First Trinity Financial (FTFC) 10-K 2008 FY Annual report

EXHIBIT 99.5

First Life America Corporation
FINANCIAL STATEMENTS

First Life America Corporation
Financial Statements

Contents
FINANCIAL STATEMENTS
Balance Sheets (Unaudited) as of September 30, 2008 and December 31, 2007	2-3
Statements of Operations (Unaudited) for the three and nine months ended September 30, 2008 and 2007	4
Statements of comprehensive income (Unaudited) for the three and nine months ended September 30, 2008 and 2007	5
Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2008 and 2007	6-7
Notes to Unaudited Financial Statements	8

1

FIRST LIFE AMERICA CORPORATION

BALANCE SHEETS

	(Unaudited)
	September 30,		December 31,
	2008		2007
Assets
Investments:
Securities available-for-sale, at fair value:
Fixed maturities (amortized cost, $20,566,571 in 2008 and $19,225,225 in 2007)	$	17,298,612	$	18,675,211
Equity securities (cost of $361,474 in 2008 and $239,250 in 2007)		285,871		191,316
Investments in real estate		274,564		274,564
Policy loans		220,010		178,731
Mortgage loans on real estate		1,370,884		1,859,382
Other investments		4,137,780		3,527,784
Total investments		23,587,721		24,706,988
Cash and cash equivalents		763,353		459,336
Accrued investment income		337,544		321,899
Accounts receivable		325,873		474,068
Reinsurance receivables		211,128		35,049
Deferred policy acquisition costs (net of accumulated amortization of $5,817,459 in 2008 and $5,173,476 in 2007)		5,410,414		5,405,783
Property and equipment (net of accumulated depreciation of $194,644 in 2008 and $127,001 in 2007)		2,670,240		2,718,028
Other assets		6,396		1,385
Total assets	$	33,312,669	$	34,122,536

See notes to financial statements.

2

FIRST LIFE AMERICA CORPORATION

BALANCE SHEETS (Continued)

	(Unaudited)
	September 30,			December 31,
	2008			2007
Liabilities and Shareholders’ Equity
Policy and contract liabilities:
Future annuity benefits	$	19,957,078		$	18,735,110
Future policy benefits		7,813,449			7,035,539
Liability for policy claims		148,448			225,189
Policyholder premium deposits		54,310			76,307
Deposits on pending policy applications		2,718			1,571
Reinsurance premiums payable		35,332			41,529
Total policy and contract liabilities		28,011,335			26,115,245
Commissions, salaries, wages and benefits payable		73,977			4,099
Other liabilities		158,662			93,045
Deferred federal income taxes payable		25,210			646,255
Total liabilities		28,269,184			26,858,644
Shareholders’ equity:
Common stock		1,500,000			1,500,000
Additional paid in capital		3,474,564			3,474,564
Accumulated earnings		2,743,786			2,767,702
Accumulated other comprehensive loss		(2,674,850	)		(478,359	)
Less: Treasury stock held at cost (12 shares in 2008 and 2007)		(15	)		(15	)
Total shareholders’ equity		5,043,485			7,263,892
Total liabilities and shareholders’ equity	$	33,312,669		$	34,122,536

See notes to financial statements.

