The future minimum lease payments to be received under non cancelable lease agreements are $142,170, $109,563, $109,563, $112,461 and $112,461 for the years 2010 through 2014, respectively.
The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance business. In the fourth quarter of 2008, the Company completed its acquisition of 100% of the outstanding stock of First Life America Corporation, included in the life insurance segment, for $2,500,000 and had additional acquisition related expenses of $195,000. Results of operations for the year 2008 are not included in the consolidated financial statements.
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We continually evaluate our estimates and assumptions, including those related to investments, loans from premium financing, deferred acquisition costs, value of insurance business acquired, policy liabilities and income taxes. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies, judgments and estimates are the most critical to the preparation of our consolidated financial statements.
Other long term investments are comprised of lottery prize receivables and are carried at amortized cost, net of unamortized premium or discounts. Interest income and the amortization of premium or discount are included in net investment income.
Loans from premium financing are carried at their outstanding unpaid principal balances, net of unearned interest, charge-offs and an allowance for loan losses. Interest on loans is earned based on the interest method for computing unearned interest. The rule of 78’s is used to calculate the amount of the interest charge to be forgiven in the event that a loan is repaid prior to the agreed upon number of monthly payments. When serious doubt concerning collectability arises, loans are placed on a nonaccrual basis, generally if no payment is received after one hundred twenty days all accrued and uncollected interest income is reversed against current period operations. Interest income on nonaccrual loans is recognized only when the loan is paid in full. Loan origination fees and costs are charged to expense as incurred.
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.
In April 2009, the FASB issued new guidance to clarify fair valuation in inactive markets and includes all assets and liabilities subject to fair value measurements. Under this guidance, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets and liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly; the entity shall place little, if any weight on that transaction price as an indicator of fair value. This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this guidance effective for the second quarter 2009, with no material impact to the consolidated financial statements.
FASB guidance requires a “management approach” in the presentation of business segments based on how management internally evaluates the operating performance of business units. The discussion of segment operating results that follows is being provided based on segment data prepared in accordance with this methodology. Our business segments are as follows:
Additionally, the independent agency endorsed and deposited $326,479 of checks issued by FTCC in the agency’s bank account that were payable to other third parties for insurance premiums. FTCC recovered these funds from the banks due to improper endorsement.
FTCC recorded losses related to loans originated by this agency net of assets received of $344,594 that has been recognized in the December 31, 2009 financial statements. FTCC and the Company continue to investigate the facts and circumstances relating to any fraudulent loans and financial transactions and will continue to seek restitution for any losses.
Revenues from premium financing operations increased 27% to $642,729 for the year ended December 31, 2009, an increase of $137,186 from $505,543 for the year ended December 31, 2008. Pre-tax income decreased to a loss of $619,613 compared to a pre-tax gain of $913 for the prior year. The loss is primarily attributable to fraudulent loans of $344,594, described above under total consolidated revenues, and an increase in allowance for loan losses of $297,521.
Revenues from corporate operations decreased $115,447. This decrease is primiarily due to a decrease in investment income. Net loss increased 18% to $(441,528) for the year ended December 31, 2009 from a net loss of $(373,994) for the year ended December 31, 2008. The increase in the loss is primarily attributable to an increase in general operating expenses.
The investment markets were very volatile at the end of 2008 and throughout 2009 due to the credit crisis and economic downturn. The Company recorded two other-than-temporary impairments during 2009. During the second quarter of 2009, the Company impaired its $200,000 par value General Motors (“GM”) bond as a result of a bankruptcy filing by GM. This impairment was considered fully credit-related, resulting in a charge to the income statement before tax of $8,659 as of June 30, 2009. This charge represents the difference between the amortized cost basis of the security and its fair value. During the third quarter 2009, the Company recorded an other-than-temporary impairment relative to CIT bonds with a total par value of $710,000. These bonds were written down to their fair value at September 30, 2009. The Company determined that the entire loss was credit related and recognized a realized loss of $146,705 in the statement of operations. These bonds defaulted on October 30, 2009. The Company recognized $31,046 of net realized loss on other investment transactions.
Benefits and claims increased $3,509,445 to $4,234,016 for the year ended December 31, 2009 from $724,571 at December 31, 2008. The increase in 2009 is primarily attributable to the increase due to the acquisition of FLAC.
The cost of acquiring insurance business is amortized over the remaining life of the business. Amortization of value of insurance business acquired was $333,493 in 2009 and $0 in 2008. The increase is due to the acquisition of FLAC.
Federal income taxes are calculated based on the earnings of TLIC. Certain items included in income reported for financial statements are not included in taxable income for the current year, resulting in deferred income taxes. Deferred income taxes totaled $49,139 and taxes currently payable were $0. In 2008, deferred income tax benefit was $832.
At December 31, 2009, the Company’s available-for-sale fixed maturities had a fair value of $22,510,660 and amortized cost of $19,772,497 compared to a fair value of $18,207,905 and an amortized cost of $18,203,764 at December 31, 2008. This portfolio is reported at fair value with unrealized gains and losses, net of applicable deferred taxes, reflected as a separate component in shareholders’ equity within “Accumulated Other Comprehensive Income”. The fixed maturities portfolio is invested in a variety of companies and U. S. Government sponsored agency securities.
Shown below is a progression of the Company’s loans from premium financing for the years ended December 31, 2009 and 2008, respectively.
Total investments were $32,782,251 and $24,826,430 at December 31, 2009 and 2008, respectively.
The amounts shown for the year 2009 reflect the merger of TLIC and FLAC. Statutory capital and surplus, specifically the component called surplus, is used to fund the expansion of an insurance company’s first-year individual life and accident and health sales. The first-year commission and underwriting expenses on such sales will normally consume a very high percentage of, if not exceed, first-year premiums. Accordingly, a statutory loss may occur on these sales the first year of the policy.
Since inception, our operations have been financed primarily through the private placement of equity securities and an intrastate public stock offering. Through December 31, 2009, we received $15,475,000 from the sale of our shares. Our operations have not been profitable and have generated significant operating losses since we were incorporated in 2004.
At December 31, 2009, we had cash and cash equivalents totaling $7,080,692. The majority of our excess funds have been invested in money market mutual funds. At December 31, 2009, cash and cash equivalents of $5,903,147 of the total $7,080,692 are held by TLIC and may not be available for use by FTFC due to the required pre-approval by the Oklahoma Insurance Department of any dividend or intercompany transaction to transfer funds to FTFC.
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 2009. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.
The Company is subject to various market risks. The quality of our investment portfolio and the current level of shareholder’ equity continue to provide a sound financial base as we strive to expand our marketing to offer competive products. Our investment portfolio recovered from the disruptions in the capital markets and had net unrealized gains of $2,867,044 at December 31, 2009.
On March 12, 2009, we entered into a senior revolving loan with a bank to loan up to $3,000,000 to provide working capital and funds for expansion. The loan was renewed on April 30, 2009 and modified to increase the revolving loan amount to $3,600,000. The loan agreement terminates May 31, 2010. On July 21, 2009, FTCC borrowed $100,000 under the loan agreement and repaid $99,999 on November 4, 2009, leaving a balance of $1. There have been no negotiations relating to renewing the senior revolving loan that matures May 31, 2010.
We are not aware of any commitments or unusual events that could materially effect 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
First Trinity Financial Corporation is the holding company of Trinity Life Insurance Company and First Trinity Capital Corporation.
First Trinity Financial Corporation, (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 a $12,750,000 intrastate public stock offering, 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 August 31, 2009, two of the Company’s subsidiaries, Trinity Life Insurance Company (“Old TLIC’) and First Life America Corporation (“FLAC”) were merged, with FLAC being the surviving company. Immediately following the merger FLAC changed its name to Trinity Life Insurance Company (“TLIC”). After the merger, the Company has two wholly owned subsidiaries, First Trinity Capital Corporation (“FTCC”) and TLIC, domiciled in Oklahoma. FTCC was incorporated in 2006, and began operations in January 2007 providing financing for casualty insurance premiums. FLAC was purchased December 23, 2008 and had statutory capital and surplus of $2,700,455 at December 31, 2008.
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. FTCC provides financing for casualty insurance premiums for individuals and companies and is licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC is the sole member of Southern Insurance Services, LLC, (“SIS”) a limited liability company that operates a property and casualty insurance agency.
