The Company leased approximately 2,517 square feet of office space in Tulsa, Oklahoma pursuant to a three-year lease that began July 1, 2008 and leased 950 square feet of office space effective December 15, 2009 that terminated December 31, 2010. On June 17, 2010, the Company agreed to lease an additional 4,252 square feet of expansion office space whereby effective October 1, 2010, the Company would lease for five years a combined 6,769 square feet. Under the terms of the home office leases as amended, the monthly rent expense for the 2,517 square feet was $3,041 through June 30, 2009, $3,146 from July 1, 2009 through June 30, 2010, $3,251 from July 1, 2010 through September 30, 2010 and $7,897 from October 1, 2010 through September 30, 2015. The 950 square feet lease was $1,225 per month. The Company incurred rent expense of $72,809 and $73,155 for the years ended December 31, 2011 and 2010, respectively. Future minimum lease payments to be paid under non cancelable lease agreements are $94,764 for each of the years 2012 through 2014 and $71,073 in 2015.
On December 24, 2009, TLIC entered into a five year lease of approximately 7,500 square feet of its building in Topeka, Kansas with an option for the lessee to renew the lease for five additional years. The monthly lease payments are as follows: $8,888 in 2010, $9,130 in 2011 and 2012 and $9,371 in 2013 and 2014.
TLIC has also leased 10,000 square feet in the Topeka, Kansas office building under a lease that was renewed during 2006 to run through June 30, 2011 with a 90 day notice to terminate the lease by the lessee. This lease was renewed on July 1, 2011 to run through May 31, 2016. Beginning July 1, 2014, the lessee can terminate the lease with a 180 day written notice. The lease agreement calls for minimum monthly base lease payments of $17,535 beginning on July 1, 2011.
The future minimum lease payments to be received under the above non cancelable lease agreements are $357,180, $360,072, $360,072, $235,220 and $87,675 for the years 2012 through 2016, respectively.
Management’s Discussion and Analysis of Financial Condition, Results of Operation and Liquidity and Capital Resources
As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense, term and annuity products to predominately middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas through independent agents. With the acquisition of Family Benefit Life in late 2011, we will be expanding into Arizona, Colorado, Missouri and New Mexico in 2012.
Our profitability in the life insurance segment is a function of our ability to accurately price the policies that we write, adequately value life insurance business acquired and administer life insurance company acquisitions at an expense level that validates the acquisition cost. Profitability in the premium financing segment is dependent on the Company’s ability to compete in that sector, maintain low administrative costs and minimize losses.
The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security. It is not possible to accurately predict when it may be determined that a specific security will become impaired. Future adverse changes in market conditions, poor operating results of underlying investments and defaults on interest and principal payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future. In addition, if a change occurs in our intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that we will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result. If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, we amortize the reduced book value back to the security’s expected recovery value over the remaining term of the bond. We continue to review the security for further impairment that would prompt another write-down in the book value.
If we determine a portion of the unamortized balance is not recoverable, it is immediately charged to amortization expense. The assumptions we use to amortize and evaluate the recoverability of the deferred acquisition costs involve significant judgment. A revision to these assumptions may impact future financial results.
Loans from Premium Financing and Allowance for Loans from Premium Financing
As of December 31, 2011 and 2010 there was $827,409 and $604,958, respectively, of accumulated amortization of the value of insurance business acquired due to the FLAC purchase that occurred at the end of 2008. We expect to amortize the value of insurance business acquired by the following amounts over the next five years: $463,663 in 2012, $445,656 in 2013, $429,468 in 2014, $412,077 in 2015 and $395,047 in 2016. As of December 31, 2011, there was no amortization of the value of insurance business acquired due to the purchase of Family Benefit Life that occurred at the end of 2011.
Estimating liabilities for our long-duration insurance contracts requires management to make various assumptions, including policyholder persistency; mortality rates; investment yields; discretionary benefit increases; new business pricing and operating expense levels. We evaluate historical experience for these factors when assessing the need for changing current assumptions. However, since many of these factors are interdependent and subject to short-term volatility during the long-duration contract period, substantial judgment is required. Actual experience may emerge differently from that originally estimated. Any such difference would be recognized in the current year’s consolidated statement of income.
All other acquisition costs should be charged to expense as incurred. In addition, administrative costs, rent, depreciation, occupancy, equipment and all other general overhead costs are considered indirect costs and should be charged to expense as incurred. ASU 2010-26 is effective for interim and annual reporting periods beginning after December 15, 2011. Early adoption is permitted, but only at the beginning of an entity’s annual reporting period. The Company will adopt ASU 2010-26 in first quarter 2012. The Company has assessed the guidance and has determined that it will not have a significant financial impact since the Company utilizes a dynamic model whereby deferred acquisition costs on the statement of financial position only include policies currently in force. This current dynamic model results in immediate amortization of all deferred acquisition costs on the statement of operations where the policy is no longer in force. Once adopted, the above defined acquisition costs will only be capitalized directly related to the successful acquisition of new or renewal insurance contracts. After adoption, these acquisition costs will be amortized on the statement of operations when the related policies are no longer in force.
In the absence of Level 1 input, premiums or discounts should be applied if market participants would do so when pricing an asset or liability.
ASU 2011-04 is effective for public companies for interim and annual periods beginning on or after December 15, 2011 and shall be applied prospectively. Early application is not permitted. The Company will adopt this guidance in first quarter 2012.
Total consolidated revenues increased 83.9% from $8,821,306 for the year ended December 31, 2010 to $16,224,259 for the year ended December 31, 2011, an increase of $7,402,953.
Premiums increased 5.7% from $5,895,030 for the year ended December 31, 2010 to $6,229,383 for the year ended December 31, 2011, an increase of $334,353. The increase was due to the following:
$419,958 decrease in first year production of whole life and term premiums due to the focus of our captive agents on the public stock offering that began on June 29, 2010.
Income from premium financing decreased 35.2% from $259,296 for the year ended December 31, 2010 to $168,124 for the year ended December 31, 2011, a decrease of $91,172. The income from premium financing has steadily decreased during the past two years. Premium financing operations are mostly based on the production of loan agreements with Oklahoma agents although we are issuing a limited number of loans in Louisiana and Mississippi with profitable agencies but currently have no production in Alabama and Arkansas. The Company is closely evaluating premium financing operations to determine if it can continue based almost entirely on Oklahoma production.
The 2010 net realized investment gains from the sales of two equity securities available-for-sale of $20,128 resulted from sale proceeds of $65,592 on equity securities available-for-sale having a $45,464 carrying value at the 2010 disposal dates.
In late December 2011, we acquired 100% ownership of Family Benefit Life from its shareholders for $13,855,129 paid in cash. The fair value of the net assets acquired in this transaction was $20,770,608. Since the fair value of the net assets acquired exceeded the cost paid for those assets by $6,915,479, the residual was recorded in the consolidated statements of operations as a component of revenues captioned “Gain from acquisition of Family Benefit Life” per the requirements of Financial Accounting Standards Board Codification Topic 805 “Business Combinations.” The reason for the gain from the acquisition of Family Benefit Life related primarily to that company’s management not being committed to rebuild the marketing force of that company in the current economic environment.
Other income was $12,577 and $66,346 for the years ended December 31, 2011 and 2010, a decrease of $53,769. The decrease is primarily due to a decrease in service fees in 2011.
$278,598 increase in interest credited to policyholders primarily due to an increase in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits in excess of withdrawals).
$56,522 increase in death benefits primarily due to an increase in the number of claims incurred, increase in the average claim amount and an increase in the amount and number of claims in course of settlement.
For the years ended December 31, 2011 and 2010, capitalized costs were $2,262,751 and $1,773,199, respectively. Amortization of deferred policy acquisition costs for the years ended December 31, 2011 and 2010 was $230,284 and $451,349, respectively. The $489,552 increase in the acquisition costs deferred primarily relates to increased new business production of final expense policies and annuity contracts. In addition, there was a 2011 change in the methodology of deferring and amortizing deferred acquisition costs that is explained below.
During 2011 $358,740 of deferrable acquisition costs associated with policies that were issued and lapsed in 2011 were not deferred and were not amortized. During 2010, $299,158 of deferrable acquisition costs associated with policies that were issued and lapsed in 2010 were deferred and were amortized during 2010.
