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 Securities Exchange act of 1934 |
|
For the quarterly period ended September 30, 2021
| 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 74133-124674133-1246
(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 November 8, 2021, the registrant had 8,661,696 shares of Class A common stock, .01 par value, asoutstanding and 101,102 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 QUARTERLYQUARTERLY PERIOD ENDED SEPTEMBER 30,, 2017 2021
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | Page Number | ||
Item 1. Consolidated Financial Statements | |||
Consolidated Statements of Financial Position as of September 30, | 3 | ||
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, | 4 | ||
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, | 5 | ||
Consolidated Statements of Changes in | 6 | ||
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, | 7 | ||
Notes to Consolidated Financial Statements (Unaudited) | 9 | ||
Item 2. | 35 | ||
Item 4. Controls and Procedures | 62 | ||
Part II. OTHER INFORMATION | |||
Item 1. Legal Proceedings | 62 | ||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 63 | ||
Item 3. Defaults upon Senior Securities | 63 | ||
Item 4. Mine Safety Disclosures | 63 | ||
Item 5. Other Information | 63 | ||
Item 6. Exhibits | 63 | ||
Signatures | |||
| 64 | |||
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 | |||||||||
| |||||||||
(Unaudited) | ||||||||
September 30, 2021 | December 31, 2020 | |||||||
Assets | ||||||||
Investments | ||||||||
Available-for-sale fixed maturity securities at fair value (amortized cost: $153,991,976 and $148,431,010 as of September 30, 2021 and December 31, 2020, respectively) | $ | 172,745,212 | $ | 170,647,836 | ||||
Available-for-sale preferred stock securities at fair value (amortized cost: $1,250,000 as of September 30, 2021) | 1,234,000 | 0 | ||||||
Equity securities at fair value (cost: $285,412 and $183,219 as of September 30, 2021 and December 31, 2020, respectively) | 340,754 | 203,003 | ||||||
Mortgage loans on real estate | 170,647,657 | 174,909,062 | ||||||
Investment real estate | 688,345 | 757,936 | ||||||
Policy loans | 2,218,249 | 2,108,678 | ||||||
Short-term investments | 1,674,777 | 3,309,020 | ||||||
Other long-term investments | 66,700,899 | 71,025,133 | ||||||
Total investments | 416,249,893 | 422,960,668 | ||||||
Cash and cash equivalents | 63,024,968 | 40,230,095 | ||||||
Accrued investment income | 4,913,923 | 5,370,508 | ||||||
Recoverable from reinsurers | 1,053,179 | 1,234,221 | ||||||
Assets held in trust under coinsurance agreement | 109,072,674 | 112,160,307 | ||||||
Agents' balances and due premiums | 1,945,949 | 2,154,322 | ||||||
Deferred policy acquisition costs | 48,664,102 | 44,513,669 | ||||||
Value of insurance business acquired | 4,382,627 | 4,592,977 | ||||||
Other assets | 12,152,845 | 10,378,502 | ||||||
Total assets | $ | 661,460,160 | $ | 643,595,269 | ||||
Liabilities and Shareholders' Equity | ||||||||
Policy liabilities | ||||||||
Policyholders' account balances | $ | 377,072,802 | $ | 362,519,753 | ||||
Future policy benefits | 85,241,834 | 76,673,797 | ||||||
Policy claims | 1,869,646 | 2,099,548 | ||||||
Other policy liabilities | 113,157 | 119,699 | ||||||
Total policy liabilities | 464,297,439 | 441,412,797 | ||||||
Funds withheld under coinsurance agreement | 109,678,542 | 112,681,925 | ||||||
Deferred federal income taxes | 9,079,407 | 9,220,905 | ||||||
Other liabilities | 9,449,432 | 10,427,430 | ||||||
Total liabilities | 592,504,820 | 573,743,057 | ||||||
Shareholders' equity | ||||||||
Class A common stock, par value $.01 per share (40,000,000 shares authorized as of September 30, 2021 and December 31, 2020, 8,909,276 issued as of September 30, 2021 and December 31, 2020, 8,661,696 outstanding as of September 30, 2021 and December 31, 2020) | 89,093 | 89,093 | ||||||
Class B common stock, par value $.01 per share (10,000,000 shares authorized, 101,102 issued and outstanding as of September 30, 2021 and December 31, 2020) | 1,011 | 1,011 | ||||||
Additional paid-in capital | 39,078,485 | 39,078,485 | ||||||
Treasury stock, at cost (247,580 shares as of September 30, 2021 and December 31, 2020) | (893,947 | ) | (893,947 | ) | ||||
Accumulated other comprehensive income | 14,794,261 | 17,518,858 | ||||||
Accumulated earnings | 15,886,437 | 14,058,712 | ||||||
Total shareholders' equity | 68,955,340 | 69,852,212 | ||||||
Total liabilities and shareholders' equity | $ | 661,460,160 | $ | 643,595,269 | ||||
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| ||
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|
First Trinity Financial Corporation and Subsidiaries | ||||||||||
Consolidated Statements of Operations | ||||||||||
(Unaudited) |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Revenues | ||||||||||||||||
Premiums | $ | 8,323,522 | $ | 7,166,641 | $ | 23,182,831 | $ | 19,971,741 | ||||||||
Net investment income | 5,757,862 | 5,749,175 | 17,979,206 | 17,895,091 | ||||||||||||
Net realized investment gains | 320,735 | 118,960 | 491,098 | 552,842 | ||||||||||||
Service fees | 12,245 | 23,212 | 191,833 | 41,108 | ||||||||||||
Other income | 13,793 | 17,681 | 73,134 | 136,472 | ||||||||||||
Total revenues | 14,428,157 | 13,075,669 | 41,918,102 | 38,597,254 | ||||||||||||
Benefits, Claims and Expenses | ||||||||||||||||
Benefits and claims | ||||||||||||||||
Increase in future policy benefits | 3,437,541 | 2,995,221 | 8,639,474 | 8,103,379 | ||||||||||||
Death benefits | 2,315,438 | 2,600,833 | 8,108,650 | 6,695,141 | ||||||||||||
Surrenders | 112,980 | 242,460 | 834,545 | 881,365 | ||||||||||||
Interest credited to policyholders | 3,279,558 | 3,071,581 | 9,487,050 | 9,191,808 | ||||||||||||
Dividend, endowment and supplementary life contract benefits | 82,600 | 69,984 | 225,666 | 223,202 | ||||||||||||
Total benefits and claims | 9,228,117 | 8,980,079 | 27,295,385 | 25,094,895 | ||||||||||||
Policy acquisition costs deferred | (3,142,259 | ) | (3,056,211 | ) | (9,325,731 | ) | (8,134,182 | ) | ||||||||
Amortization of deferred policy acquisition costs | 1,683,068 | 1,144,749 | 5,206,030 | 3,665,161 | ||||||||||||
Amortization of value of insurance business acquired | 67,030 | 73,778 | 210,350 | 227,328 | ||||||||||||
Commissions | 3,161,051 | 2,960,619 | 9,172,274 | 7,766,710 | ||||||||||||
Other underwriting, insurance and acquisition expenses | 2,085,184 | 1,908,840 | 6,946,126 | 7,285,760 | ||||||||||||
Total expenses | 3,854,074 | 3,031,775 | 12,209,049 | 10,810,777 | ||||||||||||
Total benefits, claims and expenses | 13,082,191 | 12,011,854 | 39,504,434 | 35,905,672 | ||||||||||||
Income before total federal income tax expense | 1,345,966 | 1,063,815 | 2,413,668 | 2,691,582 | ||||||||||||
Current federal income tax expense | 1,670 | 45,654 | 3,180 | 45,654 | ||||||||||||
Deferred federal income tax expense | 276,962 | 178,104 | 582,763 | 543,019 | ||||||||||||
Total federal income tax expense | 278,632 | 223,758 | 585,943 | 588,673 | ||||||||||||
Net income | $ | 1,067,334 | $ | 840,057 | $ | 1,827,725 | $ | 2,102,909 | ||||||||
Net income per common share basic and diluted | ||||||||||||||||
Class A common stock | $ | 0.1220 | $ | 0.0960 | $ | 0.2089 | $ | 0.2408 | ||||||||
Class B common stock | $ | 0.1037 | $ | 0.0816 | $ | 0.1776 | $ | 0.1670 | ||||||||
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, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Net income | $ | 1,067,334 | $ | 840,057 | $ | 1,827,725 | $ | 2,102,909 | ||||||||
Other comprehensive income (loss) | ||||||||||||||||
Total net unrealized investment gains (losses) arising during the period | (1,385,055 | ) | 3,136,605 | (3,353,993 | ) | 5,845,923 | ||||||||||
Less net realized investment gains having no credit losses | 21,932 | 111,674 | 125,597 | 429,813 | ||||||||||||
Net unrealized investment gains (losses) | (1,406,987 | ) | 3,024,931 | (3,479,590 | ) | 5,416,110 | ||||||||||
Less adjustment to deferred acquisition costs | (7,675 | ) | 4,795 | (30,732 | ) | 14,613 | ||||||||||
Other comprehensive income (loss) before federal income tax expense (benefit) | (1,399,312 | ) | 3,020,136 | (3,448,858 | ) | 5,401,497 | ||||||||||
Federal income tax expense (benefit) | (293,857 | ) | 634,228 | (724,261 | ) | 1,134,314 | ||||||||||
Total other comprehensive income (loss) | (1,105,455 | ) | 2,385,908 | (2,724,597 | ) | 4,267,183 | ||||||||||
Total comprehensive income (loss) | $ | (38,121 | ) | $ | 3,225,965 | $ | (896,872 | ) | $ | 6,370,092 | ||||||
See notes to consolidated financial statements (unaudited). |
First Trinity Financial Corporation and Subsidiaries | ||||||||||||||||
Consolidated Statements of Changes in Shareholders' Equity | ||||||||||||||||
Three and Nine Months Ended September 30, 2021 and 2020 | ||||||||||||||||
(Unaudited) |
Class A | Class B | Accumulated | ||||||||||||||||||||||||||
Common | Common | Additional | Other | Total | ||||||||||||||||||||||||
Stock | Stock | Paid-in | Treasury | Comprehensive | Accumulated | Shareholders' | ||||||||||||||||||||||
$.01 Par Value | $.01 Par Value | Capital | Stock | Income | Earnings | Equity | ||||||||||||||||||||||
Three months ended September 30, 2020 | ||||||||||||||||||||||||||||
Balance as of July 1, 2020 | $ | 81,179 | $ | 1,011 | $ | 30,429,150 | $ | (893,947 | ) | $ | 11,497,935 | $ | 20,808,567 | $ | 61,923,895 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 0 | 0 | 0 | 0 | 0 | 840,057 | 840,057 | |||||||||||||||||||||
Other comprehensive income | 0 | 0 | 0 | 0 | 2,385,908 | 0 | 2,385,908 | |||||||||||||||||||||
Balance as of September 30, 2020 | $ | 81,179 | $ | 1,011 | $ | 30,429,150 | $ | (893,947 | ) | $ | 13,883,843 | $ | 21,648,624 | $ | 65,149,860 | |||||||||||||
Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||
Balance as of January 1, 2020 | $ | 80,502 | $ | 0 | $ | 28,684,598 | $ | (893,947 | ) | $ | 9,616,660 | $ | 19,930,449 | $ | 57,418,262 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income | 0 | 0 | 0 | 0 | 0 | 2,102,909 | 2,102,909 | |||||||||||||||||||||
Other comprehensive income | 0 | 0 | 0 | 0 | 4,267,183 | 0 | 4,267,183 | |||||||||||||||||||||
Shareholders' cash dividend | 0 | 0 | 0 | 0 | 0 | (384,734 | ) | (384,734 | ) | |||||||||||||||||||
Acquisition of K-TENN Insurance Company | 1,688 | 0 | 1,744,552 | 0 | 0 | 0 | 1,746,240 | |||||||||||||||||||||
Recapitalization | (1,011 | ) | 1,011 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
Balance as of September 30, 2020 | $ | 81,179 | $ | 1,011 | $ | 30,429,150 | $ | (893,947 | ) | $ | 13,883,843 | $ | 21,648,624 | $ | 65,149,860 | |||||||||||||
Three months ended September 30, 2021 | ||||||||||||||||||||||||||||
Balance as of July 1, 2021 | $ | 89,093 | $ | 1,011 | $ | 39,078,485 | $ | (893,947 | ) | $ | 15,899,716 | $ | 14,819,103 | $ | 68,993,461 | |||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||
Net income | 0 | 0 | 0 | 0 | 0 | 1,067,334 | 1,067,334 | |||||||||||||||||||||
Other comprehensive loss | 0 | 0 | 0 | 0 | (1,105,455 | ) | 0 | (1,105,455 | ) | |||||||||||||||||||
Balance as of September 30, 2021 | $ | 89,093 | $ | 1,011 | $ | 39,078,485 | $ | (893,947 | ) | $ | 14,794,261 | $ | 15,886,437 | $ | 68,955,340 | |||||||||||||
Nine months ended September 30, 2021 | ||||||||||||||||||||||||||||
Balance as of January 1, 2021 | $ | 89,093 | $ | 1,011 | $ | 39,078,485 | $ | (893,947 | ) | $ | 17,518,858 | $ | 14,058,712 | $ | 69,852,212 | |||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||
Net income | 0 | 0 | 0 | 0 | 0 | 1,827,725 | 1,827,725 | |||||||||||||||||||||
Other comprehensive loss | 0 | 0 | 0 | 0 | (2,724,597 | ) | 0 | (2,724,597 | ) | |||||||||||||||||||
Balance as of September 30, 2021 | $ | 89,093 | $ | 1,011 | $ | 39,078,485 | $ | (893,947 | ) | �� | $ | 14,794,261 | $ | 15,886,437 | $ | 68,955,340 | ||||||||||||
See notes to consolidated financial statements (unaudited). |
PART I – FINANCIAL INFORMATION
First Trinity Financial Corporation and Subsidiaries | ||||||
Consolidated Statements of Cash Flows | ||||||
(Unaudited) |
Item 1. Consolidated Financial Statements
Nine Months Ended September 30, | ||||||||
2021 | 2020 | |||||||
Operating activities | ||||||||
Net income | $ | 1,827,725 | $ | 2,102,909 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for depreciation | 0 | 109,116 | ||||||
Accretion of discount on investments | (3,600,202 | ) | (3,733,176 | ) | ||||
Net realized investment gains | (491,098 | ) | (552,842 | ) | ||||
Amortization of policy acquisition cost | 5,206,030 | 3,665,161 | ||||||
Policy acquisition cost deferred | (9,325,731 | ) | (8,134,182 | ) | ||||
Amortization of loan origination fees | 43,585 | 30,241 | ||||||
Amortization of value of insurance business acquired | 210,350 | 227,328 | ||||||
Allowance for mortgage loan losses | 94,911 | 36,800 | ||||||
Provision for deferred federal income tax expense | 582,763 | 543,019 | ||||||
Interest credited to policyholders | 9,487,050 | 9,191,808 | ||||||
Change in assets and liabilities: | ||||||||
Policy loans | (109,571 | ) | (44,658 | ) | ||||
Short-term investments | 1,634,243 | 156,850 | ||||||
Accrued investment income | 456,585 | (177,486 | ) | |||||
Recoverable from reinsurers | 181,042 | 50,021 | ||||||
Funds under coinsurance agreement | 3,948,538 | 2,057,396 | ||||||
Agents' balances and due premiums | 208,373 | (802,590 | ) | |||||
Other assets (excludes change in receivable for securities sold of ($1,627,000) in 2020) | (1,774,343 | ) | (3,358,479 | ) | ||||
Future policy benefits | 8,568,037 | 8,061,676 | ||||||
Policy claims | (229,902 | ) | 408,900 | |||||
Other policy liabilities | (6,542 | ) | 819 | |||||
Other liabilities (excludes change in payable for securities purchased of $1,561,417 and $313,188 in 2021 and 2020, respectively) | (2,539,415 | ) | (613,164 | ) | ||||
Net cash provided by operating activities | 14,372,428 | 9,225,467 | ||||||
Investing activities | ||||||||
Purchases of fixed maturity securities | (12,760,202 | ) | (3,597,065 | ) | ||||
Maturities of fixed maturity securities | 900,000 | 945,500 | ||||||
Sales of fixed maturity securities | 6,049,876 | 14,977,950 | ||||||
Purchases of preferred stock securities | (1,250,000 | ) | 0 | |||||
Sales of preferred stock securities | 0 | 50,000 | ||||||
Purchases of equity securities | (162,603 | ) | (68,198 | ) | ||||
Sales of equity securities | 89 | 0 | ||||||
Acquisition of K-TENN Insurance Company | 0 | 1,110,299 | ||||||
Joint venture distributions | 60,410 | 66,511 | ||||||
Purchases of mortgage loans | (74,296,705 | ) | (58,751,393 | ) | ||||
Payments on mortgage loans | 78,319,365 | 45,252,139 | ||||||
Purchases of other long-term investments | (882,026 | ) | (4,799,143 | ) | ||||
Payments on other long-term investments | 8,863,095 | 8,440,078 | ||||||
Sale of real estate | 818,018 | 682,945 | ||||||
Net change in receivable and payable for securities sold and purchased | 1,561,417 | (1,313,812 | ) | |||||
Net cash provided by investing activities | 7,220,734 | 2,995,811 | ||||||
Financing activities | ||||||||
Policyholders' account deposits | 25,215,132 | 17,030,797 | ||||||
Policyholders' account withdrawals | (24,013,421 | ) | (30,041,959 | ) | ||||
Shareholders' cash dividend | 0 | (384,734 | ) | |||||
Net cash provided by (used in) financing activities | 1,201,711 | (13,395,896 | ) | |||||
Increase (decrease) in cash and cash equivalents | 22,794,873 | (1,174,618 | ) | |||||
Cash and cash equivalents, beginning of period | 40,230,095 | 23,212,170 | ||||||
Cash and cash equivalents, end of period | $ | 63,024,968 | $ | 22,037,552 | ||||
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Financial Position
See notes to consolidated financial statements (unaudited). |
(Unaudited) | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
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 | ||||||
Mortgage loans on real estate | 103,013,015 | 74,371,286 | ||||||
Investment real estate | 2,354,311 | 2,506,673 | ||||||
Policy loans | 1,626,771 | 1,598,116 | ||||||
Other long-term investments | 57,675,405 | 46,788,873 | ||||||
Total investments | 313,384,648 | 255,214,510 | ||||||
Cash and cash equivalents | 28,959,503 | 34,223,945 | ||||||
Accrued investment income | 2,618,245 | 2,176,770 | ||||||
Recoverable from reinsurers | 1,157,109 | 1,258,938 | ||||||
Agents' balances and due premiums | 1,602,599 | 1,419,250 | ||||||
Deferred policy acquisition costs | 23,164,372 | 18,191,990 | ||||||
Value of insurance business acquired | 5,610,747 | 5,908,835 | ||||||
Other assets | 10,059,398 | 14,858,375 | ||||||
Total assets | $ | 386,556,621 | $ | 333,252,613 | ||||
Liabilities and Shareholders' Equity | ||||||||
Policy liabilities | ||||||||
Policyholders' account balances | $ | 292,128,688 | $ | 245,346,489 | ||||
Future policy benefits | 48,002,489 | 44,266,227 | ||||||
Policy claims | 1,027,121 | 997,814 | ||||||
Other policy liabilities | 90,487 | 69,854 | ||||||
Total policy liabilities | 341,248,785 | 290,680,384 | ||||||
Deferred federal income taxes | 2,071,174 | 693,470 | ||||||
Other liabilities | 1,395,790 | 5,598,484 | ||||||
Total liabilities | 344,715,749 | 296,972,338 | ||||||
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 | ||||||
Additional paid-in capital | 28,684,598 | 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 | ||||||
Accumulated earnings | 9,646,620 | 7,590,446 | ||||||
Total shareholders' equity | 41,840,872 | 36,280,275 | ||||||
Total liabilities and shareholders' equity | $ | 386,556,621 | $ | 333,252,613 | ||||
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, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues | ||||||||||||||||
Premiums | $ | 4,058,629 | $ | 3,197,228 | $ | 11,560,664 | $ | 9,426,803 | ||||||||
Net investment income | 4,631,892 | 3,303,980 | 12,296,827 | 9,922,817 | ||||||||||||
Net realized investment gains (losses) | (3,486 | ) | 160,308 | 254,108 | 307,250 | |||||||||||
Loss on other-than-temporary impairments | - | - | (224,250 | ) | - | |||||||||||
Other income | 25,249 | 10,053 | 92,376 | 25,259 | ||||||||||||
Total revenues | 8,712,284 | 6,671,569 | 23,979,725 | 19,682,129 | ||||||||||||
Benefits, Claims and Expenses | ||||||||||||||||
Benefits and claims | ||||||||||||||||
Increase in future policy benefits | 1,291,943 | 1,357,212 | 3,733,907 | 3,995,230 | ||||||||||||
Death benefits | 1,310,697 | 881,928 | 3,744,278 | 2,868,216 | ||||||||||||
Surrenders | 186,202 | 205,356 | 717,790 | 541,725 | ||||||||||||
Interest credited to policyholders | 2,293,419 | 1,754,941 | 6,530,403 | 5,090,162 | ||||||||||||
Dividend, endowment and supplementary life contract benefits | 68,492 | 81,040 | 200,260 | 214,552 | ||||||||||||
Total benefits and claims | 5,150,753 | 4,280,477 | 14,926,638 | 12,709,885 | ||||||||||||
Policy acquisition costs deferred | (2,369,432 | ) | (2,023,246 | ) | (7,370,469 | ) | (5,142,381 | ) | ||||||||
Amortization of deferred policy acquisition costs | 890,135 | 536,901 | 2,318,277 | 1,588,938 | ||||||||||||
Amortization of value of insurance business acquired | 88,625 | 91,966 | 298,089 | 281,175 | ||||||||||||
Commissions | 2,051,910 | 1,954,586 | 6,641,883 | 4,783,307 | ||||||||||||
Other underwriting, insurance and acquisition expenses | 1,362,524 | 1,244,013 | 4,588,947 | 4,123,540 | ||||||||||||
Total expenses | 2,023,762 | 1,804,220 | 6,476,727 | 5,634,579 | ||||||||||||
Total benefits, claims and expenses | 7,174,515 | 6,084,697 | 21,403,365 | 18,344,464 | ||||||||||||
Income before total federal income tax expense | 1,537,769 | 586,872 | 2,576,360 | 1,337,665 | ||||||||||||
Current federal income tax expense (benefit) | (1,320 | ) | 4,472 | 18,589 | 41,982 | |||||||||||
Deferred federal income tax expense | 294,437 | 83,814 | 501,597 | 163,685 | ||||||||||||
Total federal income tax expense | 293,117 | 88,286 | 520,186 | 205,667 | ||||||||||||
Net income | $ | 1,244,652 | $ | 498,586 | $ | 2,056,174 | $ | 1,131,998 | ||||||||
Net income per common share basic and diluted | $ | 0.16 | $ | 0.06 | $ | 0.26 | $ | 0.15 | ||||||||
See notes to consolidated financial statements (unaudited).
