For fixed maturities, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security. The amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security. For equity securities, the amount of any other-than-temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security.
This allowance for possible loan losses from investments in mortgage loans on real estate is a reserve established through a provision for possible loan losses charged to expense which represents, in our judgment, the known and inherent credit losses existing in the residential and commercial mortgage loan portfolio. This allowance, in our judgment, is necessary to reserve for estimated loan losses inherent in the residential and commercial mortgage loan portfolio and reduces the carrying value of investments in mortgage loans on real estate to the estimated net realizable value on the consolidated statement of financial position.
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. Deferred acquisition costs related to the successful production of new and renewal insurance business 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.
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.
The updated guidance is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.
In April 2015, the FASB issued updated guidance to clarify the required presentation of debt issuance costs. The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts. Amortization of debt issuance costs is to be reported as interest expense. The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance. The updated guidance is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting
In March 2016, the FASB issued updated guidance clarifying that when a call (put) option in a debt instrument is contingently exercisable, the event that triggers the ability to exercise the option is considered to be clearly and closely related to the debt instrument (i.e., the economic characteristics and risks of the option are related to interest rates or credit risks) and the entity does not have to assess whether the option should be accounted for separately. The updated guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
In August 2016, the FASB issued specific guidance to reduce the existing diversity in practice in how eight specific cash flow issues of certain cash receipts and cash payments are presented and classified in the statement of cash flows. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
In October 2016, the FASB issued further guidance that makes targeted amendments to consolidation accounting. This update changes how a reporting entity that is the primary beneficiary of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The updated guidance is effective for annual and interim periods beginning after December 15, 2016, and is to be applied retrospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Please see below and Note 11 to the Consolidated Financial Statements for the years ended December 31, 2016 and 2015 and as of December 31, 2016 and 2015 for additional information regarding segment information.
Consolidated Condensed Results of Operations for the Years Ended December 31, 2016 and 2015
Consolidated Condensed Financial Position as of December 31, 2016 and 2015
Our primary sources of revenue are life insurance premium income and investment income. Premium payments are classified as first-year, renewal and single. In addition, realized gains and losses on investment holdings can significantly impact revenues from period to period.
The increase in consideration received for supplementary contracts with life contingencies reflects policyholder decisions to receive future payment streams during their remaining life instead of a lump sum payment.
In the twelve months since December 31, 2015, our investments in mortgage loans have increased approximately $15.6 million and other long term investments have increased approximately $15.2 million.
The $109,002 decrease in real estate investment income is related to the loss of rental income from the sale of $6,693,044 of investment real estate held in March 2015.
The $480,285 increase in investment expenses for the year ended December 31, 2016 is primarily related to increased fees and expenses associated with the 2016 acquisition of mortgage loan investments including the 2016 establishment of an internal mortgage loan department.
During 2016 management also impaired FBLIC’s one-half acre of undeveloped land located in Jefferson City, Missouri by $4,892 from its carrying value to its net realizable value expected at the time of ultimate resale.
During 2015, the Company impaired its bonds in a mining corporation with a total par value of $600,000 as a result of continuing unrealized losses. This impairment was considered fully credit-related, resulting in a charge to the statement of operations before tax of $502,013 for the year ended December 31, 2015. This charge represents the credit-related portion of the difference between the amortized cost basis of the security and its fair value.
The $3,175,810 increase in total benefits and claims for the year ended December 31, 2016 is primarily due to the following:
$1,357,358 increase in future policy benefits is primarily related to the production of new policies, initial sales of policies to older age bands resulting in increased mortality reserve charges and the aging of existing policies.
$389,951 increase in death benefits is primarily due to 24 additional final expense claims in 2016 compared to 2015, at an average claim amount of $15,000. We expect final expense incurred claims to increase in the future as the volume of final expense policies grows. The protective measures surrounding our underwriting of final expense products, however, should keep our mortality exposure at or below current levels.
$153,383 increase in surrenders is as we expected and corresponds to growth in our number of policies in force and amount of insurance in force that is annually growing at 15% to 22%.