The cost of acquiring insurance business is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was $222,451 and $271,465 for the years ended December 31, 2011 and 2010, respectively. The decrease in the amortization of value of insurance business acquired of $49,014 reflects improved persistency in the whole life, term and annuity business of FLAC acquired in late 2008. As of December 31, 2011, there was no amortization the value of insurance business acquired due to the purchase of Family Benefit Life that occurred at the end of 2011.
$218,728 decrease in first year whole life and term commissions that corresponds to the $419,958 decrease in other first year premiums due to the focus of our captive agents on the public stock offering that began on June 29, 2010.
$175,000 decrease in loan losses and other operating expenses in the premium finance operations due to the decline in production of new loans and our focus on business in Oklahoma and with profitable agencies.
$93,000 increase in third party administration fees related to an increase in services provided, increased number of policies administered and increased underwriting and new business services related to increased final expense production.
Net Income (Loss) and Net Income (Loss) Per Common Share Basic and Diluted
The income before total federal income taxes from Life and Annuity Insurance Operations was $8,238,255 and $736,035, respectively, for the years ended December 31, 2011 and 2010. The $7,502,220 increased profitability for 2011 compared to 2010 is primarily due to the $6,915,479 gain from the acquisition of Family Benefit Life and $447,635 of increased net realized investment gains.
Revenues from Premium Finance Operations decreased 48.5% from $323,816 for year ended December 31, 2010 to $166,919 for the year ended December 31, 2011, a decrease of $156,897. The decrease relates to a decrease in production of loan agreements as management focuses on business primarily with Oklahoma profitable agents.
As of December 31, 2011, our available-for-sale equity securities had a fair value of $898,893 compared to a fair value of $529,314 as of December 31, 2010. The cost of available-for-sale equity securities were $750,941 as of December 31, 2011 and $347,353 as of December 31, 2010. The increase is primarily due to the $304,773 in fair value of the available-for-sale equity securities acquired in the Family Benefit Life acquisition. This portfolio is also reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.” The available-for-sale equity securities portfolio is invested in a variety of companies.
As of December 31, 2010, we held the following additional invested assets: mortgage loans on real estate of $1,156,812; investment real estate of $3,077,520; policy loans of $367,284 and other long-term investments of $6,886,529. The other long-term investments are comprised of lottery prize receivables.
The value of insurance business acquired was $7,912,469 and $2,507,258 as of December 31, 2011 and December 31, 2010, respectively. Amortization of value of insurance business acquired for the years ended December 31, 2011 and 2010 was $222,451 and $271,465, respectively. The value of insurance business acquired recorded in connection with the Family Benefit Life acquisition was $5,627,662.
As of December 31, 2011 and December 31, 2010, we held loans from premium financing of $1,022,416 and $1,143,977, respectively. The loan balances as of December 31, 2011 and December 31, 2010, respectively, are net of unearned interest of $23,287 and $35,519 and allowance for loan losses of $229,004 and $443,071.
As of December 31, 2011, we held the following additional assets (excluding cash and cash equivalents and certificates of deposit that are discussed below under “Liquidity and Capital Resources”): amounts recoverable from reinsurers of $1,132,121; accrued investment income of $1,122,574; agents’ balances and due premiums of $381,901; property and equipment of $170,843 and other assets of $1,297,205. Other assets include federal and state incomes taxes recoverable, prepaid expenses, notes receivable and customer account balances receivable.
As of December 31, 2011, we had cash and cash equivalents totaling $27,705,711 with $9,103,505 acquired in the acquisition of Family Benefit Life. Some of our excess funds have been invested in money market mutual funds. As of December 31, 2011, cash and cash equivalents of $14,383,877 and $9,103,505, respectively, of the total $27,705,711 were held by TLIC and Family Benefit Life and may not be available for use by FTFC due to the required pre-approval by the Oklahoma Insurance Department and Missouri Department of Insurance of any dividend or intercompany transaction to transfer funds to FTFC. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the lesser of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is no capacity for TLIC to pay a dividend in 2011 without prior approval. However, there is the capacity for Family Benefit Life to pay a dividend up to $934,675 in 2012 without prior approval. There were no dividends paid or a return of capital to the parent company in 2010.
The Federal Deposit Insurance Corporation currently insures all non-interest bearing accounts. We monitor the solvency of all financial institutions in which we have funds to minimize the exposure for loss. We do not believe we are at significant risk for such a loss.
Our operating activities for the year ended December 31, 2011 provided $1,948,708 of cash compared to $1,220,685 of cash provided by operations during the year ended December 31, 2010. The $728,023 increase in cash provided by operations in 2011 is primarily due to increased premiums and decreased expenses in excess of increased benefits, claims and commissions.
Cash used by investing activities for the years ended December 31, 2011 and 2010 was $5,428,643 and $2,809,417, respectively. The $2,619,226 of increased cash used was primarily utilized to purchase Family Benefit Life that required the net use of $4,751,624 of cash ($13,855,129 of cash consideration to purchase 1,287,640 shares of Family Benefit Life Common Stock from shareholders that is offset by $9,103,505 of cash acquired with the Family Benefit Life net assets).
Shareholders’ equity at December 31, 2011 was $28,398,113 compared to $16,655,947 as of December 31, 2010. The increase of $11,742,166 is due primarily to the net income in 2011 of $7,359,993 and the net proceeds of $4,991,319 from the public stock offering that commenced on June 29, 2010 less a $609,146 decrease in the unrealized appreciation of available-for-sale securities. For the year ended December 31, 2011, the public stock offering generated proceeds of $5,908,890 less $917,571 of offering costs.
The liquidity requirements of our life insurance company are met primarily by funds provided from operations. Premium deposits and revenues, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. There were no liquidity issues in 2011 or 2010. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.
We will use the majority of our capital provided from the public stock offerings to expand life insurance operations and acquire life insurance companies. The operations of TLIC 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.
Loans outstanding from premium financing declined during 2010 and have continued to decline during 2011 as we have decreased production of premium financing contracts. The growth of the premium finance subsidiary is uncertain and may require additional capital. The premium financing operations have steadily decreased during the past two years. Premium financing loan operations is now based on the production of loan agreements with Oklahoma agents. We are only writing business in Louisiana and Mississippi with profitable agencies and currently have no production in Alabama and Arkansas. The Company is closely evaluating premium financing loan operations to determine if it can continue based almost entirely on Oklahoma production.
Supplemental Disclosure: Cash Investing Activity for Acquisition of Family Benefit Life Insurance Company
First Trinity Financial Corporation (the “Company”) is the parent holding company of Trinity Life Insurance Company, Family Benefit Life Insurance Company, First Trinity Capital Corporation and Southern Insurance Services, LLC. The Company was incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a life insurance subsidiary. The Company raised $1,450,000 from two private placement stock offerings during 2004. On June 22, 2005, the Company’s intrastate public stock offering filed with the Oklahoma Department of Securities for $12,750,000, which included a 10% "over-sale" provision (additional sales of $1,275,000), was declared effective. The offering was completed February 23, 2007. The Company raised $14,025,000 from this offering.
TLIC is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in eight states primarily in the Midwest. TLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment and annuity products. The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense is issued as either a simplified issue or as a graded benefit, determined by underwriting. The products are sold through independent agents in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas. The Company’s operations, prior to the acquisition of FLAC, involved the sale of a modified premium whole life insurance policy with a flexible premium deferred annuity rider through its subsidiary Old TLIC in the state of Oklahoma.
On October 20, 2011, Trinity Life Insurance Company announced that it had signed a transaction agreement to acquire Family Benefit Life Insurance Company, a life and annuity insurance company incorporated and domiciled in Missouri. Prior to October 20, 2011, the Company purchased 401,381 Family Benefit Life common shares. TLIC purchased all of the remaining 886,259 issued and outstanding shares of Family Benefit Life from its shareholders. The transaction price per share was $11.05 and was based on Family Benefit Life’s statutory capital and surplus (presented in accordance with statutory accounting principles) as of September 30, 2011 and the number of common shares issued and outstanding as of September 30, 2011 plus a premium of approximately $3.7 million. The transaction was subject to completion of due diligence, the continuation of Family Benefit Life’s business in the ordinary course and certain other conditions.
Closing of the Family Benefit Life acquisition occurred between December 13, 2011 and December 28, 2011 as Trinity Life Insurance Company purchased the Family Benefit Life’s remaining 886,259 issued and outstanding shares from the Company’s shareholders. Family Benefit Life is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in seven states. Family Benefit Life’s current product portfolio consists of whole life, term, accidental death and dismemberment, annuity, endowment and group life insurance products. The products are sold through independent agents in the states of Arizona, Colorado, Kansas, Missouri, Nebraska, New Mexico and Oklahoma.
TLIC acquired 100% ownership of Family Benefit Life from its shareholders for $13,855,129 paid in cash. The fair value of the net assets acquired in this transaction was $20,770,608. Since the fair value of the net assets acquired exceeded purchase price for acquiring those net assets by $6,915,479, the residual was recorded in the consolidated statements of operations as a component of revenues captioned as “Gain from acquisition of Family Benefit Life” per the requirements of Financial Accounting Standards Board Codification Topic 805 “Business Combinations.” The reason for the gain from the acquisition of Family Benefit Life related primarily to that company’s management not being committed to rebuild the marketing force of that company in the current economic environment.
Interest income, as well as the related amortization of premium and accretion of discount, is included in net investment income under the effective yield method. The amortized cost of fixed maturity securities available-for-sale is written down to fair value when a decline in value is considered to be other-than-temporary.
The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management's judgment as to the financial position and future prospects of the entity issuing the security. It is not possible to accurately predict when it may be determined that a specific security will become impaired. Future adverse changes in market conditions, poor operating results of underlying investments and defaults on mortgage loan payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future.
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.
Investment real estate is carried at amortized cost. Depreciation on the office building is calculated over its estimated useful life of 19 years. On January 1, 2011, the useful life of the building was changed from 39 years to 19 years.
Certificates of deposit are carried at cost. The Company limits its investment in certificates of deposit to accounts that are federally insured. The Company had no certificates of deposit as of December 31, 2011.
Realized gains and losses on sales of investments are recognized in operations on the specific identification basis. Interest and dividends earned on investments are included in net investment income.
Deferred acquisition costs for traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities.
Deferred acquisition costs related to 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. To the extent that realized gains and losses on fixed income securities result in adjustments to deferred acquisition costs related to insurance and annuity products, such adjustments are reflected as a component of the amortization of deferred acquisition costs.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Property and equipment are carried at amortized cost. Office furniture and equipment is recorded at cost or fair value at acquisition less accumulated depreciation using the straight-line method over the estimated useful life of the respective assets of 3 to 7 years. Leasehold improvements are recorded at cost and amortized over the remaining non cancelable lease term.
The Company cedes reinsurance under various agreements allowing management to control exposure to potential losses arising from large risks and providing additional capacity for growth. Estimated reinsurance recoverable balances are reported as assets and are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts.
Net income per common share basic and diluted is calculated using the weighted average number of common shares outstanding and subscribed during the year. The weighted average outstanding and subscribed common shares basic and diluted for the years ended December 31, 2011 and 2010 were 7,349,296 and 6,547,177, respectively. These weighted average shares reflect the retrospective adjustment for the impacts of the 5% stock dividend declared by the Company on January 10, 2011 and January 11, 2012 and payable to holders of shares of the Company as of March 10, 2011 and March 10, 2012.
Use of nonfinancial assets in a way that differs from the assets highest and best use.
Investments in fixed maturity and equity securities available-for-sale as of December 31, 2011 and December 31, 2010 are summarized as follows:
The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value based on all of the factors considered. Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value.
Based on our review, the Company experienced no other-than-temporary impairments during the years ended December 31, 2011 and December 31, 2010.
Management believes that the Company will fully recover its cost basis in the securities held at December 31, 2011, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The remaining temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.
Net unrealized gains included in other comprehensive income for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized as of December 31, 2011 and 2010 are summarized as follows:
The outstanding balance of lottery prize cash flows, by state lottery, as of December 31, 2011 and 2010 are summarized as follows:
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 assets and liabilities include fixed maturity securities with quoted prices that are traded less frequently than exchange-traded instruments or assets and liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes U.S. Government and agency mortgage-backed debt securities and corporate debt securities.
At December 31, 2011, Level 3 financial instruments consisted of two private placement common stocks that have no active trading. These stocks represent investments in small development stage insurance holding companies. The fair value for these securities was determined through the use of unobservable assumptions about market participants. The Company has assumed a willing market participant would purchase the securities for the same price as the Company paid until such time as the development stage company commences operations.
