | 8,958 | - | - | 43,706 | 8,958 | ||||||||||||||||||
Total | $ | 101,192,149 | $ | 73,116,478 | $ | 1,820,866 | $ | 1,254,808 | $ | 103,013,015 | $ | 74,371,286 |
Residential Mortgage Loans | Commercial Mortgage Loans | Total Mortgage Loans | ||||||||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||
Loan-To-Value Ratio | March 31, 2020 | December 31, 2019 | March 31, 2020 | December 31, 2019 | March 31, 2020 | December 31, 2019 | ||||||||||||||||||
Over 70% to 80% | $ | 45,759,251 | $ | 42,607,615 | $ | 273,446 | $ | 274,954 | $ | 46,032,697 | $ | 42,882,569 | ||||||||||||
Over 60% to 70% | 50,222,292 | 50,158,843 | 1,789,787 | 2,320,734 | 52,012,079 | 52,479,577 | ||||||||||||||||||
Over 50% to 60% | 28,572,276 | 28,939,576 | 2,159,117 | 1,318,536 | 30,731,393 | 30,258,112 | ||||||||||||||||||
Over 40% to 50% | 13,369,016 | 13,160,306 | 2,122,389 | 2,142,354 | 15,491,405 | 15,302,660 | ||||||||||||||||||
Over 30% to 40% | 8,711,066 | 8,023,690 | 1,166,313 | 1,800,952 | 9,877,379 | 9,824,642 | ||||||||||||||||||
Over 20% to 30% | 3,076,206 | 3,806,361 | 2,694,374 | 1,235,799 | 5,770,580 | 5,042,160 | ||||||||||||||||||
Over 10% to 20% | 2,711,189 | 2,677,037 | 3,297,865 | 3,308,446 | 6,009,054 | 5,985,483 | ||||||||||||||||||
10% or less | 907,307 | 629,437 | 49,638 | - | 956,945 | 629,437 | ||||||||||||||||||
Total | $ | 153,328,603 | $ | 150,002,865 | $ | 13,552,929 | $ | 12,401,775 | $ | 166,881,532 | $ | 162,404,640 |
9. Coinsurance
Effective January 1, 2018, TLIC entered into an annuity coinsurance agreement with an offshore annuity and life insurance company whereby 90% of TLIC’s annuity considerations originated after December 31, 2017 were ceded to the assuming company. The assuming company contractually reimburses TLIC for the related commissions, withdrawals, settlements, interest credited, submission costs, maintenance costs, marketing costs, excise taxes and other costs plus a placement fee.
In accordance with this annuity coinsurance agreement, TLIC holds assets and recognizes a funds withheld liability for the benefit of the assuming company in an amount at least equal to the annuity reserves in accordance with U.S. statutory accounting principles generated by this ceded business with a corresponding funds withheld liability recorded. In addition, the assuming company maintains a trust related to this ceded business amounting to at least an additional 4% of assets above the required annuity reserve required under U.S. statutory accounting principles. This coinsurance agreement may be terminated for new business by either party at any time upon 30 days prior written notice to the other party.
10. Line of Credit
On November 8, 2019, the Company renewed its $1.5 million line of credit with a bank to provide working capital and funds for expansion. The terms of the line of credit allows for advances, repayments and re-borrowings through a maturity date of September 15, 2020. Any outstanding advances will incur interest at a variable interest rate of the prime rate set forth in the Wall Street Journal plus 1% per annum adjusting monthly based on a 360 day year with a minimum interest rate floor of 5%. No amounts were outstanding on this line of credit as of March 31, 2020 and December 31, 2019.
Item 2: Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
First Trinity Financial Corporation (“we” “us”, “our”, “FTFC”“FTFC” or the “Company”) conducts operations as an insurance holding company emphasizing ordinary life insurance products and annuity contracts in niche markets.
As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core TLIC and FBLIC operations include issuing modifiedmodified 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 Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia through independent agents.
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.
Acquisitions, Recapitalizations and Reclassifications
The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance and annuity business. In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of FLAC for $2,500,000 and had additional acquisition related expenses of $195,234.
In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of FBLIC for $13,855,129.
On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreementagreement and assumed liabilities of $3,055,916.
In 2019, FTFC’s acquisition of TAI for $250,000 was approved by the Barbados, West Indies regulators.
Effective January 1, 2020, the Company acquired 100% of the outstanding common stock of K-TENN Insurance Company (“K-TENN”) from its sole shareholder in exchange for 168,866 shares of FTFC’s common stock. The aggregate purchase price of K-TENN was $1,746,240.
On October 2, 2019, at the Company Annual Shareholders’ Meeting, FTFC’s shareholders approved the following proposals subject to regulatory approval and adoption by FTFC’s Board of Directors:
1. | An amendment and restatement of FTFC’s Certificate of Incorporation to authorize 40,000,000 shares of Class A common stock and 10,000,000 shares of Class B common stock and to establish the relative rights, preferences and privileges of, and the restrictions and limitations on, the Class A common Stock and the Class B common stock. |
2. | An amendment and restatement of FTFC’s Certificate of Incorporation to automatically reclassify each issued and outstanding share of our existing common stock as one (1) share of Class A common stock or, at the shareholder’s election, into one (1) share of new Class B common stock. |
These proposals received Form A regulatory approval from the OID on February 27, 2020 and the Missouri Department of Commerce and Insurance on December 31, 2019. These proposals have been fully implemented after formal adoption by FTFC’s Board of Directors on March 12, 2020. Effective March 12, 2020, FTFC’s Class B shareholders are entitled to elect a majority of FTFC’s Board of Directors (one-half plus one) but will only receive, compared to FTFC’s Class A shareholders, 85% of cash dividends, stock dividends or amounts due upon any FTFC merger, sale or liquidation event.
FTFC’s Class B shareholders may also convert one share of FTFC’s Class B common stock for a .85 share of FTFC’s Class A common stock. FTFC’s Class A shareholders will elect the remaining Board of Directors members and will receive 100% of cash dividends, stock dividends or amounts due upon any Company merger, sale or liquidation event.
Our profitability in the life insurance and annuity segments is a function of our ability to accurately price the policies that we write, adequately value life insurance business acquired, administer life insurance company acquisitions at an expense level that validates the acquisition cost and invest the premiums and annuity considerations in assets that earn investment income with a positive spread.
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 withwith U.S. GAAP. 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, allowance for loan losses from mortgages, value of insurance business acquired, policy liabilities, 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.
For a description of the Company’sCompany’s critical accounting policies and estimates, please refer to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019. The Company considers its most critical accounting estimates to be those applied to investments in fixed maturity and equitymaturities securities, mortgage loans on real estate, deferred policy acquisition costs, value of insurance business acquired and future policy benefits. There have been no material changes to the Company’s critical accounting policies and estimates since December 31, 2016.2019.
Recent Accounting Pronouncements
Revenue from Contracts with CustomersLeases
In May 2014, the FASB issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing services will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, the entity satisfies a performance obligation.
In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognitionby one year to the quarter ending March 31, 2018. The adoption of this guidance is not expected to have a material effect on the Company’s result of operations, financial position or liquidity.
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
In August 2014, the FASB issued guidance to address the diversity in practice in determining when there is substantial doubt about an entity's ability to continue as a going concern and when an entity must disclose certain relevant conditions and events. The new guidance requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The new guidance allows the entity to consider the mitigating effects of management's plans that will alleviate the substantial doubt and requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans.
If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations and management's plans that are intended to mitigate those conditions. The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity since there are no uncertainties about the Company’s ability to continue as a going concern.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued updated guidance regarding financial instruments. This guidance intends to enhance reporting for financial instruments and addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The significant amendments in this update generally require equity investments to be measured at fair value with changes in fair value recognized in net income, require the use of an exit price notion when measuring the fair value of financial instruments for disclosure purposes and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. This guidance also intends to enhance the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments.
This guidance is effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance will be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and early adoption is not permitted. The Company is evaluating this guidance but expects the primary impact will be the recognition of unrealized gains and losses on available-for-sale equity securities in net income. Currently, all unrealized gains and losses on available-for-sale equity securities are recognized in other comprehensive income (loss). The effect of the adoption of this guidance on the Company’s results of operations, financial position and liquidity is primarily dependent on the fair value of the available-for-sale equity securities in future periods, the existence of a deferred tax asset related to available-for-sale securities in future periods and the economic conditions at the time of that future adoption.
Leases
In February 2016, the FASB issued updated guidance regarding leases that generally requires the lessee and lessor(Accounting Standards Update 2016-02) to recognize lease assets and lease liabilities on the statement of financial position. A lessee should recognize on the statement of financial position a liability to make lease payments and an asset representing its right-to-use the underlying assets for the lease term. Optional payments to extend the lease or purchase the underlying leased asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise the option(s).
If the lease has a term of 12 months or less, a lessee can make an election to recognize lease expenses for such leases on a straight-line basis over the lease term. There is a differentiation between finance leases and operating leases for the lessee in the statements of operations and cash flows. Finance leases recognize interest on the lease liability separately from the right-to-use the asset whereas an operating lease recognizes a single lease cost allocated over the lease term on a generally straight-line basis. All cash payments are within operating activities in the statement of cash flows except finance leases classify repayments of the principal portion of the lease liability within financing activities.
The accounting applied by the lessor is largely unchanged from that applied under previous U.S. GAAP. Key aspects of the lessor accounting model, however, were aligned with the revenue recognition guidance of Codification Topic 606. The previous accounting model for leverage leases continues to apply only to those leveraged leases that commenced before the effective date of Codification Update 2016-02 Leases (Topic 842).
Entities will generally continue to account for leases that commenced before the effective date of this update in accordance with previous U.S. GAAP unless the lease is modified. Lessees are requiredrequire lessees to recognize a right-of-use asset and a lease liability for allleases with terms of more than 12 months. The updated guidance retains the two classifications of a lease as either an operating leases at each reporting dateor finance lease (previously referred to as a capital lease). Both lease classifications require the lessee to record the right-of-use asset and the lease liability based onupon the present value of cash flows. Finance leases will reflect the remaining minimal rental payments that were tracked and disclosed under previous U.S. GAAP.financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The accounting by lessors is not significantly changed by the updated guidance. The updated guidance is to be applied using a modified retrospective approach effective for annualrequires expanded qualitative and interim periods beginning after December 15, 2018. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect onquantitative disclosures, including additional information about the Company’s results of operations,amounts recorded in the financial position or liquidity.
Investments — Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accountingstatements.
In March 2016,July 2018, the FASB issuedamended the updated guidance that eliminates the requirement to retroactively apply the equity method of accounting when an investmenton leases that was previously accounted for using anotherissued in February 2016 (Accounting Standards Update 2018-11) and provided an additional transition method with which to adopt the updated guidance. Under the additional transition method, entities may elect to recognize a cumulative-effect adjustment to the opening balance of accounting becomes qualified to apply the equity method due to an increaseretained earnings in the levelyear of ownership interest or degree of influence. If the investment was previously accounted for asadoption
Consequently, if this transition method is elected, an available-for-sale security, any related unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualifiedentity’s reporting for the equity method is recognized through earnings.comparative periods prior to adoption presented in the financial statements would continue to be in accordance with current lease guidance. The amendments also provide lessors with a practical expedient to combine non-lease components (e.g., a fee for common area maintenance when leasing office space) with the associated lease component rather than accounting for those components separately if certain criteria are met. The updated guidance requires entities to recognize a right-of-use asset and lease liability equal to the present value of lease payments for all leases other than those that are less than one year. The updated guidance, as amended, is effective for reporting periods beginning after December 15, 2016,2018.
In December 2018, the FASB issued additional guidance (Accounting Standards Update 2018-20) that permits an accounting policy election for lessors to not evaluate whether certain sales taxes and isother similar taxes are lessor costs or lessee costs. A lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration of the contract all collections from lessees of certain sales taxes and other similar taxes and to be applied prospectively. Early adoption was permitted.provide certain disclosures.
The Company adopted this guidance in first quarter 2019. The adoption of this guidance in 2019 did not have a material effect on the Company’s results of operations, financial position or liquidity.
Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments
In March 2016, the FASB issued updated guidance clarifying that when a call (put) option in a debt instrument is contingently exercisable, the event that triggers the ability to exercise the option is considered to be clearly and closely related to the debt instrument (i.e., the economic characteristics and risks of the option are related to interest rates or credit risks) and the entity does not have to assess whether the option should be accounted for separately.
The updated guidance is effective for reporting periods beginning after December 15, 2016. Early adoption was permitted. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Financial Instruments —- Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued updated guidance (Accounting Standards Update 2016-13) for the accounting for credit losses for financial instruments. The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance amounts recoverable)recoverables, including structured settlements that are recorded as part of reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.
The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’ssecurity’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.
The updated guidance iswas effective for reporting periods beginning after December 15, 2019. As a Smaller Reporting Company, the effective date was recently changed and the delayed effective date is now for reporting periods beginning after December 15, 2022. Early adoption is permitted for reporting periods beginning after December 15, 2018. Based on the financial instruments currently held by the Company, there would not be a material effect on the Company’s results of operations, financial position or liquidity if the new guidance were able to behad been adopted in the current accounting period. The impact on the Company’s results of operations, financial position or liquidity at the date of adoption of the updated guidance will be determined by the financial instruments held by the Company and the economic conditions at that time.