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(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 | ||||||||
See notes to consolidated financial statements (unaudited).
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 2017 and 2016
(Unaudited)
Accumulated | ||||||||||||||||||||||||
Common | Additional | Other | Total | |||||||||||||||||||||
Stock | Paid-in | Treasury | Comprehensive | Accumulated | Shareholders' | |||||||||||||||||||
$.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 | ||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | - | - | - | - | 1,131,998 | 1,131,998 | ||||||||||||||||||
Other comprehensive income | - | - | - | 7,166,759 | - | 7,166,759 | ||||||||||||||||||
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 January 1, 2017 | $ | 80,502 | $ | 28,684,598 | $ | (893,947 | ) | $ | 818,676 | $ | 7,590,446 | $ | 36,280,275 | |||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | - | - | - | - | 2,056,174 | 2,056,174 | ||||||||||||||||||
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 | |||||||||||
See notes to consolidated financial statements (unaudited).
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Operating activities | ||||||||
Net income | $ | 2,056,174 | $ | 1,131,998 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for depreciation | 109,435 | 109,587 | ||||||
Accretion of discount on investments | (2,298,768 | ) | (1,278,028 | ) | ||||
Net realized investment gains | (254,108 | ) | (307,250 | ) | ||||
Loss on other-than-temporary impairment | 224,250 | - | ||||||
Amortization of policy acquisition cost | 2,318,277 | 1,588,938 | ||||||
Policy acquisition cost deferred | (7,370,469 | ) | (5,142,381 | ) | ||||
Mortgage loan origination fees deferred | - | (4,530 | ) | |||||
Amortization of loan origination fees | 44,351 | 54,032 | ||||||
Amortization of value of insurance business acquired | 298,089 | 281,175 | ||||||
Allowance for mortgage loan losses | 105,024 | 36,096 | ||||||
Provision for deferred federal income tax expense | 501,597 | 163,685 | ||||||
Interest credited to policyholders | 6,530,403 | 5,090,162 | ||||||
Change in assets and liabilities: | ||||||||
Accrued investment income | (441,475 | ) | 56,974 | |||||
Policy loans | (28,655 | ) | (75,655 | ) | ||||
Short-term investments | - | 549,850 | ||||||
Recoverable from reinsurers | 101,829 | (37,538 | ) | |||||
Agents' balances and due premiums | (183,349 | ) | (344,558 | ) | ||||
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 | ) | ||||
Future policy benefits | 3,736,262 | 4,002,756 | ||||||
Policy claims | 29,307 | 94,291 | ||||||
Other policy liabilities | 20,633 | 5,631 | ||||||
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 | ||||||
Investing activities | ||||||||
Purchases of fixed maturity securities | (32,830,057 | ) | (6,163,564 | ) | ||||
Maturities of fixed maturity securities | 6,762,000 | 4,657,000 | ||||||
Sales of fixed maturity securities | 10,378,173 | 10,205,935 | ||||||
Purchases of equity securities | (2,832 | ) | (14,480 | ) | ||||
Sales of equity securities | - | 128,010 | ||||||
Purchases of mortgage loans | (44,857,137 | ) | (20,669,087 | ) | ||||
Payments on mortgage loans | 16,129,739 | 11,317,427 | ||||||
Purchases of other long-term investments | (14,036,084 | ) | (11,340,463 | ) | ||||
Payments on other long-term investments | 5,863,095 | 3,114,728 | ||||||
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 | ) | |||||
Net cash used in investing activities | (45,930,709 | ) | (8,793,138 | ) | ||||
Financing activities | ||||||||
Policyholders' account deposits | 54,296,750 | 32,177,094 | ||||||
Policyholders' account withdrawals | (14,044,954 | ) | (9,957,150 | ) | ||||
Net cash provided by financing activities | 40,251,796 | 22,219,944 | ||||||
Increase (decrease) in cash | (5,264,442 | ) | 17,655,725 | |||||
Cash and cash equivalents, beginning of period | 34,223,945 | 9,047,586 | ||||||
Cash and cash equivalents, end of period | $ | 28,959,503 | $ | 26,703,311 | ||||
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 Investing 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 2017 nine months ended September 30, 2021 and 2016,2020, the Company foreclosed on residential mortgage loans of real estate totaling $142,455$458,587 and $198,622,$797,158, 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 | Nine Months Ended | Nine Months Ended | |||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2021 | September 30, 2020 | |||||||||||||
Reductions in mortgage loans due to foreclosure | $ | 142,455 | $ | 198,622 | $ | 458,587 | $ | 797,158 | ||||||||
Investment real estate held-for-sale acquired through foreclosure | (142,455 | ) | (198,622 | ) | (458,587 | ) | (797,158 | ) | ||||||||
Net cash provided (used) in investing activities | $ | - | $ | - | ||||||||||||
Net cash used in investing activities | $ | 0 | $ | 0 | ||||||||||||
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.
| September 30, 2020 | ||||
Cash used in acquisition of K-TENN Insurance Company | $ | 0 | ||
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, 20172021
(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, Trinity Mortgage Corporation (“TMC”), formerly known as First Trinity Capital Corporation and Trinity American, Inc. (“FTCC”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 Alabama, Illinois, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, Texas, Utah and Texas.West Virginia. 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 FTCCTMC 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 noTMC’s primary focus changed during 2020 from premium financing loans since June 30, 2012.to originating, brokering and administrating residential and commercial mortgage loans for third parties.
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 two2 private placement stock offerings during 2004 and $25,669,480 from two2 public stock offerings and one1 private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012 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. On January 1, 2020, the Company issued 168,866 shares in connection with its acquisition of K-TENN Insurance Company (“K-TENN”).
The Company also issued 702,685 shares of its common stock in connection with two2 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.
In 2020, the Company paid a $0.05 per share cash dividend for a total of $393,178 and issued 791,339 shares of Class A common stock in connection with a 10% stock dividend to its Class A shareholders. The 10% stock dividend resulted in accumulated earnings being charged $8,657,249 with an offsetting credit of $8,657,249 to common stock and additional paid-in capital.
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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2021
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
AcquisitionCompany Recapitalizations
On October 2, 2019, at the Company Annual Shareholders’ Meeting, FTFC’s shareholders approved the following proposals:
● | 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. |
● | 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 Oklahoma Insurance Department (“OID”) on February 27, 2020 and the Missouri Department of Commerce and Insurance (“MDCI”) on December 31, 2019, followed by formal adoption by FTFC’s Board of Directors on March 12, 2020. Effective March 12, 2020, FTFC’s Class B shareholders were 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.
Acquisition of Other Companies
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 costs associated with the acquisition of $195,234. The acquisition of FLAC was financed with the working capital of FTFC.
On December 31, 2008, FTFC made FLAC a 15 year loan in the form of a surplus note in the amount of $250,000 with an interest rate of 6% payable monthly, that was approved by the Oklahoma Insurance Department (“OID”). This surplus note is eliminated in consolidation.
On August 31, 2009, two2 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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2021
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
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-Q10-Q and Article 10 of Regulation S-X.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 nine months ended September 30, 2017 2021 are not necessarily indicative of the results to be expected for the year ended December 31, 2017 2021 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-K10-K for the year ended December 31, 2016.2020.
Management continues to actively monitor the COVID-2019 pandemic, the new variants of the virus and the impact of the viruses on the Company’s operations. Although there appears to be recoveries in economic activity and output especially in the United States with the introduction of and inoculations of vaccines, should liquidity conditions worsen in the short-term, management will work with its financial institutions to assist with liquidity needs. The Company continues to adapt its operations and provide and perform all business activities despite the viruses and operates under the guidelines of the U.S. Centers for Disease Control and Prevention.
Principles of Consolidation
The consolidated financial statements include the accounts and operations of the Company and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
Reclassifications
Certain reclassifications have been made in the prior year 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
CommonClass A and Class B common stock isare fully paid, non-assessable and has a par value of $.01$.01 per share.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2021
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
1. Organization and Significant Accounting Policies(continued)
Subsequent Events
Management has evaluated all events subsequent to September 30, 2017 2021 through the date that these financial statements have been issued.
Recent Accounting Pronouncements
Revenue from Contracts with Customers
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 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 required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimal rental payments that were tracked and disclosed under previous U.S. GAAP. The updated guidance is to be applied using a modified retrospective approach effective for annual 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 on the Company’s results of operations, financial position or liquidity.
Investments — Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting
In March 2016, the FASB issued updated guidance that eliminates the requirement to retroactively apply the equity method of accounting when an investment that was previously accounted for using another method of accounting becomes qualified to apply the equity method due to an increase in the level of ownership interest or degree of influence. If the investment was previously accounted for as an available-for-sale security, any related unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for the equity method is recognized through earnings. The updated guidance is effective for reporting periods beginning after December 15, 2016, and is to be applied prospectively. 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)
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.
Statement of Cash Flows – Classification of Certain Cash ReceiptsIntangibles - Goodwill and Cash PaymentsOther
In August 2016, January 2017, the FASB issued specificupdated guidance (Accounting Standards Update 2017-04) that eliminates the requirement to reducecalculate 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).
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2021
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
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 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 2018, the FASB issued updated guidance (Accounting Standards Update 2018-12) to the existing diversity in practice in how eight specific cash flow issuesrecognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. This update improves the timeliness of certain cash receipts and cash payments are presented and classifiedrecognizing changes in the statementliability 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 cash flows.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 has been changed twice and the delayed effective date is now for reporting periods beginning after December 15, 2024. Early adoption is permitted but not elected by the Company. 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 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 simplify several other income tax accounting matters. The Company adopted this guidance in first quarter 2021. 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, 2021
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
Business Combinations – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
In October 2021, the FASB issued guidance (Accounting Standards Update 2021-08) for the accounting for revenue contracts with customers acquired in a business combination. The amendments in this Update address how to determine whether a contract liability is recognized by the acquirer in a business combination and provide specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments to this Update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification - Revenue from Contracts with Customers (“Topic 606”) at the acquisition date as if the acquirer had originated the contracts.
The amendments in this Update primarily address the accounting for contract assets and contract liabilities from revenue contracts with customers in a business combination. These amendments, however, also apply to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply. The amendments in this Update do not affect the accounting for other assets or liabilities that may arise from revenue contracts with customers in accordance with Topic 606 whether in or not in a business combination.
The amendments in this Update are effective for annual andthe Company as a public business entity for fiscal years beginning after December 15, 2022, including interim periods beginning after December 15, 2017, and is towithin those fiscal years. The amendments in this Update should be applied retrospectively.prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted.permitted including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments retrospectively to all business for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and prospectively to all business combinations that occur on or after the date of initial application. 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, 20172021
(Unaudited)
1. Organization and Significant Accounting Policies2. Investments (continued)
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)Investments in fixed maturity and preferred stock available-for-sale as 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 September 30, 2021 and vesting conditions of the modified award and the classification of the modified award (equity or liability instrument) December 31, 2020 are the samesummarized as the original award immediately before the modification.follows:
Gross | Gross | |||||||||||||||
Amortized Cost | Unrealized | Unrealized | Fair | |||||||||||||
or Cost | Gains | Losses | Value | |||||||||||||
September 30, 2021 (Unaudited) | ||||||||||||||||
Fixed maturity securities | ||||||||||||||||
U.S. government and U.S. government agencies | $ | 428,879 | $ | 1,391 | $ | 450 | $ | 429,820 | ||||||||
States and political subdivisions | 8,183,832 | 729,312 | 23,099 | 8,890,045 | ||||||||||||
Residential mortgage-backed securities | 11,373 | 13,947 | 0 | 25,320 | ||||||||||||
Corporate bonds | 114,124,130 | 14,221,882 | 97,550 | 128,248,462 | ||||||||||||
Asset-backed securities | 1,236,917 | 52,199 | 3,963 | 1,285,153 | ||||||||||||
Exchange traded securities | 523,780 | 0 | 5,780 | 518,000 | ||||||||||||
Foreign bonds | 29,083,065 | 3,865,750 | 14,233 | 32,934,582 | ||||||||||||
Certificate of deposits | 400,000 | 13,830 | 0 | 413,830 | ||||||||||||
Total fixed maturity securities | 153,991,976 | 18,898,311 | 145,075 | 172,745,212 | ||||||||||||
Preferred stock securities | 1,250,000 | 0 | 16,000 | 1,234,000 | ||||||||||||
Total fixed maturity and preferred stock securities | $ | 155,241,976 | $ | 18,898,311 | $ | 161,075 | $ | 173,979,212 | ||||||||
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.
December 31, 2020 | ||||||||||||||||
Fixed maturity securities | ||||||||||||||||
U.S. government and U.S. government agencies | $ | 430,735 | $ | 3,568 | $ | 0 | $ | 434,303 | ||||||||
States and political subdivisions | 8,830,403 | 891,285 | 31,932 | 9,689,756 | ||||||||||||
Residential mortgage-backed securities | 14,022 | 14,420 | 0 | 28,442 | ||||||||||||
Corporate bonds | 106,387,417 | 16,859,782 | 111,840 | 123,135,359 | ||||||||||||
Asset-backed securities | 2,052,174 | 32,908 | 47,813 | 2,037,269 | ||||||||||||
Exchange traded securities | 500,000 | 0 | 200 | 499,800 | ||||||||||||
Foreign bonds | 29,616,259 | 4,641,338 | 59,230 | 34,198,367 | ||||||||||||
Certificate of deposits | 600,000 | 24,540 | 0 | 624,540 | ||||||||||||
Total fixed maturity securities | $ | 148,431,010 | $ | 22,467,841 | $ | 251,015 | $ | 170,647,836 | ||||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 20172021
(Unaudited)
2. Investments 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, 2017 2021 and December 31, 2016 2020 are summarized as follows:
Unrealized | Number of | Unrealized | Number of | |||||||||||||||||||||
Fair Value | Loss | Securities | Fair Value | Loss | Securities | |||||||||||||||||||
September 30, 2017 (Unaudited) | September 30, 2021 (Unaudited) | |||||||||||||||||||||||
Fixed maturity securities | ||||||||||||||||||||||||
Less than 12 months | ||||||||||||||||||||||||
Less than 12 months in an unrealized loss position | ||||||||||||||||||||||||
U.S. government and U.S. government agencies | $ | 476,388 | $ | 4,294 | 4 | $ | 303,420 | $ | 450 | 2 | ||||||||||||||
States and political subdivisions | 1,409,461 | 27,856 | 8 | 104,131 | 157 | 1 | ||||||||||||||||||
Corporate bonds | 4,658,050 | 94,634 | 19 | 5,213,820 | 97,550 | 16 | ||||||||||||||||||
Exchange traded securities | 518,000 | 5,780 | 2 | |||||||||||||||||||||
Foreign bonds | 1,557,436 | 39,316 | 5 | 547,400 | 14,233 | 1 | ||||||||||||||||||
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 less than 12 months in an unrealized loss position | 6,686,771 | 118,170 | 22 | |||||||||||||||||||||
More than 12 months in an unrealized loss position | ||||||||||||||||||||||||
States and political subdivisions | 628,548 | 22,942 | 1 | |||||||||||||||||||||
Asset-backed securities | 357,543 | 3,963 | 1 | |||||||||||||||||||||
Total more than 12 months in an unrealized loss position | 986,091 | 26,905 | 2 | |||||||||||||||||||||
Total fixed maturity securities in an unrealized loss position | $ | 14,598,025 | $ | 690,112 | 60 | 7,672,862 | 145,075 | 24 | ||||||||||||||||
| 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 | |||||||||||||||||||
Preferred stock securities, less than 12 months in an unrealized loss position | 484,000 | 16,000 | 2 | |||||||||||||||||||||
Total fixed maturity and preferred stock securities in an unrealized loss position | $ | 8,156,862 | $ | 161,075 | $ | 26 | ||||||||||||||||||
December 31, 2020 | ||||||||||||
Fixed maturity securities | ||||||||||||
Less than 12 months in an unrealized loss position | ||||||||||||
States and political subdivisions | $ | 625,098 | $ | 31,932 | 1 | |||||||
Corporate bonds | 878,716 | 41,508 | 3 | |||||||||
Asset-backed securities | 1,047,443 | 47,813 | 3 | |||||||||
Exchange traded securities | 499,800 | 200 | 2 | |||||||||
Foreign bonds | 285,569 | 28,282 | 4 | |||||||||
Total less than 12 months in an unrealized loss position | 3,336,626 | 149,735 | 13 | |||||||||
More than 12 months in an unrealized loss position | ||||||||||||
Corporate bonds | 1,084,205 | 70,332 | 3 | |||||||||
Foreign bonds | 532,875 | 30,948 | 1 | |||||||||
Total more than 12 months in an unrealized loss position | 1,617,080 | 101,280 | 4 | |||||||||
Total fixed maturity securities in an unrealized loss position | $ | 4,953,706 | $ | 251,015 | $ | 17 | ||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2021
(Unaudited)
2. Investments (continued)
As of September 30, 2017, 2021, the Company held 6024 available-for-sale fixed maturity securities with an unrealized loss of $690,112,$145,075, fair value of $14,598,025$7,672,862 and amortized cost of $15,288,137.$7,817,937. These unrealized losses were primarily due to the market interest rate movements in the bond market as of September 30, 2021. The ratio of the fair value to the amortized cost of these 24 securities is 98%.
As of December 31, 2020, the Company held 17 available-for-sale fixed maturity securities with an unrealized loss of $251,015, fair value of $4,953,706 and amortized cost of $5,204,721. These unrealized losses were primarily due to market interest rate movements in the bond market as of September 30, 2017. December 31, 2020. The ratio of the fair value to the amortized cost of these 6017 securities is 95%.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
2. Investments(continued)
As of December 31, 2016, September 30, 2021, the Company held 170two available-for-sale fixed maturity preferred stock securities with an unrealized loss of $1,999,354,$16,000, fair value of $42,248,782$484,000 and amortized cost of $44,248,136. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2016.$500,000. The ratio of the fair value to the amortized cost of these 170 securities is 95%.
As of December 31, 2016, the Company had three available-for-sale equity securities with an unrealized loss of $6,454, fair value of $185,473 and cost of $191,927. The ratio of fair value to cost of thesetwo securities is 97%.
Fixed maturity securities were 93%91% and 92%97% investment grade as rated by Standard & Poor’s as of September 30, 2017 2021 and December 31, 2016, 2020, respectively.
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 recorded oneother-than-temporary impairments onimpairment during 2020. During 2020, the Company impaired its fixed maturity available-for-sale investmentbonds in an energy corporationoffshore drilling company with a total par value of $650,000$850,000 as a result of continuing unrealized losses. During fourth quarter 2016 this securityThis impairment was initially impaired byconsidered fully credit-related, resulting in a $207,450 charge to the statement of operations. During second quarter 2017 this security was further impaired by a $224,250operations before tax of $801,340 for the year ended December 31, 2020. This charge torepresents the statementcredit-related portion 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 has experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securities forduring 2020.
There were 0 impairments during the three and nine months ended September 30, 2017 and the year ended December 31, 2016.2021.
Management believes that the Company will fully recover its cost basis in the securities held as of September 30, 2017, 2021, 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, 20172021
(Unaudited)
2. Investments (continued)
Net unrealized gains included in other comprehensive income for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized as of September 30, 2017 2021 and December 31, 2016, 2020, are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2021 | December 31, 2020 | |||||||||||||
Unrealized appreciation on available-for-sale securities | $ | 5,500,237 | $ | 1,039,897 | $ | 18,737,236 | $ | 22,216,826 | ||||||||
Adjustment to deferred acquisition costs | (96,363 | ) | (16,553 | ) | (10,325 | ) | (41,057 | ) | ||||||||
Deferred income taxes | (1,080,775 | ) | (204,668 | ) | (3,932,650 | ) | (4,656,911 | ) | ||||||||
Net unrealized appreciation on available-for-sale securities | $ | 4,323,099 | $ | 818,676 | $ | 14,794,261 | $ | 17,518,858 | ||||||||
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$66,700,899 and $46,788,873$71,025,133 as of September 30, 2017 2021 and December 31, 2016, 2020, 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, 2021, by contractual maturity, are summarized as follows:
September 30, 2017 (Unaudited) | September 30, 2021 (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 | $ | 2,761,873 | $ | 2,809,168 | $ | 11,912,892 | $ | 12,143,150 | ||||||||||||||||
Due after one year through five years | 30,208,994 | 31,312,939 | 23,377,949 | 25,433,045 | 38,330,774 | 40,464,311 | 34,083,825 | 38,421,632 | ||||||||||||||||||||||||
Due after five years through ten years | 38,476,332 | 39,833,033 | 16,190,560 | 19,790,751 | 39,538,177 | 43,676,601 | 14,819,938 | 19,748,660 | ||||||||||||||||||||||||
Due after ten years | 66,630,897 | 69,493,041 | 9,858,486 | 15,836,022 | 73,349,779 | 85,769,812 | 5,884,244 | 11,234,378 | ||||||||||||||||||||||||
Due at multiple maturity dates | 29,190 | 71,825 | - | - | 11,373 | 25,320 | 0 | 0 | ||||||||||||||||||||||||
| $ | 142,612,677 | $ | 148,042,788 | $ | 57,675,405 | $ | 69,421,789 | $ | 153,991,976 | $ | 172,745,212 | $ | 66,700,899 | $ | 81,547,820 | |||||||||||||||||
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, 20172021
(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,investment real estate, mortgage loans on real estate investment real estate and other long-term investmentspreferred stock securities available-for-sale for the three and nine months ended September 30, 2017 2021 and 20162020 are summarized as follows:
Three Months Ended September 30, (Unaudited) | Three Months Ended September 30, (Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed Maturity Securities | Equity Securities | Mortgage Loans on Real Estate | Investment Real Estate | Fixed Maturity Securities | Investment Real Estate | Mortgage Loans on Real Estate | Preferred Stock Securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds | $ | 4,536,924 | $ | 7,368,724 | $ | - | $ | - | $ | 5,405,626 | $ | 7,655,905 | $ | - | $ | - | $ | 2,981,658 | $ | 4,209,686 | $ | 742,078 | $ | 0 | $ | 25,158,102 | $ | 12,357,549 | $ | 0 | $ | 50,000 | ||||||||||||||||||||||||||||||||
Gross realized gains | 37,337 | 242,910 | - | - | - | - | - | - | 160,753 | 115,229 | 283,491 | 0 | 1,344 | 1 | 0 | 55 | ||||||||||||||||||||||||||||||||||||||||||||||||
Gross realized losses | (40,823 | ) | (36,020 | ) | - | - | - | (46,582 | ) | - | - | (138,821 | ) | (3,610 | ) | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||||||
Loss on other-than-temporary impairment | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | |||||||||||||||||||||||||||||||||||||||
Other Long-Term Investments | Fixed Maturity Securities | Equity Securities | Investment Real Estate | Mortgage Loans on Real Estate | ||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||
Proceeds | $ | - | $ | - | $ | 6,949,876 | $ | 15,923,450 | $ | 89 | $ | 0 | $ | 818,018 | $ | 682,945 | $ | 78,319,365 | $ | 45,252,139 | ||||||||||||||||||||
Gross realized gains | - | - | 291,252 | 461,716 | 89 | 0 | 289,840 | 33,696 | 40,014 | 108,100 | ||||||||||||||||||||||||||||||
Gross realized losses | - | - | (165,655 | ) | (31,958 | ) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||
Loss on other-than-temporary impairment | - | - | ||||||||||||||||||||||||||||||||||||||
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) | Nine Months Ended September 30, (Unaudited) | |||||||||||||||
Other Long-Term Investments | Preferred Stock Securities | |||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Proceeds | $ | 792,012 | $ | - | $ | 0 | $ | 50,000 | ||||||||
Gross realized gains | 62,275 | - | 0 | 55 | ||||||||||||
Gross realized losses | - | - | 0 | 0 | ||||||||||||
Loss on other-than-temporary impairment | - | - | ||||||||||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 20172021
(Unaudited)
2. Investments (continued)
The accumulated change in net unrealized investment gains (losses) for fixed maturity and equity securitiespreferred stock available-for-sale for the three and nine months ended September 30, 2017 2021 and 20162020 and the amount of net realized investment gains (losses) on fixed maturity securities available-for-sale, equity securities, available-for-sale,investment real estate, mortgage loans on real estate investment real estate and other long-term investmentspreferred stock securities for the three and nine months ended September 30, 2017 2021 and 20162020 are summarized as follows:
Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Change in unrealized investment gains: | ||||||||||||||||||||||||||||||||
Change in unrealized investment gains (losses): | ||||||||||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||
Fixed maturity securities | $ | 694,379 | $ | 817,963 | $ | 4,429,221 | $ | 9,078,142 | $ | (1,389,187 | ) | $ | 3,025,426 | $ | (3,463,590 | ) | $ | 5,418,065 | ||||||||||||||
Equity securities | 12,381 | 33,665 | 31,119 | 26,911 | ||||||||||||||||||||||||||||
Preferred stock | (17,800 | ) | (495 | ) | (16,000 | ) | (1,955 | ) | ||||||||||||||||||||||||
Net realized investment gains (losses): | ||||||||||||||||||||||||||||||||
Available-for-sale securities: | ||||||||||||||||||||||||||||||||
Fixed maturity securities | (3,486 | ) | 206,890 | 187,451 | 328,598 | 21,932 | 111,619 | 125,597 | 429,758 | |||||||||||||||||||||||
Equity securities | - | - | - | 7,243 | ||||||||||||||||||||||||||||
Equity securities, sale of securities | 0 | 0 | 89 | 0 | ||||||||||||||||||||||||||||
Equity securities, changes in fair value | 13,968 | 7,285 | 35,558 | (18,767 | ) | |||||||||||||||||||||||||||
Investment real estate | 283,491 | 0 | 289,840 | 33,696 | ||||||||||||||||||||||||||||
Mortgage loans on real estate | - | (46,582 | ) | - | (28,591 | ) | 1,344 | 1 | 40,014 | 108,100 | ||||||||||||||||||||||
Investment real estate | - | - | 4,382 | - | ||||||||||||||||||||||||||||
Other long-term investments | - | - | 62,275 | - | ||||||||||||||||||||||||||||
Preferred stock securities | 0 | 55 | 0 | 55 | ||||||||||||||||||||||||||||
Major categories of net investment income for the three and nine months ended September 30, 2017 2021 and 20162020 are summarized as follows:
Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Fixed maturity securities | $ | 1,731,931 | $ | 1,435,041 | $ | 4,887,826 | $ | 4,535,560 | $ | 1,737,661 | $ | 1,930,697 | $ | 5,161,051 | $ | 5,443,419 | ||||||||||||||||
Equity securities | 4,382 | 6,728 | 14,540 | 20,568 | ||||||||||||||||||||||||||||
Preferred stock and equity securities | 37,732 | 22,946 | 81,136 | 79,015 | ||||||||||||||||||||||||||||
Other long-term investments | 967,959 | 687,042 | 2,707,438 | 1,857,366 | 1,151,057 | 1,275,834 | 3,656,131 | 3,927,257 | ||||||||||||||||||||||||
Mortgage loans | 2,379,176 | 1,417,445 | 5,923,207 | 4,098,943 | 3,517,394 | 3,503,652 | 10,743,701 | 10,870,548 | ||||||||||||||||||||||||
Policy loans | 28,640 | 27,348 | 84,657 | 79,937 | 40,461 | 37,985 | 118,036 | 113,814 | ||||||||||||||||||||||||
Real estate | 93,943 | 62,391 | 281,366 | 246,327 | 0 | 68,663 | 0 | 206,026 | ||||||||||||||||||||||||
Short-term and other investments | 72,935 | 56,806 | 296,019 | 198,950 | 20,854 | 38,662 | 65,227 | 92,479 | ||||||||||||||||||||||||
Gross investment income | 5,278,966 | 3,692,801 | 14,195,053 | 11,037,651 | 6,505,159 | 6,878,439 | 19,825,282 | 20,732,558 | ||||||||||||||||||||||||
Investment expenses | (647,074 | ) | (388,821 | ) | (1,898,226 | ) | (1,114,834 | ) | (747,297 | ) | (1,129,264 | ) | (1,846,076 | ) | (2,837,467 | ) | ||||||||||||||||
Net investment income | $ | 4,631,892 | $ | 3,303,980 | $ | 12,296,827 | $ | 9,922,817 | $ | 5,757,862 | $ | 5,749,175 | $ | 17,979,206 | $ | 17,895,091 | ||||||||||||||||
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, 2017 2021 and December 31, 2016, 2020, these required deposits, included in investment assets, had amortized costs that totaled $3,702,658$4,469,238 and $4,099,405,$4,464,398, respectively. As of September 30, 2017 2021 and December 31, 2016, 2020, these required deposits had fair values that totaled $3,726,812$4,517,846 and $4,125,116,$4,531,967, respectively.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 20172021
(Unaudited)
2. Investments (continued)
The Company’sCompany’s mortgage loans by property type as of September 30, 2017 2021 and December 31, 2016 2020 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 | ||||
(Unaudited) | ||||||||
September 30, 2021 | December 31, 2020 | |||||||
Residential mortgage loans | $ | 163,270,025 | $ | 163,906,373 | ||||
Commercial mortgage loans by property type | ||||||||
Apartment | 175,417 | 0 | ||||||
Industrial | 476,953 | 670,708 | ||||||
Lodging | 282,896 | 290,889 | ||||||
Office building | 2,844,637 | 4,596,331 | ||||||
Retail | 3,597,729 | 5,444,761 | ||||||
Total commercial mortgage loans by property type | 7,377,632 | 11,002,689 | ||||||
Total mortgage loans | $ | 170,647,657 | $ | 174,909,062 | ||||
There were 11 loans with a remaining principal balance of $2,211,689 that were more than 90 days past due as of September 30, 2021. There were 24 loans with a remaining principal balance of $3,979,997 that were more than 90 days past due as of December 31, 2020.
There were 0 mortgage loans in default and in the foreclosure process as of September 30, 2021. There were 0 mortgage loans in default or foreclosure as of December 31, 2020.
The Company’sCompany’s investment real estate as of September 30, 2017 2021 and December 31, 2016 2020 is summarized as follows:
(Unaudited) | ||||||||
September 30, 2017 | December 31, 2016 | |||||||
Land - held for the production of income | $ | 213,160 | $ | 213,160 | ||||
Land - held for investment | 745,155 | 745,155 | ||||||
Total land | 958,315 | 958,315 | ||||||
Building - held for the production of income | 2,267,557 | 2,267,557 | ||||||
Less - accumulated depreciation | (1,158,810 | ) | (1,049,695 | ) | ||||
Buildings net of accumulated depreciation | 1,108,747 | 1,217,862 | ||||||
Residential real estate - held for sale | 287,249 | 330,496 | ||||||
Total residential real estate | 287,249 | 330,496 | ||||||
Investment real estate, net of accumulated depreciation | $ | 2,354,311 | $ | 2,506,673 | ||||
(Unaudited) | ||||||||
September 30, 2021 | December 31, 2020 | |||||||
Land - held for investment | $ | 540,436 | $ | 540,436 | ||||
Residential real estate - held for sale | 147,909 | 217,500 | ||||||
Investment real estate, net of accumulated depreciation | $ | 688,345 | $ | 757,936 | ||||
On November 16, 2020, TLIC ownssold a 20,000 square feet office building and approximately six and one-half3 acres of land located in Topeka, Kansas that includeswith an aggregate carrying value of $1,078,037. The Company recorded a 20,000 square foot office buildinggross realized investment gain on sale of $240,374 based on an aggregate sales price of $1,318,411.
TLIC owns approximately one-fourth3 acres of this land. This building andundeveloped land on one of the four lots is held for the production of income. The other three lots of land ownedlocated in Topeka, Kansas are held for investment. In addition, with a carrying value of $409,436.
FBLIC owns one-halfapproximately one-half acre of undeveloped land located in Jefferson City, Missouri. During fourth quarter 2016 management impaired the undeveloped land by $4,892 from itsMissouri with a carrying value to its net realizable value expected at the time of ultimate resale.$131,000.
During 2017 and 2016,2021, the Company foreclosed on oneresidential mortgage loansloan of real estate totaling $142,455 and $198,622, respectively,$458,587 and transferred those propertiesthe property to investment real estate that are now held for sale.
During 2017,2021, the Company sold investment real estate property with an aggregate carrying value of $185,702.$528,178. The Company recorded a gross realized investment gain on sale of $4,382$289,840 based on an aggregate sales price of $190,084.$818,018.
During 2020, the Company foreclosed on residential mortgage loans of real estate totaling $797,158 and transferred those properties to investment real estate held for sale. During 2020, the Company sold investment real estate property with an aggregate carrying value of $791,704. The Company recorded a gross realized investment gain on sale of $106,665 based on an aggregate sales price of $898,369.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 20172021
(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, residential mortgage-backed securities, corporate debtbonds, asset-backed securities, exchange traded securities, foreign bonds and foreign debt securities.certificate of deposits.
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-levelthree-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, 20172021
(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, 2017 2021 and December 31, 2016 2020 is summarized as follows:
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
September 30, 2017 (Unaudited) | September 30, 2021 (Unaudited) | |||||||||||||||||||||||||||||||
Fixed maturity securities, available-for-sale | ||||||||||||||||||||||||||||||||
U.S. government and U.S. government agencies | $ | - | $ | 2,981,465 | $ | - | $ | 2,981,465 | $ | 0 | $ | 429,820 | $ | 0 | $ | 429,820 | ||||||||||||||||
States and political subdivisions | - | 9,668,841 | - | 9,668,841 | 0 | 8,890,045 | 0 | 8,890,045 | ||||||||||||||||||||||||
Residential mortgage-backed securities | - | 71,825 | - | 71,825 | 0 | 25,320 | 0 | 25,320 | ||||||||||||||||||||||||
Corporate bonds | - | 113,193,928 | - | 113,193,928 | 0 | 128,248,462 | 0 | 128,248,462 | ||||||||||||||||||||||||
Asset-backed securities | 0 | 1,285,153 | 0 | 1,285,153 | ||||||||||||||||||||||||||||
Exchange traded securities | 0 | 518,000 | 0 | 518,000 | ||||||||||||||||||||||||||||
Foreign bonds | - | 22,126,729 | - | 22,126,729 | 0 | 32,934,582 | 0 | 32,934,582 | ||||||||||||||||||||||||
Certificate of deposits | 0 | 413,830 | 0 | 413,830 | ||||||||||||||||||||||||||||
Total fixed maturity securities | $ | - | $ | 148,042,788 | $ | - | $ | 148,042,788 | $ | 0 | $ | 172,745,212 | $ | 0 | $ | 172,745,212 | ||||||||||||||||
Equity securities, available-for-sale | ||||||||||||||||||||||||||||||||
Preferred stock securities, available-for-sale | $ | 1,234,000 | $ | 0 | $ | 0 | $ | 1,234,000 | ||||||||||||||||||||||||
Equity securities | ||||||||||||||||||||||||||||||||
Mutual funds | $ | - | $ | 349,473 | $ | - | $ | 349,473 | $ | 0 | $ | 80,888 | $ | 0 | $ | 80,888 | ||||||||||||||||
Corporate preferred stock | 102,020 | - | - | 102,020 | ||||||||||||||||||||||||||||
Corporate common stock | 159,365 | - | 61,500 | 220,865 | 196,589 | 0 | 63,277 | 259,866 | ||||||||||||||||||||||||
Total equity securities | $ | 261,385 | $ | 349,473 | $ | 61,500 | $ | 672,358 | $ | 196,589 | $ | 80,888 | $ | 63,277 | $ | 340,754 | ||||||||||||||||
| December 31, 2016 | ||||||||||||||||||||||||||||||||
Fixed maturity securities, available-for-sale | ||||||||||||||||||||||||||||||||
U.S. government and U.S. government agencies | $ | - | $ | 3,185,383 | $ | - | $ | 3,185,383 | ||||||||||||||||||||||||
States and political subdivisions | - | 9,250,896 | - | 9,250,896 | ||||||||||||||||||||||||||||
Residential mortgage-backed securities | - | 70,727 | - | 70,727 | ||||||||||||||||||||||||||||
Corporate bonds | - | 100,980,041 | - | 100,980,041 | ||||||||||||||||||||||||||||
Foreign bonds | - | 15,824,108 | - | 15,824,108 | ||||||||||||||||||||||||||||
Total fixed maturity securities | $ | - | $ | 129,311,155 | $ | - | $ | 129,311,155 | ||||||||||||||||||||||||
Equity securities, available-for-sale | ||||||||||||||||||||||||||||||||
Mutual funds | $ | - | $ | 341,914 | $ | - | $ | 341,914 | ||||||||||||||||||||||||
Corporate preferred stock | 96,360 | - | - | 96,360 | ||||||||||||||||||||||||||||
Corporate common stock | 138,633 | - | 61,500 | 200,133 | ||||||||||||||||||||||||||||
Total equity securities | $ | 234,993 | $ | 341,914 | $ | 61,500 | $ | 638,407 | ||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||
Fixed maturity securities, available-for-sale | ||||||||||||||||
U.S. government and U.S. government agencies | $ | 0 | $ | 434,303 | $ | 0 | $ | 434,303 | ||||||||
States and political subdivisions | 0 | 9,689,756 | 0 | 9,689,756 | ||||||||||||
Residential mortgage-backed securities | 0 | 28,442 | 0 | 28,442 | ||||||||||||
Corporate bonds | 0 | 123,135,359 | 0 | 123,135,359 | ||||||||||||
Asset-backed securities | 0 | 2,037,269 | 0 | 2,037,269 | ||||||||||||
Exchange traded securities | 0 | 499,800 | 0 | 499,800 | ||||||||||||
Foreign bonds | 34,198,367 | 34,198,367 | ||||||||||||||
Certificate of deposits | 0 | 624,540 | 0 | 624,540 | ||||||||||||
Total fixed maturity securities | $ | 0 | $ | 170,647,836 | $ | 0 | $ | 170,647,836 | ||||||||
Equity securities | ||||||||||||||||
Mutual funds | $ | 0 | $ | 84,242 | $ | 0 | $ | 84,242 | ||||||||
Corporate common stock | 51,629 | 0 | 67,132 | 118,761 | ||||||||||||
Total equity securities | $ | 51,629 | $ | 84,242 | $ | 67,132 | $ | 203,003 | ||||||||
As of September 30, 2017 2021 and December 31, 2016, 2020, 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, 20172021
(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 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 nine months ended September 30, 2021 and 2020 is summarized as follows:
Unaudited | ||||||||
Nine Months Ended September 30, | ||||||||
2021 | 2020 | |||||||
Beginning balance | $ | 67,133 | $ | 64,107 | ||||
Joint venture net income | 56,554 | 68,198 | ||||||
Joint venture distribution | (60,410 | ) | (66,511 | ) | ||||
Ending balance | $ | 63,277 | $ | 65,794 | ||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 20172021
(Unaudited)
3.Fair Value Measurements (continued)
The
The 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, 2017 2021 and December 31, 2016, 2020, 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) | September 30, 2021 (Unaudited) | |||||||||||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||||||||||
Mortgage loans on real estate | ||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 1,820,866 | $ | 1,823,474 | $ | - | $ | - | $ | 1,823,474 | ||||||||||||||||||||||||||||||
Commercial | $ | 7,377,632 | $ | 8,171,057 | $ | 0 | $ | 0 | $ | 8,171,057 | ||||||||||||||||||||||||||||||
Residential | 101,192,149 | 103,364,612 | - | - | 103,364,612 | 163,270,025 | 185,575,474 | 0 | 0 | 185,575,474 | ||||||||||||||||||||||||||||||
Policy loans | 1,626,771 | 1,626,771 | - | - | 1,626,771 | 2,218,249 | 2,218,249 | 0 | 0 | 2,218,249 | ||||||||||||||||||||||||||||||
Short-term investments | 1,674,777 | 1,674,777 | 1,674,777 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Other long-term investments | 57,675,405 | 69,421,789 | - | - | 69,421,789 | 66,700,899 | 81,547,820 | 0 | 0 | 81,547,820 | ||||||||||||||||||||||||||||||
Cash and cash equivalents | 28,959,503 | 28,959,503 | 28,959,503 | - | - | 63,024,968 | 63,024,968 | 63,024,968 | 0 | 0 | ||||||||||||||||||||||||||||||
Accrued investment income | 2,618,245 | 2,618,245 | - | - | 2,618,245 | 4,913,923 | 4,913,923 | 0 | 0 | 4,913,923 | ||||||||||||||||||||||||||||||
Total financial assets | $ | 193,892,939 | $ | 205,973,290 | $ | 28,959,503 | $ | - | $ | 177,013,787 | $ | 309,180,473 | $ | 347,126,268 | $ | 64,699,745 | $ | 0 | $ | 282,426,523 | ||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||
Policyholders' account balances | $ | 292,128,688 | $ | 239,162,237 | $ | - | $ | - | $ | 239,162,237 | $ | 377,072,802 | $ | 379,131,962 | $ | 0 | $ | 0 | $ | 379,131,962 | ||||||||||||||||||||
Policy claims | 1,027,121 | 1,027,121 | - | - | 1,027,121 | 1,869,646 | 1,869,646 | 0 | 0 | 1,869,646 | ||||||||||||||||||||||||||||||
Total financial liabilities | $ | 293,155,809 | $ | 240,189,358 | $ | - | $ | - | $ | 240,189,358 | $ | 378,942,448 | $ | 381,001,608 | $ | 0 | $ | 0 | $ | 381,001,608 | ||||||||||||||||||||
| December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||||||||||
Mortgage loans on real estate | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 1,254,808 | $ | 1,268,140 | $ | - | $ | - | $ | 1,268,140 | ||||||||||||||||||||||||||||||
Residential | 73,116,478 | 70,383,661 | - | - | 70,383,661 | |||||||||||||||||||||||||||||||||||
Policy loans | 1,598,116 | 1,598,116 | - | - | 1,598,116 | |||||||||||||||||||||||||||||||||||
Other long-term investments | 46,788,873 | 55,890,429 | - | - | 55,890,429 | |||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 34,223,945 | 34,223,945 | 34,223,945 | - | - | |||||||||||||||||||||||||||||||||||
Accrued investment income | 2,176,770 | 2,176,770 | - | - | 2,176,770 | |||||||||||||||||||||||||||||||||||
Total financial assets | $ | 159,158,990 | $ | 165,541,061 | $ | 34,223,945 | $ | - | $ | 131,317,116 | ||||||||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||
Policyholders' account balances | $ | 245,346,489 | $ | 206,541,702 | $ | - | $ | - | $ | 206,541,702 | ||||||||||||||||||||||||||||||
Policy claims | 997,814 | 997,814 | - | - | 997,814 | |||||||||||||||||||||||||||||||||||
Total financial liabilities | $ | 246,344,303 | $ | 207,539,516 | $ | - | $ | - | $ | 207,539,516 | ||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Mortgage loans on real estate | ||||||||||||||||||||
Commercial | $ | 11,002,689 | $ | 11,085,406 | $ | 0 | $ | 0 | $ | 11,085,406 | ||||||||||
Residential | 163,906,373 | 184,802,993 | 0 | 0 | 184,802,993 | |||||||||||||||
Policy loans | 2,108,678 | 2,108,678 | 0 | 0 | 2,108,678 | |||||||||||||||
Short-term investments | 3,309,020 | 3,309,020 | 3,309,020 | 0 | 0 | |||||||||||||||
Other long-term investments | 71,025,133 | 89,264,246 | 0 | 0 | 89,264,246 | |||||||||||||||
Cash and cash equivalents | 40,230,095 | 40,230,095 | 40,230,095 | 0 | 0 | |||||||||||||||
Accrued investment income | 5,370,508 | 5,370,508 | 0 | 0 | 5,370,508 | |||||||||||||||
Total financial assets | $ | 296,952,496 | $ | 336,170,946 | $ | 43,539,115 | $ | 0 | $ | 292,631,831 | ||||||||||
Financial liabilities | ||||||||||||||||||||
Policyholders' account balances | $ | 362,519,753 | $ | 380,666,901 | $ | 0 | $ | 0 | $ | 380,666,901 | ||||||||||
Policy claims | 2,099,548 | 2,099,548 | 0 | 0 | 2,099,548 | |||||||||||||||
Total financial liabilities | $ | 364,619,301 | $ | 382,766,449 | $ | 0 | $ | 0 | $ | 382,766,449 | ||||||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 20172021
(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 Securities and Equity Securities
The fair value of fixed maturity securities, preferred stock 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 both residential and commercial mortgage loans, the discount rate used was indexed to the LIBOR yield curve adjusted for an appropriate credit spread. For commercial and industrial 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 andPolicy 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’ 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, 20172021
(Unaudited)
4. 4.Segment Data
TheThe Company has a life insurance segment, consisting of the life insurance operations of TLIC, FBLIC and FBLIC,TAI, an annuity segment, consisting of the annuity operations of TLIC, FBLIC and FBLICTAI and a corporate segment. Results for the parent company and the operations of FTCC,TMC, after elimination of intercompany amounts, are allocated to the corporate segment. These segments as of September 30, 2017 2021 and December 31, 2016 2020 and for the three and nine months ended September 30, 2017 2021 and 20162020 are summarized as follows:
Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | Three Months Ended September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
Life insurance operations | $ | 4,723,138 | $ | 3,720,401 | $ | 13,321,087 | $ | 11,068,191 | $ | 9,404,804 | $ | 8,201,655 | $ | 26,468,275 | $ | 23,044,336 | ||||||||||||||||
Annuity operations | 3,903,408 | 2,802,934 | 10,377,974 | 8,158,645 | 4,932,938 | 4,729,579 | 14,957,409 | 15,078,907 | ||||||||||||||||||||||||
Corporate operations | 85,738 | 148,234 | 280,664 | 455,293 | 90,415 | 144,435 | 492,418 | 474,011 | ||||||||||||||||||||||||
Total | $ | 8,712,284 | $ | 6,671,569 | $ | 23,979,725 | $ | 19,682,129 | $ | 14,428,157 | $ | 13,075,669 | $ | 41,918,102 | $ | 38,597,254 | ||||||||||||||||
Income before income taxes: | ||||||||||||||||||||||||||||||||
Income (loss) before income taxes: | ||||||||||||||||||||||||||||||||
Life insurance operations | $ | 345,522 | $ | 35,230 | $ | 899,547 | $ | 87,745 | $ | 923,202 | $ | 141,246 | $ | 808,447 | $ | (194,993 | ) | |||||||||||||||
Annuity operations | 1,141,492 | 436,051 | 1,488,848 | 1,014,476 | 385,534 | 795,043 | 1,645,473 | 2,506,220 | ||||||||||||||||||||||||
Corporate operations | 50,755 | 115,591 | 187,965 | 235,444 | 37,230 | 127,526 | (40,252 | ) | 380,355 | |||||||||||||||||||||||
Total | $ | 1,537,769 | $ | 586,872 | $ | 2,576,360 | $ | 1,337,665 | $ | 1,345,966 | $ | 1,063,815 | $ | 2,413,668 | $ | 2,691,582 | ||||||||||||||||
Depreciation and amortization expense: | ||||||||||||||||||||||||||||||||
Life insurance operations | $ | 858,012 | $ | 541,995 | $ | 1,828,933 | $ | 1,540,582 | $ | 1,270,992 | $ | 1,013,517 | $ | 4,353,884 | $ | 3,197,814 | ||||||||||||||||
Annuity operations | 178,063 | 154,648 | 941,219 | 493,151 | 479,106 | 245,115 | 1,106,081 | 834,032 | ||||||||||||||||||||||||
Corporate operations | - | - | - | - | ||||||||||||||||||||||||||||
Total | $ | 1,036,075 | $ | 696,643 | $ | 2,770,152 | $ | 2,033,733 | $ | 1,750,098 | $ | 1,258,632 | $ | 5,459,965 | $ | 4,031,846 | ||||||||||||||||
(Unaudited) | |||||||||||||||||
September 30, 2017 | December 31, 2016 | (Unaudited) | |||||||||||||||
Assets: | September 30, 2021 | December 31, 2020 | |||||||||||||||
Life insurance operations | $ | 54,305,804 | $ | 50,577,282 | $ | 138,602,579 | $ | 120,484,734 | |||||||||
Annuity operations | 325,089,923 | 275,745,766 | 518,227,430 | 518,257,307 | |||||||||||||
Corporate operations | 7,160,894 | 6,929,565 | 4,630,151 | 4,853,228 | |||||||||||||
Total | $ | 386,556,621 | $ | 333,252,613 | $ | 661,460,160 | $ | 643,595,269 | |||||||||
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 2014With the 2020 U.S. federal income tax return filed on October 13, 2021, the 2018 through 20162020 U.S. federal tax years are now 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, 20172021
(Unaudited)
6. Legal Matters and Contingent Liabilities
A lawsuit filed by the Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, in 2013against former Company Board of Directors member WayneWayne Pettigrew and Mr. Pettigrew's company, Group & Pension Planners, Inc. (the "Defendants"), originally concluded on February 17, 2017. The lawsuit was filed in the District Court of Tulsa County, Oklahoma (Case No. CJ-2013-03385).Oklahoma. 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 originally 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 original damages awarded by the jury, the Company and Mr. Zahn have initiated stepsbegan to aggressively communicate the correctioncorrection of the untrue statements to outside parties.
Prior to its acquisition by TLIC, FBLIC developed, marketed, and sold life insurance products known as “Decreasing Term to 95” policies. On January 17, 2013, FBLIC’s Board of Directors voted that, effective March 1, 2013, it was not approving, and therefore was not providing, a dividend for Mr. Pettigrew appealed this decision. In February 2020, the Decreasing Term 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 claims 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 violationCivil Appeals of the Missouri Merchandising Practices Act (“MMPA”). It alleges that during its salestate of Oklahoma reversed the Decreasing Term to 95 policies, FBLIC represented thatjudgments entered by the owners of these policies would always be entitled to dividends to purchase a one-year term life insurance policytrial court and thatremanded 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 benefitcase for a level premium payment until the policyholder reaches 95 yearsnew trial. The Court 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 Appeals reversal, however, was not allowed under Missouri law. FBLIC denies 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 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 final. The Company filed a Petition for Leave to AppealCertiorari with the MissouriOklahoma Supreme Court to request that it reverse and vacate the decision of the Court of Appeals, Southern District asking for permissionAppeals. In December 2020, the Oklahoma Supreme Court declined to appealgrant certiorari and remanded that 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 pendingretried in the District Court of Tulsa County, Oklahoma.
It remains the Company’s intention to again vigorously prosecute this action against the Defendants for damages and for correction of the Western Districtdefamatory statements. In the opinion of Missouri (hereinafter the “Federal Lawsuit”). No claims have been made against TLIC inCompany’s management, the Federal Lawsuit. The Federal Lawsuit has been stayed pendingultimate resolution of any contingencies that may arise from this litigation is not considered material in relation to the lawsuit against FBLIC in the Circuit Courtfinancial position or results 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 filingoperations 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-yearfive-year period.
7. Line of Credit
On September 15, 2021, 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, 2022. 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 4.5%. The non-utilized portion of the $1.5 million line of credit will be assessed a 1% non usage fee calculated in arrears and paid at the maturity date. NaN amounts were outstanding on this line of credit as of September 30, 2021 and December 31, 2020.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 20172021
(Unaudited)
7.8.Other 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, 2017 2021 and 20162020 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 September 30, 2021 and 2020 (Unaudited) | ||||||||||||
Unrealized | ||||||||||||
Appreciation (Depreciation) | Accumulated | |||||||||||
on | Adjustment to | Other | ||||||||||
Available-For-Sale | Deferred Acquisition | Comprehensive | ||||||||||
Securities | Costs | Income (loss) | ||||||||||
Balance as of July 1, 2021 | $ | 15,913,922 | $ | (14,206 | ) | $ | 15,899,716 | |||||
Other comprehensive loss before reclassifications, net of tax | (1,094,192 | ) | 6,063 | (1,088,129 | ) | |||||||
Less amounts reclassified from accumulated other comprehensive income (loss) having no credit losses, net of tax | 17,326 | 0 | 17,326 | |||||||||
Other comprehensive loss | (1,111,518 | ) | 6,063 | (1,105,455 | ) | |||||||
Balance as of September 30, 2021 | $ | 14,802,404 | $ | (8,143 | ) | $ | 14,794,261 | |||||
Balance as of July 1, 2020 | $ | 11,521,354 | $ | (23,419 | ) | $ | 11,497,935 | |||||
Other comprehensive income before reclassifications, net of tax | 2,477,918 | (3,788 | ) | 2,474,130 | ||||||||
Less amounts reclassified from accumulated other comprehensive income having no credit losses, net of tax | 88,222 | 0 | 88,222 | |||||||||
Other comprehensive income | 2,389,696 | (3,788 | ) | 2,385,908 | ||||||||
Balance as of September 30, 2020 | $ | 13,911,050 | $ | (27,207 | ) | $ | 13,883,843 | |||||
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 | |||||
Nine Months Ended September 30, 2021 and 2020 (Unaudited) | ||||||||||||
Unrealized | ||||||||||||
Appreciation | Accumulated | |||||||||||
(Depreciation) on | Adjustment to | Other | ||||||||||
Available-For-Sale | Deferred Acquisition | Comprehensive | ||||||||||
Securities | Costs | Income (Loss) | ||||||||||
Balance as of January 1, 2021 | $ | 17,551,279 | $ | (32,421 | ) | $ | 17,518,858 | |||||
Other comprehensive loss before reclassifications, net of tax | (2,649,654 | ) | 24,278 | (2,625,376 | ) | |||||||
Less amounts reclassified from accumulated other comprehensive income (loss) having no credit losses, net of tax | 99,221 | 0 | 99,221 | |||||||||
Other comprehensive loss | (2,748,875 | ) | 24,278 | (2,724,597 | ) | |||||||
Balance as of September 30, 2021 | $ | 14,802,404 | $ | (8,143 | ) | $ | 14,794,261 | |||||
Balance as of January 1, 2020 | $ | 9,632,323 | $ | (15,663 | ) | $ | 9,616,660 | |||||
Other comprehensive income before reclassifications, net of tax | 4,618,279 | (11,544 | ) | 4,606,735 | ||||||||
Less amounts reclassified from accumulated other comprehensive income having no credit losses, net of tax | 339,552 | 0 | 339,552 | |||||||||
Other comprehensive income | 4,278,727 | (11,544 | ) | 4,267,183 | ||||||||
Balance as of September 30, 2020 | $ | 13,911,050 | $ | (27,207 | ) | $ | 13,883,843 | |||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2021
(Unaudited)
8. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss) (continued)
The pretax components of the Company’s other comprehensive income (loss) and the related income tax expense (benefit) for each component for the three and nine months ended September 30, 2021 and 2020 are summarized as follows:
Three Months Ended September 30, 2021 (Unaudited) | ||||||||||||
Income Tax | ||||||||||||
Pretax | Expense (Benefit) | Net of Tax | ||||||||||
Other comprehensive loss: | ||||||||||||
Change in net unrealized losses on available-for-sale securities: | ||||||||||||
Unrealized holding losses arising during the period | $ | (1,385,055 | ) | $ | (290,863 | ) | $ | (1,094,192 | ) | |||
Reclassification adjustment for net gains included in operations having no credit losses | 21,932 | 4,606 | 17,326 | |||||||||
Net unrealized losses on investments | (1,406,987 | ) | (295,469 | ) | (1,111,518 | ) | ||||||
Adjustment to deferred acquisition costs | 7,675 | 1,612 | 6,063 | |||||||||
Total other comprehensive loss | $ | (1,399,312 | ) | $ | (293,857 | ) | $ | (1,105,455 | ) | |||
Three Months Ended September 30, 2020 (Unaudited) | ||||||||||||
Income Tax | ||||||||||||
Pretax | Expense (Benefit) | Net of Tax | ||||||||||
Other comprehensive income: | ||||||||||||
Change in net unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains arising during the period | $ | 3,136,605 | $ | 658,687 | $ | 2,477,918 | ||||||
Reclassification adjustment for net gains included in operations having no credit losses | 111,674 | 23,452 | 88,222 | |||||||||
Net unrealized gains on investments | 3,024,931 | 635,235 | 2,389,696 | |||||||||
Adjustment to deferred acquisition costs | (4,795 | ) | (1,007 | ) | (3,788 | ) | ||||||
Total other comprehensive income | $ | 3,020,136 | $ | 634,228 | $ | 2,385,908 | ||||||
Nine Months Ended September 30, 2021 (Unaudited) | ||||||||||||
Income Tax | ||||||||||||
Pretax | Expense (Benefit) | Net of Tax | ||||||||||
Other comprehensive loss: | ||||||||||||
Change in net unrealized losses on available-for-sale securities: | ||||||||||||
Unrealized holding losses arising during the period | $ | (3,353,993 | ) | $ | (704,339 | ) | $ | (2,649,654 | ) | |||
Reclassification adjustment for net gains included in operations having no credit losses | 125,597 | 26,376 | 99,221 | |||||||||
Net unrealized losses on investments | (3,479,590 | ) | (730,715 | ) | (2,748,875 | ) | ||||||
Adjustment to deferred acquisition costs | 30,732 | 6,454 | 24,278 | |||||||||
Total other comprehensive loss | $ | (3,448,858 | ) | $ | (724,261 | ) | $ | (2,724,597 | ) | |||
Nine Months Ended September 30, 2020 (Unaudited) | ||||||||||||
Income Tax | ||||||||||||
Pretax | Expense (Benefit) | Net of Tax | ||||||||||
Other comprehensive income: | ||||||||||||
Change in net unrealized gains on available-for-sale securities: | ||||||||||||
Unrealized holding gains arising during the period | $ | 5,845,923 | $ | 1,227,644 | $ | 4,618,279 | ||||||
Reclassification adjustment for net gains included in operations having no credit losses | 429,813 | 90,261 | 339,552 | |||||||||
Net unrealized gains on investments | 5,416,110 | 1,137,383 | 4,278,727 | |||||||||
Adjustment to deferred acquisition costs | (14,613 | ) | (3,069 | ) | (11,544 | ) | ||||||
Total other comprehensive income | $ | 5,401,497 | $ | 1,134,314 | $ | 4,267,183 | ||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 20172021
(Unaudited)
7. 8.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, 2017 2021 and 20162020 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 September 30, (Unaudited) | Nine Months Ended September 30, (Unaudited) | |||||||||||||||
Reclassification Adjustments | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Unrealized gains on available-for-sale securities having no credit losses: | ||||||||||||||||
Realized gains on sales of securities (a) | $ | 21,932 | $ | 111,674 | $ | 125,597 | $ | 429,813 | ||||||||
Income tax expense (b) | 4,606 | 23,452 | 26,376 | 90,261 | ||||||||||||
Total reclassification adjustments | $ | 17,326 | $ | 88,222 | $ | 99,221 | $ | 339,552 | ||||||||
(a) | These items appear within net realized investment gains |
(b) These items appear within federal income taxes in the consolidated statements of operations. |
8.9. 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.
As of September 30, 2017, $559,570 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, $161,907 of that escrow amount is available to the Company for possible losses on its investment of $32,381,460 in residential mortgage loans on real estate with one loan originator.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 20172021
(Unaudited)
8.9. Allowance for Loan Losses from Mortgage Loans on Real Estate and Loans from Premium Financing(continued)
As of September 30, 2021, $896,405 of independent residential mortgage loans on real estate is held in escrow by a third party for the benefit of the Company. As of September 30, 2021, $676,788 of that escrow amount is available to the Company as additional collateral on $4,924,843 of advances to the loan originator. The remaining September 30, 2021 escrow amount of $219,617 is available to the Company as additional collateral on its investment of $43,923,482 in residential mortgage loans on real estate. In addition, the Company has an additional $349,451$636,805 allowance for possible loan losses in the remaining $70,631,555$126,724,175 of investments in mortgage loans on real estate as of September 30, 2017.2021.
As of December 31, 2016, $525,0632020, $766,667 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, 2020, $431,523 of that escrow amount is available to the Company relatedas additional collateral on $4,996,358 of advances to the loan originator. The remaining December 31, 2020 escrow amount of $335,144 is available to the Company as additional collateral on its investment of $67,028,720 in $25,523,757 ofresidential mortgage loans on real estate with one loan originator.estate. In addition, the Company hadhas an additional $244,427$541,894 allowance for possible loan losses in the remaining $48,847,529$107,880,342 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, 2012.2020.
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, 2017 2021 and 20162020 are summarized as follows (excluding $32,381,460$43,923,482 and $23,962,879$67,306,217 of mortgage loans on real estate as of September 30, 2017 2021 and 2016,2020, 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) | Unaudited | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of and for the Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential Mortgage Loans | Commercial and Industrial Mortgage Loans | Premium Finance Loans | Total | Residential Mortgage Loans | Commercial Mortgage Loans | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
Allowance, beginning: | $ | 336,180 | $ | 191,332 | $ | 9,278 | $ | 6,532 | $ | - | $ | 279,662 | $ | 345,458 | $ | 477,526 | ||||||||||||||||||||||||||||||||||||||||
Allowance, beginning | $ | 394,718 | $ | 443,490 | $ | 49,210 | $ | 65,957 | $ | 443,928 | $ | 509,447 | ||||||||||||||||||||||||||||||||||||||||||||
Charge offs | - | - | - | - | - | - | - | - | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Recoveries | - | - | - | - | - | - | - | - | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||
Provision | 4,121 | 21,690 | (128 | ) | (110 | ) | - | - | 3,993 | 21,580 | 220,386 | 35,556 | (27,509 | ) | (2,825 | ) | 192,877 | 32,731 | ||||||||||||||||||||||||||||||||||||||
Allowance, ending | $ | 340,301 | $ | 213,022 | $ | 9,150 | $ | 6,422 | $ | - | $ | 279,662 | $ | 349,451 | $ | 499,106 | $ | 615,104 | $ | 479,046 | $ | 21,701 | $ | 63,132 | $ | 636,805 | $ | 542,178 | ||||||||||||||||||||||||||||
Allowance, ending: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 279,662 | $ | - | $ | 279,662 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||
Collectively evaluated | $ | 340,301 | $ | 213,022 | $ | 9,150 | $ | 6,422 | $ | - | $ | - | $ | 349,451 | $ | 219,444 | $ | 615,104 | $ | 479,046 | $ | 21,701 | $ | 63,132 | $ | 636,805 | $ | 542,178 | ||||||||||||||||||||||||||||
Carrying Values: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 347,885 | $ | - | $ | 347,885 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||
Collectively evaluated | $ | 68,810,689 | $ | 42,656,344 | $ | 1,820,866 | $ | 1,278,080 | $ | - | $ | - | $ | 70,631,555 | $ | 43,934,424 | $ | 119,346,543 | $ | 95,511,234 | $ | 7,377,632 | $ | 12,563,167 | $ | 126,724,175 | $ | 108,074,401 | ||||||||||||||||||||||||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 20172021
(Unaudited)
8.9. 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 | ||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
Residential Mortgage Loans | Commercial Mortgage Loans | Total | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Allowance, beginning | $ | 486,604 | $ | 443,057 | $ | 55,290 | $ | 62,321 | $ | 541,894 | $ | 505,378 | ||||||||||||
Charge offs | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Recoveries | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Provision | 128,500 | 35,989 | (33,589 | ) | 811 | 94,911 | 36,800 | |||||||||||||||||
Allowance, ending | $ | 615,104 | $ | 479,046 | $ | 21,701 | $ | 63,132 | $ | 636,805 | $ | 542,178 | ||||||||||||
Allowance, ending: | �� | |||||||||||||||||||||||
Individually evaluated for impairment | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
Collectively evaluated for impairment | $ | 615,104 | $ | 479,046 | $ | 21,701 | $ | 63,132 | $ | 636,805 | $ | 542,178 | ||||||||||||
Carrying Values: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||
Collectively evaluated for impairment | $ | 119,346,543 | $ | 95,511,234 | $ | 7,377,632 | $ | 12,563,167 | $ | 126,724,175 | $ | 108,074,401 | ||||||||||||
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, 2017 2021 and December 31, 2016 2020 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 | September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | ||||||||||||||||||
Over 70% to 80% | $ | 52,689,828 | $ | 53,905,657 | $ | 0 | $ | 0 | $ | 52,689,828 | $ | 53,905,657 | ||||||||||||
Over 60% to 70% | 48,048,306 | 50,752,236 | 1,363,115 | 1,608,934 | 49,411,421 | 52,361,170 | ||||||||||||||||||
Over 50% to 60% | 25,556,047 | 27,493,242 | 1,909,979 | 2,391,856 | 27,466,026 | 29,885,098 | ||||||||||||||||||
Over 40% to 50% | 16,966,344 | 13,875,675 | 449,270 | 786,143 | 17,415,614 | 14,661,818 | ||||||||||||||||||
Over 30% to 40% | 7,766,184 | 7,846,306 | 1,146,515 | 1,176,419 | 8,912,699 | 9,022,725 | ||||||||||||||||||
Over 20% to 30% | 8,846,299 | 5,538,886 | 1,928,589 | 2,774,020 | 10,774,888 | 8,312,906 | ||||||||||||||||||
Over 10% to 20% | 2,625,418 | 3,699,228 | 580,164 | 2,072,994 | 3,205,582 | 5,772,222 | ||||||||||||||||||
10% or less | 771,599 | 795,143 | 0 | 192,323 | 771,599 | 987,466 | ||||||||||||||||||
Total | $ | 163,270,025 | $ | 163,906,373 | $ | 7,377,632 | $ | 11,002,689 | $ | 170,647,657 | $ | 174,909,062 | ||||||||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2021
(Unaudited)
10.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. 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%.
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. In addition, the assuming company maintains a trust related to this ceded business amounting to at least an additional 4% of assets above the 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.
Item 2: Management’s’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
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 agreement and assumed liabilities of $3,055,916.
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.
Acquisitions
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 agreement 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.
Company Recapitalization
On October 2, 2019, at the Company Annual Shareholders’ Meeting, FTFC’s shareholders approved the following proposals:
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 MDCI on December 31, 2019, followed by formal adoption by FTFC’s Board of Directors on March 12, 2020.
Effective March 12, 2020, FTFC’s Class B shareholders were 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.
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, 2016.2020. The Company considers its most critical accounting estimates to be those applied to investments in fixed maturity and equity securities,maturities, 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, 2016.2020.
Recent Accounting Pronouncements
Revenue from Contracts with Customers
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 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 required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimal rental payments that were tracked and disclosed under previous U.S. GAAP. The updated guidance is to be applied using a modified retrospective approach effective for annual 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 on the Company’s results of operations, financial position or liquidity.
Investments — Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting
In March 2016, the FASB issued updated guidance that eliminates the requirement to retroactively apply the equity method of accounting when an investment that was previously accounted for using another method of accounting becomes qualified to apply the equity method due to an increase in the level of ownership interest or degree of influence. If the investment was previously accounted for as an available-for-sale security, any related unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for the equity method is recognized through earnings. The updated guidance is effective for reporting periods beginning after December 15, 2016, and is to be applied prospectively. 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.
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.
StatementIntangibles - 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 Cash Flows – Classificationgoodwill (i.e., Step 2 of Certain Cash Receiptsthe 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 Cash Paymentsrecognizing 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 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 reduce the existing diversity in practice in how eight specific cash flow issuesrecognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. This update improves the timeliness of certain cash receipts and cash payments are presented and classifiedrecognizing changes in the statementliability 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 cash flows.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 has been changed twice and the delayed effective date is now for reporting periods beginning after December 15, 2024. Early adoption is permitted but not elected by the Company. 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 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 simplify several other income tax accounting matters. The Company adopted this guidance in first quarter 2021. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Business Combinations – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
In October 2021, the FASB issued guidance (Accounting Standards Update 2021-08) for the accounting for revenue contracts with customers acquired in a business combination. The amendments in this Update address how to determine whether a contract liability is recognized by the acquirer in a business combination and provide specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments to this Update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification - Revenue from Contracts with Customers (“Topic 606”) at the acquisition date as if the acquirer had originated the contracts.
The amendments in this Update primarily address the accounting for contract assets and contract liabilities from revenue contracts with customers in a business combination. These amendments, however, also apply to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply. The amendments in this Update do not affect the accounting for other assets or liabilities that may arise from revenue contracts with customers in accordance with Topic 606 whether in or not in a business combination.
The amendments in this Update are effective for annual and interim periodsthe Company as a public business entity for fiscal years beginning after December 15, 2017, and is to2022, including interim periods within those fiscal years. The amendments in this Update should be applied retrospectively.prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted.permitted including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments retrospectively to all business for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and prospectively to all business combinations that occur on or after the date of initial application. 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, FBLIC and |
● | Annuity operations, consisting of the annuity operations of TLIC, |
● | Corporate operations, which includes the results of the parent company and |
Please see below and Note 4 to the Consolidated Financial Statements for the three and nine months ended September 30, 20172021 and 20162020 and as of September 30, 20172021 and December 31, 20162020 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 ofof Operations for the ThreeThree Months Ended September 30,, 2017 2021 and 20162020
(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) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Three Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Premiums | $ | 11,560,664 | $ | 9,426,803 | $ | 2,133,861 | $ | 8,323,522 | $ | 7,166,641 | $ | 1,156,881 | ||||||||||||
Net investment income | 12,296,827 | 9,922,817 | 2,374,010 | 5,757,862 | 5,749,175 | 8,687 | ||||||||||||||||||
Net realized investment gains | 254,108 | 307,250 | (53,142 | ) | 320,735 | 118,960 | 201,775 | |||||||||||||||||
Loss on other-than-temporary impairment | (224,250 | ) | - | (224,250 | ) | |||||||||||||||||||
Service fees | 12,245 | 23,212 | (10,967 | ) | ||||||||||||||||||||
Other income | 92,376 | 25,259 | 67,117 | 13,793 | 17,681 | (3,888 | ) | |||||||||||||||||
Total revenues | 23,979,725 | 19,682,129 | 4,297,596 | 14,428,157 | 13,075,669 | 1,352,488 | ||||||||||||||||||
Benefits and claims | 14,926,638 | 12,709,885 | 2,216,753 | 9,228,117 | 8,980,079 | 248,038 | ||||||||||||||||||
Expenses | 6,476,727 | 5,634,579 | 842,148 | 3,854,074 | 3,031,775 | 822,299 | ||||||||||||||||||
Total benefits, claims and expenses | 21,403,365 | 18,344,464 | 3,058,901 | 13,082,191 | 12,011,854 | 1,070,337 | ||||||||||||||||||
Income before federal income tax expense | 2,576,360 | 1,337,665 | 1,238,695 | 1,345,966 | 1,063,815 | 282,151 | ||||||||||||||||||
Federal income tax expense | 520,186 | 205,667 | 314,519 | 278,632 | 223,758 | 54,874 | ||||||||||||||||||
Net income | $ | 2,056,174 | $ | 1,131,998 | $ | 924,176 | $ | 1,067,334 | $ | 840,057 | $ | 227,277 | ||||||||||||
Net income per common share basic and diluted | $ | 0.26 | $ | 0.15 | $ | 0.11 | ||||||||||||||||||
Class A common stock | $ | 0.1220 | $ | 0.0960 | $ | 0.0260 | ||||||||||||||||||
Class B common stock | $ | 0.1037 | $ | 0.0816 | $ | 0.0221 | ||||||||||||||||||
Consolidated Condensed Results of Operations for the Nine Months Ended September 30, 2021 and 2020
(Unaudited) | ||||||||||||
Nine Months Ended September 30, | Amount Change | |||||||||||
2021 | 2020 | 2021 less 2020 | ||||||||||
Premiums | $ | 23,182,831 | $ | 19,971,741 | $ | 3,211,090 | ||||||
Net investment income | 17,979,206 | 17,895,091 | 84,115 | |||||||||
Net realized investment gains | 491,098 | 552,842 | (61,744 | ) | ||||||||
Service fees | 191,833 | 41,108 | 150,725 | |||||||||
Other income | 73,134 | 136,472 | (63,338 | ) | ||||||||
Total revenues | 41,918,102 | 38,597,254 | 3,320,848 | |||||||||
Benefits and claims | 27,295,385 | 25,094,895 | 2,200,490 | |||||||||
Expenses | 12,209,049 | 10,810,777 | 1,398,272 | |||||||||
Total benefits, claims and expenses | 39,504,434 | 35,905,672 | 3,598,762 | |||||||||
Income before federal income tax expense | 2,413,668 | 2,691,582 | (277,914 | ) | ||||||||
Federal income tax expense | 585,943 | 588,673 | (2,730 | ) | ||||||||
Net income | $ | 1,827,725 | $ | 2,102,909 | $ | (275,184 | ) | |||||
Net income per common share basic and diluted | ||||||||||||
Class A common stock | $ | 0.2089 | $ | 0.2408 | $ | (0.0319 | ) | |||||
Class B common stock | $ | 0.1776 | $ | 0.1670 | $ | 0.0106 | ||||||
Consolidated Condensed Financial Position as of September 30,, 2017 2021 and December 31, 20162020
(Unaudited) | Amount Change | |||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | ||||||||||
Investment assets | $ | 313,384,648 | $ | 255,214,510 | $ | 58,170,138 | ||||||
Other assets | 73,171,973 | 78,038,103 | (4,866,130 | ) | ||||||||
Total assets | $ | 386,556,621 | $ | 333,252,613 | $ | 53,304,008 | ||||||
Policy liabilities | $ | 341,248,785 | $ | 290,680,384 | $ | 50,568,401 | ||||||
Deferred federal income taxes | 2,071,174 | 693,470 | 1,377,704 | |||||||||
Other liabilities | 1,395,790 | 5,598,484 | (4,202,694 | ) | ||||||||
Total liabilities | 344,715,749 | 296,972,338 | 47,743,411 | |||||||||
Shareholders' equity | 41,840,872 | 36,280,275 | 5,560,597 | |||||||||
Total liabilities and shareholders' equity | $ | 386,556,621 | $ | 333,252,613 | $ | 53,304,008 | ||||||
Shareholders' equity per common share | $ | 5.36 | $ | 4.65 | $ | 0.71 | ||||||
(Unaudited) | Amount Change | |||||||||||
September 30, 2021 | December 31, 2020 | 2021 to 2020 | ||||||||||
Investment assets | $ | 416,249,893 | $ | 422,960,668 | $ | (6,710,775 | ) | |||||
Assets held in trust under coinsurance agreement | 109,072,674 | 112,160,307 | (3,087,633 | ) | ||||||||
Other assets | 136,137,593 | 108,474,294 | 27,663,299 | |||||||||
Total assets | $ | 661,460,160 | $ | 643,595,269 | $ | 17,864,891 | ||||||
Policy liabilities | $ | 464,297,439 | $ | 441,412,797 | $ | 22,884,642 | ||||||
Funds withheld under coinsurance agreement | 109,678,542 | 112,681,925 | (3,003,383 | ) | ||||||||
Deferred federal income taxes | 9,079,407 | 9,220,905 | (141,498 | ) | ||||||||
Other liabilities | 9,449,432 | 10,427,430 | (977,998 | ) | ||||||||
Total liabilities | 592,504,820 | 573,743,057 | 18,761,763 | |||||||||
Shareholders' equity | 68,955,340 | 69,852,212 | (896,872 | ) | ||||||||
Total liabilities and shareholders' equity | $ | 661,460,160 | $ | 643,595,269 | $ | 17,864,891 | ||||||
Shareholders' equity per common share | ||||||||||||
Class A common stock | $ | 7.8827 | $ | 7.9853 | $ | (0.1026 | ) | |||||
Class B common stock | $ | 6.7003 | $ | 6.7875 | $ | (0.0872 | ) | |||||
Results of Operations – Three Months Ended September 30, 20172021 and 20162020
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, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Three Months Ended September 30, | Amount Change | Three Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Premiums | $ | 4,058,629 | $ | 3,197,228 | $ | 861,401 | $ | 8,323,522 | $ | 7,166,641 | $ | 1,156,881 | ||||||||||||
Net investment income | 4,631,892 | 3,303,980 | 1,327,912 | 5,757,862 | 5,749,175 | 8,687 | ||||||||||||||||||
Net realized investment gains (losses) | (3,486 | ) | 160,308 | (163,794 | ) | |||||||||||||||||||
Net realized investment gains | 320,735 | 118,960 | 201,775 | |||||||||||||||||||||
Service fees | 12,245 | 23,212 | (10,967 | ) | ||||||||||||||||||||
Other income | 25,249 | 10,053 | 15,196 | 13,793 | 17,681 | (3,888 | ) | |||||||||||||||||
Total revenues | $ | 8,712,284 | $ | 6,671,569 | $ | 2,040,715 | $ | 14,428,157 | $ | 13,075,669 | $ | 1,352,488 | ||||||||||||
The $2,040,715$1,352,488 increase in total revenues for the three months ended September 30, 20172021 is discussed below.
Premiums
Our premiums for the three months ended September 30, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Three Months Ended September 30, | Amount Change | Three Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
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 | $ | 521,628 | $ | 378,729 | $ | 142,899 | ||||||||||||||||||
Ordinary life renewal | 1,031,007 | 903,553 | 127,454 | |||||||||||||||||||||
Final expense first year | 1,215,515 | 920,613 | 294,902 | 1,508,894 | 1,471,145 | 37,749 | ||||||||||||||||||
Final expense renewal | 2,242,657 | 1,643,600 | 599,057 | 5,261,993 | 4,413,214 | 848,779 | ||||||||||||||||||
Total premiums | $ | 4,058,629 | $ | 3,197,228 | $ | 861,401 | $ | 8,323,522 | $ | 7,166,641 | $ | 1,156,881 | ||||||||||||
The $861,401$1,156,881 increase in premiums for the three months ended September 30, 20172021 is primarily due to a $599,057$848,779 increase in final expense renewal premiums, and a $294,902$142,899 increase in final expense first year premiums. The increase in final expenseordinary life first year premiums represents management’s focus on expanding final expense production by contracting new, independent agentsand a $127,454 increase in expanded locations. ordinary life renewal premiums.
The increase in final expense renewal premiums reflects the persistency of prior years’ final expense production. Our marketing efforts are focused on final expenseThe increase in ordinary life first year premiums and annuity production.ordinary life renewal premiums primarily reflects ordinary dollar denominated life insurance policies sold in the international market by TAI.
NetNet Investment Income
The major components of our net investment income for the three months ended September 30, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Three Months Ended September 30, | Amount Change | Three Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Fixed maturity securities | $ | 1,731,931 | $ | 1,435,041 | $ | 296,890 | $ | 1,737,661 | $ | 1,930,697 | $ | (193,036 | ) | |||||||||||
Equity securities | 4,382 | 6,728 | (2,346 | ) | ||||||||||||||||||||
Preferred stock and equity securities | 37,732 | 22,946 | 14,786 | |||||||||||||||||||||
Other long-term investments | 967,959 | 687,042 | 280,917 | 1,151,057 | 1,275,834 | (124,777 | ) | |||||||||||||||||
Mortgage loans | 2,379,176 | 1,417,445 | 961,731 | 3,517,394 | 3,503,652 | 13,742 | ||||||||||||||||||
Policy loans | 28,640 | 27,348 | 1,292 | 40,461 | 37,985 | 2,476 | ||||||||||||||||||
Real estate | 93,943 | 62,391 | 31,552 | - | 68,663 | (68,663 | ) | |||||||||||||||||
Short-term and other investments | 72,935 | 56,806 | 16,129 | 20,854 | 38,662 | (17,808 | ) | |||||||||||||||||
Gross investment income | 5,278,966 | 3,692,801 | 1,586,165 | 6,505,159 | 6,878,439 | (373,280 | ) | |||||||||||||||||
Investment expenses | (647,074 | ) | (388,821 | ) | 258,253 | (747,297 | ) | (1,129,264 | ) | (381,967 | ) | |||||||||||||
Net investment income | $ | 4,631,892 | $ | 3,303,980 | $ | 1,327,912 | $ | 5,757,862 | $ | 5,749,175 | $ | 8,687 | ||||||||||||
The $1,586,165 increase$373,280 decrease in gross investment income for the three months ended September 30, 20172021 is primarily due to increases$193,036 decrease in investments in mortgage loans, fixed maturity securities, and$124,777 decrease in other long-term investments. In the twelve months since September 30, 2016, we had increased investments and $68,663 decrease in mortgage loans of $35.1 million,real estate. The $193,036 decline in fixed maturity securities of $13.5 millionis due to lower gross effective yields on fixed maturity securities purchased and held during third quarter 2021. The $124,777 decline in investment income from other long-term investments is due to decreased holdings in this investment category. The $68,663 decline in investment income from real estate is due the November 16, 2020 sale of $16.0 million.an office building and land located in Topeka, Kansas.
The $258,253 increase$381,967 decrease in investment expensesexpense for the three months ended September 30, 2017 is2021 primarily relateddue to increased production of investments indecreased mortgage loans on real estate includingloan acquisition expenses and the costssale of the Company’s mortgage loan department that are fully assigned to investment expenses beginning in 2017.Topeka, Kansas office building and land on November 16, 2020.
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) result from sales of fixed maturity securities available-for-sale, investment real estate, mortgage loans on real estate and preferred stock securities available-for-sale plus changes in fair value of equity securities.
Our net realized investment gains for the three months ended September 30, 20172021 and 20162020 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 | ) | ||||
(Unaudited) | ||||||||||||
Three Months Ended September 30, | Amount Change | |||||||||||
2021 | 2020 | 2021 less 2020 | ||||||||||
Fixed maturity securities available-for-sale: | ||||||||||||
Sale proceeds | $ | 2,981,658 | $ | 4,209,686 | $ | (1,228,028 | ) | |||||
Amortized cost at sale date | 2,959,726 | 4,098,067 | (1,138,341 | ) | ||||||||
Net realized gains | $ | 21,932 | $ | 111,619 | $ | (89,687 | ) | |||||
Investment real estate: | ||||||||||||
Sale proceeds | $ | 742,078 | $ | - | $ | 742,078 | ||||||
Carrying value at sale date | 458,587 | - | 458,587 | |||||||||
Net realized gains | $ | 283,491 | $ | - | $ | 283,491 | ||||||
Mortgage loans on real estate: | ||||||||||||
Sale proceeds | $ | 25,158,102 | $ | 12,357,549 | $ | 12,800,553 | ||||||
Carrying value at sale date | 25,156,758 | 12,357,548 | 12,799,210 | |||||||||
Net realized gains | $ | 1,344 | $ | 1 | $ | 1,343 | ||||||
Preferred stock securities available-for-sale: | ||||||||||||
Sale proceeds | $ | - | $ | 50,000 | $ | (50,000 | ) | |||||
Amortized cost at sale date | - | 49,945 | (49,945 | ) | ||||||||
Net realized gains | $ | - | $ | 55 | $ | (55 | ) | |||||
Equity securities, changes in fair value | $ | 13,968 | $ | 7,285 | $ | 6,683 | ||||||
Net realized investment gains | $ | 320,735 | $ | 118,960 | $ | 201,775 | ||||||
Total Benefits, Claims and Expenses
Our benefits, claims and expenses are primarily generated from benefit payments, surrenders,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 three months ended September 30, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Three Months Ended September 30, | Amount Change | Three Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Benefits and claims | ||||||||||||||||||||||||
Increase in future policy benefits | $ | 1,291,943 | $ | 1,357,212 | $ | (65,269 | ) | $ | 3,437,541 | $ | 2,995,221 | $ | 442,320 | |||||||||||
Death benefits | 1,310,697 | 881,928 | 428,769 | 2,315,438 | 2,600,833 | (285,395 | ) | |||||||||||||||||
Surrenders | 186,202 | 205,356 | (19,154 | ) | 112,980 | 242,460 | (129,480 | ) | ||||||||||||||||
Interest credited to policyholders | 2,293,419 | 1,754,941 | 538,478 | 3,279,558 | 3,071,581 | 207,977 | ||||||||||||||||||
Dividend, endowment and supplementary life contract benefits | 68,492 | 81,040 | (12,548 | ) | 82,600 | 69,984 | 12,616 | |||||||||||||||||
Total benefits and claims | 5,150,753 | 4,280,477 | 870,276 | 9,228,117 | 8,980,079 | 248,038 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Policy acquisition costs deferred | (2,369,432 | ) | (2,023,246 | ) | (346,186 | ) | (3,142,259 | ) | (3,056,211 | ) | (86,048 | ) | ||||||||||||
Amortization of deferred policy acquisition costs | 890,135 | 536,901 | 353,234 | 1,683,068 | 1,144,749 | 538,319 | ||||||||||||||||||
Amortization of value of insurance business acquired | 88,625 | 91,966 | (3,341 | ) | 67,030 | 73,778 | (6,748 | ) | ||||||||||||||||
Commissions | 2,051,910 | 1,954,586 | 97,324 | 3,161,051 | 2,960,619 | 200,432 | ||||||||||||||||||
Other underwriting, insurance and acquisition expenses | 1,362,524 | 1,244,013 | 118,511 | 2,085,184 | 1,908,840 | 176,344 | ||||||||||||||||||
Total expenses | 2,023,762 | 1,804,220 | 219,542 | 3,854,074 | 3,031,775 | 822,299 | ||||||||||||||||||
Total benefits, claims and expenses | $ | 7,174,515 | $ | 6,084,697 | $ | 1,089,818 | $ | 13,082,191 | $ | 12,011,854 | $ | 1,070,337 | ||||||||||||
The $1,089,818$1,070,337 increase in total benefits, claims and expenses for the three months ended September 30, 20172021 is discussed below.
Benefits and Claims
The $870,276$248,038 increase in benefits and claims for the three months ended September 30, 20172021 is primarily due to the following:
● | $ |
● | $207,977 increase in interest credited to policyholders is primarily due to an increase of approximately |
● | $ |
● | $285,395 decrease in death benefits is primarily |
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 threethree months ended September 30, 20172021 and 2016,2020, capitalized costs were $2,369,432$3,142,259 and $2,023,246,$3,056,211, respectively. Amortization of deferred policy acquisition costs for the three months ended September 30, 20172021 and 20162020 were $890,135$1,683,068 and $536,901,$1,144,749, respectively.
The $346,186$86,048 increase in the 20172021 acquisition costs deferred primarily relates to increased final expense production by appointed agents based upon expansion into additional states and recruitingfirst year deferral of additional agents. The $353,234increased eligible commissions. There was a $538,319 increase in the 2017 third quarter2021 amortization of deferred acquisition costs is primarily due to an increased number2021 surrenders and amountwithdrawal activity and the impact of final expense policies in force, lapsation of ordinary life policies and annuity contracts with increased death benefits and annuity withdrawals.mortality.
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$67,030 and $91,966$73,778 for the three months ended September 30, 20172021 and 2016, respectively.2020, respectively, representing a $6,748 decrease.
Commissions
Our commissions for the threethree months ended September 30, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Three Months Ended September 30, | Amount Change | Three Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Annuity | $ | 325,415 | $ | 652,377 | $ | (326,962 | ) | $ | 202,611 | $ | 337,634 | $ | (135,023 | ) | ||||||||||
Whole life and term first year | 37,637 | 30,368 | 7,269 | |||||||||||||||||||||
Whole life and term renewal | 19,890 | 24,033 | (4,143 | ) | ||||||||||||||||||||
Ordinary life first year | 574,792 | 405,204 | 169,588 | |||||||||||||||||||||
Ordinary life renewal | 80,333 | 44,316 | 36,017 | |||||||||||||||||||||
Final expense first year | 1,453,356 | 1,098,269 | 355,087 | 1,795,193 | 1,748,223 | 46,970 | ||||||||||||||||||
Final expense renewal | 215,612 | 149,539 | 66,073 | 508,122 | 425,242 | 82,880 | ||||||||||||||||||
Total commissions | $ | 2,051,910 | $ | 1,954,586 | $ | 97,324 | $ | 3,161,051 | $ | 2,960,619 | $ | 200,432 | ||||||||||||
The $97,324$200,432 increase in commissions for the three months ended September 30, 20172021 is primarily due to a $355,087$169,588 increase in final expenseordinary life first year commissions, that corresponds to the $294,902 increase in final expense first year premiums and a $66,073$82,880 increase in final expense renewal commissions that correspondsexceeded a $135,023 decrease in annuity commissions that corresponded to the $599,057a $142,899 increase in ordinary life first year premiums, a $848,779 increase in final expense renewal premiums that was offset byand a $326,962$4,692,001 decrease in retained 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.deposits.
Other Underwriting, Insurance and Acquisition Expenses
The $118,511There was a $176,344 increase in other underwriting, insurance and acquisition expenses for the three months ended September 30, 20172021 was primarily related to increased legal fees related to acquisition activities and increased third party administration fees primarily related to themaintaining 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.third party administrator.
Federal Income Taxes
FTFC files afiled its 2020 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.TMC on October 13, 2021. 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 threethree months ended September 30, 20172021 and 2016,2020, current income tax expense (benefit) was ($1,320)$1,670 and $4,472,$45,654, respectively. DeferredFor the three months ended September 30, 2021 and 2020, deferred federal income tax expense was $294,437$276,962 and $83,814$178,104, respectively.
Net Income Per Common Share Basic and Diluted
For the three months ended September 30, 2021 and 2020, the net income allocated to the Class B shareholders is the total net income less shareholders’ cash dividends multiplied by the right to receive dividends at 85% for Class B shares (85,937) as of the reporting date divided by the allocated total shares (8,747,633) of Class A shares (8,661,696) and Class B shares (85,937) as of the reporting date.
For the three months ended September 30, 2021, the net income allocated to the Class A shareholders of $1,056,848 is the total net income $1,067,334 less the net income allocated to the Class B shareholders $10,486. For the three months ended September 30, 2020, the net income allocated to the Class A shareholders $831,804 is the total net income $840,057 less the net income allocated to the Class B shareholders $8,253.
The weighted average outstanding common shares basic for the three months ended September 30, 20172021 and 2016, respectively. The increase in deferred income taxes2020 were 8,661,696 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 BasicClass A shares 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)101,102 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. Class B shares. The weighted average outstandingClass A shares reflect the retrospective adjustment for the impacts of the 10% stock dividend declared by the Company on November 12, 2020 and subscribedissued to holders of Class A common stock shares basic and diluted were 7,802,593 for bothof the three months ended September 30, 2017 and 2016.Company as of November 12, 2020.
Business Segments
TheThe Company has a life insurance segment, consisting of the life insurance operations of TLIC, FBLIC and FBLIC,TAI, an annuity segment, consisting of the annuity operations of TLIC, FBLIC and FBLICTAI and a corporate segment. Results for the parent company and the operations of FTCC,TMC, 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, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Three Months Ended September 30, | Amount Change | Three Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Life insurance operations | $ | 4,723,138 | $ | 3,720,401 | $ | 1,002,737 | $ | 9,404,804 | $ | 8,201,655 | $ | 1,203,149 | ||||||||||||
Annuity operations | 3,903,408 | 2,802,934 | 1,100,474 | 4,932,938 | 4,729,579 | 203,359 | ||||||||||||||||||
Corporate operations | 85,738 | 148,234 | (62,496 | ) | 90,415 | 144,435 | (54,020 | ) | ||||||||||||||||
Total | $ | 8,712,284 | $ | 6,671,569 | $ | 2,040,715 | $ | 14,428,157 | $ | 13,075,669 | $ | 1,352,488 | ||||||||||||
Income before income taxes: | ||||||||||||||||||||||||
Income (loss) before federal income taxes: | ||||||||||||||||||||||||
Life insurance operations | $ | 345,522 | $ | 35,230 | $ | 310,292 | $ | 923,202 | $ | 141,246 | $ | 781,956 | ||||||||||||
Annuity operations | 1,141,492 | 436,051 | 705,441 | 385,534 | 795,043 | (409,509 | ) | |||||||||||||||||
Corporate operations | 50,755 | 115,591 | (64,836 | ) | 37,230 | 127,526 | (90,296 | ) | ||||||||||||||||
Total | $ | 1,537,769 | $ | 586,872 | $ | 950,897 | $ | 1,345,966 | $ | 1,063,815 | $ | 282,151 | ||||||||||||
Life Insurance Operations
The $1,002,737 increase inincreases and decreases of revenues and profitability from Life Insurance Operationsour business segments for the three months ended September 30, 2017 is primarily due to the following:2021 and 2020 are summarized as follows:
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The $310,292 increased profitability from Life Insurance Operations for the three months ended September 30, 2017 is primarily due to the following:
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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:
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The $705,441 increased profitability from Annuity Operations for the three months ended September 30, 2017 is due to the following:
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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.
Life Insurance | Annuity | Corporate | ||||||||||||||
Operations | Operations | Operations | Total | |||||||||||||
Revenues | ||||||||||||||||
Premiums | $ | 1,156,881 | $ | - | $ | - | $ | 1,156,881 | ||||||||
Net invesment income | (36,647 | ) | 92,002 | (46,668 | ) | 8,687 | ||||||||||
Net realized investment gains | 60,478 | 141,297 | - | 201,775 | ||||||||||||
Service fees and other income | 22,437 | (29,940 | ) | (7,352 | ) | (14,855 | ) | |||||||||
Total revenue | 1,203,149 | 203,359 | (54,020 | ) | 1,352,488 | |||||||||||
Benefits and claims | ||||||||||||||||
Increase in future policy benefits | 442,320 | - | - | 442,320 | ||||||||||||
Death benefits | (285,395 | ) | - | - | (285,395 | ) | ||||||||||
Surrenders | (129,480 | ) | - | - | (129,480 | ) | ||||||||||
Interest credited to policyholders | - | 207,977 | - | 207,977 | ||||||||||||
Dividend, endowment and supplementary life contract benefits | 12,616 | - | - | 12,616 | ||||||||||||
Total benefits and claims | 40,061 | 207,977 | - | 248,038 | ||||||||||||
Expenses | ||||||||||||||||
Policy acquisition costs deferred net of amortization | 3,555 | 448,716 | - | 452,271 | ||||||||||||
Amortization of value of insurance business acquired | (3,374 | ) | (3,374 | ) | - | (6,748 | ) | |||||||||
Commissions | 335,455 | (135,023 | ) | - | 200,432 | |||||||||||
Other underwriting, insurance and acquisition expenses | 45,496 | 94,572 | 36,276 | 176,344 | ||||||||||||
Total expenses | 381,132 | 404,891 | 36,276 | 822,299 | ||||||||||||
Total benefits, claims and expenses | 421,193 | 612,868 | 36,276 | 1,070,337 | ||||||||||||
Income (loss) before federal income taxes (benefits) | $ | 781,956 | $ | (409,509 | ) | $ | (90,296 | ) | $ | 282,151 | ||||||
Results of Operations – Nine Months Ended September 30, 20172021 and 20162020
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 nine months ended September 30, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Nine Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Premiums | $ | 11,560,664 | $ | 9,426,803 | $ | 2,133,861 | $ | 23,182,831 | $ | 19,971,741 | $ | 3,211,090 | ||||||||||||
Net investment income | 12,296,827 | 9,922,817 | 2,374,010 | 17,979,206 | 17,895,091 | 84,115 | ||||||||||||||||||
Net realized investment gains | 254,108 | 307,250 | (53,142 | ) | 491,098 | 552,842 | (61,744 | ) | ||||||||||||||||
Loss on other-than-temporary impairment | (224,250 | ) | - | (224,250 | ) | |||||||||||||||||||
Service fees | 191,833 | 41,108 | 150,725 | |||||||||||||||||||||
Other income | 92,376 | 25,259 | 67,117 | 73,134 | 136,472 | (63,338 | ) | |||||||||||||||||
Total revenues | $ | 23,979,725 | $ | 19,682,129 | $ | 4,297,596 | $ | 41,918,102 | $ | 38,597,254 | $ | 3,320,848 | ||||||||||||
Premiums
Premiums
Our premiums for the nine months ended September 30, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Nine Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
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 | ) | ||||||||||||||||||||
Ordinary life first year | $ | 1,300,290 | $ | 1,074,637 | $ | 225,653 | ||||||||||||||||||
Ordinary life renewal | 2,667,323 | 2,228,261 | 439,062 | |||||||||||||||||||||
Final expense first year | 3,496,902 | 2,526,244 | 970,658 | 4,505,903 | 4,021,256 | 484,647 | ||||||||||||||||||
Final expense renewal | 6,213,881 | 4,496,784 | 1,717,097 | 14,709,315 | 12,647,587 | 2,061,728 | ||||||||||||||||||
Supplementary contracts with life contingencies | 6,570 | 378,574 | (372,004 | ) | ||||||||||||||||||||
Total premiums | $ | 11,560,664 | $ | 9,426,803 | $ | 2,133,861 | $ | 23,182,831 | $ | 19,971,741 | $ | 3,211,090 | ||||||||||||
The $2,133,861$3,211,090 increase in premiums for the nine months ended September 30, 20172021 is primarily due to the following: $1,717,097$2,061,728 increase in final expense renewal premiums, $970,658$484,647 increase in final expense first year premiums, $439,062 increase in ordinary life renewal premiums and $372,004 decrease$225,653 increase in supplementary contracts withordinary life contingencies consideration.first year premiums.
The increase in final expense renewal premiums reflects the persistency of prior years’ final expense production. The increase in final expense first year premiums represents management’smanagement’s focus on expanding final expense production by contracting new, independent agents in expanded locations. The increase in final expenseordinary life renewal premiums and ordinary life first year premiums primarily reflects ordinary dollar denominated life insurance policies sold in 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 life instead of a lump sum payment.international market by TAI.
Net Investment Income
The major components of our net investment income for the nine months ended September 30, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Nine Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Fixed maturity securities | $ | 4,887,826 | $ | 4,535,560 | $ | 352,266 | $ | 5,161,051 | $ | 5,443,419 | $ | (282,368 | ) | |||||||||||
Equity securities | 14,540 | 20,568 | (6,028 | ) | ||||||||||||||||||||
Preferred stock and equity securities | 81,136 | 79,015 | 2,121 | |||||||||||||||||||||
Other long-term investments | 2,707,438 | 1,857,366 | 850,072 | 3,656,131 | 3,927,257 | (271,126 | ) | |||||||||||||||||
Mortgage loans | 5,923,207 | 4,098,943 | 1,824,264 | 10,743,701 | 10,870,548 | (126,847 | ) | |||||||||||||||||
Policy loans | 84,657 | 79,937 | 4,720 | 118,036 | 113,814 | 4,222 | ||||||||||||||||||
Real estate | 281,366 | 246,327 | 35,039 | - | 206,026 | (206,026 | ) | |||||||||||||||||
Short-term and other investments | 296,019 | 198,950 | 97,069 | 65,227 | 92,479 | (27,252 | ) | |||||||||||||||||
Gross investment income | 14,195,053 | 11,037,651 | 3,157,402 | 19,825,282 | 20,732,558 | (907,276 | ) | |||||||||||||||||
Investment expenses | (1,898,226 | ) | (1,114,834 | ) | 783,392 | (1,846,076 | ) | (2,837,467 | ) | (991,391 | ) | |||||||||||||
Net investment income | $ | 12,296,827 | $ | 9,922,817 | $ | 2,374,010 | $ | 17,979,206 | $ | 17,895,091 | $ | 84,115 | ||||||||||||
The $3,157,402 increase$907,276 decrease in gross investment income for the nine months ended September 30, 20172021 is primarily due to increases$282,368 decrease in fixed maturity securities, $271,126 decrease in other long-term investments, $206,026 decrease in real estate and $126,847 decrease in mortgage loans.
The $282,368 decline in fixed maturity securities is due to lower gross effective yields on fixed maturity securities purchased and held during 2021. The $271,126 decline in investment income from other long-term investments is due to decreased holdings in this investment category. The $206,026 decline in investment income from real estate is due the November 16, 2020 sale of an office building and land located in Topeka, Kansas. The $126,847 decline in mortgage loans other long-term investmentsinvestment income is due to decreased holdings of mortgage loans and fixed maturity securities. Inlower gross effective yields on mortgage loan purchased.
The $991,391 decrease in investment expense for the twelvenine months sinceended September 30, 2016, we had increased investments in mortgage loans of $35.1 million, other long-term investments of $16.0 million and fixed maturity securities of $13.5 million.
The $783,392 increase in investment expense2021 is primarily related to increased production of investments indecreased mortgage loans on real estate includingloan acquisition expenses and the costssale of the Company’s mortgage loan department that are fully assigned to investment expenses beginning in 2017.Topeka, Kansas office building and land on November 16, 2020.
Net Realized Investment Gains (Losses)
Our net realized investment gains (losses) result from sales of fixed maturity andsecurities available-for-sale, equity securities, available-for-sale, early payoff ofinvestment real estate, mortgage loans on real estate salesand preferred stock securities available-for-sale plus changes in fair value of investment real estate and sales of other long-term investments.equity securities.
OurOur net realized investment gains (losses) for the nine months ended September 30, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Nine Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Fixed maturity securities available-for-sale: | ||||||||||||||||||||||||
Sale proceeds | $ | 17,140,173 | $ | 14,862,935 | $ | 2,277,238 | $ | 6,949,876 | $ | 15,923,450 | $ | (8,973,574 | ) | |||||||||||
Amortized cost at sale date | 16,952,722 | 14,534,337 | 2,418,385 | 6,824,279 | 15,493,692 | (8,669,413 | ) | |||||||||||||||||
Net realized gains | $ | 187,451 | $ | 328,598 | $ | (141,147 | ) | $ | 125,597 | $ | 429,758 | $ | (304,161 | ) | ||||||||||
Equity securities available-for-sale: | ||||||||||||||||||||||||
Equity securities sold: | ||||||||||||||||||||||||
Sale proceeds | $ | - | $ | 128,010 | $ | (128,010 | ) | $ | 89 | $ | - | $ | 89 | |||||||||||
Cost at sale date | - | 120,767 | (120,767 | ) | - | - | - | |||||||||||||||||
Net realized gains | $ | - | $ | 7,243 | $ | (7,243 | ) | $ | 89 | $ | - | $ | 89 | |||||||||||
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 | $ | 818,018 | $ | 682,945 | $ | 135,073 | ||||||||||||
Carrying value at sale date | 185,702 | - | 185,702 | 528,178 | 649,249 | (121,071 | ) | |||||||||||||||||
Net realized gains | $ | 4,382 | $ | - | $ | 4,382 | $ | 289,840 | $ | 33,696 | $ | 256,144 | ||||||||||||
Other long-term investments | ||||||||||||||||||||||||
Mortgage loans on real estate: | ||||||||||||||||||||||||
Sale proceeds | $ | 792,012 | $ | - | $ | 792,012 | $ | 78,319,365 | $ | 45,252,139 | $ | 33,067,226 | ||||||||||||
Carrying value at sale date | 729,737 | - | 729,737 | 78,279,351 | 45,144,039 | 33,135,312 | ||||||||||||||||||
Net realized gains | $ | 62,275 | $ | - | $ | 62,275 | $ | 40,014 | $ | 108,100 | $ | (68,086 | ) | |||||||||||
Preferred stock securities available-for-sale: | ||||||||||||||||||||||||
Sale proceeds | $ | - | $ | 50,000 | $ | (50,000 | ) | |||||||||||||||||
Carrying value at sale date | - | 49,945 | (49,945 | ) | ||||||||||||||||||||
Net realized gains | $ | - | $ | 55 | $ | (55 | ) | |||||||||||||||||
Equity securities, changes in fair value | $ | 35,558 | $ | (18,767 | ) | $ | 54,325 | |||||||||||||||||
Net realized investment gains | $ | 254,108 | $ | 307,250 | $ | (53,142 | ) | $ | 491,098 | $ | 552,842 | $ | (61,744 | ) | ||||||||||
Service Fees
The Company has recorded other-than-temporary impairments on its fixed maturity available-for-sale investment$150,725 increase 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 nine months ended September 30, 2017 and the year ended December 31, 2016. 2021 is primarily due to an increase in fees from Trinity Mortgage Corporation brokering mortgage loans for a fee to third parties.
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 nine months ended September 30, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Nine Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Benefits and claims | ||||||||||||||||||||||||
Increase in future policy benefits | $ | 3,733,907 | $ | 3,995,230 | $ | (261,323 | ) | $ | 8,639,474 | $ | 8,103,379 | $ | 536,095 | |||||||||||
Death benefits | 3,744,278 | 2,868,216 | 876,062 | 8,108,650 | 6,695,141 | 1,413,509 | ||||||||||||||||||
Surrenders | 717,790 | 541,725 | 176,065 | 834,545 | 881,365 | (46,820 | ) | |||||||||||||||||
Interest credited to policyholders | 6,530,403 | 5,090,162 | 1,440,241 | 9,487,050 | 9,191,808 | 295,242 | ||||||||||||||||||
Dividend, endowment and supplementary life contract benefits | 200,260 | 214,552 | (14,292 | ) | 225,666 | 223,202 | 2,464 | |||||||||||||||||
Total benefits and claims | 14,926,638 | 12,709,885 | 2,216,753 | 27,295,385 | 25,094,895 | 2,200,490 | ||||||||||||||||||
Expenses | ||||||||||||||||||||||||
Policy acquisition costs deferred | (7,370,469 | ) | (5,142,381 | ) | (2,228,088 | ) | (9,325,731 | ) | (8,134,182 | ) | (1,191,549 | ) | ||||||||||||
Amortization of deferred policy acquisition costs | 2,318,277 | 1,588,938 | 729,339 | 5,206,030 | 3,665,161 | 1,540,869 | ||||||||||||||||||
Amortization of value of insurance business acquired | 298,089 | 281,175 | 16,914 | 210,350 | 227,328 | (16,978 | ) | |||||||||||||||||
Commissions | 6,641,883 | 4,783,307 | 1,858,576 | 9,172,274 | 7,766,710 | 1,405,564 | ||||||||||||||||||
Other underwriting, insurance and acquisition expenses | 4,588,947 | 4,123,540 | 465,407 | 6,946,126 | 7,285,760 | (339,634 | ) | |||||||||||||||||
Total expenses | 6,476,727 | 5,634,579 | 842,148 | 12,209,049 | 10,810,777 | 1,398,272 | ||||||||||||||||||
Total benefits, claims and expenses | $ | 21,403,365 | $ | 18,344,464 | $ | 3,058,901 | $ | 39,504,434 | $ | 35,905,672 | $ | 3,598,762 | ||||||||||||
The $3,058,901$3,598,762 increase in total benefits, claims and expenses for the nine months ended September 30, 20172021 is discussed below.
Benefits and Claims
The $2,216,753$2,200,490 increase in benefits and claims for the nine months ended September 30, 20172021 is primarily due to the following:
● | $ |
● | $536,095 increase in future policy benefits is primarily due to the increased number of life policies in force and the aging of existing life policies. |
● | $295,242 increase in interest credited to policyholders is primarily due to an increase of approximately |
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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 insurance and annuity contracts.
For the nine months ended September 30, 20172021 and 2016,2020, capitalized costs were $7,370,469$9,325,731 and $5,142,381,$8,134,182, respectively. Amortization of deferred policy acquisition costs for the nine months ended September 30, 20172021 and 20162020 were $2,318,277$5,206,030 and $1,588,938,$3,665,161, respectively.
The $2,228,088$1,191,549 increase in the 20172021 acquisition costs deferred primarily relates to increased first year final expense premiums and annuity production. The $729,339production and deferral of increased eligible commissions. There was an $1,540,869 increase in the 20172021 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,2021 surrenders and annuity withdrawals.withdrawal activity and the impact of mortality.
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$210,350 and $281,175$227,328 for the nine months ended September 30, 20172021 and 2016, respectively.2020, respectively, representing a $16,978 decrease.
Commissions
Our commissionscommissions for the nine months ended September 30, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Nine Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Annuity | $ | 1,697,220 | $ | 1,209,118 | $ | 488,102 | $ | 749,448 | $ | 470,682 | $ | 278,766 | ||||||||||||
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 | 1,426,788 | 1,183,716 | 243,072 | |||||||||||||||||||||
Ordinary life renewal | 208,935 | 105,211 | 103,724 | |||||||||||||||||||||
Final expense first year | 4,181,772 | 3,006,846 | 1,174,926 | 5,370,868 | 4,782,514 | 588,354 | ||||||||||||||||||
Final expense renewal | 590,703 | 400,812 | 189,891 | 1,416,235 | 1,224,587 | 191,648 | ||||||||||||||||||
Total commissions | $ | 6,641,883 | $ | 4,783,307 | $ | 1,858,576 | $ | 9,172,274 | $ | 7,766,710 | $ | 1,405,564 | ||||||||||||
The $1,858,576$1,405,564 increase in commissions for the nine months ended September 30, 20172021 is primarily due to a $1,174,926$588,354 increase in final expense first year commissions, $278,766 increase in annuity commissions and a $243,072 increase in ordinary life first year premiums that correspondcorresponded to the $970,658a $484,647 increase in final expense first year premiums, a $189,891$8,724,496 increase in final expense renewal commissions that corresponds to the $1,717,097retained annuity deposits and a $225,653 increase in final expense renewal premiums and a $488,102 increase 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.ordinary life first year premiums.
.
Other Underwriting, Insurance and Acquisition Expenses
The $465,407 increase$339,634 decrease in other underwriting, insurance and acquisition expenses for the nine months ended September 30, 20172021 was primarily related to a decrease in the Company’s Chief Executive Officer bonus that exceeded increased legal fees related to acquisition activities and maintenance costs associated with increased final expense and annuity production, increased third party administration fees primarily related to themaintaining increased number of policies in force and increased service requests increased salaries and benefits due to increased staffing levels 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, decreased legal fees and no bad debts recorded in 2017 for FTCC.third party administrator.
Federal Income Taxes
FTFC files afiled its 2020 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.TMC on October 13, 2021. 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 nine months ended September 30, 20172021 and 2016,2020, current income tax expense was $18,589$3,180 and $41,982,$45,654, respectively. Deferred federal income tax expense was $501,597$582,763 and $163,685$543,019 for the nine months ended September 30, 20172021 and 2016,2020, 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
NetFor the nine months ended September 30, 2021 and 2020, the net income was $2,056,174 ($0.26 perallocated to the Class B shareholders is the total net income less shareholders’ cash dividends multiplied by the right to receive dividends at 85% for Class B shares (85,937) as of the reporting date divided by the allocated total shares (8,747,633) of Class A shares (8,661,696) and Class B shares (85,937) as of the reporting date.
For the nine months ended September 30, 2021, the net income allocated to the Class A shareholders of $1,809,769 is the total net income $1,827,725 less the net income allocated to the Class B shareholders $17,956. For the nine months ended September 30, 2020, the net income allocated to the Class A shareholders $2,086,030 is the total net income $2,102,909 less the net income allocated to the Class B shareholders $16,879.
The weighted average outstanding common shareshares basic and diluted) and $1,131,998 ($0.15 per common share basic and diluted) for the nine months ended September 30, 20172021 and 2016, respectively.
Net income per common share basic2020 were 8,661,696 for Class A shares and diluted is calculated using the weighted average number of common shares outstanding and subscribed during the year. 101,102 for Class B shares. The weighted average outstandingClass A shares reflect the retrospective adjustment for the impacts of the 10% stock dividend declared by the Company on November 12, 2020 and subscribedissued to holders of Class A common stock shares basic and diluted were 7,802,593 for bothof the nine months ended September 30, 2017 and 2016.Company as of November 12, 2020.
Business Segments
TheThe Company has a life insurance segment, consisting of the life insurance operations of TLIC, FBLIC and FBLIC,TAI and an annuity segment, consisting of the annuity operations of TLIC, FBLIC and FBLICTAI and a corporate segment. Results for the parent company and the operations of FTCC,TMC, 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 nine months ended September 30, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Nine Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Life insurance operations | $ | 13,321,087 | $ | 11,068,191 | $ | 2,252,896 | $ | 26,468,275 | $ | 23,044,336 | $ | 3,423,939 | ||||||||||||
Annuity operations | 10,377,974 | 8,158,645 | 2,219,329 | 14,957,409 | 15,078,907 | (121,498 | ) | |||||||||||||||||
Corporate operations | 280,664 | 455,293 | (174,629 | ) | 492,418 | 474,011 | 18,407 | |||||||||||||||||
Total | $ | 23,979,725 | $ | 19,682,129 | $ | 4,297,596 | $ | 41,918,102 | $ | 38,597,254 | $ | 3,320,848 | ||||||||||||
Income before income taxes: | ||||||||||||||||||||||||
Income (loss) before income taxes: | ||||||||||||||||||||||||
Life insurance operations | $ | 899,547 | $ | 87,745 | $ | 811,802 | $ | 808,447 | $ | (194,993 | ) | $ | 1,003,440 | |||||||||||
Annuity operations | 1,488,848 | 1,014,476 | 474,372 | 1,645,473 | 2,506,220 | (860,747 | ) | |||||||||||||||||
Corporate operations | 187,965 | 235,444 | (47,479 | ) | (40,252 | ) | 380,355 | (420,607 | ) | |||||||||||||||
Total | $ | 2,576,360 | $ | 1,337,665 | $ | 1,238,695 | $ | 2,413,668 | $ | 2,691,582 | $ | (277,914 | ) | |||||||||||
Life Insurance Operations
The $2,252,896 increase inincreases and decreases of revenues and profitability from Life Insurance Operationsour business segments for the nine months ended September 30, 2017 is primarily due to the following:2021 and 2020 are summarized as follows:
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Life Insurance | Annuity | Corporate | ||||||||||||||
Operations | Operations | Operations | Total | |||||||||||||
Revenues | ||||||||||||||||
Premiums | $ | 3,211,090 | $ | - | $ | - | $ | 3,211,090 | ||||||||
Net invesment income | 144,454 | (14,194 | ) | (46,145 | ) | 84,115 | ||||||||||
Net realized investment gains | 14,251 | (75,995 | ) | - | (61,744 | ) | ||||||||||
Service fees and other income | 54,144 | (31,309 | ) | 64,552 | 87,387 | |||||||||||
Total revenue | 3,423,939 | (121,498 | ) | 18,407 | 3,320,848 | |||||||||||
Benefits and claims | ||||||||||||||||
Increase in future policy benefits | 536,095 | - | - | 536,095 | ||||||||||||
Death benefits | 1,413,509 | - | - | 1,413,509 | ||||||||||||
Surrenders | (46,820 | ) | - | - | (46,820 | ) | ||||||||||
Interest credited to policyholders | - | 295,242 | - | 295,242 | ||||||||||||
Dividend, endowment and supplementary life contract benefits | 2,464 | - | - | 2,464 | ||||||||||||
Total benefits and claims | 1,905,248 | 295,242 | - | 2,200,490 | ||||||||||||
Expenses | ||||||||||||||||
Policy acquisition costs deferred net of amortization | (223,334 | ) | 572,654 | - | 349,320 | |||||||||||
Amortization of value of insurance business acquired | (8,489 | ) | (8,489 | ) | - | (16,978 | ) | |||||||||
Commissions | 1,126,798 | 278,766 | - | 1,405,564 | ||||||||||||
Other underwriting, insurance and acquisition expenses | (379,724 | ) | (398,924 | ) | 439,014 | (339,634 | ) | |||||||||
Total expenses | 515,251 | 444,007 | 439,014 | 1,398,272 | ||||||||||||
Total benefits, claims and expenses | 2,420,499 | 739,249 | 439,014 | 3,598,762 | ||||||||||||
Income (loss) before federal income taxes (benefits) | $ | 1,003,440 | $ | (860,747 | ) | $ | (420,607 | ) | $ | (277,914 | ) | |||||
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The $811,802 increased profitability from Life Insurance Operations for the nine months ended September 30, 2017 is primarily due to the following:
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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:
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The $474,372 increased profitability from Annuity Operations for the nine months ended September 30, 2017 is due to the following:
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Corporate Operations
The $174,629 decrease in revenues from Corporate Operations for the nine months ended September 30, 2017 is primarily due to $245,841 of decreased net investment income that exceeded $71,212 of increased other income.
The $47,479 decreased Corporate Operations profitability for the nine months ended September 30, 2017 is primarily due to $245,841 of decreased net investment income that exceeded $71,212 of increased other income and $127,150 of decreased operating expenses.
Consolidated Financial Condition
OurOur invested assets as of September 30, 20172021 and December 31, 20162020 are summarized as follows:
(Unaudited) | Amount Change | (Unaudited) | Amount Change | |||||||||||||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | September 30, 2021 | December 31, 2020 | 2021 less 2020 | |||||||||||||||||||
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: $153,991,976 and $148,431,010 as of September 30, 2021 and December 31, 2020, respectively) | $ | 172,745,212 | $ | 170,647,836 | $ | 2,097,376 | ||||||||||||||||||
Available-for-sale preferred stock securities at fair value(amortized cost: $1,250,000 as of September 30, 2021) | 1,234,000 | - | 1,234,000 | |||||||||||||||||||||
Equity securities at fair value (cost: $285,412 and $183,219 as of September 30, 2021 and December 31, 2020, respectively) | 340,754 | 203,003 | 137,751 | |||||||||||||||||||||
Mortgage loans on real estate | 103,013,015 | 74,371,286 | 28,641,729 | 170,647,657 | 174,909,062 | (4,261,405 | ) | |||||||||||||||||
Investment real estate | 2,354,311 | 2,506,673 | (152,362 | ) | 688,345 | 757,936 | (69,591 | ) | ||||||||||||||||
Policy loans | 1,626,771 | 1,598,116 | 28,655 | 2,218,249 | 2,108,678 | 109,571 | ||||||||||||||||||
Short-term investments | 1,674,777 | 3,309,020 | (1,634,243 | ) | ||||||||||||||||||||
Other long-term investments | 57,675,405 | 46,788,873 | 10,886,532 | 66,700,899 | 71,025,133 | (4,324,234 | ) | |||||||||||||||||
Total investments | $ | 313,384,648 | $ | 255,214,510 | $ | 58,170,138 | $ | 416,249,893 | $ | 422,960,668 | $ | (6,710,775 | ) | |||||||||||
The $18,731,633$2,097,376 increase and $36,034 increases$6,106,764 decrease in fixed maturity available-for-sale securities for the nine months ended September 30, 20172021 and 2016,2020, respectively, are summarized as follows:
Nine Months Ended September 30, (Unaudited) | (Unaudited) | |||||||||||||||
2017 | 2016 | Nine Months Ended September 30, | ||||||||||||||
Amount | Amount | 2021 | 2020 | |||||||||||||
Fixed maturity securities, available-for-sale, beginning | $ | 129,311,155 | $ | 134,556,027 | $ | 170,647,836 | $ | 178,951,324 | ||||||||
Purchases | 32,830,057 | 6,163,564 | 12,760,202 | 3,597,065 | ||||||||||||
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) | (3,463,590 | ) | 5,418,065 | |||||||||||||
Net realized investment gains | 125,597 | 429,758 | ||||||||||||||
Sales proceeds | (10,378,173 | ) | (10,205,935 | ) | (6,049,876 | ) | (14,977,950 | ) | ||||||||
Maturities | (6,762,000 | ) | (4,657,000 | ) | (900,000 | ) | (945,500 | ) | ||||||||
Transfer to other long-term investments | (729,737 | ) | - | |||||||||||||
Premium amortization | (620,936 | ) | (671,335 | ) | (374,957 | ) | (428,202 | ) | ||||||||
Increase | 18,731,633 | 36,034 | ||||||||||||||
Increase (decrease) | 2,097,376 | (6,106,764 | ) | |||||||||||||
Fixed maturity securities, available-for-sale, ending | $ | 148,042,788 | $ | 134,592,061 | $ | 172,745,212 | $ | 172,844,560 | ||||||||
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$1,234,000 increase and $79,376$51,900 decrease in equity securitiespreferred stock available-for-sale for the nine months ended September 30, 20172021 and 2016,2020, 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) | ||||||||
Nine Months Ended September 30, | ||||||||
2021 | 2020 | |||||||
Preferred stock, available-for-sale, beginning | $ | - | $ | 51,900 | ||||
Purchases | 1,250,000 | - | ||||||
Unrealized depreciation | (16,000 | ) | (1,955 | ) | ||||
Net realized investment gain on sale | - | 55 | ||||||
Sales proceeds | - | (50,000 | ) | |||||
Increase (decrease) | 1,234,000 | (51,900 | ) | |||||
Preferred stock, available-for-sale, ending | $ | 1,234,000 | $ | - | ||||
Equity securitiesPreferred stock available-for-sale areis 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$137,751 increase and $17,080 decrease in equity securities portfolio is investedfor the nine months ended September 30, 2021 and 2020, respectively, are summarized as follows:
(Unaudited) | ||||||||
Nine Months Ended September 30, | ||||||||
2021 | 2020 | |||||||
Equity securities, beginning | $ | 203,003 | $ | 201,024 | ||||
Purchases | 162,603 | 68,198 | ||||||
Sales proceeds | (89 | ) | - | |||||
Joint venture distributions | (60,410 | ) | (66,511 | ) | ||||
Net realized investment gains, sale of securities | 89 | - | ||||||
Net realized investment gains (losses), changes in fair value | 35,558 | (18,767 | ) | |||||
Increase (decrease) | 137,751 | (17,080 | ) | |||||
Equity securities, ending | $ | 340,754 | $ | 183,944 | ||||
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$4,261,405 decrease and $9,122,385 increases$12,975,978 increase in mortgage loans on real estate for the nine months ended September 30, 20172021 and 2016,2020, 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) | ||||||||
Nine Months Ended September 30, | ||||||||
2021 | 2020 | |||||||
Mortgage loans on real estate, beginning | $ | 174,909,062 | $ | 162,404,640 | ||||
Purchases | 74,296,705 | 58,751,393 | ||||||
Discount accretion | 318,324 | 232,823 | ||||||
Net realized investment gains | 40,014 | 108,100 | ||||||
Payments | (78,319,365 | ) | (45,252,139 | ) | ||||
Foreclosed - transfer to real estate | (458,587 | ) | (797,158 | ) | ||||
Increase in allowance for bad debts | (94,911 | ) | (36,800 | ) | ||||
Amortization of loan origination fees | (43,585 | ) | (30,241 | ) | ||||
Increase (decrease) | (4,261,405 | ) | 12,975,978 | |||||
Mortgage loans on real estate, ending | $ | 170,647,657 | $ | 175,380,618 | ||||
The $152,362$69,591 decrease and $89,505$38,793 increase in investment real estate for the nine months ended September 30, 20172021 and 2016,2020, respectively, are summarized as follows:
(Unaudited) | ||||||||||||||||
Nine Months Ended September 30, | (Unaudited) | |||||||||||||||
2017 | 2016 | Nine Months Ended September 30, | ||||||||||||||
Amount | Amount | 2021 | 2020 | |||||||||||||
Investment real estate, beginning | $ | 2,506,673 | $ | 2,326,558 | $ | 757,936 | $ | 1,951,759 | ||||||||
Acquired through foreclosure | 142,455 | 198,622 | ||||||||||||||
Real estate acquired through mortgage loan foreclosure | 458,587 | 797,158 | ||||||||||||||
Sales proceeds | (190,084 | ) | - | (818,018 | ) | (682,945 | ) | |||||||||
Depreciation of building | (109,115 | ) | (109,117 | ) | - | (109,116 | ) | |||||||||
Net realized investment gains | 4,382 | - | 289,840 | 33,696 | ||||||||||||
Increase (decrease) | (152,362 | ) | 89,505 | (69,591 | ) | 38,793 | ||||||||||
Investment real estate, ending | $ | 2,354,311 | $ | 2,416,063 | $ | 688,345 | $ | 1,990,552 | ||||||||
The $10,886,532$4,324,234 decrease and $10,091,564 increases$287,620 increase in other long-term investments (composed primarily of lottery receivables) for the nine months ended September 30, 20172021 and 2016,2020, respectively, are summarized as follows:
Nine Months Ended September 30, (Unaudited) | (Unaudited) | |||||||||||||||
2017 | 2016 | Nine Months Ended September 30, | ||||||||||||||
Amount | Amount | 2021 | 2020 | |||||||||||||
Other long-term investments, beginning | $ | 46,788,873 | $ | 31,566,927 | $ | 71,025,133 | $ | 71,824,480 | ||||||||
Purchases | 14,036,084 | 11,340,463 | 882,026 | 4,799,143 | ||||||||||||
Transfer from fixed maturity available-for-sale securities | 729,737 | - | ||||||||||||||
Accretion of discount | 2,713,543 | 1,865,829 | 3,656,835 | 3,928,555 | ||||||||||||
Net realized investment gains | 62,275 | - | ||||||||||||||
Sales proceeds | (792,012 | ) | - | |||||||||||||
Payments | (5,863,095 | ) | (3,114,728 | ) | (8,863,095 | ) | (8,440,078 | ) | ||||||||
Increase | 10,886,532 | 10,091,564 | ||||||||||||||
Increase (decrease) | (4,324,234 | ) | 287,620 | |||||||||||||
Other long-term investments, ending | $ | 57,675,405 | $ | 41,658,491 | $ | 66,700,899 | $ | 72,112,100 | ||||||||
Our assets other thanthan invested assets as of September 30, 20172021 and December 31, 20162020 are summarized as follows:
(Unaudited) | Amount Change | (Unaudited) | Amount Change | |||||||||||||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | September 30, 2021 | December 31, 2020 | 2021 less 2020 | |||||||||||||||||||
Cash and cash equivalents | $ | 28,959,503 | $ | 34,223,945 | $ | (5,264,442 | ) | $ | 63,024,968 | $ | 40,230,095 | $ | 22,794,873 | |||||||||||
Accrued investment income | 2,618,245 | 2,176,770 | 441,475 | 4,913,923 | 5,370,508 | (456,585 | ) | |||||||||||||||||
Recoverable from reinsurers | 1,157,109 | 1,258,938 | (101,829 | ) | 1,053,179 | 1,234,221 | (181,042 | ) | ||||||||||||||||
Assets held in trust under coinsurance agreement | 109,072,674 | 112,160,307 | (3,087,633 | ) | ||||||||||||||||||||
Agents' balances and due premiums | 1,602,599 | 1,419,250 | 183,349 | 1,945,949 | 2,154,322 | (208,373 | ) | |||||||||||||||||
Deferred policy acquisition costs | 23,164,372 | 18,191,990 | 4,972,382 | 48,664,102 | 44,513,669 | 4,150,433 | ||||||||||||||||||
Value of insurance business acquired | 5,610,747 | 5,908,835 | (298,088 | ) | 4,382,627 | 4,592,977 | (210,350 | ) | ||||||||||||||||
Other assets | 10,059,398 | 14,858,375 | (4,798,977 | ) | 12,152,845 | 10,378,502 | 1,774,343 | |||||||||||||||||
Assets other than investment assets | $ | 73,171,973 | $ | 78,038,103 | $ | (4,866,130 | ) | $ | 245,210,267 | $ | 220,634,601 | $ | 24,575,666 | |||||||||||
The $5,264,442 decrease$22,794,873 increase 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$3,087,633 decrease in 2017 agents’ balances and due premiumsassets held in trust under the coinsurance agreement is due to a $183,033 increasereduction in agents’ balancesassets under TLIC’s annuity coinsurance agreement with an offshore annuity and $316 increase in due premiums. life insurance company that is administered on a funds withheld basis.
.
The increase in agents’ balances is due to increased production of final expense policies resulting in increased advances of commissions to agents. The Company closely monitors commission advancesdeferred policy acquisition costs for the nine months ended September 30, 2021 and has not historically experienced, nor expects to experience, future collection problems.2020, respectively, are summarized as follows:
(Unaudited) | ||||||||
Nine Months Ended September 30, | ||||||||
2021 | 2020 | |||||||
Balance, beginning of year | $ | 44,513,669 | $ | 38,005,639 | ||||
Capitalization of commissions, sales and issue expenses | 9,325,731 | 8,134,182 | ||||||
Amortization | (5,206,030 | ) | (3,665,161 | ) | ||||
Deferred acquisition costs allocated to investments | 30,732 | (14,613 | ) | |||||
Balance, end of period | $ | 48,664,102 | $ | 42,460,047 | ||||
Our
Our other assets as of September 30, 20172021 and December 31, 20162020 are summarized as follows:
(Unaudited) | Amount Change | (Unaudited) | Amount Change | |||||||||||||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | September 30, 2021 | December 31, 2020 | 2021 less 2020 | |||||||||||||||||||
Advances to mortgage loan originator | $ | 4,654,494 | $ | 5,207,380 | $ | (552,886 | ) | $ | 4,924,843 | $ | 4,996,358 | $ | (71,515 | ) | ||||||||||
Federal and state income taxes recoverable | 2,941,670 | 2,220,566 | 721,104 | 6,433,062 | 4,050,726 | 2,382,336 | ||||||||||||||||||
Lease asset - right to use | 590,571 | 664,393 | (73,822 | ) | ||||||||||||||||||||
Notes receivable | 448,258 | 464,366 | (16,108 | ) | 56,798 | 472,306 | (415,508 | ) | ||||||||||||||||
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 | ) | ||||||||||||||||||||
Guaranty funds | 78,800 | 78,711 | 89 | 53,185 | 63,869 | (10,684 | ) | |||||||||||||||||
Other receivables, prepaid assets and deposits | 87,833 | 87,493 | 340 | 94,386 | 130,850 | (36,464 | ) | |||||||||||||||||
Total other assets | $ | 10,059,398 | $ | 14,858,375 | $ | (4,798,977 | ) | $ | 12,152,845 | $ | 10,378,502 | $ | 1,774,343 | |||||||||||
There was a $552,886$2,382,336 increase in federal and state income taxes recoverable primarily due to federal and state tax withholdings on lottery receivables. In addition, the Company is working with the Tax Advocate Office of the Internal Revenue Service to recover its 2019 refund of $1,019,705.
The $415,508 decline in notes receivable is primarily due to repayment of a $400,000 loan from the estate of the Company’s former chairman.
Our liabilities as of September 30, 2021 and December 31, 2020 are summarized as follows:
(Unaudited) | Amount Change | |||||||||||
September 30, 2021 | December 31, 2020 | 2021 less 2020 | ||||||||||
Policy liabilities | ||||||||||||
Policyholders' account balances | $ | 377,072,802 | $ | 362,519,753 | $ | 14,553,049 | ||||||
Future policy benefits | 85,241,834 | 76,673,797 | 8,568,037 | |||||||||
Policy claims | 1,869,646 | 2,099,548 | (229,902 | ) | ||||||||
Other policy liabilities | 113,157 | 119,699 | (6,542 | ) | ||||||||
Total policy liabilities | 464,297,439 | 441,412,797 | 22,884,642 | |||||||||
Funds withheld under coinsurance agreement | 109,678,542 | 112,681,925 | (3,003,383 | ) | ||||||||
Deferred federal income taxes | 9,079,407 | 9,220,905 | (141,498 | ) | ||||||||
Other liabilities | 9,449,432 | 10,427,430 | (977,998 | ) | ||||||||
Total liabilities | $ | 592,504,820 | $ | 573,743,057 | $ | 18,761,763 | ||||||
The $14,553,049 increase and $2,394,885 decrease in advancespolicyholders’ account balances for the nine months ended September 30, 2021 and 2020, respectively, are summarized as follows:
(Unaudited) | ||||||||
Nine Months Ended September 30, | ||||||||
2021 | 2020 | |||||||
Policyholders' account balances, beginning | $ | 362,519,753 | $ | 363,083,838 | ||||
Deposits | 25,215,132 | 17,030,797 | ||||||
Withdrawals | (24,013,421 | ) | (30,041,959 | ) | ||||
Funds under coinsurance agreement | 3,864,288 | 1,424,469 | ||||||
Interest credited | 9,487,050 | 9,191,808 | ||||||
Increase (decrease) | 14,553,049 | (2,394,885 | ) | |||||
Policyholders' account balances, ending | $ | 377,072,802 | $ | 360,688,953 | ||||
The $8,568,037 increase in future policy benefits during the nine months ended September 30, 2021 is primarily related to one mortgage loan originator who acquires residential mortgage loans for ourthe production of new life companies. insurance policies and the aging of existing policies.
The $141,498 decrease in deferred federal income taxes during the nine months ended September 30, 2021 was due to $724,261 of decreased deferred federal income taxes on the unrealized appreciation of fixed maturity securities and preferred stock available-for-sale and $582,763 of operating deferred federal tax expense.
The $3,003,383 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.
Our other liabilities as of September 30, 2021 and December 31, 2020 are summarized as follows:
(Unaudited) | Amount Change | |||||||||||
September 30, 2021 | December 31, 2020 | 2021 less 2020 | ||||||||||
Mortgage loans suspense | $ | 5,933,347 | $ | 5,967,403 | $ | (34,056 | ) | |||||
Payable for securities purchased | 1,939,463 | 378,046 | 1,561,417 | |||||||||
Accrued expenses payable | 662,000 | 748,000 | (86,000 | ) | ||||||||
Lease liability | 590,571 | 664,393 | (73,822 | ) | ||||||||
Suspense accounts payable | 234,632 | 2,555,255 | (2,320,623 | ) | ||||||||
Unclaimed funds | 128,172 | 79,946 | 48,226 | |||||||||
Unearned investment income | 85,721 | 71,325 | 14,396 | |||||||||
Deferred revenue | 66,000 | - | 66,000 | |||||||||
Accounts payable | 46,818 | 72,124 | (25,306 | ) | ||||||||
Guaranty fund assessments | 25,000 | 25,000 | - | |||||||||
Other payables, withholdings and escrows | (262,292 | ) | (134,062 | ) | (128,230 | ) | ||||||
Total other liabilities | $ | 9,449,432 | $ | 10,427,430 | $ | (977,998 | ) | |||||
As of September 30, 2017,2021, the Company had $550,000$1,939,463 in security salespurchases where the trade date and settlement date were in different financial reporting periods compared to $6,288,274$378,046 of security salespurchases overlapping financial reporting periods as of December 31, 2016.2020.
There was a $721,104 increaseThe $128,230 decrease in federalother payables, withholdings and state income taxes recoverableescrows is primarily due to federal and state tax withholdings on lottery receivables.
There was a $786,758an increase in the accrual ofescrow advances on 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, 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.
Our liabilities as of September 30, 2017 and December 31, 2016 are summarized as follows:
(Unaudited) | Amount Change | |||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | ||||||||||
Policy liabilities | ||||||||||||
Policyholders' account balances | $ | 292,128,688 | $ | 245,346,489 | $ | 46,782,199 | ||||||
Future policy benefits | 48,002,489 | 44,266,227 | 3,736,262 | |||||||||
Policy claims | 1,027,121 | 997,814 | 29,307 | |||||||||
Other policy liabilities | 90,487 | 69,854 | 20,633 | |||||||||
Total policy liabilities | 341,248,785 | 290,680,384 | 50,568,401 | |||||||||
Deferred federal income taxes | 2,071,174 | 693,470 | 1,377,704 | |||||||||
Other liabilities | 1,395,790 | 5,598,484 | (4,202,694 | ) | ||||||||
Total liabilities | $ | 344,715,749 | $ | 296,972,338 | $ | 47,743,411 | ||||||
The $46,782,199 and $27,310,106 increase in policyholders’ account balances for the nine months ended September 30, 2017 and 2016, respectively, are summarized as follows:
Nine Months Ended September 30, (Unaudited) | ||||||||
2017 | 2016 | |||||||
Amount | Amount | |||||||
Policyholders' account balances, beginning | $ | 245,346,489 | $ | 197,688,616 | ||||
Deposits | 54,296,750 | 32,177,094 | ||||||
Withdrawals | (14,044,954 | ) | (9,957,150 | ) | ||||
Interest credited | 6,530,403 | 5,090,162 | ||||||
Increase | 46,782,199 | 27,310,106 | ||||||
Policyholders' account balances, ending | $ | 292,128,688 | $ | 224,998,722 | ||||
The $3,736,262 increase in future policy benefits during the nine months ended September 30, 2017 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.loans.
The $1,377,704 increase in deferred federal income taxes during the nine months ended September 30, 2017 was due to $876,107 of increased deferred federal income taxes on the unrealized appreciation of fixed maturity and equity securities available-for-sale and $501,597 of operating deferred federal tax expense.
Our other liabilities as of September 30, 2017 and December 31, 2016 are summarized as follows:
(Unaudited) | Amount Change | |||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | ||||||||||
Suspense accounts payable | $ | 575,853 | $ | 4,684,726 | $ | (4,108,873 | ) | |||||
Accrued expenses payable | 565,762 | 527,938 | 37,824 | |||||||||
Payable for securities purchased | 176,249 | 234,225 | (57,976 | ) | ||||||||
Guaranty fund assessments | 60,000 | 60,000 | - | |||||||||
Unearned investment income | 57,398 | 48,466 | 8,932 | |||||||||
Deferred revenue | 32,491 | 29,632 | 2,859 | |||||||||
Unclaimed funds | 25,820 | 23,057 | 2,763 | |||||||||
Other payables, withholdings and escrows | (97,783 | ) | (9,560 | ) | (88,223 | ) | ||||||
Total other liabilities | $ | 1,395,790 | $ | 5,598,484 | $ | (4,202,694 | ) | |||||
The $4,108,873$2,320,623 decrease in suspense accounts payable is primarily due to decreased deposits on policy applications that had not been issued as of the financial reporting date.
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, 2017,2021, we have received $27,119,480 from the sale of our shares.shares and recorded $1,746,240 from the exchange of our shares to acquire K-TENN in 2020.
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.
In 2020, the Company paid a $0.05 per share cash dividend for a total of $393,178 and issued 791,339 shares of class A common stock in connection with a 10% stock dividend to its Class A shareholders. The 10% stock dividend resulted in accumulated earnings being charged $8,657,249 with an offsetting credit of $8,657,249 to common stock and additional paid-in capital
The Company has also 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’sCompany’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.
As of September 30, 2017,2021, we had cash and cash equivalents totaling $28,959,503.$63,024,968. As of September 30, 2017,2021, cash and cash equivalents of $10,594,184$21,573,022 and $15,125,591,$39,289,745, respectively, totaling $60,862,767 were held by FBLICTLIC and TLICFBLIC and may not be available for use by FTFC due to the required pre-approval by the Missouri Department of InsuranceOID and OIDMDCI 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$1,363,823 in 20172021 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $914,179$1,025,933 in 20172021 without prior approval. FBLIC has paid no dividends of $1,000,000 to TLIC in 2016.2021 and 2020. Dividends paid by FBLIC arewould be eliminated in consolidation. TLIC has paid no dividends to FTFC.FTFC in 2021 and 2020.
During 2020, FTFC paid a $0.05 per share cash dividend for a total of $393,178 to its Class A shareholders.
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$51,472,898 and $22,117,921$32,645,110 as of September 30, 20172021 and December 31, 2016,2020, 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, 2017,15, 2021, 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, 2022. 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 4.5%. The non-utilized portion of the $1.5 million line of credit is subject to annual renewal based uponwill be assessed a 1% non usage fee calculated in arrears and paid at the discretionmaturity date. No amounts were outstanding on this line of both the Companycredit as of September 30, 2021 and the bank.December 31, 2020.
Our cashcash flows for the nine months ended September 30, 20172021 and 20162020 are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Nine Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Net cash provided by operating activities | $ | 414,471 | $ | 4,228,919 | $ | (3,814,448 | ) | $ | 14,372,428 | $ | 9,225,467 | $ | 5,146,961 | |||||||||||
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 | ) | |||||||||||||||||||
Net cash provided by investing activities | 7,220,734 | 2,995,811 | 4,224,923 | |||||||||||||||||||||
Net cash provided by (used in) financing activities | 1,201,711 | (13,395,896 | ) | 14,597,607 | ||||||||||||||||||||
Increase (decrease) in cash and cash equivalents | 22,794,873 | (1,174,618 | ) | 23,969,491 | ||||||||||||||||||||
Cash and cash equivalents, beginning of period | 34,223,945 | 9,047,586 | 25,176,359 | 40,230,095 | 23,212,170 | 17,017,925 | ||||||||||||||||||
Cash and cash equivalents, end of period | $ | 28,959,503 | $ | 26,703,311 | $ | 2,256,192 | $ | 63,024,968 | $ | 22,037,552 | $ | 40,987,416 | ||||||||||||
The $414,471$14,372,428 and $4,228,919 of cash$9,225,467 provided by operating activities for the nine months ended September 30, 20172021 and 2016,2020, respectively, are summarized as follows:
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
Nine Months Ended September 30, | Amount Change | Nine Months Ended September 30, | Amount Change | |||||||||||||||||||||
2017 | 2016 | 2017 less 2016 | 2021 | 2020 | 2021 less 2020 | |||||||||||||||||||
Premiums collected | $ | 11,582,534 | $ | 9,441,443 | $ | 2,141,091 | $ | 23,259,786 | $ | 19,816,153 | $ | 3,443,633 | ||||||||||||
Net investment income collected | 8,778,763 | 7,429,581 | 1,349,182 | 14,849,767 | 13,990,963 | 858,804 | ||||||||||||||||||
Service fees and other income collected | 264,966 | 177,580 | 87,386 | |||||||||||||||||||||
Death benefits paid | (3,613,141 | ) | (2,811,463 | ) | (801,678 | ) | (8,157,510 | ) | (6,236,220 | ) | (1,921,290 | ) | ||||||||||||
Surrenders paid | (717,790 | ) | (541,725 | ) | (176,065 | ) | (834,545 | ) | (881,365 | ) | 46,820 | |||||||||||||
Dividends and endowments paid | (227,341 | ) | (224,599 | ) | (2,742 | ) | ||||||||||||||||||
Commissions paid | (6,824,917 | ) | (5,135,536 | ) | (1,689,381 | ) | (9,045,723 | ) | (8,411,494 | ) | (634,229 | ) | ||||||||||||
Other underwriting, insurance and acquisition expenses paid | (4,359,559 | ) | (3,679,616 | ) | (679,943 | ) | (6,509,023 | ) | (6,242,914 | ) | (266,109 | ) | ||||||||||||
Taxes paid | (739,692 | ) | (518,966 | ) | (220,726 | ) | (2,385,516 | ) | (1,972,538 | ) | (412,978 | ) | ||||||||||||
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 advances to mortgage loan originator | 71,515 | (761,734 | ) | 833,249 | ||||||||||||||||||||
Increased (decreased) deposits of pending policy applications | (2,320,623 | ) | 1,053,759 | (3,374,382 | ) | |||||||||||||||||||
Decreased funds under coinsurance agreement | 3,948,538 | 2,057,396 | 1,891,142 | |||||||||||||||||||||
Decreased short-term investments | 1,634,243 | 156,850 | 1,477,393 | |||||||||||||||||||||
Increased policy loans | (109,571 | ) | (44,658 | ) | (64,913 | ) | ||||||||||||||||||
Increased (decreased) mortgage loan suspense | 4,681 | (3,210,009 | ) | 3,214,690 | ||||||||||||||||||||
Other | (135,740 | ) | (258,762 | ) | 123,022 | (71,216 | ) | (41,703 | ) | (29,513 | ) | |||||||||||||
Increase in cash provided by operating activities | $ | 414,471 | $ | 4,228,919 | $ | (3,814,448 | ) | |||||||||||||||||
Net cash provided by operating activities | $ | 14,372,428 | $ | 9,225,467 | $ | 5,146,961 | ||||||||||||||||||
Please see the statements of cash flows for the nine months ended September 30, 20172021 and 20162020 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, 20172021 and December 31, 20162020 is summarized as follows:
(Unaudited) | Amount Change | (Unaudited) | Amount Change | |||||||||||||||||||||
September 30, 2017 | December 31, 2016 | 2017 less 2016 | September 30, 2021 | December 31, 2020 | 2021 less 2020 | |||||||||||||||||||
Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 | $ | 80,502 | $ | 80,502 | $ | - | ||||||||||||||||||
Shareholders' equity | ||||||||||||||||||||||||
Class A common stock, par value $.01 per share (40,000,000 shares authorized as of September 30, 2021 and December 31, 2020, 8,909,276 issued as of September 30, 2021 and December 31, 2020, 8,661,696 outstanding as of September 30, 2021 and December 31, 2020) | $ | 89,093 | $ | 89,093 | $ | - | ||||||||||||||||||
Class B common stock, par value $.01 per share (10,000,000 shares authorized, 101,102 issued and outstanding as of September 30, 2021 and December 31, 2020) | 1,011 | 1,011 | - | |||||||||||||||||||||
Additional paid-in capital | 28,684,598 | 28,684,598 | - | 39,078,485 | 39,078,485 | - | ||||||||||||||||||
Treasury stock, at cost (247,580 shares as of September 30, 2017 and December 31, 2016) | (893,947 | ) | (893,947 | ) | - | |||||||||||||||||||
Treasury stock, at cost (247,580 shares as of September 30, 2021 and December 31, 2020) | (893,947 | ) | (893,947 | ) | - | |||||||||||||||||||
Accumulated other comprehensive income | 4,323,099 | 818,676 | 3,504,423 | 14,794,261 | 17,518,858 | (2,724,597 | ) | |||||||||||||||||
Accumulated earnings | 9,646,620 | 7,590,446 | 2,056,174 | 15,886,437 | 14,058,712 | 1,827,725 | ||||||||||||||||||
Total shareholders' equity | $ | 41,840,872 | $ | 36,280,275 | $ | 5,560,597 | $ | 68,955,340 | $ | 69,852,212 | $ | (896,872 | ) | |||||||||||
The increasedecrease in shareholders’shareholders’ equity of $5,560,597$896,872 for the nine months ended September 30, 20172021 is primarily due to $3,504,423 ofa $2,724,597 decrease in accumulated other comprehensive income andthat exceeded 2021 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.$1,827,725.
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 20172021 or 2016.2020. Our investments include marketable debt securities that could be readily converted to cash for liquidity needs.
We are subject to various market risks. The quality of our investment portfolio and the current level of shareholders’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$18,737,236 and $1,039,897$22,216,826 as of September 30, 20172021 and December 31, 2016,2020, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. An increase of $4,423,541$3,353,993 in unrealized gainslosses arising for the nine months ended September 30, 20172021 has been offset by the 20172021 net realized investment lossesgains of $36,799$125,597 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.$3,479,590.
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, 2017,2021, 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%17.16% 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 2016,2020, 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.
Effective JanuaryJanuary 1, 2017,2019, the Company entered into a revised advance agreement with one loan originator. As of September 30, 2017,2021, the Company has outstanding advances to this loan originator totaling $4,654,494.$4,924,843. The advances are secured by $6,015,814$9,341,094 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$1,575,157 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, $559,5702021, $896,405 of additional and secured residential mortgage loan balances on real estate are held in escrow by the Company. As of September 30, 2017, $397,6632021, $676,788 of that escrow amount is available to the Company as additional collateral on $4,654,494$4,924,843 of advances to the loan originator. The remaining September 30, 20172021 escrow amount of $161,907$219,617 is available to the Company as additional collateral on its investment of $32,381,460$43,923,482 in residential mortgage loans on real estate.
Management continues to actively monitor the COVID-2019 pandemic, the new variants of the virus and the impact of the viruses on the Company’s operations. Although there appears to be recoveries in economic activity and output especially in the United States with the introduction of and inoculations of vaccines, should liquidity conditions worsen in the short-term, management will work with its financial institutions to assist with liquidity needs. The Company continues to adapt its operations and provide and perform all business activities despite the viruses and operates under the guidelines of the U.S. Centers for Disease Control and Prevention.
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, 20172021 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:
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● | 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, 20172021 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"), originally concluded on February 17, 2017. The lawsuit was filed in the District Court of Tulsa County, Oklahoma (Case No. CJ-2013-03385).Oklahoma. 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 originally 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 original damages awarded by the jury, the Company and Mr. Zahn have initiated stepsbegan to aggressively communicate the correction of the untrue statements to outside parties.
Mr. Pettigrew can appealappealed this decisiondecision. In February 2020, the Court of Civil Appeals of the state of Oklahoma reversed the judgments entered by the jury that will require him to posttrial court and remanded the case for a bond in the amountnew trial. The Court 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.
Prior to its acquisition by TLIC, FBLIC developed, marketed, and sold life insurance products known as “Decreasing Term to 95” policies. On January 17, 2013, FBLIC’s Board of Directors voted that, effective March 1, 2013, itAppeals reversal, however, was not approving, and therefore was not providing, a dividend for the Decreasing Term 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 claims 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 policy and that the owners would have a level death benefit without an increase in premium.
final. 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, FBLICCompany filed a Petition for Leave to AppealCertiorari with the MissouriOklahoma Supreme Court to request that it reverse and vacate the decision of the Court of Appeals, Southern District asking for permissionAppeals. In December 2020, the Oklahoma Supreme Court declined to appealgrant certiorari and remanded that 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 pendingretried in the District Court of Tulsa County, Oklahoma.
It remains the Company’s intention to again vigorously prosecute this action against the Defendants for damages and for correction of the Western Districtdefamatory statements. In the opinion of Missouri (hereinafter the “Federal Lawsuit”). No claims have been made against TLIC inCompany’s management, the Federal Lawsuit. The Federal Lawsuit has been stayed pendingultimate resolution of any contingencies that may arise from this litigation is not considered material in relation to the lawsuit against FBLIC infinancial position or results of operations of the Circuit Court of Greene County, Missouri.Company.
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 |
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| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer |
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| 32.1 | Section 1350 Certification of Principal Executive Officer |
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| 32.2 | Section 1350 Certification of Principal Financial Officer |
| 101.INS** | Inline XBRL Instance |
| 101.SCH** | Inline XBRL Taxonomy Extension Schema |
| 101.CAL** | Inline XBRL Taxonomy Extension Calculation |
| 101.DEF** | Inline XBRL Taxonomy Extension Definition |
| 101.LAB** | Inline XBRL Taxonomy Extension Labels |
| 101.PRE** | Inline XBRL Taxonomy Extension Presentation |
| 104 | Cover Page Interactive Data (formatted as Inline XBRL and continued in Exhibit 101) |
| **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 |
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 | |||||
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| November | By: | /s/ Gregg E. Zahn | |||
| Gregg E. Zahn, President and Chief Executive Officer | |||||
| November 12, 2021 | By: | /s/ Jeffrey J. Wood | |||
| Jeffrey J. Wood, | |||||
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