The Company’s equity securities are included in Level 1 except for mutual funds and the preferred stock included in Level 2 and the private placement common stocks are included in Level 3. Level 1 for these equity securities is appropriate since they trade on a daily basis, are based on quoted market prices in active markets and based upon unadjusted prices. Level 2 for the mutual funds and preferred stock is appropriate since they are not actively traded as of December 31, 2011. The mutual funds were moved from Level 1 to Level 2 during 2010. The Company’s fixed maturity and equity securities portfolio is highly liquid and allows for a high percentage of the portfolio to be priced through pricing services.
The change in the fair value of the Company’s Level 3 equity securities, available-for-sale for the years ended December 31, 2011 and 2010 is summarized as follows:
The estimated fair values of financial instruments, as of December 31, 2011 and 2010 are summarized as follows:
Prior to January 1, 2011, the Company pledged a certificate of deposit with a market value of $65,000 as collateral for the letter of credit with a bank. There were no amounts borrowed against this letter of credit. The letter of credit was obtained solely to secure the issuance of standby letters of credit. The standby letters of credit are used to guarantee reserve credits taken by Optimum Re Insurance Company (“Optimum Re”). The letter of credit in effect as of December 31, 2011 and into 2012 does not require a pledged certificate of deposit.
TLIC and Family Benefit Life are required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At December 31, 2011 and 2010, these required deposits had a carrying value that totaled $2,571,669 and $2,643,506, respectively.
A reconciliation of federal income tax expense computed by applying the federal income tax rate of 35% to income before federal income tax expense for the years ended December 31, 2011 and 2010 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, 2011 and 2010 are summarized as follows:
The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, have not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 2008 through 2011 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.
Property and equipment as of December 31, 2011 and 2010 is summarized as follows:
Family Benefit Life entered into a one-year lease beginning August 1, 2010 and ending July 31, 2011. The lease can be renewed annually if no termination notice is given by either party on or before May 1. No notice was given by either party on May 1, 2011 and therefore the lease was renewed for an additional one-year period. The tenant pays Family Benefit Life $15,000 per year in monthly installments of $1,250.
The Company has a life insurance segment, consisting of the operations of TLIC and Family Benefit Life, and a premium financing segment, consisting of the operations of FTCC and SIS. Results for the parent company, after elimination of intercompany amounts, are allocated to the corporate segment. These segments as of and for the years ended December 31, 2011 and 2010 are summarized as follows:
The components of comprehensive income, net of related federal income taxes and adjustments to deferred acquisition costs, for the years ended December 31, 2011 and 2010 are summarized as follows:
On April 30, 2009, FTCC renewed and modified its loan agreement with the First National Bank of Muskogee, to increase the revolving loan amount to $3,600,000. The loan bore interest on the outstanding principal amount for each interest period at a rate per annum equal to the sum of the J.P. Morgan Chase Prime Rate at all times in effect plus the Prime Rate Margin of .25 of one percent. The rate had a floor of no less than 5% at any time. FTFC was a guarantor on the loan. The loan matured May 31, 2010 and was not renewed at the election of FTFC. The maximum amount that was borrowed when the revolving loan was effective was $100,000.
On July 26, 2011, the Company signed a definitive agreement to acquire Doctors Life Insurance Company, domiciled in California, with assets of approximately $22 million and licensed in California, Arizona, Hawaii, Montana, Nevada, Texas and Wyoming. The purchase price would have been $4,500,000, subject to adjustment based upon required statutory capital and surplus. In first quarter 2012, the stock purchase agreement was terminated since the closing was not going to take place.
The net fair value of the Family Benefit Life assets acquired is included in the consolidated statement of financial position as of December 31, 2011. The results of operations of Family Benefit Life are not included in the consolidated statement of operations for the year ended December 31, 2011 due to the late 2011 acquisition date. The Company acquired Family Benefit Life to expand its insurance operations in additional states.
The following unaudited pro forma financial information has been prepared to present the results of operations of the Company assuming the acquisition of Family Benefit Life had occurred at the beginning of the years ended December 31, 2011 and 2010. This pro forma information is supplemental and does not necessarily present the operations of the Company that would have occurred had the acquisition occurred on those dates and may not reflect the operations that will occur in the future.
The unaudited pro forma financial information for the years ended December 31, 2011 and 2010 is summarized as follows: