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-half of this land. 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: $9,130 in 2011 and 2012 and $9,371 in 2013 and 2014.
Family Benefit Life owned approximately one and one-half acres of land located in Jefferson City, Missouri. A 6,100 square foot building (serving as Family Benefit Life’s headquarters) and a 2,200 square foot building (leased to a third party) are on one acre of this land and the other half acre is held for sale. In October 2012, both of the buildings were sold.
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. However, as introduced above, the Company has discontinued its premium financing operations and will completely exit that segment of the business on approximately July 1, 2013.
As of December 31, 2012 and 2011 there was $1,230,982 and $827,409, respectively, of accumulated amortization of the value of insurance business acquired due to the purchases of FLAC and Family Benefit Life. The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years: $414,820 in 2013, $421,829 in 2014, $409,016 in 2015, $395,025 in 2016 and $381,246 in 2017.
In June 2011, the FASB issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in shareholders’ equity. The updated guidance requires that all nonowner changes in shareholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance was effective for the quarter ended March 31, 2012 and was applied retrospectively.
The updated guidance was effective for the quarter ended March 31, 2012. The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.
In July 2012, the FASB issued updated guidance regarding the impairment test applicable to indefinite-lived intangible assets that is similar to the impairment guidance applicable to goodwill. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact the fair value of the indefinite-lived intangible asset and lead to the determination that it is more likely than not that the fair value of the asset is less than its carrying value. If an entity determines that it is more likely than not that the fair value of the intangible asset is less than its carrying value, an impairment test must be performed. The impairment test requires an entity to calculate the estimated fair value of the indefinite-lived intangible asset. If the carrying value of the indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess.
In February 2013, the FASB issued updated guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement of income or in the notes, separately for each component of comprehensive income, the current period reclassifications out of accumulated other comprehensive income by the respective line items of net income affected by the reclassification.
The updated guidance is effective prospectively for reporting periods beginning after December 15, 2012. The updated guidance will not have any effect on the Company's results of operations, financial position or liquidity.
Premium finance operations, consisting of the operations of FTCC and SIS; and
Our revenues for the years ended December 31, 2012 and 2011 are summarized as follows:
The decrease of $5,340,066 in total revenues for the year ended December 31, 2012, excluding Family Benefit Life revenues, is discussed below.
The $618,412 increase in premiums for the year ended December 31, 2012, excluding Family Benefit Life premiums, is primarily due to a $643,277 increase in final expense renewal premiums.
As introduced above, the Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continues to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
The major components of our net investment income for the years ended December 31, 2012 and 2011 are summarized as follows:
The $161,111 decrease in investment expenses for the year ended December 31, 2012, excluding Family Benefit Life investment expenses, is due to $117,000 of decreased investment advisory management service fees and $72,000 of decreased investment real estate expenses that more than offset $28,000 of increased loan origination fees.
There was a $142,105 increase in net realized investment gains for the year ended December 31, 2012.
The net realized investment gains from the sale of investment real estate of $75,832 for the year ended December 31, 2012 resulted from proceeds of $512,500 for two buildings that had a carrying value of $436,668 at the 2012 disposal date.
The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $606,935 for the year ended December 31, 2011 resulted from proceeds of $4,671,870 for these securities that had carrying values of $4,064,935 at the 2011 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 FASB 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.
The total acquisition date fair value of the net assets acquired from Family Benefit Life in late December 2011 is as follows:
The $907 decrease in other income for the year ended December 31, 2012, excluding Family Benefit Life other income, is primarily due to decrease service fees.
The impact on total benefits, claims and expenses of Family Benefit Life total benefits, claims and expenses, acquired on December 28, 2011, for the year ended December 31, 2012 is summarized in the tables below.
Our benefits, claims and expenses for the years ended December 31, 2012 and 2011 are summarized as follows:
The increase of $1,439,466 in total benefits, claims and expenses for the year ended December 31, 2012, excluding Family Benefit Life benefits, claims and expenses, is discussed below.
$532,045 increase in death benefits is primarily due to an increase in the number of final expense claims incurred. There was a 1,010 increase in the number of final expense policies in force from 8,063 policies as of December 31, 2011 to 9,073 policies as of December 31, 2012. Correspondingly, there was a $9,305,891 increase in the amount of final expense insurance in force from $67,693,765 as of December 31, 2011 to $76,999,656 as of December 31, 2012. This final expense policy expansion has increased our mortality exposure.
Family Benefit Life had little impact on the deferral or amortization of deferred acquisition costs since its 2012 production of new life and annuity policies was minimal. The Company’s management is focused on reinvigorating the Family Benefit Life new business production and has filed new products for state approval that should begin being marketed in April 2013.
The $39,319 increase in the acquisition costs deferred primarily relates to increased production of ordinary policies in 2012. The $282,262 increase in the 2012 amortization of deferred acquisition costs primarily reflects the increase in final expense claims incurred and the increased annuity lapses after the surrender charge period.
The cost of acquiring insurance business is amortized over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was $403,573 and $222,451 for the years ended December 31, 2012 and 2011, respectively. The $181,122 increase in the 2012 amortization of value of insurance business acquired primarily relates to the $225,106 amortization of value of insurance business acquired related to the acquisition of Family Benefit Life on December 28, 2011.
The $10,086 increase in commissions for the year ended December 31, 2012, excluding Family Benefit Life commissions, is primarily due to:
$80,614 increase in first year whole life and term commissions that corresponds to $164,113 of increased first year whole life and term premiums.
$72,030 increase in final expense renewal commissions that corresponds to $643,277 of increased final expense renewal premiums.
$1,449 decrease in renewal whole life and term commissions that corresponds to a $141,979 decrease in renewal whole life and term premiums.
$49,776 decrease in final expense first year commissions that correspond to the $46,999 decrease in final expense first year premiums.
The $294,520 decrease in other underwriting, insurance and acquisition expenses for the year ended December 31, 2012, excluding Family Benefit Life expenses, is primarily attributed to third party legal, accounting, actuarial and other costs incurred in 2011 associated with the acquisition of Family Benefit Life. The 2012 costs paid to third parties related to the synergy and conversion of Family Benefit Life into our operations were accumulated in Family Benefit Life and for the year ended December 31, 2012 totaled approximately $200,000.
For the years ended December 31, 2012 and 2011, deferred income tax expense (benefit) was ($417,122) and $96,183, respectively. Current income tax expense was $273,054 and $34,095 for the years ended December 31, 2012 and 2011, respectively.
$3,924,327 of revenues due to the acquisition of Family Benefit Life on December 28, 2011
The $64,185 decrease in revenues from Premium Finance Operations for the year ended December 31, 2012 is due to decreased fee income as we discontinued offering premium finance contracts on July 1, 2012.
The $12,245 decreased profitability from Premium Finance Operations for the year ended December 31, 2012 is primarily due to $64,185 of decreased fee income and $52,000 of decreased operating expenses.
The $384,435 increase in revenues from Corporate Operations for the year ended December 31, 2012 is primarily due to a $350,000 realized investment gain from the sale of equity securities available-for-sale and $33,000 of increased net investment income.
The $385,496 increased Corporate Operations profitability for the year ended December 31, 2012 is primarily due to the $384,435 increase in revenues discussed above.
Our invested assets as of December 31, 2012 and 2011 are summarized as follows:
The $9,685,119 increase in other long-term investments (comprised of lottery receivables) for the year ended December 31, 2012 is primarily due to the purchases of $11,188,607, $1,188,321 of accretion of discount less principal payments of $2,691,809.
Our assets other than invested assets as of December 31, 2012 and December 31, 2011 are summarized as follows:
The progression of the Company’s loans from premium financing for the years ended December 31, 2012 and 2011 is summarized as follows:
The $678,813 increase in deferred federal income taxes during the year ended December 31, 2012 was due to $1,095,935 of increased deferred federal income taxes on the unrealized appreciation of available-for-sale fixed maturity and equity securities. This increase was partially offset by $417,122 of operating deferred tax benefits.
Our operations have been financed primarily through the private placement of equity securities and an intrastate public stock offering. Through December 31, 2012, we have received $27,011,105 from the sale of our shares. Our operations have been profitable and have generated $5,072,303 of net income from operations since we were incorporated in 2004 as shown in the accumulated earnings (deficit) balance in the December 31, 2012 consolidated statement of financial position. The Company issued 323,777 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2011, however, that resulted in accumulated earnings being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital. The Company also issued 378,928 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2012, that resulted in accumulated earnings being charged an additional $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital. The impact of these two stock dividend charges of $5,270,288 to accumulated earnings (deficit) decreased the balance of accumulated deficit as of December 31, 2012 to $197,985.
The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures non-interest bearing accounts up to $250,000. Uninsured balances aggregate $2,514,836 as of December 31, 2012. Other funds are invested in mutual funds that invest in U.S. government securities. We monitor the solvency of all financial institutions in which we have funds to minimize the exposure for loss. The Company has not experienced any losses in such accounts.
The $938,577 decrease in cash provided by operating activities during the year ended December 31, 2012 is primarily due to increased benefits and claims and decreases in premiums that exceeded increases in net investment income and decreases in other underwriting, insurance and acquisition expenses.
The $7,083,601 decrease in cash provided by financing activities for the year ended December 31, 2012 resulted from $3,229,954 of decreased policyholder account deposits in excess of withdrawals; $3,205,052 of decreased net proceeds from the public and private placement stock offerings and $648,595 for purchasing treasury shares.
We believe gradual increases in interest rates do not present a significant liquidity exposure for the life insurance policies. We maintain conservative durations in our fixed maturity portfolio. As of December 31, 2012, cash and the fair value of fixed maturity available-for-sale securities with maturities of less than one year and the fair value of lottery receivables with maturities of less than one year equaled 13.9% of total policy liabilities. If interest rates rise significantly in a short time frame, there can be no assurance that the life insurance industry, including the Company, would not experience increased levels of surrenders and reduced sales, and thereby be materially adversely affected.
On June 29, 2010, the Company commenced a public offering of its common stock registered with the U.S. Securities and Exchange Commission and the Oklahoma Department of Securities. The offering was completed April 30, 2012. The Company raised $11,000,010 from this offering and incurred $1,650,001 in offering costs resulting in $9,350,009 in net proceeds.
On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas, Missouri and South Dakota. The private placement is for 600,000 shares of the Company’s common stock for $8.50 per share. If all shares were sold, the Company would have received $4,335,000 after reduction for estimated offering expenses. As of December 31, 2012, the Company had received gross proceeds of $536,095 from the subscription of 63,070 shares of its common stock in this private placement and incurred $232,921 in offering costs. This offerring was suspended on March 8, 2013 and resulted in gross proceeds of $620,245 from the subscription of 72,970 shares of its common stock and incurred $290,163 in offering costs.
We have audited the accompanying consolidated statements of financial position of First Trinity Financial Corporation and Subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
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. On June 29, 2010, the Company commenced a public offering of its common stock registered with the U.S. Securities and Exchange Commission and the Oklahoma Department of Securities. The offering was completed April 30, 2012. The Company raised $11,000,010 from this offering. On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas, Missouri and South Dakota. The private placement is for 600,000 shares of the Company’s common stock for $8.50 per share. If all shares were sold, the Company would have received $4,335,000 after reduction for estimated offering expenses. As of December 31, 2012, the Company had received gross proceeds of $536,095 from the subscription of 63,070 shares of its common stock in this private placement and incurred $232,921 in offering costs. This offering was suspended on March 8, 2013 and resulted in gross proceeds of $620,245 from the subscription of 72,970 shares of its common stock and incurred $290,163 in offering costs.
The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC will not accept new premium financing contracts after June 30, 2012. FTCC will continue to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
The Company also owns 100% of Southern Insurance Services, LLC, (“SIS”), a limited liability company acquired in 2010, that operated as a property and casualty insurance agency but currently has no operations.
Investment real estate is carried at amortized cost. Depreciation on the office building is calculated over its estimated useful life of 19 years.
Other long term investments are comprised of lottery prize receivables and are carried at amortized cost, net of unamortized premium or discount. Interest income and the accretion of discount are included in net investment income.
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.
While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy and changes in interest rates. The Company’s allowance for possible loan losses consists of specific valuation allowances established for probable losses on specific loans and a portfolio reserve for probable incurred but not specifically identified loans. 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.
Other assets consist primarily of prepaid expenses, recoverable federal and state income taxes, guaranty funds, notes receivable, customer account balances receivable and receivables for securities sold with trade dates in 2012 and settlement dates in 2013. Other liabilities consist primarily of accrued expenses, account payables, deposits on pending policy applications, unearned investment income and payable for securities purchased with trade dates in 2012 and settlement dates in 2013.
Management has evaluated all events subsequent to December 31, 2012 through the date that these financial statements have been issued. Please see note 16.
In October 2010, the FASB issued updated guidance to address diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred.
If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs.
In September 2011, the FASB issued updated guidance that modifies the manner in which the two-step impairment test of goodwill is applied. Under the updated guidance, an entity may assess qualitative factors (such as changes in management, key personnel, strategy, key technology, or customers) that may impact a reporting unit’s fair value and lead to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If an entity determines that it is more likely than not, it must perform an impairment test.
Investments in fixed maturity and equity securities available-for-sale as of December 31, 2012 and December 31, 2011 are summarized as follows:
All securities in an unrealized loss position as of the financial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position as of December 31, 2012 and 2011 are summarized as follows:
The amortized cost and fair value of fixed maturity available-for-sale securities as of December 31, 2012, by contractual maturity, are summarized as follows:
Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity and equity securities available-for-sale and investment real estate for the years ended December 31, 2012 and 2011 are summarized as follows:
The Company’s mortgage loans by property type as of December 31, 2012 and 2011 are summarized as follows:
Major categories of net investment income for the years ended December 31, 2012 and 2011 are summarized as follows:
The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in and out of the Level 3 category as of the beginning of the period in which the reclassifications occur.
As of December 31, 2012, Level 3 financial instruments consisted of two private placement common stocks that have no active trading. During 2012, one private placement common stock was sold and another was purchased. These private placement 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 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, 2012 and 2011, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:
The fair values for mortgage loans are estimated using discounted cash flow analyses, using the actual spot rate yield curve in effect at the end of the period, as determined by recent new loan activity.
The carrying value of these financial instruments approximates their fair values. Cash and cash equivalents are included in level 1 of the fair value hierarchy due to their highly liquid nature.
The carrying value of loans from premium financing is net of unearned interest and any estimated loan losses and approximates fair value. Unearned interest was $1,389 and $23,287 as of December 31, 2012 and 2011, respectively. Estimated loan losses were $228,999 and $229,004 as of December 31, 2012 and 2011, respectively.
TLIC and Family Benefit Life 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, 2012 and 2011, these required deposits had carrying values that totaled $3,981,060 and $2,671,083, respectively. As of December 31, 2012 and 2011, these required deposits had fair values that totaled $4,219,334 and $2,704,967, respectively.
The Company files a consolidated federal income tax return with FTCC and SIS and does not file a consolidated return with TLIC or Family Benefit Life. TLIC and Family Benefit Life are taxed as life insurance companies under the provisions of the Internal Revenue Code and must file separate tax returns until they have been members of the filing group for five years.
A reconciliation of federal income tax expense (benefit) computed by applying the federal income tax rate of 35% to income before federal income tax expense for the years ended December 31, 2012 and 2011 is summarized as follows:
TLIC is a 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. TLIC’s maximum exposure on any one insured under the Reinsurance Pool is $50,000. As of January 1, 2008, the Reinsurance Pool stopped accepting new cessions.
Property and equipment as of December 31, 2012 and 2011 is summarized as follows:
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, 2012 and 2011 are summarized as follows:
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 non-interest bearing accounts up to $250,000. Uninsured balances aggregate $2,514,836 as of December 31, 2012. 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. The Company’s lottery prize receivables due from various states and the geographical distribution of the Company’s mortgage loans by state are summarized in Note 2.
On December 28, 2011, the Company, through its primary insurance subsidiary, TLIC, completed the Tender Offer of Family Benefit Life by paying Family Benefit Life shareholders promptly for all the issued and outstanding common shares that satisfied the terms of the offer through the expiration of the extended Tender Offer on December 21, 2011.
During the Tender Offer, TLIC accepted tenders of 869,669 shares meeting the minimum condition requirements during the original and subsequent offers which expired on December 9, 2011 and December 21, 2011, respectively, and promptly paid for the shares tendered. The shares tendered represented 98.1% of the issued and outstanding shares not owned by TLIC. Prior to October 20, 2011, TLIC purchased 401,381 Family Benefit Life common shares. These purchases brought the aggregate shares held by TLIC to 1,271,050 shares, or 98.7% of the 1,287,640 shares issued and outstanding.
TLIC acquired the remaining 16,590 issued and outstanding shares of Family Benefit Life by initiating and completing a merger under the corporation laws of the state of Missouri. TLIC paid an aggregate of $13,855,129 for the acquisition of 100% of the issued and outstanding shares of Family Benefit Life.