Intangibles - Goodwill and Other
In January 2017, the FASB issued updated guidance (Accounting Standards Update 2017-04) that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge by comparing a reporting unit’s fair value with its carrying amount and recognizing an impairment charge for the excess of the carrying amount over estimated fair value (i.e., Step 1 of current guidance).
StatementThe implied fair value of Cash Flows – Classificationgoodwill is currently determined in Step 2 by deducting the fair value of Certain Cash Receiptsall assets and Cash Paymentsliabilities of the reporting unit (determined in the same manner as a business combination) from the reporting unit’s fair value as determined in Step 1 (including any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unit in Step 1). The updated guidance requires an entity to perform its annual, or interim, impairment test by either: (1) an initial qualitative assessment of 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 reporting unit’s fair value is less than its carrying value, including goodwill (consistent with current guidance), or (2) applying Step 1.
The Company adopted this guidance in first quarter 2020. The adoption of this guidance in 2020 did not have a material effect on the Company’s results of operations, financial position or liquidity.
Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2016,2018, the FASB issued specificupdated guidance (Accounting Standards Update 2018-12) to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. This update improves the timeliness of recognizing changes in the liability for future policy benefits, modifies the rate used to discount future cash flows, simplifies and improves accounting for certain market-based options or guarantees associated with deposit (i.e., account balance) contracts, simplifies the amortization of deferred acquisitions costs and expands required disclosures. The expanded disclosure requires an insurance entity to provide disaggregated roll forwards of beginning to ending balances of the following: liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities and deferred acquisition costs including disclosure about, changes to and effect of changes for significant inputs, judgments, assumptions and methods used in measurements.
The updated guidance was effective for reporting periods beginning after December 15, 2020. As a Smaller Reporting Company, the effective date was recently changed and the delayed effective date is now for reporting periods beginning after December 15, 2023. Early adoption is permitted. With respect to the liability for future policyholder benefits for traditional and limited-payment contracts and deferred acquisition costs, an insurance entity may elect to apply the amendments retrospectively as of the beginning of the earliest period presented.
With respect to the market risk benefits, an insurance entity should apply the amendments retrospectively as of the beginning of the earliest period presented. The Company expects that the impact on the Company’s results of operations, financial position and liquidity at the date of adoption of the updated guidance in 2024 will be determined by the long-duration contracts then held by the Company and the economic conditions at that time.
Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued amendments (Accounting Standards Update 2018-13) to modify the disclosure requirements related to fair value measurements including the consideration of costs and benefits of producing the modified disclosures. The Company adopted this guidance in first quarter 2020. The adoption of this guidance in 2020 did not have a material effect on the Company’s results of operations, financial position or liquidity.
Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued updated guidance (Accounting Standards Update 2019-12) for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to reduce the existing diversity in practice in how eight specific cash flow issues of certain cash receipts and cash payments are presented and classified in the statement of cash flows.simplify several other income tax accounting matters. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively.the quarter ending March 31, 2021. 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.
Consolidation – Interests Held through Related Parties that Are Under Common Control
In October 2016, the FASB issued further guidance that makes targeted amendments to consolidation accounting. This update changes how a reporting entity that is the primary beneficiary of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The updated guidance is effective for annual and interim periods beginning after December 15, 2016, and is to be applied retrospectively. Early adoption was permitted. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments
In November 2016, the FASB issued specific guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents when there are transfers between cash, cash equivalents and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. 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.
Business Combinations – Clarifying the Definition of a Business
In January 2017, the FASB issued guidance to clarify the definition of a business to assist reporting entities in evaluating whether transactions should be accounted for as an acquisition or disposal of assets or businesses. This update provides a screen to determine when an integrated set of assets or activities is not a business and the requirements to be met to be considered a business.
The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted in certain situations. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Intangibles – Goodwill and Other - Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued guidance to modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Reporting entities will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Compensation — Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued updated guidance to improve the presentation of net periodic pension cost and net periodic post retirement cost (net benefit costs). Net benefit costs comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees. The update requires that the employer service cost component be reported in the same lines as other employee compensation cost and that the other components (non-service costs) be presented separately from the service cost and outside of a subtotal of income from operations if one is presented. The update also allows only the service cost component to be eligible for capitalization in assets when applicable.
The updated guidance is effective for reporting periods beginning after December 15, 2017. The update is to be applied retrospectively with respect to the presentation of service cost and non-service cost and prospectively with respect to applying the service cost only eligible for capitalization in assets guidance. Early adoption is permitted as of the first interim period of an annual period if an entity issues interim financial statements. This pronouncement will not impact the Company since it does not have any pension or postretirement benefit plans and has no intention to adopt such plans.
Compensation — Stock Compensation: Scope of Modification Accounting
In May 2017, the FASB issued updated guidance related to a change to the terms or conditions (modification) of a share-based payment award. The updated guidance provides that an entity should account for the effects of a modification unless the fair value and vesting conditions of the modified award and the classification of the modified award (equity or liability instrument) are the same as the original award immediately before the modification.
The updated guidance is effective for the quarter ending March 31, 2018. The update is to be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted in any interim periods for which financial statements have not yet been made available for issuance. The adoption of this guidance is not expected to have a material 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 insurance operations, consisting of the life insurance operations of TLIC and FBLIC; |
● | Annuity operations, consisting of the annuity operations of TLIC and FBLIC and |
● | Corporate operations, which includes the results of the parent company and FTCC after the elimination of intercompany amounts. |
Please see below and Note 4 to the Consolidated Financial Statements for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 and as of September 30, 2017March 31, 2020 and December 31, 20162019 for additional information regarding segment information.
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 Three Months Ended September March 31, 2030, 201720 and 20169
(Unaudited) | ||||||||||||
Three Months Ended September 30, | Amount Change | |||||||||||
2017 | 2016 | 2017 less 2016 | ||||||||||
Premiums | $ | 4,058,629 | $ | 3,197,228 | $ | 861,401 | ||||||
Net investment income | 4,631,892 | 3,303,980 | 1,327,912 | |||||||||
Net realized investment gains (losses) | (3,486 | ) | 160,308 | (163,794 | ) | |||||||
Other income | 25,249 | 10,053 | 15,196 | |||||||||
Total revenues | 8,712,284 | 6,671,569 | 2,040,715 | |||||||||
Benefits and claims | 5,150,753 | 4,280,477 | 870,276 | |||||||||
Expenses | 2,023,762 | 1,804,220 | 219,542 | |||||||||
Total benefits, claims and expenses | 7,174,515 | 6,084,697 | 1,089,818 | |||||||||
Income before federal income tax expense | 1,537,769 | 586,872 | 950,897 | |||||||||
Federal income tax expense | 293,117 | 88,286 | 204,831 | |||||||||
Net income | $ | 1,244,652 | $ | 498,586 | $ | 746,066 | ||||||
Net income per common share basic and diluted | $ | 0.16 | $ | 0.06 | $ | 0.10 |
Consolidated Condensed Results of Operations for the Nine Months Ended September 30, 2017 and 2016
(Unaudited) | ||||||||||||
Nine Months Ended September 30, | Amount Change | |||||||||||
2017 | 2016 | 2017 less 2016 | ||||||||||
Premiums | $ | 11,560,664 | $ | 9,426,803 | $ | 2,133,861 | ||||||
Net investment income | 12,296,827 | 9,922,817 | 2,374,010 | |||||||||
Net realized investment gains | 254,108 | 307,250 | (53,142 | ) | ||||||||
Loss on other-than-temporary impairment | (224,250 | ) | - | (224,250 | ) | |||||||
Other income | 92,376 | 25,259 | 67,117 | |||||||||
Total revenues | 23,979,725 | 19,682,129 | 4,297,596 | |||||||||
Benefits and claims | 14,926,638 | 12,709,885 | 2,216,753 | |||||||||
Expenses | 6,476,727 | 5,634,579 | 842,148 | |||||||||
Total benefits, claims and expenses | 21,403,365 | 18,344,464 | 3,058,901 | |||||||||
Income before federal income tax expense | 2,576,360 | 1,337,665 | 1,238,695 | |||||||||
Federal income tax expense | 520,186 | 205,667 | 314,519 | |||||||||
Net income | $ | 2,056,174 | $ | 1,131,998 | $ | 924,176 | ||||||
Net income per common share basic and diluted | $ | 0.26 | $ | 0.15 | $ | 0.11 |
(Unaudited) | ||||||||||||
Three Months Ended March 31, | Amount Change | |||||||||||
2020 | 2019 | 2020 less 2019 | ||||||||||
Premiums | $ | 6,365,876 | $ | 5,530,806 | $ | 835,070 | ||||||
Net investment income | 6,269,843 | 5,573,456 | 696,387 | |||||||||
Net realized investment gains | 23,502 | 53,720 | (30,218 | ) | ||||||||
Service fees | 10,871 | 427,734 | (416,863 | ) | ||||||||
Other income | 13,414 | 38,984 | (25,570 | ) | ||||||||
Total revenues | 12,683,506 | 11,624,700 | 1,058,806 | |||||||||
Benefits and claims | 7,809,207 | 6,754,128 | 1,055,079 | |||||||||
Expenses | 3,857,915 | 3,068,480 | 789,435 | |||||||||
Total benefits, claims and expenses | 11,667,122 | 9,822,608 | 1,844,514 | |||||||||
Income before federal income tax expense | 1,016,384 | 1,802,092 | (785,708 | ) | ||||||||
Federal income tax expense | 227,128 | 379,896 | (152,768 | ) | ||||||||
Net income | $ | 789,256 | $ | 1,422,196 | $ | (632,940 | ) | |||||
Net income per common share basic and duluted | ||||||||||||
Class A common stock | $ | 0.0992 | $ | 0.1823 | $ | (0.0831 | ) | |||||
Class B common stock | $ | 0.0843 | $ | - | $ | 0.0843 |
Consolidated Condensed Financial Position as of September March 31, 2030, 201720 and December 31, 20169
(Unaudited) | Amount Change | (Unaudited) | Amount Change | |||||||||||||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | March 31, 2020 | December 31, 2019 | 2020 to 2019 | |||||||||||||||||||
Investment assets | $ | 313,384,648 | $ | 255,214,510 | $ | 58,170,138 | $ | 408,698,391 | $ | 419,242,515 | $ | (10,544,124 | ) | |||||||||||
Assets held in trust under coinsurance agreement | 100,291,192 | 105,089,240 | (4,798,048 | ) | ||||||||||||||||||||
Other assets | 73,171,973 | 78,038,103 | (4,866,130 | ) | 82,542,014 | 80,604,619 | 1,937,395 | |||||||||||||||||
Total assets | $ | 386,556,621 | $ | 333,252,613 | $ | 53,304,008 | $ | 591,531,597 | $ | 604,936,374 | $ | (13,404,777 | ) | |||||||||||
Policy liabilities | $ | 341,248,785 | $ | 290,680,384 | $ | 50,568,401 | $ | 431,230,331 | $ | 429,631,596 | $ | 1,598,735 | ||||||||||||
Funds withheld under coinsurance agreement | 101,038,693 | 105,638,974 | (4,600,281 | ) | ||||||||||||||||||||
Deferred federal income taxes | 2,071,174 | 693,470 | 1,377,704 | 3,752,091 | 6,345,918 | (2,593,827 | ) | |||||||||||||||||
Other liabilities | 1,395,790 | 5,598,484 | (4,202,694 | ) | 5,993,680 | 5,901,624 | 92,056 | |||||||||||||||||
Total liabilities | 344,715,749 | 296,972,338 | 47,743,411 | 542,014,795 | 547,518,112 | (5,503,317 | ) | |||||||||||||||||
Shareholders' equity | 41,840,872 | 36,280,275 | 5,560,597 | 49,516,802 | 57,418,262 | (7,901,460 | ) | |||||||||||||||||
Total liabilities and shareholders' equity | $ | 386,556,621 | $ | 333,252,613 | $ | 53,304,008 | $ | 591,531,597 | $ | 604,936,374 | $ | (13,404,777 | ) | |||||||||||
Shareholders' equity per common share | $ | 5.36 | $ | 4.65 | $ | 0.71 | ||||||||||||||||||
Class A common stock | $ | 6.2254 | $ | 7.3589 | $ | (1.1335 | ) | |||||||||||||||||
Class B common stock | $ | 5.2916 | $ | - | $ | 5.2916 |
Results of Operations – Three Months Ended September 30, 2017March 31, 2020 and 20162019
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.period.
Our revenues for the three months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Three Months Ended September 30, | Amount Change | Three Months Ended March 31, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2020 | 2019 | 2020 less 2019 | |||||||||||||||||||
Premiums | $ | 4,058,629 | $ | 3,197,228 | $ | 861,401 | $ | 6,365,876 | $ | 5,530,806 | $ | 835,070 | ||||||||||||
Net investment income | 4,631,892 | 3,303,980 | 1,327,912 | 6,269,843 | 5,573,456 | 696,387 | ||||||||||||||||||
Net realized investment gains (losses) | (3,486 | ) | 160,308 | (163,794 | ) | |||||||||||||||||||
Net realized investment gains | 23,502 | 53,720 | (30,218 | ) | ||||||||||||||||||||
Service fees | 10,871 | 427,734 | (416,863 | ) | ||||||||||||||||||||
Other income | 25,249 | 10,053 | 15,196 | 13,414 | 38,984 | (25,570 | ) | |||||||||||||||||
Total revenues | $ | 8,712,284 | $ | 6,671,569 | $ | 2,040,715 | $ | 12,683,506 | $ | 11,624,700 | $ | 1,058,806 |
The $2,040,715$1,058,806 increase in total revenues for the three months ended September 30, 2017March 31, 2020 is discussed below.
Premiums
Our premiums for the three months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Three Months Ended September 30, | Amount Change | Three Months Ended March 31, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2020 | 2019 | 2020 less 2019 | |||||||||||||||||||
Whole life and term first year | $ | 43,122 | $ | 44,599 | $ | (1,477 | ) | |||||||||||||||||
Whole life and term renewal | 557,335 | 588,416 | (31,081 | ) | ||||||||||||||||||||
Ordinary life first year | $ | 437,246 | $ | 344,885 | $ | 92,361 | ||||||||||||||||||
Ordinary life renewal | 739,559 | 575,496 | 164,063 | |||||||||||||||||||||
Final expense first year | 1,215,515 | 920,613 | 294,902 | 1,199,052 | 1,164,306 | 34,746 | ||||||||||||||||||
Final expense renewal | 2,242,657 | 1,643,600 | 599,057 | 3,990,019 | 3,318,628 | 671,391 | ||||||||||||||||||
Supplementary contracts with life contingencies | - | 127,491 | (127,491 | ) | ||||||||||||||||||||
Total premiums | $ | 4,058,629 | $ | 3,197,228 | $ | 861,401 | $ | 6,365,876 | $ | 5,530,806 | $ | 835,070 |
The $861,401$835,070 increase in premiums for the three months ended September 30, 2017March 31, 2020 is primarily due to a $599,057$671,391 increase in final expense renewal premiums and a $294,902$164,063 increase in final expense first yearordinary life renewal premiums. The increase in final expense first year premiums represents management’s focus on expanding final expense production by contracting new, independent agents in expanded locations.
The increase in final expense renewal premiums reflects the persistency of prior years’ final expense production. Our marketing efforts are focused on final expense and annuity production.
Net Investment Income
The major components of our net investment income for the three months ended September 30, 2017 and 2016 are summarized as follows:
(Unaudited) | ||||||||||||
Three Months Ended September 30, | Amount Change | |||||||||||
2017 | 2016 | 2017 less 2016 | ||||||||||
Fixed maturity securities | $ | 1,731,931 | $ | 1,435,041 | $ | 296,890 | ||||||
Equity securities | 4,382 | 6,728 | (2,346 | ) | ||||||||
Other long-term investments | 967,959 | 687,042 | 280,917 | |||||||||
Mortgage loans | 2,379,176 | 1,417,445 | 961,731 | |||||||||
Policy loans | 28,640 | 27,348 | 1,292 | |||||||||
Real estate | 93,943 | 62,391 | 31,552 | |||||||||
Short-term and other investments | 72,935 | 56,806 | 16,129 | |||||||||
Gross investment income | 5,278,966 | 3,692,801 | 1,586,165 | |||||||||
Investment expenses | (647,074 | ) | (388,821 | ) | 258,253 | |||||||
Net investment income | $ | 4,631,892 | $ | 3,303,980 | $ | 1,327,912 |
The $1,586,165 increase in gross investment income for the three months ended September 30, 2017 isordinary life renewal premiums primarily due to increases in investments in mortgage loans, fixed maturity securities and other long-term investments. In the twelve months since September 30, 2016, we had increased investments in mortgage loans of $35.1 million, fixed maturity securities of $13.5 million and other long-term investments of $16.0 million.
The $258,253 increase in investment expenses for the three months ended September 30, 2017 is primarily related to increased production of investments in mortgage loans on real estate including the costs of the Company’s mortgage loan department that are fully assigned to investment expenses beginning in 2017.
Net Realized Investment Gains (Losses)
Our net realized investment gains (losses) result from sales of fixed maturity and equity securities available-for-sale, early payoff of acquired mortgage loans on real estate, sales of investment real estate and sales of other long-term investments.
Our net realized investment gains (losses) for the three months ended September 30, 2017 and 2016 are summarized as follows:
(Unaudited) | ||||||||||||
Three Months Ended September 30, | Amount Change | |||||||||||
2017 | 2016 | 2017 less 2016 | ||||||||||
Fixed maturity securities available-for-sale: | ||||||||||||
Sale proceeds | $ | 4,536,924 | $ | 7,368,724 | $ | (2,831,800 | ) | |||||
Amortized cost at sale date | 4,540,410 | 7,161,834 | (2,621,424 | ) | ||||||||
Net realized gains (losses) | $ | (3,486 | ) | $ | 206,890 | $ | (210,376 | ) | ||||
Mortgage loans on real estate: | ||||||||||||
Payments and early payoffs of mortgage loans | $ | 5,405,626 | $ | 7,655,905 | $ | (2,250,279 | ) | |||||
Principal collections | 5,405,626 | 7,702,487 | (2,296,861 | ) | ||||||||
Net realized (losses) | $ | - | $ | (46,582 | ) | $ | 46,582 | |||||
Net realized investment gains (losses) | $ | (3,486 | ) | $ | 160,308 | $ | (163,794 | ) |
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.
Our benefits, claims and expenses for the three months ended September 30, 2017 and 2016 are summarized as follows:
(Unaudited) | ||||||||||||
Three Months Ended September 30, | Amount Change | |||||||||||
2017 | 2016 | 2017 less 2016 | ||||||||||
Benefits and claims | ||||||||||||
Increase in future policy benefits | $ | 1,291,943 | $ | 1,357,212 | $ | (65,269 | ) | |||||
Death benefits | 1,310,697 | 881,928 | 428,769 | |||||||||
Surrenders | 186,202 | 205,356 | (19,154 | ) | ||||||||
Interest credited to policyholders | 2,293,419 | 1,754,941 | 538,478 | |||||||||
Dividend, endowment and supplementary life contract benefits | 68,492 | 81,040 | (12,548 | ) | ||||||||
Total benefits and claims | 5,150,753 | 4,280,477 | 870,276 | |||||||||
Expenses | ||||||||||||
Policy acquisition costs deferred | (2,369,432 | ) | (2,023,246 | ) | (346,186 | ) | ||||||
Amortization of deferred policy acquisition costs | 890,135 | 536,901 | 353,234 | |||||||||
Amortization of value of insurance business acquired | 88,625 | 91,966 | (3,341 | ) | ||||||||
Commissions | 2,051,910 | 1,954,586 | 97,324 | |||||||||
Other underwriting, insurance and acquisition expenses | 1,362,524 | 1,244,013 | 118,511 | |||||||||
Total expenses | 2,023,762 | 1,804,220 | 219,542 | |||||||||
Total benefits, claims and expenses | $ | 7,174,515 | $ | 6,084,697 | $ | 1,089,818 |
The $1,089,818 increase in total benefits, claims and expenses for the three months ended September 30, 2017 is discussed below.
Benefits and Claims
The $870,276 increase in benefits and claims for the three months ended September 30, 2017 is primarily due to the following:
|
|
|
|
Deferral and Amortization of Deferred Acquisition Costs
Certain costs related to the successful acquisition of traditionalreflects ordinary life insurance policies are capitalized and amortized oversold in the premium-paying period ofinternational market that 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 periodsCompany started assuming 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 successful production of new and renewal insurance and annuity contracts.fourth quarter 2018.
For the three months ended September 30, 2017 and 2016, capitalized costs were $2,369,432 and $2,023,246, respectively. Amortization of deferred policy acquisition costs for the three months ended September 30, 2017 and 2016 were $890,135 and $536,901, respectively.
The $346,186 increase in the 2017 acquisition costs deferred primarily relates to increased final expense production by appointed agents based upon expansion into additional states and recruiting of additional agents. The $353,234 increase in the 2017 third quarter amortization of deferred acquisition costs is primarily due to an increased number and amount of final expense policies in force, lapsation of ordinary life policies and annuity contracts with increased death benefits and annuity withdrawals.
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 $88,625 and $91,966 for the three months ended September 30, 2017 and 2016, respectively.
Commissions
Our commissions for the three months ended September 30, 2017 and 2016 are summarized as follows:
(Unaudited) | ||||||||||||
Three Months Ended September 30, | Amount Change | |||||||||||
2017 | 2016 | 2017 less 2016 | ||||||||||
Annuity | $ | 325,415 | $ | 652,377 | $ | (326,962 | ) | |||||
Whole life and term first year | 37,637 | 30,368 | 7,269 | |||||||||
Whole life and term renewal | 19,890 | 24,033 | (4,143 | ) | ||||||||
Final expense first year | 1,453,356 | 1,098,269 | 355,087 | |||||||||
Final expense renewal | 215,612 | 149,539 | 66,073 | |||||||||
Total commissions | $ | 2,051,910 | $ | 1,954,586 | $ | 97,324 |
The $97,324 increase in commissions for the three months ended September 30, 2017 is primarily due to a $355,087 increase in final expense first year commissions that corresponds to the $294,902 increase in final expense first year premiums and a $66,073 increase in final expense renewal commissions that corresponds to the $599,057 increase in final expense renewal premiums that was offset by a $326,962 decrease in annuity commissions that corresponds to a $9,417,188 decrease in policyholders’ account deposits for the three months ended September 30, 2017 compared to the corresponding period in 2016.
Other Underwriting, Insurance and Acquisition Expenses
The $118,511 increase in other underwriting, insurance and acquisition expenses for the three months ended September 30, 2017 was primarily related to increased third party administration fees primarily related to the increased number of policies in force and increased service requests, increased legal fees, increased salaries and benefits due to increased staffing levels and increased salary that exceeded the costs of the Company’s mortgage loan department that are fully assigned to investment expenses beginning in 2017 and no bad debts recorded in 2017 for FTCC.
Federal Income Taxes
FTFC files a consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC or FBLIC. TLIC and FBLIC 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. We continue to file consolidated life insurance company federal tax returns for TLIC and FBLIC. 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 three months ended September 30, 2017 and 2016, current income tax expense (benefit) was ($1,320) and $4,472, respectively. Deferred federal income tax expense was $294,437 and $83,814 for the three months ended September 30, 2017 and 2016, respectively. The increase in deferred income taxes for the three months ended September 30, 2017 is primarily due to faster growth in deferred policy acquisition costs on the U.S. GAAP statement of financial position compared to the tax-basis balance sheet.
Net Income Per Common Share Basic and Diluted
Net income was $1,244,652 ($0.16 per common share basic and diluted) and $498,586 ($0.06 per common share basic and diluted) for the three months ended September 30, 2017 and 2016, 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 were 7,802,593 for both the three months ended September 30, 2017 and 2016.
Business Segments
The Company has a life insurance segment, consisting of the life insurance operations of TLIC and FBLIC, an annuity segment, consisting of the annuity operations of TLIC and FBLIC and a corporate segment. Results for the parent company and the operations of FTCC, after elimination of intercompany amounts, are allocated to the corporate segment.
The revenues and income before federal income taxes from our business segments for the three months ended September 30, 2017 and 2016 are summarized as follows:
(Unaudited) | ||||||||||||
Three Months Ended September 30, | Amount Change | |||||||||||
2017 | 2016 | 2017 less 2016 | ||||||||||
Revenues: | ||||||||||||
Life insurance operations | $ | 4,723,138 | $ | 3,720,401 | $ | 1,002,737 | ||||||
Annuity operations | 3,903,408 | 2,802,934 | 1,100,474 | |||||||||
Corporate operations | 85,738 | 148,234 | (62,496 | ) | ||||||||
Total | $ | 8,712,284 | $ | 6,671,569 | $ | 2,040,715 | ||||||
Income before income taxes: | ||||||||||||
Life insurance operations | $ | 345,522 | $ | 35,230 | $ | 310,292 | ||||||
Annuity operations | 1,141,492 | 436,051 | 705,441 | |||||||||
Corporate operations | 50,755 | 115,591 | (64,836 | ) | ||||||||
Total | $ | 1,537,769 | $ | 586,872 | $ | 950,897 |
Life Insurance Operations
The $1,002,737 increase in revenues from Life Insurance Operations for the three months ended September 30, 2017 is primarily due to the following:
|
|
|
|
|
|
|
|
The $310,292 increased profitability from Life Insurance Operations for the three months ended September 30, 2017 is primarily due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity Operations
The $1,100,474 increase in revenues from Annuity Operations for the three months ended September 30, 2017 is due to the following:
|
|
|
|
The $705,441 increased profitability from Annuity Operations for the three months ended September 30, 2017 is due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Operations
The $62,496 decrease in revenues from Corporate Operations for the three months ended September 30, 2017 is primarily due to $83,627 of decreased net investment income that exceeded $21,131 of increased other income.
The $64,836 decreased Corporate Operations profitability for the three months ended September 30, 2017 is primarily due to $83,627 of decreased net investment income and $2,340 of increased operating expenses that exceeded $21,131 of increased other income.
Results of Operations – Nine Months Ended September 30, 2017 and 2016
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.
Our revenues for the nine months ended September 30, 2017 and 2016 are summarized as follows:
(Unaudited) | ||||||||||||
Nine Months Ended September 30, | Amount Change | |||||||||||
2017 | 2016 | 2017 less 2016 | ||||||||||
Premiums | $ | 11,560,664 | $ | 9,426,803 | $ | 2,133,861 | ||||||
Net investment income | 12,296,827 | 9,922,817 | 2,374,010 | |||||||||
Net realized investment gains | 254,108 | 307,250 | (53,142 | ) | ||||||||
Loss on other-than-temporary impairment | (224,250 | ) | - | (224,250 | ) | |||||||
Other income | 92,376 | 25,259 | 67,117 | |||||||||
Total revenues | $ | 23,979,725 | $ | 19,682,129 | $ | 4,297,596 |
Premiums
Our premiums for the nine months ended September 30, 2017 and 2016 are summarized as follows:
(Unaudited) | ||||||||||||
Nine Months Ended September 30, | Amount Change | |||||||||||
2017 | 2016 | 2017 less 2016 | ||||||||||
Whole life and term first year | $ | 125,009 | $ | 167,783 | $ | (42,774 | ) | |||||
Whole life and term renewal | 1,718,302 | 1,857,418 | (139,116 | ) | ||||||||
Final expense first year | 3,496,902 | 2,526,244 | 970,658 | |||||||||
Final expense renewal | 6,213,881 | 4,496,784 | 1,717,097 | |||||||||
Supplementary contracts with life contingencies | 6,570 | 378,574 | (372,004 | ) | ||||||||
Total premiums | $ | 11,560,664 | $ | 9,426,803 | $ | 2,133,861 |
The $2,133,861 increase in premiums for the nine months ended September 30, 2017 is primarily due to the following: $1,717,097 increase in final expense renewal premiums, $970,658 increase in final expense first year premiums and $372,004 decrease in supplementary contracts with life contingencies consideration.
The increase in final expense first year premiums represents management’s focus on expanding final expense production by contracting new, independent agents in expanded locations. The increase in final expense renewal premiums reflects the persistency of prior years’ final expense production. Our marketing efforts are focused on final expense and annuity production and we have not been focused on whole life and term production the past few years. The decrease in supplementary contracts with life contingencies reflects policyholder decisions to receive future payment streams during their remaining lifelifetime instead of a lump sum payment.
Net Investment Income
The major components of our net investment income for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Three Months Ended March 31, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2020 | 2019 | 2020 less 2019 | |||||||||||||||||||
Fixed maturity securities | $ | 4,887,826 | $ | 4,535,560 | $ | 352,266 | $ | 1,838,382 | $ | 1,529,476 | $ | 308,906 | ||||||||||||
Equity securities | 14,540 | 20,568 | (6,028 | ) | ||||||||||||||||||||
Preferred stock and equity securities | 32,323 | 34,218 | (1,895 | ) | ||||||||||||||||||||
Other long-term investments | 2,707,438 | 1,857,366 | 850,072 | 1,347,138 | 1,150,757 | 196,381 | ||||||||||||||||||
Mortgage loans | 5,923,207 | 4,098,943 | 1,824,264 | 3,570,405 | 3,182,848 | 387,557 | ||||||||||||||||||
Policy loans | 84,657 | 79,937 | 4,720 | 37,707 | 32,273 | 5,434 | ||||||||||||||||||
Real estate | 281,366 | 246,327 | 35,039 | 68,682 | 64,296 | 4,386 | ||||||||||||||||||
Short-term and other investments | 296,019 | 198,950 | 97,069 | 24,537 | 244,840 | (220,303 | ) | |||||||||||||||||
Gross investment income | 14,195,053 | 11,037,651 | 3,157,402 | 6,919,174 | 6,238,708 | 680,466 | ||||||||||||||||||
Investment expenses | (1,898,226 | ) | (1,114,834 | ) | 783,392 | (649,331 | ) | (665,252 | ) | (15,921 | ) | |||||||||||||
Net investment income | $ | 12,296,827 | $ | 9,922,817 | $ | 2,374,010 | $ | 6,269,843 | $ | 5,573,456 | $ | 696,387 |
The $3,157,402$680,466 increase in gross investment income for the ninethree months ended September 30, 2017March 31, 2020 is primarily due to increasesthe increase in investments in mortgage loans, fixed maturity securities and other long-term investments that exceeded a decrease in short-term and fixed maturity securities.other investments. In the twelve months since September 30, 2016,March 31, 2019, we had increased investments in mortgage loans of $35.1$23.7 million, other long-term investments of $16.0 million and fixed maturity securities of $13.5$22.6 million and other long term investments of $10.0 million.
The $783,392 increase The decrease in investment expenseshort-term and other investments is primarily relateddue to increased productionthe decrease in cash and cash equivalents of investments in mortgage loans on real estate including$52.6 million comparing the costsbalance as of the Company’s mortgage loan department that are fully assigned to investment expenses beginning in 2017.March 31, 2020 and March 31, 2019.
Net Realized Investment Gains (Losses)
Our net realized investment gains (losses) result from sales of fixed maturity and equity securities available-for-sale early payoffand changes in fair value of mortgage loans on real estate, sales of investment real estate and sales of other long-term investments.
Ourequity securities. Our net realized investment gains (losses) for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
(Unaudited) | ||||||||||||
Three Months Ended March 31, | Amount Change | |||||||||||
2020 | 2019 | 2020 less 2019 | ||||||||||
Fixed maturity securities available-for-sale: | ||||||||||||
Sale proceeds / maturities | $ | 5,550,987 | $ | 3,399,846 | $ | 2,151,141 | ||||||
Amortized cost at sale date | 5,489,068 | 3,359,771 | 2,129,297 | |||||||||
Net realized gains | $ | 61,919 | $ | 40,075 | $ | 21,844 | ||||||
Equity securities, changes in fair value | $ | (38,417 | ) | $ | 13,645 | $ | (52,062 | ) | ||||
Net realized investment gains | $ | 23,502 | $ | 53,720 | $ | (30,218 | ) |
(Unaudited) | ||||||||||||
Nine Months Ended September 30, | Amount Change | |||||||||||
2017 | 2016 | 2017 less 2016 | ||||||||||
Fixed maturity securities available-for-sale: | ||||||||||||
Sale proceeds | $ | 17,140,173 | $ | 14,862,935 | $ | 2,277,238 | ||||||
Amortized cost at sale date | 16,952,722 | 14,534,337 | 2,418,385 | |||||||||
Net realized gains | $ | 187,451 | $ | 328,598 | $ | (141,147 | ) | |||||
Equity securities available-for-sale: | ||||||||||||
Sale proceeds | $ | - | $ | 128,010 | $ | (128,010 | ) | |||||
Cost at sale date | - | 120,767 | (120,767 | ) | ||||||||
Net realized gains | $ | - | $ | 7,243 | $ | (7,243 | ) | |||||
Mortgage loans on real estate: | ||||||||||||
Payments and early payoffs of mortgage loans | $ | 16,129,739 | $ | 11,317,427 | $ | 4,812,312 | ||||||
Principal collections | 16,129,739 | 11,346,018 | 4,783,721 | |||||||||
Net realized losses | $ | - | $ | (28,591 | ) | $ | 28,591 | |||||
Investment real estate: | ||||||||||||
Sale proceeds | $ | 190,084 | $ | - | $ | 190,084 | ||||||
Carrying value at sale date | 185,702 | - | 185,702 | |||||||||
Net realized gains | $ | 4,382 | $ | - | $ | 4,382 | ||||||
Other long-term investments | ||||||||||||
Sale proceeds | $ | 792,012 | $ | - | $ | 792,012 | ||||||
Carrying value at sale date | 729,737 | - | 729,737 | |||||||||
Net realized gains | $ | 62,275 | $ | - | $ | 62,275 | ||||||
Net realized investment gains | $ | 254,108 | $ | 307,250 | $ | (53,142 | ) |
Service Fees
The Company has recorded other-than-temporary impairments on its fixed maturity available-for-sale investment$416,863 decrease in an energy corporation with a total par value of $650,000 as a result of continuing unrealized losses. During fourth quarter 2016 this security was initially impaired by a $207,450 charge to the statement of operations. During second quarter 2017 this security was further impaired by a $224,250 charge to the statement of operations. These impairments were considered fully credit-related and represent the difference between the amortized cost basis of the security and its fair value. The Company experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securitiesservice fees for the ninethree months ended September 30, 2017March 31, 2020 is primarily due to a decrease in ceding fees related to TLIC’s annuity coinsurance agreement with an offshore annuity and the year ended December 31, 2016. life insurance company.
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.
Our benefits, claimsclaims and expenses for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Three Months Ended March 31, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2020 | 2019 | 2020 less 2019 | |||||||||||||||||||
Benefits and claims | ||||||||||||||||||||||||
Increase in future policy benefits | $ | 3,733,907 | $ | 3,995,230 | $ | (261,323 | ) | $ | 2,641,119 | $ | 2,151,600 | $ | 489,519 | |||||||||||
Death benefits | 3,744,278 | 2,868,216 | 876,062 | 1,611,780 | 1,632,780 | (21,000 | ) | |||||||||||||||||
Surrenders | 717,790 | 541,725 | 176,065 | 410,364 | 350,407 | 59,957 | ||||||||||||||||||
Interest credited to policyholders | 6,530,403 | 5,090,162 | 1,440,241 | 3,063,245 | 2,550,672 | 512,573 | ||||||||||||||||||
Dividend, endowment and supplementary life contract benefits | 200,260 | 214,552 | (14,292 | ) | 82,699 | 68,669 | 14,030 | |||||||||||||||||
Total benefits and claims | 14,926,638 | 12,709,885 | 2,216,753 | 7,809,207 | 6,754,128 | 1,055,079 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Policy acquisition costs deferred | (7,370,469 | ) | (5,142,381 | ) | (2,228,088 | ) | (2,384,968 | ) | (3,615,460 | ) | 1,230,492 | |||||||||||||
Amortization of deferred policy acquisition costs | 2,318,277 | 1,588,938 | 729,339 | 1,213,274 | 764,346 | 448,928 | ||||||||||||||||||
Amortization of value of insurance business acquired | 298,089 | 281,175 | 16,914 | 79,974 | 81,447 | (1,473 | ) | |||||||||||||||||
Commissions | 6,641,883 | 4,783,307 | 1,858,576 | 2,308,163 | 3,572,572 | (1,264,409 | ) | |||||||||||||||||
Other underwriting, insurance and acquisition expenses | 4,588,947 | 4,123,540 | 465,407 | 2,641,472 | 2,265,575 | 375,897 | ||||||||||||||||||
Total expenses | 6,476,727 | 5,634,579 | 842,148 | 3,857,915 | 3,068,480 | 789,435 | ||||||||||||||||||
Total benefits, claims and expenses | $ | 21,403,365 | $ | 18,344,464 | $ | 3,058,901 | $ | 11,667,122 | $ | 9,822,608 | $ | 1,844,514 |
The $3,058,901$1,844,514 increase in total benefits, claims and expenses for the ninethree months ended September 30, 2017March 31, 2020 is discussed below.
Benefits and Claims
The $2,216,753$1,055,079 increase in benefits and claims for the ninethree months ended September 30, 2017March 31, 2020 is primarily due to the following:
● | $ |
● | $ |
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,policies and contracts, which vary with, and are primarily related to, the successful production of new and renewal life insurance policies and annuity contracts.
For the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, capitalized costs were $7,370,469$2,384,968 and $5,142,381,$3,615,460, respectively. Amortization of deferred policy acquisition costs for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 were $2,318,277$1,213,274 and $1,588,938,$764,346, respectively.
The $2,228,088 increase$1,230,492 decrease in the 20172020 acquisition costs deferred primarily relates to increased final expense anddecreased annuity production. The $729,339There was a $448,928 increase in the 20172020 amortization of deferred acquisition costs is primarily due to an increased number and amount of final expense policies in force, lapsation of ordinary life policies and annuity contracts reflected by increased death benefits, surrenders and annuity withdrawals.
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 $298,089$79,974 and $281,175$81,447 for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively.
Commissions
Our commissionscommissions for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Three Months Ended March 31, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2020 | 2019 | 2020 less 2019 | |||||||||||||||||||
Annuity | $ | 1,697,220 | $ | 1,209,118 | $ | 488,102 | $ | 23,151 | $ | 1,466,822 | $ | (1,443,671 | ) | |||||||||||
Whole life and term first year | 110,426 | 89,432 | 20,994 | |||||||||||||||||||||
Whole life and term renewal | 61,762 | 77,099 | (15,337 | ) | ||||||||||||||||||||
Ordinary life first year | 446,901 | 378,455 | 68,446 | |||||||||||||||||||||
Ordinary life renewal | 20,686 | 13,368 | 7,318 | |||||||||||||||||||||
Final expense first year | 4,181,772 | 3,006,846 | 1,174,926 | 1,428,339 | 1,387,243 | 41,096 | ||||||||||||||||||
Final expense renewal | 590,703 | 400,812 | 189,891 | 389,086 | 326,684 | 62,402 | ||||||||||||||||||
Total commissions | $ | 6,641,883 | $ | 4,783,307 | $ | 1,858,576 | $ | 2,308,163 | $ | 3,572,572 | $ | (1,264,409 | ) |
The $1,858,576 increase$1,264,409 decrease in commissions for the ninethree months ended September 30, 2017March 31, 2020 is primarily due to a $1,174,926 increase$1,443,671 (due to a $41,180,754 decrease in final expense first year commissions that correspond to the $970,658 increase in final expense first year premiums, a $189,891 increase in final expense renewal commissions that corresponds to the $1,717,097 increase in final expense renewal premiums and a $488,102 increaseretained annuity deposits) decrease in annuity commissions that corresponds to a $22,119,656 increase in policyholders’ account deposits for the nine months ended September 30, 2017 compared to the corresponding period in 2016.
.commissions.
Other Underwriting, Insurance and Acquisition Expenses
The $465,407$375,897 increase in other underwriting, insurance and acquisition expenses for the ninethree months ended September 30, 2017March 31, 2020 was primarily related to increased acquisition and maintenance costs associated with increased final expense and annuity production, increased third party administration fees primarily related to the increased number of policies in force and increased service requests, increased salaries and benefits due to increased staffing levelsincreases and increased salary and bonus levels that exceeded the costs of the Company’s mortgage loan department that are fully assigned to investment expenses beginning in 2017, decreasedbonuses, legal fees and no bad debts recordeda decrease in 2017 for FTCC.fees reimbursed from TLIC’s annuity coinsurance agreement with an offshore annuity and life insurance company.
Federal Income Taxes
FTFC files afiled its 2018 consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC, or FBLIC. TLICFBLIC and FBLIC 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. We continue to file consolidated life insurance company federal tax returns for TLIC and FBLIC.FTCC. 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 ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, current income tax expense was $18,589$46,575 and $41,982,$303,002, respectively. DeferredFor the three months ended March 31, 2020 and 2019, deferred federal income tax expense was $501,597$180,553 and $163,685 for the nine months ended September 30, 2017 and 2016,$76,894, respectively. The increase in deferred income taxes is primarily due to faster growth in deferred policy acquisition costs on the U.S. GAAP statement of financial position compared to the tax-basis balance sheet.
Net Income Per Common Share Basic and Diluted
Net income was $2,056,174 ($0.26 per common share basic and diluted) and $1,131,998 ($0.15 per common share basic and diluted) forFor the ninethree months ended September 30, 2017March 31, 2020, the net income allocated to the Class B shareholders is the total net income multiplied by the right to receive dividends at 85% for Class B shares (99,065) as of the reporting date divided by the allocated total shares (7,953,977) of Class A shares (7,854,912) and 2016, respectively.Class B shares (99,065) as of the reporting date.
NetFor the three months ended March 31, 2020, the net income per common share basic and dilutedallocated to the Class A shareholders is calculated using the weighted average number of common shares outstanding and subscribed duringtotal net income less the year. net income allocated to the Class B shareholders.
The weighted average outstanding common shares basic for the three months ended March 31, 2020 were 7,854,912 for Class A shares and subscribed116,547 for Class B shares. The weighted average outstanding common shares diluted for the three months ended March 31, 2020 were 7,953,977 for Class A shares.
The weighted average outstanding common shares basic and diluted were 7,802,593 for both the ninethree months ended September 30, 2017 and 2016.March 31, 2019 were 7,802,593.
Business Segments
TheThe Company has a life insurance segment, consisting of the life insurance operations of TLIC and FBLIC, an annuity segment, consisting of the annuity operations of TLIC and FBLIC and a corporate segment. Results for the parent company and the operations of FTCC, after elimination of intercompany amounts, are allocated to the corporate segment.
The revenues and income before federal income taxes from our business segments for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Three Months Ended March 31, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2020 | 2019 | 2020 less 2019 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Life insurance operations | $ | 13,321,087 | $ | 11,068,191 | $ | 2,252,896 | $ | 7,325,468 | $ | 6,471,048 | $ | 854,420 | ||||||||||||
Annuity operations | 10,377,974 | 8,158,645 | 2,219,329 | 5,220,251 | 4,970,032 | 250,219 | ||||||||||||||||||
Corporate operations | 280,664 | 455,293 | (174,629 | ) | 137,787 | 183,620 | (45,833 | ) | ||||||||||||||||
Total | $ | 23,979,725 | $ | 19,682,129 | $ | 4,297,596 | $ | 12,683,506 | $ | 11,624,700 | $ | 1,058,806 | ||||||||||||
Income before income taxes: | ||||||||||||||||||||||||
Income before federal income taxes: | ||||||||||||||||||||||||
Life insurance operations | $ | 899,547 | $ | 87,745 | $ | 811,802 | $ | 64,404 | $ | 197,559 | $ | (133,155 | ) | |||||||||||
Annuity operations | 1,488,848 | 1,014,476 | 474,372 | 911,918 | 1,502,612 | (590,694 | ) | |||||||||||||||||
Corporate operations | 187,965 | 235,444 | (47,479 | ) | 40,062 | 101,921 | (61,859 | ) | ||||||||||||||||
Total | $ | 2,576,360 | $ | 1,337,665 | $ | 1,238,695 | $ | 1,016,384 | $ | 1,802,092 | $ | (785,708 | ) |
Life Insurance Operations
The $2,252,896$854,420 increase in revenues from Life Insurance Operations for the ninethree months ended September 30, 2017March 31, 2020 is primarily due to the following:
● | $ |
● | $ |
● | $ |
● | $ |
The $811,802 increased$133,155 decreased profitability from Life Insurance Operations for the ninethree months ended September 30, 2017March 31, 2020 is primarily due to the following:
● | $ |
● | $ |
● | $ |
● | $ |
● | $59,957 increase in surrenders |
● | $26,459 decrease in other income |
● | $ |
● | $ |
● | $ |
● | $ |
|
|
|
|
|
|
● | $ |
Annuity Operations
The $2,219,329 increase in revenues from Annuity Operations for the nine months ended September 30, 2017 is due to the following:
|
|
● | $ |
Annuity Operations
The $474,372 increased profitability$250,219 increase in revenues from Annuity Operations for the ninethree months ended September 30, 2017March 31, 2020 is due to the following:
● | $ |
● | $ |
● | $416,864 decrease in service fees and other income |
The $590,694 decreased profitability from Annuity Operations for the three months ended March 31, 2020 is due to the following:
● | $1,490,240 decrease in policy acquisition costs deferred net of amortization |
● | $ |
● | $416,864 decrease in service fees and other income |
● | $282,507 increase in other underwriting, insurance and acquisition expenses |
● | $20,846 decrease in net realized investment gains |
● | $736 decrease in amortization of value of insurance business acquired |
● | $ |
● | $ |
|
|
|
|
Corporate Operations
The $174,629$45,833 decrease in revenues from Corporate Operations for the ninethree months ended September 30, 2017March 31, 2020 is primarily due to $245,841$46,723 of decreased net investment income that exceeded $71,212$890 of increased service fees and other income.
The $47,479 decreased$61,859 decrease in Corporate Operations profitability for the ninethree months ended September 30, 2017March 31, 2020 is primarily due to $245,841 of$46,723 decreased net investment income and $16,026 of increased operating expenses that exceeded $71,212$890 of increased service fees and other income and $127,150 of decreased operating expenses.income.
Consolidated Financial Condition
OurOur invested assets as of September 30, 2017March 31, 2020 and December 31, 20162019 are summarized as follows:
(Unaudited) | Amount Change | (Unaudited) | Amount Change | |||||||||||||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | March 31, 2020 | December 31, 2019 | 2020 less 2019 | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Investments | ||||||||||||||||||||||||
Available-for-sale fixed maturity securities at fair value (amortized cost: $142,612,677 and $128,310,625 as of September 30, 2017 and December 31, 2016, respectively) | $ | 148,042,788 | $ | 129,311,155 | $ | 18,731,633 | ||||||||||||||||||
Available-for-sale equity securities at fair value (cost: $602,232 and $599,400 as of September 30, 2017 | 672,358 | 638,407 | 33,951 | |||||||||||||||||||||
Available-for-sale fixed maturity securities at fair value (amortized cost: $162,916,429 and $166,760,448 as of March 31, 2020 and December 31, 2019, respectively) | $ | 161,876,414 | $ | 178,951,324 | $ | (17,074,910 | ) | |||||||||||||||||
Available-for-sale preferred stock at fair value (cost: 49,945 as of March 31, 2020 and December 31, 2019) | 49,600 | 51,900 | (2,300 | ) | ||||||||||||||||||||
Equity securities at fair value (cost: $182,375 and $180,194 as of March 31, 2020 and December 31, 2019, respectively) | 164,788 | 201,024 | (36,236 | ) | ||||||||||||||||||||
Mortgage loans on real estate | 103,013,015 | 74,371,286 | 28,641,729 | 166,881,532 | 162,404,640 | 4,476,892 | ||||||||||||||||||
Investment real estate | 2,354,311 | 2,506,673 | (152,362 | ) | 2,659,478 | 1,951,759 | 707,719 | |||||||||||||||||
Policy loans | 1,626,771 | 1,598,116 | 28,655 | 2,087,602 | 2,026,301 | 61,301 | ||||||||||||||||||
Short-term investments | 1,832,872 | 1,831,087 | 1,785 | |||||||||||||||||||||
Other long-term investments | 57,675,405 | 46,788,873 | 10,886,532 | 73,146,105 | 71,824,480 | 1,321,625 | ||||||||||||||||||
Total investments | $ | 313,384,648 | $ | 255,214,510 | $ | 58,170,138 | $ | 408,698,391 | $ | 419,242,515 | $ | (10,544,124 | ) |
The $18,731,633$17,074,910 decrease and $36,034 increases$8,120,491 increase in fixed maturity available-for-sale securities for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively, are summarized as follows:
(Unaudited) | ||||||||||||||||
Nine Months Ended September 30, (Unaudited) | Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
Amount | Amount | Amount | Amount | |||||||||||||
Fixed maturity securities, available-for-sale, beginning | $ | 129,311,155 | $ | 134,556,027 | $ | 178,951,324 | $ | 131,152,199 | ||||||||
Purchases | 32,830,057 | 6,163,564 | 1,005,000 | 6,536,434 | ||||||||||||
Unrealized appreciation | 4,429,221 | 9,078,142 | ||||||||||||||
Net realized investment gains (losses) | (36,799 | ) | 328,598 | |||||||||||||
Acquisition of K-TENN Insurance Company | 800,000 | - | ||||||||||||||
Unrealized appreciation (depreciation) | (13,230,891 | ) | 5,077,355 | |||||||||||||
Net realized investment gains | 61,919 | 40,075 | ||||||||||||||
Sales proceeds | (10,378,173 | ) | (10,205,935 | ) | (5,350,987 | ) | (799,846 | ) | ||||||||
Maturities | (6,762,000 | ) | (4,657,000 | ) | (200,000 | ) | (2,600,000 | ) | ||||||||
Transfer to other long-term investments | (729,737 | ) | - | |||||||||||||
Premium amortization | (620,936 | ) | (671,335 | ) | (159,951 | ) | (133,527 | ) | ||||||||
Increase | 18,731,633 | 36,034 | ||||||||||||||
Increase (decrease) | (17,074,910 | ) | 8,120,491 | |||||||||||||
Fixed maturity securities, available-for-sale, ending | $ | 148,042,788 | $ | 134,592,061 | $ | 161,876,414 | $ | 139,272,690 |
Fixed maturity securities available-for-sale are 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 (Loss)”.” The available-for-sale fixed maturity securities portfolio is invested primarily in a variety of companies, U. S. government and government agencies, states and political subdivisions and foreign securities.
The $33,951$2,300 decrease and $9,820 increase and $79,376 decrease in equity securitiespreferred stock available-for-sale for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively, are summarized as follows:
Nine Months Ended September 30, (Unaudited) | ||||||||
2017 | 2016 | |||||||
Amount | Amount | |||||||
Equity securities, available-for-sale, beginning | $ | 638,407 | $ | 892,800 | ||||
Purchases | 2,832 | 14,480 | ||||||
Sales proceeds | - | (128,010 | ) | |||||
Unrealized appreciation | 31,119 | 26,911 | ||||||
Net realized investment gains | - | 7,243 | ||||||
Increase (decrease) | 33,951 | (79,376 | ) | |||||
Equity securities, available-for-sale, ending | $ | 672,358 | $ | 813,424 |
(Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Amount | Amount | |||||||
Preferred stock, available-for-sale, beginning | $ | 51,900 | $ | 90,580 | ||||
Unrealized appreciation (depreciation) | (2,300 | ) | 9,820 | |||||
Increase (decrease) | (2,300 | ) | 9,820 | |||||
Preferred stock, available-for-sale, ending | $ | 49,600 | $ | 100,400 |
Equity securitiesPreferred stock available-for-sale are 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 (Loss)”.”
The available-for-sale$36,236 decrease and $17,605 increase in equity securities portfolio is investedfor the three months ended March 31, 2020 and 2019, respectively, are summarized as follows:
(Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Amount | Amount | |||||||
Equity securities, beginning | $ | 201,024 | $ | 198,668 | ||||
Purchases | 29,220 | 27,784 | ||||||
Joint venture distributions | (27,039 | ) | (23,824 | ) | ||||
Net realized investment gains (losses), changes in fair value | (38,417 | ) | 13,645 | |||||
Increase (decrease) | (36,236 | ) | 17,605 | |||||
Equity securities, ending | $ | 164,788 | $ | 216,273 |
Equity securities are reported at fair value with the change in a varietyfair value reflected in net realized investment gains within the consolidated statements of companies.operations.
The $28,641,729$4,476,892 and $9,122,385$13,132,676 increases in mortgage loans on real estate for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively, are summarized as follows:
Nine Months Ended September 30, (Unaudited) | ||||||||
2017 | 2016 | |||||||
Amount | Amount | |||||||
Mortgage loans on real estate, beginning | $ | 74,371,286 | $ | 58,774,918 | ||||
Purchases | 44,857,137 | 20,669,087 | ||||||
Capitalization of loan origination fees | - | 4,530 | ||||||
Discount accretion | 206,161 | 83,536 | ||||||
Net realized investment gains | - | (28,591 | ) | |||||
Payments | (16,129,739 | ) | (11,317,427 | ) | ||||
Foreclosed - transferred to real estate | (142,455 | ) | (198,622 | ) | ||||
Increase in allowance for bad debts | (105,024 | ) | (36,096 | ) | ||||
Amortization of loan origination fees | (44,351 | ) | (54,032 | ) | ||||
Increase | 28,641,729 | 9,122,385 | ||||||
Mortgage loans on real estate, ending | $ | 103,013,015 | $ | 67,897,303 |
(Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Amount | Amount | |||||||
Mortgage loans on real estate, beginning | $ | 162,404,640 | $ | 130,049,610 | ||||
Purchases | 19,403,227 | 21,818,443 | ||||||
Discount accretion | 65,798 | 149,110 | ||||||
Payments | (14,244,785 | ) | (8,694,982 | ) | ||||
Foreclosed - transferred to real estate | (744,091 | ) | (99,218 | ) | ||||
Decrease (increase) in allowance for bad debts | 1,860 | (33,217 | ) | |||||
Amortization of loan origination fees | (5,117 | ) | (7,460 | ) | ||||
Increase | 4,476,892 | 13,132,676 | ||||||
Mortgage loans on real estate, ending | $ | 166,881,532 | $ | 143,182,286 |
The $152,362 decrease$707,719 and $89,505 increase$62,846 increases in investment real estate for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively, are summarized as follows:
(Unaudited) | ||||||||
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Amount | Amount | |||||||
Investment real estate, beginning | $ | 2,506,673 | $ | 2,326,558 | ||||
Acquired through foreclosure | 142,455 | 198,622 | ||||||
Sales proceeds | (190,084 | ) | - | |||||
Depreciation of building | (109,115 | ) | (109,117 | ) | ||||
Net realized investment gains | 4,382 | - | ||||||
Increase (decrease) | (152,362 | ) | 89,505 | |||||
Investment real estate, ending | $ | 2,354,311 | $ | 2,416,063 |
(Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Amount | Amount | |||||||
Investment real estate, beginning | $ | 1,951,759 | $ | 2,392,031 | ||||
Real estate acquired through mortgage loan foreclosure | 744,091 | 99,218 | ||||||
Depreciation of building | (36,372 | ) | (36,372 | ) | ||||
Increase | 707,719 | 62,846 | ||||||
Investment real estate, ending | $ | 2,659,478 | $ | 2,454,877 |
The $10,886,532$1,321,625 and $10,091,564$3,930,418 increases in other long-term investments (composed primarily of lottery receivables) for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively, are summarized as follows:
(Unaudited) | ||||||||||||||||
Nine Months Ended September 30, (Unaudited) | Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
Amount | Amount | Amount | Amount | |||||||||||||
Other long-term investments, beginning | $ | 46,788,873 | $ | 31,566,927 | $ | 71,824,480 | $ | 59,255,477 | ||||||||
Purchases | 14,036,084 | 11,340,463 | 3,258,188 | 5,629,292 | ||||||||||||
Transfer from fixed maturity available-for-sale securities | 729,737 | - | ||||||||||||||
Accretion of discount | 2,713,543 | 1,865,829 | 1,347,700 | 1,151,586 | ||||||||||||
Net realized investment gains | 62,275 | - | ||||||||||||||
Sales proceeds | (792,012 | ) | - | |||||||||||||
Payments | (5,863,095 | ) | (3,114,728 | ) | (3,284,263 | ) | (2,850,460 | ) | ||||||||
Increase | 10,886,532 | 10,091,564 | 1,321,625 | 3,930,418 | ||||||||||||
Other long-term investments, ending | $ | 57,675,405 | $ | 41,658,491 | $ | 73,146,105 | $ | 63,185,895 |
Our assets other thanthan invested assets as of September 30, 2017March 31, 2020 and December 31, 20162019 are summarized as follows:
(Unaudited) | Amount Change | (Unaudited) | Amount Change | |||||||||||||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | March 31, 2020 | December 31, 2019 | 2020 less 2019 | |||||||||||||||||||
Cash and cash equivalents | $ | 28,959,503 | $ | 34,223,945 | $ | (5,264,442 | ) | $ | 16,728,153 | $ | 23,212,170 | $ | (6,484,017 | ) | ||||||||||
Accrued investment income | 2,618,245 | 2,176,770 | 441,475 | 5,348,548 | 5,207,823 | 140,725 | ||||||||||||||||||
Recoverable from reinsurers | 1,157,109 | 1,258,938 | (101,829 | ) | 3,455,756 | 1,244,733 | 2,211,023 | |||||||||||||||||
Assets held in trust under coinsurance agreement | 100,291,192 | 105,089,240 | (4,798,048 | ) | ||||||||||||||||||||
Agents' balances and due premiums | 1,602,599 | 1,419,250 | 183,349 | 1,980,608 | 1,618,115 | 362,493 | ||||||||||||||||||
Deferred policy acquisition costs | 23,164,372 | 18,191,990 | 4,972,382 | 39,199,188 | 38,005,639 | 1,193,549 | ||||||||||||||||||
Value of insurance business acquired | 5,610,747 | 5,908,835 | (298,088 | ) | 4,811,474 | 4,891,448 | (79,974 | ) | ||||||||||||||||
Other assets | 10,059,398 | 14,858,375 | (4,798,977 | ) | 11,018,287 | 6,424,691 | 4,593,596 | |||||||||||||||||
Assets other than investment assets | $ | 73,171,973 | $ | 78,038,103 | $ | (4,866,130 | ) | $ | 182,833,206 | $ | 185,693,859 | $ | (2,860,653 | ) |
The $5,264,442$6,484,017 decrease in cash and cash equivalents is discussed below in the “Liquidity and Capital Resources” section where cash flows are addressed.
The $441,475 increase in accrued investment income is primarily due to the $58,170,138 increase in invested assets during the first nine months of 2017.
The $183,349 increase$4,798,048 decrease in 2017 agents’ balances and due premiumsassets held in trust under the coinsurance agreement is due to a $183,033 increasechange in agents’ balancesassets held under TLIC’s annuity coinsurance agreement with an offshore annuity and $316 increase in due premiums. The increase in agents’ balanceslife insurance company that is due to increased production of final expense policies resulting in increased advances of commissions to agents. The Company closely monitors commission advances and has not historically experienced, nor expects to experience, future collection problems.administered on a fund withheld basis.
OurThe $1,193,549 and $2,838,617 increases in deferred policy acquisition costs for the three months ended March 31, 2020 and 2019, respectively, are summarized as follows:
(Unaudited) | ||||||||
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Balance, beginning of year | $ | 38,005,639 | $ | 29,681,737 | ||||
Capitalization of commissions, sales and issue expenses | 2,384,968 | 3,615,460 | ||||||
Amortization | (1,213,274 | ) | (764,346 | ) | ||||
Deferred acquisition costs allocated to investments | 21,855 | (12,497 | ) | |||||
Increase | 1,193,549 | 2,838,617 | ||||||
Balance, end of year | $ | 39,199,188 | $ | 32,520,354 |
Our other assets as of September 30, 2017March 31, 2020 and December 31, 20162019 are summarized as follows:
(Unaudited) | Amount Change | (Unaudited) | Amount Change | |||||||||||||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | March 31, 2020 | December 31, 2019 | 2020 less 2019 | |||||||||||||||||||
Advances to mortgage loan originator | $ | 4,654,494 | $ | 5,207,380 | $ | (552,886 | ) | $ | 4,717,541 | $ | 4,436,787 | $ | 280,754 | |||||||||||
Federal and state income taxes recoverable | 2,941,670 | 2,220,566 | 721,104 | 2,177,427 | 1,301,868 | 875,559 | ||||||||||||||||||
Notes receivable | 448,258 | 464,366 | (16,108 | ) | 483,318 | 445,778 | 37,540 | |||||||||||||||||
Accrual of mortgage loan and long-term investment payments due | 1,298,343 | 511,585 | 786,758 | |||||||||||||||||||||
Receivable for securities sold | 550,000 | 6,288,274 | (5,738,274 | ) | ||||||||||||||||||||
Long-term investment receivable | 3,446,905 | - | 3,446,905 | |||||||||||||||||||||
Guaranty funds | 78,800 | 78,711 | 89 | 63,180 | 71,455 | (8,275 | ) | |||||||||||||||||
Lease asset - right to use | 51,140 | 76,711 | (25,571 | ) | ||||||||||||||||||||
Other receivables, prepaid assets and deposits | 87,833 | 87,493 | 340 | 78,776 | 92,092 | (13,316 | ) | |||||||||||||||||
Total other assets | $ | 10,059,398 | $ | 14,858,375 | $ | (4,798,977 | ) | $ | 11,018,287 | $ | 6,424,691 | $ | 4,593,596 |
As of March 31, 2020, the Company had $3,446,905 in long-term investment purchases where the trade date and settlement date are in different financial reporting periods.
There was an $875,559 increase in federal and state income taxes recoverable primarily due to federal and state tax withholdings on lottery receivables.
There was a $552,886 decrease$280,754 increase in advances to one mortgage loan originator who acquires residential mortgage loans for our life companies.
As of September 30, 2017, the Company had $550,000 in security sales where the trade date and settlement date were in different financial reporting periods compared to $6,288,274 of security sales overlapping financial reporting periods as of December 31, 2016.
There was a $721,104 increase in federal and state income taxes recoverable is primarily due to federal and state tax withholdings on lottery receivables.
There was a $786,758 increase in the accrual of mortgage loans and long-term investment payments due based upon the scheduled timing of investment payments remitted by the third party servicers. Those cash payments were received in October 2017.
On April 15, 2017,2019, the Company renewed its previous one-year loan of $400,000 to its former Chairman. The renewed loan also has a term of one year and a contractual interest rate of 5.00%. The loan is collateralized by 100,000 shares of the Company’s Class A Common stock owned by the former Chairman. As a result of Coronavirus Disease, the Company extended the maturity date of the loan by 90 days.
Our liabilities as of September 30, 2017March 31, 2020 and December 31, 20162019 are summarized as follows:
(Unaudited) | Amount Change | (Unaudited) | Amount Change | |||||||||||||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | March 31, 2020 | December 31, 2019 | 2020 less 2019 | |||||||||||||||||||
Policy liabilities | ||||||||||||||||||||||||
Policyholders' account balances | $ | 292,128,688 | $ | 245,346,489 | $ | 46,782,199 | $ | 362,198,197 | $ | 363,083,838 | $ | (885,641 | ) | |||||||||||
Future policy benefits | 48,002,489 | 44,266,227 | 3,736,262 | 67,807,951 | 65,015,390 | 2,792,561 | ||||||||||||||||||
Policy claims | 1,027,121 | 997,814 | 29,307 | 1,139,262 | 1,399,393 | (260,131 | ) | |||||||||||||||||
Other policy liabilities | 90,487 | 69,854 | 20,633 | 84,921 | 132,975 | (48,054 | ) | |||||||||||||||||
Total policy liabilities | 341,248,785 | 290,680,384 | 50,568,401 | 431,230,331 | 429,631,596 | 1,598,735 | ||||||||||||||||||
Funds withheld under coinsurance agreement | 101,038,693 | 105,638,974 | (4,600,281 | ) | ||||||||||||||||||||
Deferred federal income taxes | 2,071,174 | 693,470 | 1,377,704 | 3,752,091 | 6,345,918 | (2,593,827 | ) | |||||||||||||||||
Other liabilities | 1,395,790 | 5,598,484 | (4,202,694 | ) | 5,993,680 | 5,901,624 | 92,056 | |||||||||||||||||
Total liabilities | $ | 344,715,749 | $ | 296,972,338 | $ | 47,743,411 | $ | 542,014,795 | $ | 547,518,112 | $ | (5,503,317 | ) |
The $46,782,199$885,641 decrease and $27,310,106$36,142,005 increase in policyholders’ account balances for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively, are summarized as follows:
(Unaudited) | ||||||||||||||||
Nine Months Ended September 30, (Unaudited) | Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
Amount | Amount | Amount | Amount | |||||||||||||
Policyholders' account balances, beginning | $ | 245,346,489 | $ | 197,688,616 | $ | 363,083,838 | $ | 297,168,411 | ||||||||
Deposits | 54,296,750 | 32,177,094 | 1,769,421 | 70,719,584 | ||||||||||||
Withdrawals | (14,044,954 | ) | (9,957,150 | ) | (10,318,588 | ) | (8,740,280 | ) | ||||||||
Change in funds withheld under coinsurance agreement | 4,600,281 | (28,387,971 | ) | |||||||||||||
Interest credited | 6,530,403 | 5,090,162 | 3,063,245 | 2,550,672 | ||||||||||||
Increase | 46,782,199 | 27,310,106 | ||||||||||||||
Increase (decrease) | (885,641 | ) | 36,142,005 | |||||||||||||
Policyholders' account balances, ending | $ | 292,128,688 | $ | 224,998,722 | $ | 362,198,197 | $ | 333,310,416 |
The $3,736,262$2,792,561 increase in future policy benefits during the ninethree months ended September 30, 2017March 31, 2020 is primarily related to the production of new life insurance policies, initial sales of policies to older age bands (resulting in increased mortality reserve charges) and the aging of existing policies.
The $1,377,704 increase$2,593,827 decrease in deferred federal income taxes during the ninethree months ended September 30, 2017March 31, 2020 was due to $876,107$2,774,380 of increaseddecreased deferred federal income taxes on the unrealized appreciation (depreciation) of fixed maturity securities and equity securitiespreferred stock available-for-sale and $501,597that exceeded $180,553 of operating deferred federal tax expense.
The $4,600,281 decrease in funds withheld under coinsurance agreement is due to the liability related to TLIC’s annuity coinsurance agreement with an offshore annuity and life insurance company.
OurOur other liabilities as of September 30, 2017March 31, 2020 and December 31, 20162019 are summarized as follows:
(Unaudited) | Amount Change | (Unaudited) | Amount Change | |||||||||||||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | March 31, 2020 | December 31, 2019 | 2020 less 2019 | |||||||||||||||||||
Suspense accounts payable | $ | 575,853 | $ | 4,684,726 | $ | (4,108,873 | ) | $ | 59,467 | $ | 20,166 | $ | 39,301 | |||||||||||
Accounts payable | 102,178 | 21,387 | 80,791 | |||||||||||||||||||||
Accrued expenses payable | 565,762 | 527,938 | 37,824 | 516,370 | 679,000 | (162,630 | ) | |||||||||||||||||
Payable for securities purchased | 176,249 | 234,225 | (57,976 | ) | 576,000 | 564 | 575,436 | |||||||||||||||||
Guaranty fund assessments | 60,000 | 60,000 | - | 25,000 | 25,000 | - | ||||||||||||||||||
Unearned investment income | 57,398 | 48,466 | 8,932 | 85,957 | 62,404 | 23,553 | ||||||||||||||||||
Deferred revenue | 32,491 | 29,632 | 2,859 | 5,415 | 8,123 | (2,708 | ) | |||||||||||||||||
Unclaimed funds | 25,820 | 23,057 | 2,763 | 65,515 | 38,273 | 27,242 | ||||||||||||||||||
Lease liability | 51,140 | 76,711 | (25,571 | ) | ||||||||||||||||||||
Mortgage loans suspense | 5,404,046 | 5,782,427 | (378,381 | ) | ||||||||||||||||||||
Other payables, withholdings and escrows | (97,783 | ) | (9,560 | ) | (88,223 | ) | (897,408 | ) | (812,431 | ) | (84,977 | ) | ||||||||||||
Total other liabilities | $ | 1,395,790 | $ | 5,598,484 | $ | (4,202,694 | ) | $ | 5,993,680 | $ | 5,901,624 | $ | 92,056 |
As of March 31, 2020, the Company had $576,000 in security purchases where the trade date and settlement date were in different financial reporting periods compared to $564 of security purchases overlapping financial reporting periods as of December 31, 2019.
The $4,108,873reduction in mortgage loan suspense of $378,381 is primarily due to timing of principal loan payments on mortgage loans.
The $162,630 decrease in suspense accountsaccrued expenses payable is primarily due to decreased deposits on policy applications that had not been issued as ofa reduction in the financial reporting date.March 2020 accrual for agency conference and acquisition expenses.
Liquidity and Capital Resources
Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through September 30, 2017,March 31, 2020, we have received $27,119,480 from the sale of our shares.
The Company raised $1,450,000 from two private placements during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012; and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings.
The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital.
TheDuring 2012, 2013, 2014 and 2015, the Company has also purchasedrepurchased 247,580 shares of treasuryits common stock at a total cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’sCompany’s current Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.
As of September 30, 2017,March 31, 2020, we had cash and cash equivalents totaling $28,959,503.$16,728,153. As of September 30, 2017,March 31, 2020, cash and cash equivalents of $10,594,184$10,388,545 and $15,125,591,$5,017,908, respectively, totaling $15,406,453 were held by FBLICTLIC and TLICFBLIC and may not be available for use by FTFC due to the required pre-approval by the OID and Missouri Department of InsuranceCommerce and OIDInsurance 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 greater 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 capacity for TLIC to pay a dividend up to $1,852,287$1,245,184 in 20172020 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $914,179$918,511 in 20172020 without prior approval. FBLIC has paid no dividends of $1,000,000 to TLIC in 2016. Dividends paid by FBLIC are eliminated in consolidation.2020 and 2019. TLIC has paid no dividends to FTFC.FTFC in 2020 and 2019.
The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures interest and non-interest bearing accounts up to $250,000. Uninsured balances aggregate $18,349,060$10,400,336 and $22,117,921$18,089,331 as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. 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. The Company has not experienced any losses in such accounts.
On September 1, 2017,November 8, 2019, the Company agreed to a $1.0renewed its $1.5 million line of credit with a bank to provide working capital and funds for expansion. The terms of the line of credit allowallows for advances, repayments and re-borrowings through thea maturity date of July 1, 2018. TheSeptember 15, 2020. Any outstanding advances will incur interest at a variable interest rate of the prime rate set forth in the Wall Street Journal plus 1% per annum adjusting monthly based on a 360 day year. Thisyear with a minimum interest rate floor of 5%. No amounts were outstanding on this line of credit is subject to annual renewal based upon the discretionas of both the CompanyMarch 31, 2020 and the bank.December 31, 2019.
Our cashcash flows for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 are summarized as follows:
(Unaudited) | ||||||||||||
Nine Months Ended September 30, | Amount Change | |||||||||||
2017 | 2016 | 2017 less 2016 | ||||||||||
Net cash provided by operating activities | $ | 414,471 | $ | 4,228,919 | $ | (3,814,448 | ) | |||||
Net cash used in investing activities | (45,930,709 | ) | (8,793,138 | ) | (37,137,571 | ) | ||||||
Net cash provided by financing activities | 40,251,796 | 22,219,944 | 18,031,852 | |||||||||
Increase (decrease) in cash | (5,264,442 | ) | 17,655,725 | (22,920,167 | ) | |||||||
Cash and cash equivalents, beginning of period | 34,223,945 | 9,047,586 | 25,176,359 | |||||||||
Cash and cash equivalents, end of period | $ | 28,959,503 | $ | 26,703,311 | $ | 2,256,192 |
(Unaudited) | ||||||||||||
Three Months Ended March 31, | Amount Change | |||||||||||
2020 | 2019 | 2020 less 2019 | ||||||||||
Net cash provided by (used in) operating activities | $ | 967,977 | $ | (3,215,788 | ) | $ | 4,183,765 | |||||
Net cash provided by (used in) investing activities | 1,097,173 | (19,133,401 | ) | 20,230,574 | ||||||||
Net cash provided by (used in) financing activities | (8,549,167 | ) | 61,979,304 | (70,528,471 | ) | |||||||
Increase (decrease) in cash and cash equivalents | (6,484,017 | ) | 39,630,115 | (46,114,132 | ) | |||||||
Cash and cash equivalents, beginning of period | 23,212,170 | 29,665,605 | (6,453,435 | ) | ||||||||
Cash and cash equivalents, end of period | $ | 16,728,153 | $ | 69,295,720 | $ | (52,567,567 | ) |
The $414,471 and $4,228,919$967,977 of cash provided by operating activities and $3,215,788 of cash used in operating activities for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively, are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Three Months Ended March 31, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2020 | 2019 | 2019 less 2018 | |||||||||||||||||||
Premiums collected | $ | 11,582,534 | $ | 9,441,443 | $ | 2,141,091 | $ | 6,124,439 | $ | 5,520,968 | $ | 603,471 | ||||||||||||
Net investment income collected | 8,778,763 | 7,429,581 | 1,349,182 | 4,899,617 | 4,131,003 | 768,614 | ||||||||||||||||||
Service fees and other income collected | 24,284 | 466,718 | (442,434 | ) | ||||||||||||||||||||
Death benefits paid | (3,613,141 | ) | (2,811,463 | ) | (801,678 | ) | (4,082,934 | ) | (1,434,518 | ) | (2,648,416 | ) | ||||||||||||
Surrenders paid | (717,790 | ) | (541,725 | ) | (176,065 | ) | (410,364 | ) | (350,407 | ) | (59,957 | ) | ||||||||||||
Dividends and endowments paid | (82,033 | ) | (68,641 | ) | (13,392 | ) | ||||||||||||||||||
Commissions paid | (6,824,917 | ) | (5,135,536 | ) | (1,689,381 | ) | (2,483,383 | ) | (3,661,303 | ) | 1,177,920 | |||||||||||||
Other underwriting, insurance and acquisition expenses paid | (4,359,559 | ) | (3,679,616 | ) | (679,943 | ) | (3,148,023 | ) | (2,258,740 | ) | (889,283 | ) | ||||||||||||
Taxes paid | (739,692 | ) | (518,966 | ) | (220,726 | ) | (922,133 | ) | (718,166 | ) | (203,967 | ) | ||||||||||||
Advances to mortgage loan originator | 552,886 | (2,466,020 | ) | 3,018,906 | ||||||||||||||||||||
Deposited policy applications unissued | (4,108,873 | ) | 2,220,132 | (6,329,005 | ) | |||||||||||||||||||
Decrease in short-term investments | - | 549,851 | (549,851 | ) | ||||||||||||||||||||
(Increased) decreased assets held in trust under coinsurance agreement | 4,798,048 | (19,715,191 | ) | 24,513,239 | ||||||||||||||||||||
Increased long-term investment receivable | (3,446,905 | ) | - | (3,446,905 | ) | |||||||||||||||||||
Increased advances to mortgage loan originator | (280,754 | ) | (770,232 | ) | 489,478 | |||||||||||||||||||
Increased deposits of pending policy applications | 39,302 | 16,618,921 | (16,579,619 | ) | ||||||||||||||||||||
Increased short-term investments | (1,785 | ) | (914,153 | ) | 912,368 | |||||||||||||||||||
Increased policy loans | (60,256 | ) | (25,467 | ) | (34,789 | ) | ||||||||||||||||||
Other | (135,740 | ) | (258,762 | ) | 123,022 | 857 | (36,580 | ) | 37,437 | |||||||||||||||
Increase in cash provided by operating activities | $ | 414,471 | $ | 4,228,919 | $ | (3,814,448 | ) | |||||||||||||||||
Increase (decrease) in cash provided by operating activities | $ | 967,977 | $ | (3,215,788 | ) | $ | 4,183,765 |
Please see the statements of cash flows for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 for a summary of the components of net cash used in investing activities and net cash provided by financing activities.
Our shareholders’shareholders’ equity as of September 30, 2017March 31, 2020 and December 31, 20162019 is summarized as follows:
(Unaudited) | Amount Change | (Unaudited) | Amount Change | |||||||||||||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | March 31, 2020 | December 31, 2019 | 2020 less 2019 | |||||||||||||||||||
Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 | $ | 80,502 | $ | 80,502 | $ | - | ||||||||||||||||||
Class A common stock, par value $.01 per share (40,000,000 and 20,000,000 shares authorized as of March 31, 2020 and December 31, 2019, respectively, 8,102,492 and 8,050,173 issued as of March 31, 2020 and December 31, 2019, rescetively, 7,854,912 and 7,802,593 outstanding as of March 31, 2020 and December 31, 2019, respectively) | $ | 81,025 | $ | 80,502 | $ | 523 | ||||||||||||||||||
Class B common stock, par value $.01 per share (10,000,000 shares authorized, 116,547 issued and outstanding as of March 31, 2020) | 1,165 | - | 1,165 | |||||||||||||||||||||
Additional paid-in capital | 28,684,598 | 28,684,598 | - | 30,429,150 | 28,684,598 | 1,744,552 | ||||||||||||||||||
Treasury stock, at cost (247,580 shares as of September 30, 2017 and December 31, 2016) | (893,947 | ) | (893,947 | ) | - | |||||||||||||||||||
Accumulated other comprehensive income | 4,323,099 | 818,676 | 3,504,423 | |||||||||||||||||||||
Treasury stock, at cost (247,580 shares as of March 31, 2020 and December 31, 2019) | (893,947 | ) | (893,947 | ) | - | |||||||||||||||||||
Accumulated other comprehensive income (loss) | (820,296 | ) | 9,616,660 | (10,436,956 | ) | |||||||||||||||||||
Accumulated earnings | 9,646,620 | 7,590,446 | 2,056,174 | 20,719,705 | 19,930,449 | 789,256 | ||||||||||||||||||
Total shareholders' equity | $ | 41,840,872 | $ | 36,280,275 | $ | 5,560,597 | $ | 49,516,802 | $ | 57,418,262 | $ | (7,901,460 | ) |
The increasedecrease in shareholders’shareholders’ equity of $5,560,597$7,901,460 for the ninethree months ended September 30, 2017March 31, 2020 is due to $3,504,423 of$10,436,956 in other comprehensive incomeloss that exceeded an increase in additional paid-in capital of $1,744,552 (acquisition of K-TENN Insurance Company) and $789,256 in net income of $2,056,174.
Equity per common share outstanding increased 15.3% from $4.65 per share as of December 31, 2016 to $5.36 per share as of September 30, 2017, based upon 7,802,593 common shares outstanding as of both September 30, 2017 and December 31, 2016.income.
The liquidity requirements of our life insurance companies are met primarily by funds provided from operations. Premium and annuity consideration deposits, 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 20172020 or 2016.2019. Our investments include marketable debt securities that could be readily converted to cash for liquidity needs.
We are subject to various market risks. During first quarter 2020, the world market and the Company have been impacted by the Coronavirus disease. The quality of our investment portfolio and the current level of shareholders’shareholders’ equity continue to provide a sound financial base as we strive to expand our marketing to offer competitive products. Our investment portfolio had unrealized appreciation (depreciation) on available-for-sale securities of $5,500,237($1,040,360) and $1,039,897$12,192,831 as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. An increaseA decrease of $4,423,541$13,171,272 in unrealized gains arising for the ninethree months ended September 30, 2017March 31, 2020 has been offset by the 20172020 net realized investment lossesgains of $36,799$61,919 originating from the sale and call activity for fixed maturity securities available-for-sale resulting in net unrealized gainslosses on investments of $4,460,340.$13,233,191.
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 our 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 relationshiprelationship 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 FBLIC’sFBLIC’s annuity business is impacted by changes in interest rates. Life insurance company 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 and annuity contracts. We maintain conservative durations in our fixed maturity portfolio.
As of September 30, 2017,March 31, 2020, cash and cash equivalents, short-term investments, 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 13.1%7.6% 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 FBLIC must comply with the National Association of Insurance Commissioners 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 FBLIC met during 2016,2019, the SVL also requires the Company to perform annual cash flow testing for TLIC and FBLIC. 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.
The operations of TLIC and FBLIC 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 or existing assets and reserves. We will service other expenses and commitments by: (1) using available cash, (2) dividends from TLIC and FBLIC that are limited by law to the greater of prior year net operating income or 10% of prior year-endyear-end surplus unless specifically approved by the controlling insurance department, (3) public and private offerings of our common stock and (4) corporate borrowings, if necessary.
Given the impact of the Coronavirus Disease on the current economic environment, the Company still maintains that it can raise funds through public and private offering of our common stock and corporate markets.
Effective JanuaryJanuary 1, 2017,2019, the Company entered into a revised advance agreement with one loan originator. As of September 30, 2017,March 31, 2020, the Company has outstanding advances to this loan originator totaling $4,654,494.$4,717,541. The advances are secured by $6,015,814$7,023,016 of residential mortgage loans on real estate that are assigned to the Company. The Company has committed to fund up to an additional $845,506$1,782,459 to the loan originator that would result in additional security in the form of residential mortgage loans on real estate to be assigned to the Company.
Effective January 1, 2017,2019, the Company also entered into a revised escrow agreement with the same loan originator. According to the revised terms of the escrow agreement, as of September 30, 2017, $559,570March 31, 2020, $808,028 of additional and secured residential mortgage loan balances on real estate are held in escrow by the Company. As of September 30, 2017, $397,663March 31, 2020, $480,196 of that escrow amount is available to the Company as additional collateral on $4,654,494$4,717,541 of advances to the loan originator. The remaining September 30, 2017March 31, 2020 escrow amount of $161,907$327,832 is available to the Company as additional collateral on its investment of $32,381,460$66,609,678 in residential mortgage loans on real estate.
As a result of Coronavirus Disease 2019, which was declared a pandemic on March 11, 2020, the United States Federal, State and Local Governments, and other countries around the world have taken measures that have suddenly limited economic output. Due to the decline in economic activity, the Company is faced with a sudden uncertainty as of the date of this report on its operations when considering its revenue sources and potential future liquidity needs. Management is actively monitoring the situation and the impact to the Company’s operations. As the pandemic continues, should liquidity conditions worsen in the short-term, management will work with its financial institutions to assist with liquidity needs.
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 September 30, 2017March 31, 2020 will be sufficient to fund our anticipated operating expenses.
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; |
● | impact of medical epidemics and viruses; |
● | 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 assimilation of life insurance businesses we acquire and the sound management of these businesses; |
● | the availability of capital to expand our |
● | Coronavirus disease impact on economic environment. |
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.
Item 4.4. Controls and Procedures
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 Quarterly Report on Form 10-Q. 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.
Changes to Internal Control over Financial Reporting
There were no changes in the Company’sCompany’s internal control over financial reporting during the three months ended September 30, 2017March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A lawsuit filed by the Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, in 2013 against former Company Board of Directors member Wayne Pettigrew and Mr. Pettigrew's company, Group & Pension Planners, Inc. (the "Defendants""Defendants"), concluded on February 17, 2017. The lawsuit was filed in the District Court of Tulsa County, Oklahoma (Case No. CJ-2013-03385). In the lawsuit, the Company alleged that Mr. Pettigrew had defamed the Company by making untrue statements to certain shareholders of the Company, to the press and to regulators of the state of Oklahoma and had breached his fiduciary duties. Mr. Pettigrew denied the allegations.
The jury concluded that Mr. Pettigrew, while still a member of the Company’sCompany’s Board of Directors, did, in fact, make untrue statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company and the jury awarded itthe Company $800,000 of damages against Mr. Pettigrew. In addition, the jury found that Mr. Pettigrew had defamed Mr. Zahn and intentionally inflicted emotional distress on Mr. Zahn and awarded Mr. Zahn $3,500,000 of damages against Mr. Pettigrew. In addition to the damages awarded by the jury, the Company and Mr. Zahn have initiated steps to aggressively communicate the correction of the untrue statements to outside parties.
Mr. Pettigrew canappealed this decision. The appeal this decisionchallenged two trial court judgments based on separate verdicts against him in the jury trial. On February 28, 2020, the Court of Civil Appeals of the state of Oklahoma reversed the judgments entered by the jurytrial court and remanded the case for a new trial. The Court of Appeals reversal, however, is not final. The Company will request that will require him to postthe Court of Appeals grant a bond in the amount of the total judgment of $4,300,000.rehearing and reverse its decision. Should Mr. Pettigrew fail to post such a bond,it not do so, the Company and Mr. Zahn will be permittedpetition the Oklahoma Supreme Court to execute on Mr. Pettigrew's assets. To date, Mr. Pettigrew has failed to post this bond and, as a consequence,reverse the Company and Mr. Zahn are in the processCourt of executing on the judgments against Mr. Pettigrew’s assets. While the Company and Mr. Zahn will continue to execute on the judgments, any money or property collected during the execution of the judgments would have to be returned to Mr. Pettigrew in the event the judgments are reversed by the appellate courts.Appeals decision.
Prior to its acquisition by TLIC, FBLIC developed, marketed, and sold life insurance products known as “Decreasing Term to 95” policies. On January 17,In 2013, FBLIC’sthe Company’s Board of Directors, votedrepresented by independent counsel, concluded that effective March 1,there was no action to be taken against Mr. Zahn and that the allegations by Mr. Pettigrew were without substance. The Company was also informed back in 2013 by the Oklahoma Insurance Department that it would take no action and was also informed in 2013 that the Oklahoma Department of Securities, after its investigation of the allegations, concluded that no proceedings were needed with respect to the alleged matters. It remains the Company’s intention to again vigorously prosecute this action against the Defendants for damages and for correction of the defamatory statements. In the opinion of the Company’s management, the ultimate resolution of any contingencies that may arise from this litigation is not approving, and therefore was not providing, a dividend forconsidered material in relation to the Decreasing Term to 95 policies. On November 22, 2013, three individuals who owned Decreasing Term to 95 policies filed a Petition infinancial position or results of operations of the Circuit Court of Greene County, Missouri asserting claims against FBLIC relating to FBLIC’s decision to not provide a dividend under the Decreasing Term to 95 policies.Company.
On June 18, 2015, plaintiffs filed an amended petition. Like the original Petition, the amended Petition asserts claims for breach of contract and anticipatory breach of contract, and alleges that FBLIC breached, and will anticipatorily breach, the Decreasing Term to 95 policies of insurance by not providing a dividend sufficient to purchase a one year term life insurance policy which would keep the death benefit under the Decreasing Term to 95 policies the same as that provided during the first year of coverage under the policy. It also asserts claims for negligent misrepresentation, fraud, and violation of the Missouri Merchandising Practices Act (“MMPA”). It alleges that during its sale of the Decreasing Term to 95 policies, FBLIC represented that the owners of these policies would always be entitled to dividends to purchase a one-year term life insurance policy and that the owners would have a level death benefit without an increase in premium.
The main difference between the original Petition and the amended Petition is that the amended Petition also seeks equitable relief based on two new theories: that the Decreasing Term to 95 policies should be reformed so that they will provide a level death benefit for a level premium payment until the policyholder reaches 95 years of age; and alternatively, Count VIII of the amended Petition asks the Court to (1) find that the dividend provisions in the Decreasing Term to 95 policies violate Missouri law, specifically, § 376.360 RSMo.; (2) order that the policies are void ab initio; and (3) order that FBLIC return all premiums collected under these policies. In addition, as part of the MMPA claim, plaintiffs are now alleging that FBLIC undertook a fraudulent scheme to sell the Decreasing Term to 95 policies as a level premium for level benefit even though FBLIC never intended to pay dividends for the life of the policies and that part of this alleged fraudulent scheme included having a dividend option which is not allowed under Missouri law. FBLIC denies the allegations in the amended Petition and will continue to defend against them.
On February 1, 2016, the plaintiffs asked that the Court certify the case as a class action. With their motion, Plaintiffs filed an affidavit from an actuary stating the opinion that FBLIC has collected at least $2,548,939 in premiums on the Decreasing Term to 95 policies. This presumably is the amount that Plaintiffs will seek to be refunded to policyholders if the policies are declared void. FBLIC opposed the request for class certification. On July 21, 2016, the Court certified three classes to maintain the claims for breach of contract, anticipatory breach of contract, violation of the MMPA, reformation, and to void the Decreasing Term to 95 policies.
On August 1, 2016, FBLIC filed a Petition for Leave to Appeal with the Missouri Court of Appeals, Southern District asking for permission to appeal the Court’s class certification. The Petition for Leave to Appeal was denied. FBLIC intends to defend vigorously against the class and individual allegations. The Company is unable to determine the potential magnitude of the claims in the event of a final certification and the plaintiffs prevailing on this substantive action. The trial in this case will be before a judge and is scheduled to begin on November 27, 2017.
On May 13, 2015, FBLIC filed a Counterclaim against Doyle Nimmo seeking indemnity and seeking damages for breach of fiduciary duty in the event FBLIC is liable under Plaintiffs’ underlying claims. In addition, on April 29, 2015, TLIC filed a lawsuit against Doyle Nimmo and Michael Teel alleging that they were liable for violations of federal and state securities laws for failing to disclose information relating to the Decreasing Term to 95 policies. This lawsuit is currently pending in the District Court for the Western District of Missouri (hereinafter the “Federal Lawsuit”). No claims have been made against TLIC in the Federal Lawsuit. The Federal Lawsuit has been stayed pending resolution of the lawsuit against FBLIC in the Circuit Court of Greene County, Missouri.
On September 28, 2015, Doyle Nimmo filed a Third-Party Petition for Declaratory Judgment (and Other Relief) against FBLIC. In this Third-Party Petition, Doyle Nimmo, a former director for FBLIC, seeks a declaratory judgment that the corporate by-laws of FBLIC require FBLIC to indemnify him for attorney’s fees, judgments, costs, fines, and amounts paid in defense of both the Counterclaim and the Federal Lawsuit and seeks a monetary judgment for the amounts expended by Doyle Nimmo in such defense. Prior to Doyle Nimmo’s filing of the Third-Party Petition, FBLIC’s Board of Directors executed a Unanimous Written Consent in Lieu of a Special Meeting in which it denied Doyle Nimmo’s tender of defense and request for indemnification finding Mr. Nimmo did not meet the applicable standard of conduct for indemnification under Missouri law.
Doyle Nimmo subsequently submitted a claim and tendered the defense of these claims to Utica Mutual Insurance Company under a policy providing Insurance Agents and Brokers Errors and Omissions Liability coverage. On November 4, 2015, Utica Mutual Insurance Company filed a lawsuit against Doyle Nimmo and other interested parties, including FBLIC and TLIC. The lawsuit was pending in the District Court for the Western District of Missouri and asked the Court to determine whether the Errors and Omissions policy provides coverage for the lawsuits filed against Doyle Nimmo. Utica Mutual Insurance Company did not seek a monetary judgment against FBLIC or TLIC.
On June 14, 2017, FBLIC and Doyle Nimmo executed a settlement to dismiss with prejudice all claims, causes of action and demands between them arising out of or in any way relating to the transactions and occurrences connected to the legal proceedings described above. The settlement proceeds included payments of $90,000 to FBLIC by Utica Mutual Insurance Company and $10,000 to FBLIC by Doyle Nimmo. The settlement also included an agreement whereby FBLIC and Doyle Nimmo bore exclusive liability for payment of their respective attorneys’ fees, lawsuit expenses, expert consulting fees and taxable costs of court incurred in connection with prosecution and/or defense of the claims, causes of action and demands related to the legal proceedings described above.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None
Item 6.Exhibits
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 |
32.2 |
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 Sections 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. |
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FIRST TRINITY FINANCIAL CORPORATION | ||
an Oklahoma corporation | |||
|
|
|
|
|
|
|
|
| By: | /s/ Gregg E. Zahn |
|
|
| Gregg E. Zahn, President and Chief Executive Officer | |
| |||
| |||
May 15, 2020 | By: | /s/ Jeffrey J. Wood | |
Jeffrey J. Wood, | |||
70