3

FIRST LIFE AMERICA CORPORATION

Statements of Operations

	(Unaudited)						(Unaudited)
	Three months ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007
Revenues:
Gross premium income	$	1,039,107		$	1,001,146		$	3,259,617		$	3,188,504
Reinsurance premiums assumed		6,897			6,980			26,442			16,038
Reinsurance premiums ceded		(101,044	)		(122,201	)		(340,918	)		(396,392	)
Net premium income		944,960			885,925			2,945,141			2,808,150
Net investment income		402,088			369,601			1,206,860			1,036,671
Net realized investment gain (loss)		(27,266	)		864			(26,398	)		818
Rental income		60,421			59,886			180,293			184,084
Total revenue		1,380,203			1,316,276			4,305,896			4,029,723
Benefits and expenses:
Increase in policy reserves		233,489			195,593			777,909			677,279
Policyholder surrender values		82,017			121,107			275,973			266,853
Interest credited on annuities and premium deposits		226,732			212,053			669,639			577,906
Death claims		339,432			259,767			901,584			677,049
Commissions		212,482			201,617			657,319			700,052
Policy acquisition costs deferred		(210,659	)		(240,266	)		(648,614	)		(729,358	)
Amortization of deferred policy acquisition costs		303,328			190,059			643,983			548,728
Salaries, wages, and employee benefits		168,095			200,789			580,266			566,589
Miscellaneous taxes		35,727			32,356			99,352			89,132
Other operating costs and expenses		135,847			155,706			416,070			444,873
Total benefits and expenses		1,526,490			1,328,781			4,373,481			3,819,103
Income (Loss) before income tax expense		(146,287	)		(12,505	)		(67,585	)		210,620
Income tax expense (benefit)		(23,841	)		(19	)		(43,669	)		19,323
Net Income (Loss)	$	(122,446	)	$	(12,486	)	$	(23,916	)	$	191,297
Net Income (Loss) per common share — basic and diluted	$	(0.08	)	$	(0.01	)	$	(0.02	)	$	0.13

See notes to financial statements.

4

FIRST LIFE AMERICA CORPORATION

Statements of Comprehensive Income

	(Unaudited)						(Unaudited)
	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007
Net income (loss)	$	(122,446	)	$	(12,486	)	$	(23,916	)	$	191,297
Unrealized gain (loss) on available-for-sale securities:
Unrealized holding gain (loss) during the period		(2,064,367	)		154,971			(2,772,012	)		(276,752	)
Less: Reclassification for gains included in net income		(27,266	)		864			(26,398	)		818
Tax benefit (expense)		407,419			(30,821	)		549,122			55,515
Other comprehensive income (loss)		(1,629,682	)		123,286			(2,196,492	)		(222,055	)
Comprehensive income (loss)	$	(1,752,128	)	$	110,800		$	(2,220,408	)	$	(30,758	)

See notes to financial statements.

5

FIRST LIFE AMERICA CORPORATION

Statements of Cash Flows

	(Unaudited)
	September 30,			September 30,
	2008			2007
Operating activities:
Net income (loss)	$	(23,916	)	$	191,297
Adjustments to reconcile net loss to net cash provided by operating activities:
Interest credited on annuities and premium deposits		669,639			577,906
Net realized investment (gain) loss		26,398			(818	)
Provision for depreciation		67,643			55,248
Amortization of premium and accretion of discount on fixed maturity and short-term investments		(179,775	)		(157,481	)
Acquisition costs capitalized		(648,614	)		(729,358	)
Amortization of deferred acquisition costs		643,983			548,728
Provision for deferred federal income taxes		(71,922	)		19,324
(Increase) decrease in assets:
Accrued investment income		(15,645	)		(62,538	)
Accounts receivable		148,195			(123,629	)
Reinsurance receivables		(176,079	)		(123,015	)
Policy loans		(41,279	)		(4,428	)
Other assets		(5,011	)		(2,129	)
Increase (decrease) in liabilities:
Future policy benefits		777,910			677,278
Liability for policy claims		(76,741	)		(75,775	)
Deposits on pending policy applications		1,147			(22,857	)
Reinsurance premiums payable		(6,197	)		(11,717	)
Amounts held under reinsurance		—			(18,321	)
Commissions, salaries, wages and benefits payable		69,878			5,426
Other liabilities		65,617			(125,490	)
Net cash provided by operating activities	$	1,225,231		$	617,651

See notes to financial statements.

6

FIRST LIFE AMERICA CORPORATION

Statements of Cash Flows (Continued)

	(Unaudited)
	September 30,			September 30,
	2008			2007
Investing activities:
Purchase of available-for-sale fixed maturities	$	(2,494,046	)	$	(5,910,308	)
Maturity of available-for-sale fixed maturities		1,094,601			224,001
Purchase of available-for-sale equities		(122,224	)		—
Sale of available-for-sale equities		—			2,623
Additions to property and equipment		(19,855	)		(37,365	)
Purchase of other investments		(838,660	)		(592,400	)
Maturity of other investments		440,141			490,140
Payments received on mortgage loans		488,498			58,091
Net cash used in investing activities		(1,451,545	)		(5,765,218	)
Financing activities:
Deposits on annuity contracts		1,930,554			4,832,144
Surrenders on annuity contracts		(1,376,244	)		(962,227	)
Policyholder premium deposits		—			12,154
Withdrawals on policyholder premium deposits		(23,979	)		(36,342	)
Net cash provided by financing activities		530,331			3,845,729
Increase (decrease) in cash and cash equivalents		304,017			(1,301,838	)
Cash and cash equivalents, beginning of period		459,336			1,978,394
Cash and cash equivalents, end of period	$	763,353		$	676,556
Supplemental disclosure of cash activities:
Interest paid	$	—		$	—
Income taxes paid	$	—		$	—

See notes to financial statements.

7

FIRST LIFE AMERICA CORPORATION
Notes to Financial Statements

1) Organization and Accounting Policies

a) Nature of Operations

First Life America Corporation (the “Company”) is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in eight states.

b) Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which differ from statutory accounting practices prescribed or permitted by the Kansas Insurance Department (“KID”).

Certain amounts from prior years have been reclassified to conform with the current year’s presentation. These reclassifications had no effect on previously reported net income or shareholders’ equity.

c) Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities and disclosures. Accordingly, the actual amounts could differ from those estimates. Any adjustments applied to estimated amounts are recognized in the year in which such adjustments are determined. The following are significant estimates made by management:

• Useful lives of assets

• Changes in assumptions related to policy and contract liabilities and related deferred acquisition costs

• Amount of future insurance claim losses, loss expense and earned premium percentages

• Future interest spreads, mortality margins, expense margins and premium persistency experience

• Amortization

• Amount of current and deferred income tax expense and payable

It is at least reasonably possible these estimates will change in the near term.

8

FIRST LIFE AMERICA CORPORATION

Notes to Financial Statements

d) Cash Equivalents

For purposes of the statements of cash flows, the Company considers all cash on hand, cash in banks and short-term investments purchased with a maturity of three months or less to be cash and cash equivalents.

e) Investments

The Company classifies all of its fixed maturity and equity investments as available-for-sale. Available-for-sale fixed maturities are carried at fair value with unrealized gains and losses, net of applicable taxes, reported in other comprehensive income. Equity securities are carried at fair value with unrealized gains and losses, net of applicable taxes, reported in other comprehensive income. Mortgage loans on real estate are carried at cost less principal payments. Other investments are carried at amortized cost. Discounts originating at the time of purchase, net of capitalized acquisition costs, are amortized using the level yield method on an individual basis over the remaining contractual term of the investment. Policy loans are carried at unpaid balances. Realized gains and losses on sales of investments are recognized in operations on the specific identification basis. Interest earned on investments is included in net investment income.

f) Deferred Policy Acquisition Costs

Commissions and other costs of acquiring life insurance, which vary with, and are primarily related to, the production of new business have been deferred to the extent recoverable from future policy revenues and gross profits. The acquisition costs are being amortized over the premium paying period of the related policies using assumptions consistent with those used in computing policy reserves.

g) Property and Equipment

Property and equipment, including the home office building, are carried at cost less accumulated depreciation. Depreciation on the office building and land improvements is calculated using the straight-line method over the estimated useful lives of the respective assets. Depreciation on furniture, fixtures and equipment is calculated using the 200% declining balance method over the estimated useful lives of the respective assets. The estimated useful lives are generally as follows:

Buildings and leasehold improvements	39 years
Furniture and equipment	3 to 7 years

h) Policy and Contract Liabilities

Annuity contract liabilities are computed using the retrospective deposit method and consist of policy account balances before deduction of surrender charges, which accrue to the benefit of policyholders. Premiums received on annuity contracts are recognized as an increase in a liability rather than premium income. Interest credited on annuity contracts is recognized as an expense. The range of interest crediting rates for annuity products was 4.25 to 5.25 percent in 2008 and 2007.

9

i) Future Policy Benefits

Traditional life insurance policy benefit liabilities are computed on a net level premium method using assumptions with respect to current yield, mortality, withdrawal rates, and other assumptions deemed appropriate by the Company. Reserve interest assumptions, including the impact of grading for possible adverse deviations, ranged from 4.00 to 7.25 percent.

Policy claim liabilities represent the estimated liabilities for claims reported plus claims incurred but not yet reported. The liabilities are subject to the impact of actual payments and future changes in claim factors.

Policyholder premium deposits represent premiums received for the payment of future premiums on existing policyholder contracts. Interest is credited on these deposits at the rate of 4% in 2008 and 2007. The premium deposits are recognized as an increase in a liability rather than premium income. Interest credited on the premium deposits is recognized as an expense.

j) Treasury Stock

Treasury stock is held at cost.

k) Premiums

For limited payment and other traditional life insurance policies, premium income is reported as earned when due. Profits are recognized over the life of these contracts by associating benefits and expenses with insurance in force for limited payment policies and with earned premiums for other traditional life policies. This association is accomplished by a provision for liability for future policy benefits and the amortization of policy acquisition costs.

l) Federal Income Taxes

The Company uses the liability method of accounting for income taxes. Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under accounting principles generally accepted in the United States of America and balances determined for tax reporting purposes.

m) Reinsurance

Estimated reinsurance receivables are reported as assets and are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 113,“Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts.”

10

n) Net Earnings Per Common Share

Basic net income per common share is calculated by dividing net income by the weighted average number of shares of the Company’s common stock outstanding.

o) Comprehensive Income

SFAS No. 130 requires unrealized gains and losses on the Company’s available-for-sale securities to be recorded as a component of accumulated other comprehensive income. Unrealized gains and losses recognized in accumulated other comprehensive income that are later recognized in net income through a reclassification adjustment are identified on the specific identification method.

p) New Accounting Pronouncements

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” which provides enhanced guidance for using fair value measurements in financial reporting. While the standard does not expand the use of fair value in any new circumstance, it has applicability to several current accounting standards that require or permit entities to measure assets and liabilities at fair value. This standard defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Application of this standard is required for the Company beginning in 2008. It is not expected that adoption of this Statement will have a material impact on the Company’s results of operations and financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS No. 115.” This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in Statement 159 are elective; however, the amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities with available-for-sale and trading securities. The fair value option established by Statement 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Statement 159 is effective for the Company’s financial statements covering periods after December 31, 2007. It is not expected that adoption of this Statement will have a material impact on the operating results or financial condition of the Company.

11

2) Investments

The amortized cost and fair value of investments at September 30, 2008 and December 31, 2007 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2008:
U.S. Government Agency	$	1,216,795	$	10,484	$	8,437	$	1,218,842
Corporate bonds		19,349,776		18,680		3,288,686		16,079,770
Total	$	20,566,571	$	29,164	$	3,297,123	$	17,298,612
Equity securities	$	361,474	$	9,925	$	85,528	$	285,871
December 31, 2007:
U.S. Government Agency	$	2,131,743	$	21,379	$	247	$	2,152,875
Corporate bonds		17,093,482		129,375		700,521		16,522,336
Total	$	19,225,225	$	150,754	$	700,768	$	18,675,211
Equity securities	$	239,250	$	7,050	$	54,984	$	191,316

The amortized cost and fair value of fixed maturities at December 31, 2008, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations.

The fair values for investments in fixed maturities are based on quoted market prices.

Included in investments are securities, which have been pledged to various state insurance departments.

Since 2004, the Company has purchased investments in lottery prize cash flows. These other investments involve purchasing assignments of the future payment rights from the lottery winners at a discounted price sufficient to meet the Company’s yield requirements.

Payments on these other investments will be made by state run lotteries and as such are backed by the general credit of the respective states. At September 30, 2008 and December 31, 2007 the carrying value of other investments was $4,137,780 and $3,527,784 respectively.

Investment income consists of dividends and interest earned on notes receivable, policy loans, available-for-sale securities, mortgage loans, and other investments. Following are the components of net investment income for the years ended September 30, 2008 and December 31, 2007:

The Company has a policy and process in place to identify securities that could potentially have an impairment that is other-than-temporary. This process involves monitoring market events that could impact issuers’ credit ratings, business climate, management changes, litigation and government actions, and other similar factors. At the end of each quarter, all securities are reviewed in an effort to determine each issuer’s ability to service its debts and the length of time the security has been trading below cost. This quarterly process includes an assessment of the credit quality of each investment in the entire securities portfolio. The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (1) the length of time the fair value has been below cost; (2) the financial position of the issuer, including the current and future impact of any specific events; and (3) the Company’s ability and intent to hold the security to maturity or until it recovers in value. Based on the performance of these procedures, no securities are deemed to be other-than-temporarily impaired by the Company.

12

There are a number of significant risks and uncertainties inherent in the process of monitoring impairments and determining if an impairment is other-than-temporary. These risks and uncertainties include: (1) the risk that the Company’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer, (2) the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated, (3) the risk that fraudulent information could be provided to the Company’s investment professionals who determine the fair value estimates and other-than-temporary impairments, and (4) the risk that new information obtained by the Company or changes in other facts and circumstances lead the Company to change its intent to hold the security to maturity or until it recovers in value. Any of these situations could result in a charge to income in a future period.

The following tables provide information regarding unrealized losses on investments available for sale, as of September 30, 2008 and December 31, 2007.

	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
September 30, 2008:
U.S. Government Agency	$	511,154	$	8,437	$	—	$	—	$	511,154	$	8,437
Corporate bonds		8,662,604		959,323		6,009,562		2,329,363		14,672,166		3,288,686
Total	$	9,173,758	$	967,760	$	6,009,562	$	2,329,363	$	15,183,320	$	3,297,123
Equity securities	$	44,622	$	44,978	$	59,450	$	40,550	$	104,072	$	85,528

	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
December 31, 2007:
U.S. Government Agency	$	—	$	—	$	199,750	$	247		199,750	$	247
Corporate bonds		4,180,180		180,587		5,610,404		519,935		9,790,583		700,521
Total	$	4,180,180	$	180,587	$	5,810,154	$	520,182	$	9,990,333	$	700,768
Equity securities	$	51,916	$	37,684	$	82,700	$	17,300	$	134,616	$	54,984

3) Concentrations of Credit Risk

Credit risk is limited by emphasizing investment grade securities and by diversifying the investment portfolio among various investment instruments. Certain cash balances exceed the maximum insurance protection of $100,000 provided by the Federal Deposit Insurance Corporation. However, the cash balances exceeding this maximum are protected through additional insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

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4) Property and Equipment

The Company owns approximately six and one-half acres of land located in Topeka, Kansas. A 20,000 square foot office building has been constructed on approximately one-half of this land. The remaining land, is classified as real estate held for investment. The Company occupies approximately 7,500 square feet of the building and the remaining 12,500 square feet is leased.

A summary of property and equipment at September 30, 2008 and December 31, 2007 is as follows:

	September 30,			December 31,
	2008			2007
Land and improvements	$	167,428		$	167,428
Building and capitalized interest		2,632,572			2,632,572
Furniture, fixtures and equipment		33,607			38,739
Computers		13,470			—
Tenant improvements		17,807			6,290
Total property and equipment		2,864,884			2,845,029
Less — accumulated depreciation and amortization		(194,644	)		(127,001	)
Net property and equipment	$	2,670,240		$	2,718,028

Depreciation expense for September 30, 2008 and December 31, 2007 was $67,643 and $81,600, respectively.

5) Leases

As noted above, the Company occupies approximately 7,500 square feet of its building in Topeka, Kansas. The Company has leased 10,000 square feet under a lease that was renewed during 2006 to run through June 30, 2011 with a 90 day notice to terminate the lease by the lessee. The lease agreement calls for minimum monthly base lease payments of $15,757.

Effective August 29, 2005, the Company executed a lease agreement with a tenant for the remaining 2,500 square feet. The base lease period commenced on September 1, 2005 and will end on August 31, 2010. The lease will automatically renew if not terminated on or after August 15, 2010 for another five years with a 90 day notice to terminate the lease by the lessee. The lease agreement calls for minimum monthly base lease payments of $4,438 through August 31, 2010. The lease payments will decrease to $3,100 per month for the period September 1, 2010 through August 31, 2015.

The future minimum lease payments to be received under non cancelable lease agreements at September 30, 2008 are approximately as follows:

Twelve-Month Periods
Ending September 30,	Amount
2009		53,258
2010		48,820
Total	$	102,078

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6) Federal Income Taxes

The Company has filed a consolidated federal income tax return with its parent, Brooke Capital Corporation for the period ended November 15, 2007. The Company is required to file a separate return for the period of November 16, 2007 to December 31, 2007 and the following five calendar years due to a change in ownership control on November 15, 2007. FLAC is taxed as a life insurance company under the provisions of the Internal Revenue Code and had to file a separate tax return for its initial five years of existence. Federal income tax expense for the years ended December 31, 2008 and 2007 consisted of the following:

	Nine-Month Periods
	Ended September 30,
	2008			2007
Current	$	28,253		$	—
Deferred		(71,922	)		19,323
Federal income tax (benefit) expense	$	(43,669	)	$	19,323

Federal income tax expense differs from the amount computed by applying the statutory federal income tax rate for 2008 and 2007 as follows:

	Nine-Month Periods
	Ended September 30,
	2008			2007
Federal income tax expense (benefit) at statutory rate	$	(22,979	)	$	71,611
Small life insurance company deduction		495			(22,085	)
Other		(21,185	)		(30,203	)
Federal income tax (benefit) expense	$	(43,669	)	$	19,323

15

Deferred federal income taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Significant components of the Company’s net deferred tax liability are as follows:

	September 30,		December 31,
	2008		2007
Deferred tax liability:
Due premiums	$	10,771	$	10,393
Deferred policy acquisition costs		902,733		903,230
Accrual of discount		19,164		13,665
Premium deposit		10,862		14,009
Total deferred tax liability		943,530		941,297
Deferred tax asset:
Policy reserves		53,495		30,781
Capital loss carryforward		12,762		7,483
Reinsurance premiums		1,021		1,557
Net operating loss carryforward		182,329		135,631
Net unrealized investment loss		668,713		119,590
Total deferred tax asset		918,320		295,042
Net deferred tax liability	$	25,210	$	646,255

The Company has net operating loss carry-forwards of approximately $911,644. These loss carry-forwards expire in 2022 through 2028. Capital loss carry-forwards of $63,811 will expire in 2011 and 2013.

7) Statutory Accounting Practices

FLAC prepares its statutory-basis financial statements in accordance with statutory accounting practices (“SAP”) prescribed or permitted by the KID. Currently, “prescribed” statutory accounting practices include state insurance laws, regulations, and general administrative rules, as well as the National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures Manual and a variety of other NAIC publications. “Permitted” statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. During 1998, the NAIC adopted codified statutory accounting principles (“Codification”). Codification replaced the NAIC Accounting Practices and Procedures Manual and was effective January 1, 2001. The impact of Codification was not material to FLAC’s statutory-basis financial statements.

Principal differences between GAAP and SAP include: a) costs of acquiring new policies are deferred and amortized for GAAP; b) benefit reserves are calculated using more realistic investment, mortality and withdrawal assumptions for GAAP; c) statutory asset valuation reserves are not required for GAAP; and d) available-for-sale fixed maturity investments are reported at fair value with unrealized gains and losses reported as a separate component of shareholders’ equity for GAAP.

Statutory restrictions limit the amount of dividends, which may be paid by FLAC to the Company. Generally, dividends during any year may not be paid without prior regulatory approval, in excess of the lesser of (a) 10% of statutory shareholders’ surplus as of the preceding December 31, or (b) statutory net operating income for the preceding year. In addition, FLAC must maintain the minimum statutory capital and surplus required for life insurance companies in those states in which it is licensed to transact life insurance business.

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The KID imposes on insurance enterprises minimum risk-based capital (“RBC”) requirements that were developed by the NAIC. The formulas for determining the amount of RBC specify various weighing factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by ratio (the “Ratio”) of the enterprises regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Enterprise’s below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. FLAC has a ratio that is in excess of the minimum RBC requirements; accordingly, the Company’s management believes that FLAC meets the RBC requirements.

8) Reinsurance

In order to reduce the risk of financial exposure to adverse underwriting results, insurance companies reinsure a portion of their risks with other insurance companies. FLAC has entered into agreements with Optimum Re Insurance Company (“Optimum Re”) of Dallas, Texas, and Wilton Reassurance Company (“Wilton Re”) of Wilton, CT, to reinsure portions of the life insurance risks it underwrites. Pursuant to the terms of the agreements, FLAC retains a maximum coverage exposure of $50,000 on any one insured.

Pursuant to the terms of the agreement with Optimum Re, FLAC generally pays no reinsurance premiums on first year individual business. However, SFAS No. 113 requires the unpaid premium to be recognized as a first year expense and amortized over the estimated life of the reinsurance policies. FLAC records this unpaid premium as “reinsurance premiums payable” in the accompanying balance sheet and as “reinsurance premiums ceded” in the accompanying income statement. To the extent that the reinsurance companies are unable to fulfill their obligations under the reinsurance agreements, FLAC remains primarily liable for the entire amount at risk.

FLAC is party to an Automatic Retrocession Pool Agreement (the “Reinsurance Pool”) with Optimum Re, Catholic Order of Foresters, American Home Life Insurance Company and Woodmen of the World. The agreement provides for automatic retrocession of coverage in excess of Optimum Re’s retention on business ceded to Optimum Re by the other parties to the Reinsurance Pool. FLAC’s maximum exposure on any one insured under the Reinsurance Pool is $50,000. As of January 1, 2008 Reinsurance Pool is not accepting any new cessions.

Effective September 29, 2005, the Company and Wilton Re executed a binding letter of intent whereby both parties agreed that the Company would cede the simplified issue version of its Golden Eagle Whole Life (Final Expense) product to Wilton Re on a 50/50 quota share original term coinsurance basis. The letter of intent was executed on a retroactive basis to cover all applicable business issued by the Company subsequent to January 1, 2005. Wilton Re has agreed to provide various commission and expense allowances to the Company in exchange for the Company ceding 50% of the applicable premiums to Wilton Re as they are collected. As of June 24, 2006, Wilton Re terminated the reinsurance agreement, for new business issued after the termination date.

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9) Other Regulatory Matters

The Company is currently licensed to transact life and annuity business in the states of Kansas, Texas, Illinois, Oklahoma, North Dakota, Kentucky and Nebraska. Due to the varied processes of obtaining admission to write business in new states, management cannot reasonably estimate the time frame of expanding its marketing presence.

On May 3, 2007, the Company was released from its Memorandum of Understanding with the Ohio Department of Insurance. The Company’s license had been previously suspended as its statutory capital had fallen below the minimum required level in Ohio of $2,500,000. While the license had been reinstated during 2006, the Company had been prohibited from writing new business in that state while under the Memorandum. At December 31, 2008, First Life’s statutory basis capital and surplus was $2,700,455, which is in excess of the aforementioned minimum requirement.

10) Fair Values of Financial Instruments

The fair values of financial instruments, and the methods and assumptions used in estimating their fair values, are described below. In all cases, these financial instruments represent assets of the Company and their carrying values represent or approximate their fair values as follows:

Fixed Maturities

Fixed maturities are carried at fair value in the accompanying consolidated balance sheets. The fair value of fixed maturities are based on quoted market prices. At September 30, 2008 and December 31, 2007, the fair value of fixed maturities was $17,298,612 and $18,675,211, respectively.

Equity Securities

Equity securities are carried at fair value in the accompanying consolidated balance sheets. The fair value of equity securities are based on quoted market prices. At September 30, 2008 and December 31, 2007, the fair value of equity securities was $285,871 and $191,316, respectively.

Policy Loans

The carrying value of policy loans approximates their fair value. At September 30, 2008 and December 31, 2007, the fair value of policy loans was $220,010 and $178,731, respectively.

Mortgage Loans on Real Estate

The carrying value of mortgage loans on real estate approximates their fair value. At September 30, 2008 and December 31, 2007, the fair value of mortgage loans on real estate was $1,370,884 and $1,859,382, respectively.

Other Investments

The carrying value of other investments approximates their fair value. At September 30, 2008 and December 31, 2007, the fair value of other investments was $4,137,780 and $3,527,784, respectively.

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Cash and Cash Equivalents

The carrying value of cash and cash equivalents approximates their fair value. At September 30, 2008 and December 31, 2007, the fair value of cash and cash equivalents was $763,353 and $459,336, respectively.

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