Certain costs related to the successful acquisition of traditional life insurance policies are capitalized and amortized over the premium-paying period of the policies. Certain costs related to the successful acquisition of insurance and annuity policies that subject us to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed (i.e., limited-payment long-duration annuity contracts) are capitalized and amortized in relation to the present value of actual and expected gross profits on the policies. These acquisition costs, which are referred to as deferred policy acquisition costs, include commissions and other successful costs of acquiring life insurance, which vary with, and are primarily related to, the successful production of new and renewal insurance and annuity contracts.
For the years ended December 31, 2016 and 2015, capitalized costs were $7,445,304 and $5,204,940, respectively. Amortization of deferred policy acquisition costs for the years ended December 31, 2016 and 2015 were $2,202,367 and $1,563,625, respectively.
The $2,240,364 increase in the 2016 acquisition costs deferred primarily relates to increased final expense and annuity production. During 2016, more annuity contracts were issued but at a lower average amount. During third quarter 2016, we conducted an actuarial study that resulted in approximately a $100,000 decrease in the 2016 acquisition expenses to be capitalized and deferred.
The $638,742 increase in the 2016 amortization of deferred acquisition costs is primarily due to the growth in the volume of final expense policies and annuity contracts. With these increases in final expense policies and annuity contracts, we experienced increased mortality, annuity withdrawals and life insurance policy surrenders causing an immediate amortization of the remaining acquisition costs deferred associated with a specific policy or contract. We expect this trend to continue as we grow.
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 $379,365 and $386,214 for the years ended December 31, 2016 and 2015, respectively.
Our commissions for the years ended December 31, 2016 and 2015 are summarized as follows:
$151,577 increase in final expense renewal commissions that correspond to the $1,424,944 increase in final expense renewal premiums.
FTFC files a consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC or FBLIC. TLIC and FBLIC are taxed as life insurance companies under the provisions of the Internal Revenue Code. Life insurance companies must file separate tax returns until they have been a member of the consolidated filing group for five years. However, we filed consolidated life insurance company federal tax returns for TLIC and FBLIC for 2013, 2014 and 2015 and intend to also file a consolidated life insurance company federal tax return for TLIC and FBLIC for 2016 during 2017.
The revenues and income before federal income taxes from our business segments for the years ended December 31, 2016 and 2015 are summarized as follows:
The $112,418 increase in Corporate Operations profitability for the year ended December 31, 2016 is primarily due to $106,700 of increased net investment income, $56,445 of increased other income, $16,958 of decreased realized losses and $67,685 of increased operating expenses.
Equity securities available-for-sale are also reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income (Loss).” The available-for-sale equity securities portfolio is invested in a small number of companies.
The $599,855 decrease in short-term investments is due to management’s decision to decrease our investment in funds that have a maturity of more than 90 days but less than one year at the date of purchase.
The increase in deferred policy acquisition costs for the years ended December 31, 2016 and 2015, respectively, are summarized as follows:
The $955,113 increase in federal and state income taxes recoverable is primarily due to federal and state tax withholdings on lottery receivables and the 2015 federal tax refund of $615,975 not received until January 2017.
The decrease in notes receivable of $163,137 is due to the write-off of $128,888 related to the Company’s premium finance business conducted in FTCC and the repayment of $34,249 on FTFC notes receivable.
The $47,657,873 and $57,133,643 increases in policyholders’ account balances for the years ended December 31, 2016 and 2015, respectively, are summarized as follows:
During 2016, management made a conscious decision to decrease the production of new annuity contracts by decreasing the interest rate paid to policyholders and the minimum guaranteed interest rate during the contractual period. This intentional reduction in new annuity production is demonstrated by the $5,284,813 decrease in annuity deposits from $59,274,275 to $53,989,462 for the years ended December 31, 2015 and 2016, respectively. This decision was made so that FTFC’s two life insurance companies, TLIC and FBLIC, can improve their statutory solvency by increasing the ratio of the total statutory adjusted capital to the statutory authorized control level risk-based capital in both TLIC and FBLIC.
Our other liabilities as of December 31, 2016 and December 31, 2015 are summarized as follows:
The $4,509,592 increase in suspense accounts payable is primarily due to increased deposits on policy applications that had not been issued as of the financial reporting date.
The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital.
Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is capacity for TLIC to pay a dividend up to $1,852,287 in 2017 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $914,179 in 2017 without prior approval. FBLIC paid dividends of $1,000,000 to TLIC in 2016 and 2015. Dividends paid by FBLIC are eliminated in consolidation. TLIC has paid no dividends to FTFC.
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 $9,485,884 and $3,465,542 of cash provided by operating activities for the years ended December 31, 2016 and 2015, respectively, are summarized as follows:
Please see the statements of cash flows for the years ended December 31, 2016 and 2015 for a summary of the components of net cash used in investing activities and net cash provided by financing activities.
Our shareholders’ equity as of December 31, 2016 and 2015 is summarized as follows:
Equity per common share outstanding increased 20.1% from $3.87 per share as of December 31, 2015 to $4.65 per share as of December 31, 2016, based upon 7,802,593 common shares outstanding as of December 31, 2016 and 2015.
The liquidity requirements of our life insurance companies are met primarily by funds provided from operations. Premium and annuity consideration deposits, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. There were no liquidity issues in 2016 or 2015. Fixed maturity securities amounting to $129,311,155 as of December 31, 2016 are approximately 51% of our total invested assets and, if needed, could be converted to cash for liquidity needs.
Our investment portfolio had unrealized appreciation (depreciation) on available-for-sale securities of $1,039,897 and ($3,369,843) as of December 31, 2016 and 2015, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. An increase of $4,880,178 in unrealized gains arising for the year ended December 31, 2016 includes 2016 net realized investment gains of $470,438 originating from the sale and call activity for fixed maturity and equity securities available-for-sale resulting in a net increase in net unrealized appreciation for the year ended December 31, 2016 of $4,409,740.
In addition to the measures described above, TLIC and FBLIC must comply with the National Association of Insurance Commissioners promulgated Standard Valuation Law ("SVL") which specifies minimum reserve levels and prescribes methods for determining them, with the intent of enhancing solvency. Upon meeting certain tests, which TLIC and FBLIC met during 2016, 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.
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, 2016 will be sufficient to fund our anticipated operating expenses.
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
During 2016 the Company foreclosed on seven residential mortgage loans of real estate totaling $394,427 and transferred those properties to investment real estate that are now held for sale. The Company reduced the carrying value of this residential real estate obtained through foreclosure to the lower of acquisition cost or net realizable value.
Commissions and other acquisition costs which vary with and are primarily related to the successful production of new business are deferred and amortized in a systematic manner based on the related contract revenues or gross profits as appropriate. Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense.
While the Company utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the residential and commercial mortgage loan and premium finance loan portfolios, the economy and changes in interest rates. The Company’s allowance for possible mortgage loan and premium finance loan losses consists of specific valuation allowances established for probable losses on specific loans and a portfolio reserve for probable incurred but not specifically identified loans.
Mortgage loans and premium finance loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the mortgage loan or premium finance loan agreement. Factors considered by the Company in determining impairment include payment status, collateral value of the real estate subject to the mortgage loan, and the probability of collecting scheduled principal and interest payments when due. Mortgage loans and premium finance loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Company determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the mortgage loan or premium finance loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis.
As of December 31, 2016 and 2015, there was $2,831,043 and $2,451,678, 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: $339,942 in 2017, $331,886 in 2018, $308,179 in 2019, $283,088 in 2020 and $262,097 in 2021.
Other assets consist primarily of receivable for securities sold, recoverable federal and state income taxes, receivables from mortgage loans and other long-term assets (lottery receivables), guaranty funds, notes receivable, customer account balances receivable, prepaid expenses, other receivables, property and equipment and loans from premium financing.
Treasury stock, representing shares of the Company’s common stock that have been reacquired after having been issued and fully paid, is recorded at the reacquisition cost and the shares are no longer outstanding.
In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognition by one year to the quarter ending March 31, 2018. The adoption of this guidance is not expected to have a material effect on the Company’s result of operations, financial position or liquidity.
The updated guidance is effective for annual and interim periods beginning after December 15, 2015. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
Investments in fixed maturity and equity securities available-for-sale as of December 31, 2016 and 2015 are summarized as follows:
The Company recorded one other-than-temporary impairment during 2016. During 2016, the Company impaired its bonds in an energy corporation with a total par value of $650,000 as a result of continuing unrealized losses. This impairment was considered fully credit-related, resulting in a charge to the statement of operations before tax of $207,450 for the year ended December 31, 2016. This charge represents the credit-related portion of the difference between the amortized cost basis of the security and its fair value. The Company has experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securities during 2016.
The Company also recorded one other-than-temporary impairment during 2015. During 2015, the Company impaired its bonds in a mining corporation with a total par value of $600,000 as a result of continuing unrealized losses. This impairment was considered fully credit-related, resulting in a charge to the statement of operations before tax of $502,013 for the year ended December 31, 2015. This charge represents the credit-related portion of the difference between the amortized cost basis of the security and its fair value.
Based on management’s review, the Company experienced one other-than-temporary impairment during the year ended December 31, 2016 and one other-than-temporary impairment during the year ended December 31, 2015. Except for one other-than-temporary impairment recorded during 2016 and the one other-than-temporary impairment recorded during 2015, management believes that the Company will fully recover its cost basis in the securities held as of December 31, 2016, 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, 2016 and 2015 are summarized as follows:
The amortized cost and fair value of fixed maturity available-for-sale securities as of December 31, 2016, 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, mortgage loans on real estate and investment real estate for the years ended December 31, 2016 and 2015 are summarized as follows:
The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the years ended December 31, 2016 and 2015 and the amount of realized investment gains (losses) on fixed maturity and equity securities available-for-sale, mortgage loans on real estate and investment real estate for the years ended December 31, 2016 and 2015 are summarized as follows:
The Company’s mortgage loans by property type as of December 31, 2016 and 2015 are summarized as follows:
The Company utilizes the ratio of the carrying value of individual residential and commercial mortgage loans compared to the individual appraisal value to evaluate the credit quality of its mortgage loans on real estate (commonly referred to as the loan-to-value ratio). The Company’s residential and commercial mortgage loans on real estate by credit quality using this ratio as of December 31, 2016 and 2015 are summarized as follows:
There were 11 loans with a remaining principal balance of $1,208,379 that were more than 90 days past due as of December 31, 2016. There were five loans with a remaining principal balance of $531,026 that were more than 90 days past due as of December 31, 2015.
In 2016 the Company did not experience any impairment on mortgage loan investments. In 2015 management impaired one mortgage loan on real estate investment that was in foreclosure and reduced that investment by $23,737 from its carrying value to its net realizable value expected at the time of ultimate resale.
The amortized cost and estimated fair value of lottery prize cash flows, by contractual maturity, as of December 31, 2016 are summarized as follows:
As of December 31, 2016 and 2015, Level 3 financial instruments consisted of two private placement common stocks that have no active trading. During 2016, additional investments in one of the private placement common stocks were purchased.
The Company analyzes market valuations received to verify reasonableness and to understand the key assumptions used and the sources. Since the fixed maturity securities owned by the Company do not trade on a daily basis, the third party investment service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing. As the fair value estimates of the Company’s fixed maturity securities are based on observable market information rather than market quotes, the estimates of fair value on these fixed maturity securities are included in Level 2 of the hierarchy. The Company’s Level 2 investments include obligations of U.S. government, U.S. government agencies, state and political subdivisions, mortgage-backed securities, corporate bonds and foreign bonds.
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, 2016 and 2015, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:
As of December 31, 2016, $525,063 of independent mortgage loan balances are held in escrow by a third party for the benefit of the Company related to its investment in $25,523,757 of mortgage loans on real estate with one loan originator. In addition, the Company has an additional $244,427 allowance for possible loan losses in the remaining $48,847,529 of investments in mortgage loans on real estate as of December 31, 2016.
As of December 31, 2015, $534,330 of independent mortgage loan balances are held in escrow by a third party for the benefit of the Company related to its investment in $21,755,620 of mortgage loans on real estate with one loan originator. In addition, the Company has an additional $183,348 allowance for possible loan losses in the remaining $37,019,298 of investments in mortgage loans on real estate as of December 31, 2015.
FTFC files a consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC or FBLIC. TLIC and FBLIC are taxed as life insurance companies under the provisions of the Internal Revenue Code. Life insurance companies must file separate tax returns until they have been a member of the consolidated filing group for five years. However, in 2016 and 2015, TLIC and FBLIC filed combined life insurance company 2015 and 2014 federal tax returns and intend to also file a combined life insurance company 2016 federal tax return for TLIC and FBLIC in 2017.
TLIC has net operating loss carry forwards of $116,225, expiring in 2023 that remain from the acquisition of FLAC. The utilization of those losses is restricted by the tax laws and some or all of the losses may not be available for use. During 2016, TLIC utilized $135,000 of the net operating loss carryforward existing as of January 1, 2016 to offset 2016 federal taxable income. During 2015, TLIC also utilized $135,000 of the net operating loss carryforward existing as of January 1, 2015 to offset 2015 federal taxable income.
TLIC participates in reinsurance in order to provide risk diversification, additional capacity for future growth and limit the maximum net loss potential arising from large risk. TLIC reinsures all amounts of risk on any one life in excess of $75,000 for individual life insurance with Investors Heritage Life Insurance Company, Optimum Re Insurance Company (“Optimum Re”) and Wilton Reassurance Company (“Wilton Re”).
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.
A five year lease agreement effective September 1, 2010 automatically renewed on 2,500 square feet of the Topeka, Kansas office building with a 90 day notice by the lessee to terminate the lease. This lease was renewed on September 1, 2015 to run through August 31, 2017 with an option for an additional three years through August 31, 2020. Beginning September 1, 2017, 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 called for monthly lease payments of $3,100 from January 1, 2015 through August 31, 2015. The lease payments are $4,236 per month from September 1, 2015 through August 31, 2016 and $4,249 from September 1, 2016 through August 31, 2017.
TLIC is domiciled in Oklahoma and prepares its statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Oklahoma Insurance Department. FBLIC is domiciled in Missouri and prepares its statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Missouri Department of Insurance. Prescribed statutory accounting practices include publications of the National Association of Insurance Commissioners, state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Statutory accounting practices primarily differ from U.S. GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions and valuing investments, deferred taxes, and certain assets on a different basis.
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 $1,852,287 in 2017 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $914,179 in 2017 without prior approval. FBLIC paid dividends of $1,000,000 to TLIC in 2016 and 2015. These dividends are eliminated in consolidation. TLIC has paid no dividends to FTFC.
The jury concluded that Mr. Pettigrew, while still a member of the Company’s Board of Directors, did, in fact, make untrue statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company and awarded it $800,000 of damages against Mr. Pettigrew. In addition, the jury found that Mr. Pettigrew had defamed Mr. Zahn and intentionally inflicted emotional distress on Mr. Zahn and awarded Mr. Zahn $3,500,000 of damages against Mr. Pettigrew.
In addition to the damages awarded by the jury, the Company and Mr. Zahn have initiated steps to aggressively communicate the correction of the untrue statements to outside parties.
FBLIC intends to defend vigorously against the class and individual allegations. The Company is unable to determine the potential magnitude of the claims in the event of a final certification and the plaintiffs prevailing on this substantive action.
On September 28, 2015, Doyle Nimmo filed a Third-Party Petition for Declaratory Judgment (and Other Relief) against FBLIC. In this Third-Party Petition, Doyle Nimmo, a former director for FBLIC, seeks a declaratory judgment that the corporate by-laws of FBLIC require FBLIC to indemnify him for attorney’s fees, judgments, costs, fines, and amounts paid in defense of both the Counterclaim and the Federal Lawsuit and seeks a monetary judgment for the amounts expended by Doyle Nimmo in such defense. Prior to Doyle Nimmo’s filing of the Third-Party Petition, FBLIC’s Board of Directors executed a Unanimous Written Consent in Lieu of a Special Meeting in which it denied Doyle Nimmo’s tender of defense and request for indemnification finding Mr. Nimmo did not meet the applicable standard of conduct for indemnification under Missouri law. FBLIC intends to vigorously defend the Third-Party Petition on these grounds. The Company is unable to determine the potential magnitude of the claims in the event Doyle Nimmo prevails on his Third-Party Petition.
The changes in the components of the Company’s accumulated other comprehensive income (loss) for the years ended December 31, 2016 and 2015 are summarized as follows: