The Company leases 6,769 square feet of office space pursuant to an original five-year lease that began October 1, 2010 and was amended on October 1, 2015 for another five-year term. Under the terms of the original home office lease, the monthly rent was $7,897 from October 1, 2010 through September 30, 2015. Under the terms of the amended home office lease, the monthly rent is $8,461 from October 1, 2015 through September 30, 2016, $8,630 from October 1, 2016 through September 30, 2017, $8,805 from October 1, 2017 through September 30, 2018 and $8,920 from October 1, 2018 through September 30, 2019 with an increase of two percent for the period from October 1, 2019 through September 30, 2020. The Company incurred rent expense (including charges for the lessor’s building operating expenses above those specified in the lease agreement less monthly amortization of the leasehold improvement allowance received from the lessor) of $97,063 and $92,041 for the years ended December 31, 2018 and 2017, respectively, under this lease.
During 2018 and 2017 the Company foreclosed on residential mortgage loans of real estate totaling $467,593 and $207,482, respectively, and transferred those properties to investment real estate held for sale. The Company’s policy is to reduce the carrying value of this residential real estate obtained through foreclosure to the lower of acquisition cost or net realizable value.
During 2018, the Company sold investment real estate property with an aggregate carrying value of $313,040. The Company recorded a gross realized investment gain on sale of $51,649 based on an aggregate sales price of $364,689. During 2017, the Company sold investment real estate property with an aggregate carrying value of $185,701. The Company recorded a gross realized investment gain on sale of $4,382 based on an aggregate sales price of $190,083.
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 First Life America Corporation for $2,500,000 and had additional acquisition related expenses of $195,234.
We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the mortgage loan on real estate and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.
As of December 31, 2018 and 2017, there was $3,554,008 and $3,213,233, respectively, of accumulated amortization of the value of insurance business acquired due to the purchases of FLAC and FBLIC. The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years: $281,649 in 2019, $259,735 in 2020, $239,257 in 2021, $221,542 in 2022 and $212,645 in 2023.
Estimating liabilities for our long-duration insurance contracts requires management to make various assumptions, including policyholder persistency, mortality rates, investment yields, discretionary benefit increases, new business pricing and operating expense levels.
This guidance was effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance were 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 adoption of this guidance in 2018 did not have a material effect on the Company’s result of operations, financial position or liquidity.
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.
In June 2016, the FASB issued updated guidance 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. mortgage loans and reinsurance amounts recoverable) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures.
The update is to be applied prospectively to an award modified on or after the adoption date. Early adoption was permitted. The adoption of this guidance in 2018 did not have a material effect on the Company’s results of operations, financial position or liquidity.
The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which the effect of the Tax Cuts and Jobs Act of 2017 related to items remaining in accumulated other comprehensive income are recognized or at the beginning of the period of adoption. Early adoption was permitted and the Company adopted the updated guidance effective December 31, 2017. The adoption of this guidance in 2017 did not have a material effect on the Company’s result of operations, financial position or liquidity.
The updated guidance is effective for reporting periods beginning after December 15, 2020. Early adoption is permitted. With respect to the liability for future policyholder benefits for traditional and limited-payment contracts and deferred acquisition costs, an insurance entity may elect to apply the amendments retrospectively as of the beginning of the earliest period presented. With respect to the market risk benefits, an insurance entity should apply the amendments retrospectively as of the beginning of the earliest period presented. The Company expects that the impact on the Company’s results of operations, financial position and liquidity at the date of adoption of the updated guidance in 2021 will be determined by the long-duration contracts then held by the Company and the economic conditions at that time.
Corporate operations, which includes the results of the parent company and FTCC after the elimination of intercompany amounts.
Consolidated Condensed Results of Operations for the Years Ended December 31, 2018 and 2017
Consolidated Condensed Financial Position as of December 31, 2018 and 2017
Our revenues for the years ended December 31, 2018 and 2017 are summarized as follows:
The $2,966,831 increase in premiums for the year ended December 31, 2018 is primarily due to a $3,077,750 increase in final expense renewal premiums and a $235,573 increase in ordinary life first year premiums that exceeded a $197,843 decrease in ordinary life renewal premiums and a $195,991 decrease in final expense first year premiums.