The consolidated financial statements include the accounts and operations of the Company and its subsidiaries, including FLAC from its date of acquisition, which is treated as December 31, 2008 for financial reporting purposes. No operating results of FLAC are included in the consolidated financial statements for the year ended December 31, 2008. All intercompany accounts and transactions are eliminated in consolidation.
Fixed maturities are comprised of bonds that are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable deferred taxes, reported in accumulated other comprehensive income (loss). The amortized cost of fixed maturities is adjusted for amortization of premium and accretion of discount to maturity. 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 maturities is written down to fair value when a decline in value is considered to be other-than-temporary.
The home office building that was acquired in the acquisition of FLAC and carried as property and equipment on the balance sheet in 2008 was leased to third parties in December 2009 and has been reclassified on the balance sheet to investment real estate. Property and equipment are carried at amortized cost. Depreciation on the office building occupied by SIS is calculated over its estimated useful life of 39 years. Office furniture and equipment is recorded at cost or fair value at acquisition less accumulated depreciation using the 200% declining balance method over the estimated useful life of the respective assets of 3 to 7 years.
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 recoverables are reported as assets and are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts.
Other assets consist primarily of prepaid expenses and federal and state income tax recoverables. Other liabilities consist primarily of accrued expenses and payables.
The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date. This liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Interest crediting rates for individual annuities range from 3.75% to 6.75%. Interest crediting rates for premium deposit funds range from 3.5% to 4%.
The Company’s liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. For life insurance and annuity products, expected mortality and morbidity is generally based on the Company’s historical experience or standard industry tables including a provision for the risk of adverse deviation. Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality and morbidity and interest rate assumptions are “locked-in” upon the issuance of new insurance with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to provide for expected future losses on a product by establishing premium deficiency reserves.
In May 2009, the FASB issued new guidance that established general accounting standards and disclosure for events occurring subsequent to the balance sheet date but before the financial statements are issued. This guidance became effective for interim and annual accounting periods ending after June 15, 2009. The Company adopted this guidance upon issuance, with no material impact to the consolidated financial statements.
The Company recorded two other-than-temporary impairments during 2009. During the second quarter of 2009, the Company impaired its $200,000 par value General Motors (“GM”) bond as a result of a bankruptcy filing by GM. This impairment was considered fully credit-related, resulting in a charge to the income statement before tax of $8,659 as of June 30, 2009. This charge represents the difference between the amortized cost basis of the security and its fair value. During the third quarter 2009, the Company recorded an other-than-temporary impairment relative to CIT bonds with a total par value of $710,000. These bonds were written down to their fair value at September 30, 2009. The Company determined that the entire loss was credit related and recognized a realized loss of $146,705 in the statement of operations. These bonds defaulted on October 30, 2009. The Company experienced no additional other-than temporary impairments during 2009. Management believes that the Company will fully recover its cost basis in the securities held at December 31, 2009, 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.
Proceeds from the sale and maturity of fixed maturities during 2009 and 2008 were $2,556,904 and $625,000, respectively. Gross gains of $5,323 and $0 and gross losses of $36,369 and $0 were realized on the sales during 2009 and 2008, respectively. Certain other than temporary losses were recognized on General Motors and CIT Corporation bonds totaling $155,364.
The residential loan is located in Mississippi and commercial loans are geographically concentrated in the states of Colorado (98%) and Arizona (2%) at December 31, 2009.
A summary of investment real estate at December 31, 2009 and 2008 is as follows:
The amortized cost and estimated fair value of lottery prize cash flows, by contractual maturity, at December 31, 2009 are shown below:
Net investment income arose from the following sources for the years ended December 31, 2009 and 2008:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the measurement date. The Company also considers the impact on fair value of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity.
At December 31, 2009, Level 3 financial instruments consisted of one private placement common stock that has no active trading. This stock represents an investment in a small development stage insurance holding company. The fair value for this security 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 value of loans from premium financing is net of unearned interest and any estimated loan losses and approximates fair value. Estimated loan losses were $318,826 and $21,305 at December 31, 2009 and 2008, respectively.
TLIC has a $100,000 line of credit from a bank. The line of credit expires on December 31, 2010 and interest is accrued on the outstanding principal balance at Bank of America’s Prime Rate. The line 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”). At December 31, 2009 for TLIC and December 31, 2008 for FLAC there was a $65,000 letter of credit secured by the line of credit agreement. The Company pledged certificate of deposits with a market value of $65,000 as collateral for the letter of credit. There were no amounts borrowed against this line of credit.
The Company finances amounts up to 80% of the premium on casualty insurance policies after a 20% or greater down payment is made by the policy owner. The premiums financed are collateralized by the amount of the unearned premium of the insurance policy. Policies that become delinquent are submitted for cancellation and recovery of the unearned premium, up to the amount of the loan balance, 25 days after a payment becomes delinquent. Loans from premium financing are carried net of unearned interest and any estimated loan losses.
The following table presents the company’s credit losses related to loans from premium financing at December 31, 2009 and 2008.
The balances of and changes in deferred acquisition costs as of and for the years ended December 31, are as follows:
There was no current federal income tax expense for the years 2009 and 2008.
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 at December 31, 2009 and 2008 are as follows:
FTFC has net operating loss carry forwards of approximately $3,525,000, expiring in 2019 through 2024, TLIC has net operating loss carry forwards of approximately $1,008,000, expiring in 2021 through 2024. Net operating loss carry forwards of $1,219,940, expiring in 2017 through 2023 and capital loss carry forwards of $63,727, expiring in 2011 and 2013 that may be available to offset future taxable income were acquired in the acquisition of FLAC and the use of these losses are restricted by the tax laws and some or all of the losses may not be available for use.
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 $55,000 for individual life insurance with Investors Heritage Life Insurance Company, Munich American Reassurance Company, Optimum Re and Wilton RE.
The Company leases approximately 2,517 square feet of office space pursuant to a three-year lease that began July 1, 2008, leased approximately 200 square feet on a month to month basis during 2009 and leased 950 square feet of office space effective December 15, 2009 that terminates December 31, 2010. Under the terms of the leases, the monthly rent expense for the 2,517 square feet is $3,041 through June 30, 2009, $3,146 from July 1, 2009 through June 30, 2010 and $3,251 from July 1, 2010 through June 30, 2011 and the month to month lease is $300 per month and the 950 square feet is $1,225 per month. The Company incurred rent expense of $43,809 and $31,562 for the years 2009 and 2008, respectively. Future minimum lease payments are $53,084 and $19,507 for the years 2010 and 2011, respectively.
TLIC occupied approximately 7,500 square feet of its building in Topeka, Kansas until December 2009. Effective December 24, 2009, TLIC entered into a five year lease with a tenant for this space with an option to renew for five additional years. The monthly lease payments are as follows: 2010 are $8,888, 2011 and 2012 are $9,130 and 2013 and 2014 are $9,371. TLIC has leased 10,000 square feet under a lease that was renewed during 2006 to run through June 30, 2011 with a 90 day notice to terminate the lease by the lessee. The lease agreement calls for minimum monthly base lease payments of $15,757.
Effective August 29, 2005, TLIC executed a lease agreement with a tenant for 2,500 square feet. The base lease period commenced on September 1, 2005 and will end on August 31, 2010. The lease will automatically renew, if not terminated on or after August 15, 2010, for another five years with a 90 day notice to terminate the lease by the lessee. The lease agreement calls for minimum monthly base lease payments of $4,332 through August 31, 2010. The lease payments will decrease to $3,100 per month for the period September 1, 2010 through August 31, 2015.
The statutory net loss for TLIC amounted to $882,176 for the year ended December 31, 2009. The statutory net loss for Old TLIC was $238,936 for the year ended December 31, 2008. The statutory surplus of TLIC was $4,327,428 at December 31, 2009 and the statutory surplus of Old TLIC and FLAC at December 31, 2008 was $2,242,226 and $2,700,455, respectively.
The following unaudited pro forma information has been prepared to present the results of operations of the Company assuming the acquisition of First Life America Corporation had occurred at the beginning of the years ended December 31, 2008. This pro forma information is supplemental and does not necessarily present the operations of the Company that would have occurred had the acquisitions occurred on those dates and may not reflect the operations that will occur in the future:
Credit risk is limited by diversifying the investments. The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures accounts up to $250,000 at each banking institution. Other funds are invested in mutual funds that invest in U.S. government securities. Uninsured balances aggregate $1,975,925 at December 31, 2009. The Company has not experienced any losses in such accounts. The company has lottery prize receivables due from the states of Massachusetts and Illinois in the amount of $2,345,406 and $1,047,617, respectively.