The increase in final expense renewal premiums reflects the persistency of prior years’ final expense production. The decrease in final expense first year premium reflects increased competition. Our marketing efforts are focused on final expense and annuity production. The increase in ordinary life first year premiums reflects ordinary life insurance sold in the international market that the Company started assuming in fourth quarter 2018.
The major components of our net investment income for the years ended December 31, 2018 and 2017 are summarized as follows:
The $102,861 increase in investment expense is primarily related to increased production of investments in mortgage loans on real estate.
The $2,587,093 increase in total benefits and claims for the year ended December 31, 2018 is primarily due to the following:
$881,853 increase in death benefits is primarily due to approximately $937,000 of increased final expense settlements and $268,000 of decreased ceded claims that exceeded $346,000 of decreased ordinary life settlements. The increase in final expense incurred claims is expected by the Company due to the continued growth in the number and amount of final expense policies in force.
$442,406 increase in interest credited to policyholders is primarily due to an increase of approximately $4.3 million in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits and interest credited in excess of withdrawals) since December 31, 2017.
Our commissions for the years ended December 31, 2018 and 2017 are summarized as follows:
The $1,378,363 decrease in other underwriting, insurance and acquisition expenses for the year ended December 31, 2018 was primarily related to the $1.85 million settlement of the Decreasing Term to 95 lawsuit in 2017 that exceeded an increase in 2018 expenses for the use of consultants for the international business initiative and an increase in third party administration fees primarily related to the increased number of policies in force and increased service requests less decreased 2018 legal fees.
For the years ended December 31, 2018 and 2017, current income tax expense was $100,075 and $105,696, respectively. Deferred federal income tax expense was $1,362,046 and $1,267,823 for the years ended December 31, 2018 and 2017, respectively.
The $3,676,781 increase in revenues from Life Insurance Operations for the year ended December 31, 2018 is primarily due to the following:
$36,160 increase in net realized investment gains (that also includes a loss on other-than-temporary impairment)
The $3,089,285 increased profitability from Annuity Operations for the year ended December 31, 2018 is due to the following:
$183,118 increase in net realized investment gains (that also includes a loss on other-than-temporary impairment)
The $184,082 increase in Corporate Operations profitability for the year ended December 31, 2018 is primarily due to $192,149 of increased net investment income and $26,926 of decreased operating expenses that exceeded $34,993 of decreased other income.
Our invested assets as of December 31, 2018 and 2017 are summarized as follows:
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, asset-backed securities and foreign securities.
The $10,140 decrease and $4,360 increase in preferred stock available-for-sale for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:
The $372,759 decrease and $29,380 increase in equity securities available-for-sale for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:
The $27,553,159 and $28,125,165 increases in mortgage loans on real estate for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:
The $9,065 increase and $123,707 decrease in investment real estate for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:
The $1,830,554 decrease in cash and cash equivalents for the year ended December 31, 2018 and the corresponding amount for the year ended December 31, 2017 are summarized in the Company’s consolidated statements of cash flows.
The increase in deferred policy acquisition costs for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:
Our other assets as of December 31, 2018 and December 31, 2017 are summarized as follows:
As of December 31, 2018, the Company had $33,600 of security sales where the trade date and settlement date were in different financial reporting periods compared to $364,611 of security sales overlapping financial reporting periods as of December 31, 2017.
There was a $1,470,856 decrease in the accrual of mortgage loans and long-term investment payments due based upon the scheduled timing of investment payments remitted by third party servicers. Those cash payments were received in January 2019.
On April 15, 2018, 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.
The $588,451 decrease in deferred federal income taxes during the year ended December 31, 2018 was due to $1,950,497 of decreased deferred federal income taxes on the unrealized appreciation (depreciation) of fixed maturity and preferred stock available-for-sale and $1,362,046 of operating deferred federal tax expense.
The $1,851,508 decrease in accounts payable is primarily due to a payment of $1,850,000 to settle the FBLIC Decreasing Term to 95 lawsuit.
Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through December 31, 2018, we have received $27,119,480 from the sale of our shares.
Our cash flows for the years ended December 31, 2018 and 2017 are summarized as follows:
The $8,858,987 cash used in operating activities and $1,898,407 cash provided by operating activities for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:
Shareholders’ equity per common share outstanding decreased 5.29% from $5.29 per share as of December 31, 2017 to $5.01 per share as of December 31, 2018, based upon 7,802,593 common shares outstanding as of both December 31, 2018 and 2017.
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 2018, 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.
Effective January 1, 2017, the Company entered into a revised advance agreement with one loan originator. As of December 31, 2018, the Company has outstanding advances to this loan originator totaling $4,942,870. The advances are secured by $6,092,039 of residential mortgage loans on real estate that are assigned to the Company. The Company has committed to fund up to an additional $557,130 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.
We are not aware of any commitments or unusual events that could materially affect our capital resources. We are not aware of any current recommendations by any regulatory authority which, if implemented, would have a material adverse effect on our liquidity, capital resources or operations. We believe that our existing cash and cash equivalents as of December 31, 2018 will be sufficient to fund our anticipated operating expenses.
We have audited the accompanying consolidated statements of financial position of First Trinity Financial Corporation and Subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
First Trinity Financial Corporation (the “Company” or “FTFC”) is the parent holding company of Trinity Life Insurance Company (“TLIC”), Family Benefit Life Insurance Company (“FBLIC”) and First Trinity Capital Corporation (“FTCC”). 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. TLIC and FBLIC are primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life insurance and annuity products to individuals. TLIC’s and FBLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment and annuity products. The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense product is issued as either a simplified issue or as a graded benefit, determined by underwriting. The TLIC and FBLIC products are sold through independent agents. TLIC is licensed in the states of Illinois, Kansas, Kentucky, Montana, Nebraska, North Dakota, Ohio, Oklahoma and Texas. FBLIC is licensed in the states of Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia.
The Company owns 100% of FTCC that was incorporated in 2006, and began operations in January 2007. FTCC provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC has made no premium financing loans since June 30, 2012.
The 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.
Fixed maturity securities comprised of bonds and preferred stocks are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable income taxes, reported in accumulated other comprehensive income. The amortized cost of fixed maturity securities available-for-sale is adjusted for amortization of premium and accretion of discount to maturity.
Interest income on fixed maturity securities, as well as the related amortization of premium and accretion of discount, is included in net investment income under the effective yield method. Dividend income on preferred stocks are recognized in net investment income when declared. The amortized cost of fixed maturity securities available-for-sale and the cost of preferred stocks are written down to fair value when a decline in value is considered to be other-than-temporary.
The Company evaluates the difference between the cost or amortized cost and estimated fair value of its fixed maturity and preferred stock investments to determine whether any decline in value is other-than-temporary in nature. This determination involves a degree of uncertainty. If a decline in the fair value of a security is determined to be temporary, the decline is recorded as an unrealized loss in stockholders' equity. If a decline in a security's fair value is considered to be other-than-temporary, the Company then determines the proper treatment for the other-than-temporary impairment.
Mortgage loans are carried at unpaid balances, net of unamortized premium or discounts. Interest income and the amortization of premiums or discounts are included in net investment income. Mortgage loan fees, certain direct loan origination costs, and purchase premiums and discounts on loans are recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. In certain circumstances, prepayments may be anticipated. The Company has established a valuation allowance for mortgage loans on real estate that are not supported by funds held in escrow.
Interest and dividends earned on investments are included in net investment income. Realized gains and losses on sales of investments are recognized in operations on the specific identification basis.
Deferred acquisition costs for the successful production of traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities. Deferred acquisition costs related to the successful production of insurance and annuity products that subject the Company to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed (i.e., limited-payment long-duration annuity contracts) are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies.
For the amortization of the value of acquired insurance in force, the Company periodically reviews its estimates of gross profits. The most significant assumptions involved in the estimation of gross profits include interest rate spreads, future financial market performance, business surrender/lapse rates, mortality and morbidity, expenses and the impact of realized investment gains and losses. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company is required to record a charge or credit to amortization expense for the period in which an adjustment is made.
Other assets consist primarily of advances to mortgage loan originator, receivable for securities sold, federal and state income taxes recoverable, accrual of mortgage loan and long-term investment payments due, guaranty funds, notes receivable, prepaid assets, deposits, other receivables and property and equipment.
Policy claim liabilities represent the estimated liabilities for claims reported plus estimated incurred but not yet reported claims developed from trends of historical market data applied to current exposure.
Revenues on traditional life insurance products consist of direct premiums reported as earned when due. Liabilities for future policy benefits are provided and acquisition costs are amortized in a systematic manner based on the related contract revenues or gross profits as appropriate.
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 was effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance were 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 adoption of this guidance in 2018 did not have a material effect on the Company’s result of operations, financial position or liquidity.
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’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.
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 was permitted. The adoption of this guidance in 2018 did not have a material effect on the Company’s results of operations, financial position or liquidity.
As of December 31, 2018, the Company held two preferred stocks with an unrealized loss of $9,365, fair value of $90,580 and cost of $99,945. The ratio of fair value to cost of these two preferred stocks is 91%.
As of December 31, 2017, the Company had no equity securities and preferred stocks with unrealized losses.
Fixed maturity securities were 96% and 93% investment grade as rated by Standard & Poor’s as of December 31, 2018 and December 31, 2017, respectively.
The Company has recorded other-than-temporary impairments on its fixed maturity available-for-sale investment in an energy corporation with a total par value of $650,000 as a result of continuing unrealized losses. During fourth quarter 2016 this security was initially impaired by a $207,450 charge to the statement of operations. During second quarter 2017 this security was further impaired by a $224,250 charge to the statement of operations. These impairments were considered fully credit-related and represent the difference between the amortized cost basis of the security and its fair value. The Company experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securities for the years ended December 31, 2018 and 2017.
Management believes that the Company will fully recover its cost basis in the securities held as of December 31, 2018, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The remaining temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.
Net unrealized gains (losses) included in other comprehensive income (loss) for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation (depreciation) had been realized as of December 31, 2018 and 2017 are summarized as follows:
The Company’s mortgage loans by property type as of December 31, 2018 and 2017 are summarized as follows:
The outstanding principal balance of mortgage loans, by the most significant states, as of December 31, 2018 and 2017 are summarized as follows:
There were 11 loans with a remaining principal balance of $2,233,575 that were more than 90 days past due as of December 31, 2018. There were 23 loans with a remaining principal balance of $3,094,155 that were more than 90 days past due as of December 31, 2017.
During 2018 the Company foreclosed on residential mortgage loans of real estate totaling $467,593 and transferred those properties to investment real estate held for sale. During 2017 the Company foreclosed on residential mortgage loans of real estate totaling $207,482 and transferred those properties to investment real estate held for sale.
In 2018 and 2017 the Company did not experience any impairment on mortgage loan investments.
The amortized cost and estimated fair value of lottery prize cash flows, by contractual maturity, as of December 31, 2018 are summarized as follows:
The outstanding balance of lottery prize cash flows, by state lottery, as of December 31, 2018 and 2017 are summarized as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets include equity securities that are traded in an active exchange market.
The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 2018 and 2017 is summarized as follows:
As of December 31, 2018 and 2017, Level 3 financial instruments consisted of two private placement common stocks that have no active trading and a joint venture investment with a mortgage loan originator.
The carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of December 31, 2018 and 2017, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:
TLIC and FBLIC are required to hold assets on deposit for the benefit of policyholders and other special deposits in accordance with statutory rules and regulations. As of December 31, 2018 and 2017, these required deposits had amortized costs that totaled $4,376,463 and $4,308,853, respectively. As of December 31, 2018 and 2017, these required deposits had fair values that totaled $4,292,657 and $4,307,439, respectively.
As of December 31, 2018, $823,645 of independent residential mortgage loans on real estate are held in escrow by a third party for the benefit of the Company. As of December 31, 2018, $598,803 of that escrow amount is available to the Company as additional collateral on $4,942,870 of advances to the loan originator. The remaining December 31, 2018 escrow amount of $224,842 is available to the Company as additional collateral on its investment of $44,968,471 in residential mortgage loans on real estate. In addition, the Company has an additional $424,166 allowance for possible loan losses in the remaining $85,081,139 of investments in mortgage loans on real estate as of December 31, 2018.
The balances of and changes in the Company’s credit losses related to residential and commercial (includes apartment, industrial, lodging, office building and retail) mortgage loans on real estate as of and for the years ended December 31, 2018 and 2017 are summarized as follows (excluding $44,968,471 and $33,900,260 of mortgage loans on real estate as of December 31, 2018 and 2017, respectively, with one loan originator where independent mortgage loan balances are held in escrow by a third party for the benefit of the Company):
The balances of and changes in deferred acquisition costs as of and for the years ended December 31, 2018 and 2017 are summarized as follows:
FTFC filed a 2017 consolidated federal income tax return that included TLIC, FBLIC, FTFC and FTCC since all companies had been members of a consolidated group for five years. Prior to 2017, FTFC filed consolidated federal income tax returns with FTCC. From 2012 to 2016, TLIC and FBLIC filed separate federal income tax returns as consolidated life insurance companies.
A reconciliation of federal income tax expense computed by applying the federal income tax rate of 21% and 34% to income before federal income tax expense for the years ended December 31, 2018 and 2017, respectively, is summarized as follows:
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2018 and 2017 are summarized as follows:
TLIC participates in ceded and assumed reinsurance in order to provide risk diversification, additional capacity for future growth and limit the maximum net loss potential arising from large risks. TLIC reinsures all amounts of risk on any one life in excess of $100,000 for individual life insurance with Investors Heritage Life Insurance Company, Optimum Re Insurance Company (“Optimum Re”) and Wilton Reassurance Company (“Wilton Re”).
To the extent that the reinsurance companies are unable to meet their obligations under the reinsurance agreements, TLIC and FBLIC remain primarily liable for the entire amount at risk.
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.
On January 1, 2011, the Company received a $120,000 leasehold improvement allowance from the lessor related to the original lease that was fully amortized by September 30, 2015. In accordance with the amended lease on October 1, 2015, the Company was provided an allowance of $54,152 for leasehold improvements. The leasehold improvement allowance is amortized over the remaining amended non-cancellable lease term and reduced rent expense by $10,830 and $14,491 for the years ended December 31, 2018 and 2017, respectively. The future minimum lease payments to be paid under the amended non-cancellable lease agreement are $108,304 and $82,446 for the years 2019 and 2020, respectively.
TLIC owns approximately six and one-half acres of land located in Topeka, Kansas. A 20,000 square foot office building has been constructed on approximately one-fourth of this land. TLIC executed a two year lease agreement effective January 1, 2015, for 7,500 square feet of its building in Topeka, Kansas. Effective January 1, 2017, this lease was renewed for two years. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were $8,696 for 2015, 2016, 2017 and 2018.
This 10,000 square feet lease was renewed for five years to be effective from June 1, 2016 through May 31, 2021, with an option for an additional five years from June 1, 2021 through May 31, 2026. Beginning June 1, 2021, the lessee can terminate the lease with a 120 day written notice. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance with partial reimbursement from the lessee. The lease agreement calls for a monthly lease payment of $16,598 from June 1, 2016 through June 30, 2016. Starting July 1, 2016, the lease agreement includes an $88,833 tenant improvement allowance that is amortized over 59 months with interest at 5.00%. The monthly lease payments were $18,299 from July 1, 2016 through May 31, 2017, $18,376 from June 1, 2017 through May 31, 2018 and are $18,508 from June 1, 2018 through May 31, 2021.
TLIC is subject to Oklahoma laws and FBLIC is subject to Missouri laws that limit the amount of dividends insurance companies can pay to stockholders without approval of the respective Departments of Insurance. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the 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 $2,073,443 in 2019 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $988,218 in 2019 without prior approval. FBLIC paid dividends of $760,347 to TLIC in 2018. These dividends are eliminated in consolidation. TLIC has paid no dividends to FTFC.
Credit risk is limited by diversifying the Company’s investments. The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures accounts up to $250,000. Uninsured balances aggregate $14,663,402 as of December 31, 2018. Other funds are invested in mutual funds that invest in U.S. government securities. The Company monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. The Company has not experienced any losses in such accounts.
Mr. Pettigrew has appealed this decision but has failed to post an appeal bond. As a consequence, the Company and Mr. Zahn are in the process of executing on the judgments against Mr. Pettigrew’s assets. The Company and Mr. Zahn have so far collected some property and money in the execution process and will continue to execute on the judgments. Any money or property collected to date during the execution of the judgments are held in an escrow by a third party, have not been reflected in the December 31, 2018 consolidated financial statements and would have to be returned to Mr. Pettigrew in the event the judgments are reversed by the appellate courts.
On April 15, 2018, the Company renewed its previous one-year loan of $400,000 to its former Chairman. The renewed loan 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. This loan is included in other assets in the consolidated statements of financial position.
The pretax components of the Company’s other comprehensive income (loss) and the related income tax expense (benefit) for each component for the years ended December 31, 2018 and 2017 are summarized as follows:
The pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income (loss) to the Company’s consolidated statements of operations for the years ended December 31, 2018 and 2017 are summarized as follows: