The future minimum lease payments to be received under the above non-cancellable lease agreements are $798,190, $670,864, $464,032, $466,798 and $476,610 for the years 2015 through 2019, respectively.
First Trinity Financial Corporation (“we” “us”, “our”, “FTFC” or the “Company”) conducts operations as an insurance holding company emphasizing ordinary life insurance products in niche markets. We are no longer operating a premium finance company, financing casualty insurance premiums.
As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core TLIC operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense, term and annuity products to predominately middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas through independent agents. With the acquisition of FBLIC in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico. FBLIC also had initial licenses in Kansas, Nebraska and Oklahoma where TLIC was also licensed. In late 2012, FBLIC was licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia. In 2013, FBLIC was licensed in Illinois and Pennsylvania. In 2014, FBLIC was licensed in Georgia, Louisiana, Michigan, Mississippi, North Carolina, Ohio, Tennessee and Virginia. FBLIC also has a certificate of authority application pending in Alabama.
We also realize revenues from our investment portfolio, which is a key component of our operations. The revenues we collect as premiums from policyholders are invested to ensure future benefit payments under the policy contracts. Life insurance companies earn profits on the investment spread, which reflects the investment income earned on the premiums paid to the insurer between the time of receipt and the time benefits are paid out under policies. Changes in interest rates, changes in economic conditions and volatility in the capital markets can all impact the amount of earnings that we realize from our investment portfolio.
Prior to June 30, 2013, we provided financing for casualty insurance premiums for individuals and companies through independent property and casualty insurance agents through our wholly owned subsidiary FTCC. FTCC was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC currently has no operations other than minor premium refunds and collections of past due accounts and accounts involved in litigation.
The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance business. In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of First Life America Corporation for $2,500,000 and had additional acquisition related expenses of $195,000.
In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of FBLIC for $13,855,129.
We carry mortgage loans on real estate at unpaid balances, net of unamortized premium or discounts. Interest income and the amortization of premiums or discounts are included in net investment income. Mortgage loan fees, certain direct loan origination costs and purchase premiums and discounts on loans are recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. In certain circumstances, prepayments may be anticipated.
The 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 is provided based on segment data prepared in accordance with this methodology.
Prior to January 1, 2014, the Company’s segment data was reported based upon a life insurance segment, consisting of the operations of TLIC and FBLIC, a premium financing segment, consisting of the operations of FTCC and SIS and a corporate segment. Prior to January 1, 2014, the results for the parent company, after elimination of intercompany amounts, were included in the corporate segment.
Annuity operations, consisting of the annuity operations of TLIC and FBLIC and
Corporate operations, which includes the results of the parent company, FTCC and SIS after the elimination of intercompany amounts.
The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources.
Consolidated Condensed Results of Operations for the Years Ended December 31, 2014 and 2013
Consolidated Condensed Financial Position as of December 31, 2014 and 2013
Results of Operations - Years Ended December 31, 2014 and 2013
The $1,729,950 increase in total revenues for the year ended December 31, 2014 is discussed below.
The $165,527 increase in premiums for the year ended December 31, 2014 is primarily due to a $472,138 increase in final expense renewal premiums that exceeded a $329,134 decrease in whole life and term first year and renewal premiums.
The increase in final expense renewal premiums reflects the persistency of prior years’ final expense production. Our marketing efforts are focused on final expense and annuity production and we have not been focused on whole life and term production the past few years.
The $294,260 increase in investment expenses for the year ended December 31, 2014 is due to fees and expenses associated with our increased investments in mortgage loans and real estate including $137,581 of interest on the $4,076,473 of notes payable and a $68,271 increase in the mortgage loan allowance.
The $1,494,952 increase in total benefits, claims and expenses for the year ended December 31, 2014 is discussed below.
$271,791 increase in future policy benefits primarily related to the existing policies in force aging one additional year.
$214,205 increase in death benefits is primarily due to increased number of claims although the average amount per claim has decreased slightly. This increase in death benefits is as expected due to an increase in final expense life insurance in force.
The $401,091 increase in the acquisition costs deferred primarily relates to increased production of annuity and final expense products by appointed agents based upon expansion into additional states and recruiting of additional agents. The $380,789 increase in the 2014 amortization of deferred acquisition costs is primarily due to an actuarial review that increased the average amount of an individual final expense policy in force resulting in a fewer number of final expense policies in force that triggered increased amortization. In addition, the lapsation of whole life and term renewal products originally sold by TLIC has increased slightly. However, the in force business acquired as a result of the purchases of FLAC and FBLIC in 2008 and 2011, respectively, continues to have high persistency.
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 $412,376 and $422,105 for the years ended December 31, 2014 and 2013, respectively. The $9,729 decrease in the 2014 amortization of value of insurance business acquired is due to the persistency of the FLAC and FBLIC business acquired in 2008 and 2011, respectively, due to our continuing conservation efforts.
Our commissions for the years ended December 31, 2014 and 2013 are summarized as follows:
The $267,683 increase in commissions for the year ended December 31, 2014 is primarily due to a $250,660 increase in annuity first year, single and renewal commissions that corresponds to $8,990,223 of increased annuity considerations deposited.
The $92,938 increase in other underwriting, insurance and acquisition expenses for the year ended December 31, 2014 is primarily due to scheduled insurance examinations by the Oklahoma and Missouri regulators and licensing and filing fees related to certificate of authority expansion into additional states and the filing of insurance products with state regulators.
For the year ended December 31, 2014 and 2013, current income tax expense was $63,983 and $100,820, respectively. Deferred federal income tax expense (benefit) was ($546,421) and $217,932 for the years ended December 31, 2014 and 2013, respectively. The change in deferred taxes between 2013 and 2014 is primarily due to the utilization of net operating loss carryforwards and the reduction in valuation allowances on deferred tax assets as it is probable that a portion of the net operating loss carryforwards on the consolidated federal income tax returns of FTFC and FTCC will be utilized due to projected taxable income in future years demonstrated by the taxable income generated in 2014.
Net income was $1,925,511 ($0.25 per common share basic and diluted) and $889,323 ($0.11 per common share basic and diluted) for the years ended December 31, 2014 and 2013, respectively. Net income per common share basic and diluted is calculated using the weighted average number of common shares outstanding and subscribed during the year. The weighted average outstanding and subscribed common shares basic and diluted for the years ended December 31, 2014 and 2013 were 7,831,108 and 7,852,014, respectively.
The revenues and income (loss) before federal income taxes from our business segments for the years ended December 30, 2014 and 2013 are summarized as follows:
The $1,297,763 increase in revenues from Annuity Operations for the year ended December 31, 2014 is due to the following:
The $161,502 increase in revenues from Corporate Operations for the year ended December 31, 2014 is primarily due to $110,376 of increased net investment income, $42,500 of decreased realized losses and $8,626 of increased other income.
Our invested assets as of December 31, 2014 and 2013 are summarized as follows:
However, we hold three available-for-sale fixed maturity securities in a mining industry company that when combined have unrealized losses of $281,089, fair values of $328,125 and amortized costs of $609,214. Our analysis indicates that this mining industry company will more than likely be able to make principal and interest payments through the maturity of these three securities in 2020 and 2021. The ratio of the fair value to the amortized cost of these three securities was 54%. The ratio of the fair value to the amortized cost of the other 78 securities in an unrealized loss position as of December 31, 2014 is 96% with all 78 securities having a fair value to amortized cost ratio above 83%.
As of December 31, 2013, we held 154 available-for-sale fixed maturity securities with an unrealized loss of $1,596,459, fair value of $34,634,408 and amortized cost of $36,230,867. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2013. The ratio of the fair value to the amortized cost of these 154 securities is 96% with all 154 securities having a fair value to amortized cost ratio above 77%.
The $46,076 decrease in available-for-sale equity securities for the year ended December 31, 2014 is primarily due to sales of $205,080, purchases of $154,078, net realized investment gains of $2,900 and a $2,026 increase in unrealized appreciation of available-for-sale equity securities. This portfolio is also reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.” The available-for-sale equity securities portfolio is invested in a variety of companies.
As of December 31, 2013, we held three available-for-sale equity securities with unrealized losses of $32,605, fair value of $185,840 and cost of $218,445. The ratio of fair value to cost of these three securities is 85% with all of these three securities having a fair value to cost ratio above 78%.
The $19,524,864 increase in mortgage loans for the year ended December 31, 2014 is primarily due to the origination of $26,905,225 of mortgage loans, $218,504 of realized gains on prepayment of mortgage loans purchased at a discount, $97,500 of capitalization of loan origination fees and discount accretion of $119,128 less principal payments of $7,667,843, amortization of loan origination fees of $79,379 and increases in mortgage loan loss allowances of $68,271.
The $1,141,199 increase in short-term investments is due to investing in funds that have a maturity of more than 90 days but less than one year at the date of purchase.
Our liabilities as of December 30, 2014 and 2013 are summarized as follows:
The $29,352,064 increase in total policy liabilities is primarily due to deposits on annuity and deposit-type contracts exceeding withdrawals by $22,370,530, interest credited to policyholders’ account balances of $4,433,762 and increased future policy benefit reserves of $2,559,276 due to the actuarial exposure of the life insurance policies being in force for an additional year.
In December 2013, TLIC also purchased one acre of land in Norman, Oklahoma that included a 9,100 square foot building constructed on approximately 18% of this land at a cost of $1,519,431 (including closing costs of $37,931). The building is leased through August 31, 2028 plus three future five year extensions on September 1, 2028, September 1, 2033 and September 1, 2038. The terms of the lease have the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments are $8,004 through August 31, 2028.
The second promissory note totaling $1,067,208 is collateralized (including assignment of the tenant leases) by the February 2014 TLIC purchase of three-fourths of an acre of land in Harrisonville, Missouri that included a 6,895 square foot building constructed on approximately 20% of this land at a cost of $1,752,397 (including closing costs of $44,864). The building is leased through October 31, 2028 plus three future five year extensions on November 1, 2028, November 1, 2033 and November 1, 2038. The terms of the lease have the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments are $9,463 through October 31, 2028.
Other liabilities consist primarily of accrued expenses, account payables, deposits on pending policy applications and unearned investment income. The $175,220 increase in other liabilities is primarily due to an $189,224 increase in deposits on pending applications.
Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is capacity for TLIC to pay a dividend up to $2,167,518 in 2015 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $980,906 in 2015 without prior approval. FBLIC paid dividends of $1,500,000 and $850,000 to TLIC in 2014 and 2013, respectively. These dividends are eliminated in consolidation. TLIC has paid no dividends to FTFC.
The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures interest and non-interest bearing accounts up to $250,000. Uninsured balances aggregate $6,494,515 as of December 31, 2014. Uninsured balances aggregated $2,576,504 as of December 31, 2013. The primary reason for this $3,981,011 increase in uninsured balances is due to a late 2014 influx of annuity deposits that have not yet been invested. 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 $105,232 increase in cash provided by operating activities during the year ended December 31, 2014 was primarily related to increased net investment income in excess of increased benefits, claims and expenses.
The increase in shareholders’ equity of $2,569,324 for the year ended December 31, 2014 is due to $1,925,511 of net income and $805,386 of other comprehensive income less $161,573 for purchases of 39,946 shares of treasury stock from a former agent, the former spouse of the Company’s Chairman, Chief Executive Officer and President and the former Chairman of the Board of Directors.
Equity per common share outstanding increased 9.0% to $4.25 as of December 31, 2014 compared to $3.90 per share as of December 31, 2013, based upon 7,812,038 and 7,851,984 common shares outstanding as of December 31, 2014 and 2013, respectively.
The liquidity requirements of our life insurance companies 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 2014 or 2013. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.
A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy.
One of our significant risks relates to the fluctuations in interest rates. Regarding interest rates, the value of our available-for-sale fixed maturity securities investment portfolio will increase or decrease in an inverse relationship with fluctuations in interest rates, while net investment income earned on newly acquired available-for-sale fixed maturity securities increases or decreases in direct relationship with interest rate changes. From an income perspective, we are exposed to rising interest rates which could be a significant risk, as TLIC's and FBLIC’s annuity business is impacted by changes in interest rates. Life insurance company policy liabilities bear fixed rates. From a liquidity perspective, our fixed rate policy liabilities are relatively insensitive to interest rate fluctuations.
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, 2014, cash and cash equivalents, short-term investments, 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 10.0% 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.
The operations of TLIC and FBLIC may require additional capital contributions to meet statutory capital and surplus requirements mandated by state insurance departments. Life insurance contract liabilities are generally long term in nature and are generally paid from future cash flows or existing assets and reserves. We will service other expenses and commitments by: (1) using available cash, (2) dividends from TLIC and FBLIC that are limited by law to the greater of prior year net operating income or 10% of prior year-end surplus unless specifically approved by the controlling insurance department, (3) public and private offerings of our common stock and (4) corporate borrowings, if necessary. 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, 2014 will be sufficient to fund our anticipated operating expenses.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
First Trinity Financial Corporation (the “Company”) is the parent holding company of Trinity Life Insurance Company (“TLIC”), Family Benefit Life Insurance Company (“FBLIC”), First Trinity Capital Corporation (“FTCC”) and Southern Insurance Services, LLC (“SIS”). The Company was incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a life insurance subsidiary.
The Company owns 100% of TLIC. TLIC owns 100% of FBLIC. TLIC and FBLIC are primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals. TLIC’s and FBLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment and annuity products. The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense is issued as either a simplified issue or as a graded benefit, determined by underwriting. The TLIC and FBLIC products are sold through independent agents. TLIC is licensed in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas. FBLIC is licensed in the states of Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Virginia and West Virginia. FBLIC also has a certificate of authority application pending in Alabama.
The Company owns 100% of FTCC that was incorporated in 2006, and began operations in January 2007. FTCC provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC currently has no operations other than minor premium refunds and collections of past due accounts and accounts involved in litigation. The Company also owns 100% of SIS, a limited liability company acquired in 2009 that operated as a property and casualty insurance agency but currently has no operations.
The Company raised $1,450,000 from two private placement stock offerings during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012; and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings.
The Company also issued 702,705 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 $5,270,288 with an offsetting credit of $5,270,288 to common stock and additional paid-in capital. The historic impact of these two stock dividend charges of $5,270,288 decreased during 2011 and 2012 the balance of accumulated earnings and resulted in a reported balance as of December 31, 2014 of $2,616,849, as shown in the accumulated earnings caption in the December 31, 2014 consolidated statement of financial position.
The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the mortgage loan 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 a result of the Company’s purchase of FLAC and FBLIC, an asset was recorded in the application of purchase accounting to recognize the value of acquired insurance in force. The Company’s value of acquired insurance in force is an intangible asset with a definite life and is amortized under Financial Accounting Standards Board (“FASB”) guidance. The value of acquired insurance in force is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits.
Other assets consist primarily of 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, loans from premium financing and receivables for securities purchased with trade dates and settlement dates in different years. Other liabilities consist primarily of accrued expenses, account payables, deposits on pending policy applications, unearned investment income and payables for securities purchased with trade dates and settlement dates in different years.
Treasury stock represents shares of the Company’s common stock that have been reacquired after being issued and fully paid, is recorded at the reacquisition cost and is treated as unissued shares of common stock.
In addition, deferred acquisition costs related to limited-payment long-duration insurance and annuity contracts are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from available-for-sale securities had actually been realized. This adjustment is included in the change in net unrealized appreciation (depreciation) on available-for-sale securities, a component of “Accumulated Other Comprehensive Income” in the shareholders’ equity section of the statement of financial position.
Net income per common share basic and diluted is calculated using the weighted average number of common shares outstanding and subscribed during the year. The weighted average outstanding and subscribed common shares basic and diluted for the years ended December 31, 2014 and 2013 were 7,831,108 and 7,852,014 respectively.
Management has evaluated all events subsequent to December 31, 2014 through the date that these financial statements have been issued.
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
The updated guidance is effective for the quarter ending March 31, 2015. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.
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, 2014 and 2013 are summarized as follows:
However, the Company holds three available-for-sale fixed maturity securities in a mining industry company that when combined have unrealized losses of $281,089, fair values of $328,125 and amortized costs of $609,214. Management’s analysis indicates that this mining industry company will more than likely be able to make principal and interest payments through the maturity of these three securities in 2020 and 2021. The ratio of the fair value to the amortized cost of these three securities was 54%. The ratio of the fair value to the amortized cost of the other 78 securities in an unrealized loss position as of December 31, 2014 is 96% with all 78 securities having a fair value to amortized cost ratio above 83%.
As of December 31, 2013, the Company held three available-for-sale equity securities with unrealized losses of $32,605, fair value of $185,840 and cost of $218,445. The ratio of fair value to cost of these three securities is 85% with all of these three securities having a fair value to cost ratio above 78%.
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, 2014 and 2013 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, 2014 and 2013 and the amount of realized investment gains (losses) on fixed maturity and equity securities available-for-sale and mortgage loans on real estate for the years ended December 31, 2014 and 2013 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, 2014 and 2013 are summarized as follows:
The outstanding principal balance of mortgage loans, by the most significant states, as of December 31, 2014 and 2013 are summarized as follows:
The principal balances of the 471 residential mortgage owned by the Company as of December 31, 2014 that aggregated to $36,687,140 ranged from a low of $2,760 to a high of $669,982 and the interest rates ranged from 5.71% to 16.07%. The principal balances of the eight commercial mortgage loans owned by the Company as of December 31, 2014 that aggregated to $1,962,593 ranged from a low of $8,048 to a high of $483,558 and the interest rates ranged from 5.75% to 8.25%.
TLIC owns approximately six and one-half acres of land located in Topeka, Kansas that includes a 20,000 square foot office building on approximately one-half of this land. This building and land is held for the production of income. In addition, FBLIC owns one-half acre of undeveloped land located in Jefferson City, Missouri. This land is held for sale. FTCC also owned a small, undeveloped land parcel in Carthage, Mississippi that was sold during 2014.
The Company’s investment real estate as of December 31, 2014 and 2013 is summarized as follows:
The amortized cost and estimated fair value of lottery prize cash flows, by contractual maturity, as of December 31, 2014 are summarized as follows:
Major categories of net investment income for the years ended December 31, 2014 and 2013 are summarized as follows:
The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 2014 and 2013 is summarized as follows:
As of December 31, 2014 and 2013, Level 3 financial instruments consisted of two private placement common stocks that have no active trading. During 2014, additional investments in one of the private placement common stocks were purchased and sold. During 2013, another private placement common stock was purchased. In addition, a private placement equity security with a carrying value of $42,500 was deemed to be fully impaired in the fourth quarter of 2013 with the decrease in value reported as a realized loss.
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, 2014 and 2013, 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 carrying value of these financial instruments approximates their fair values. Cash and cash equivalents and short-term investments are included in Level 1 of the fair value hierarchy due to their highly liquid nature.
The carrying amounts reported for these liabilities approximate their fair value. These notes payable were issued on March 26, 2014 and the current refinancing of these liabilities would result in notes payable yielding approximately the carrying amount as shown in the December 31, 2014 consolidated statement of financial position.
Notes payable as of December 31, 2014 are summarized as follows:
The $1,067,208 promissory note is collateralized (including assignment of the tenant leases) by the February 2014 TLIC purchase of three-fourths of an acre of land in Harrisonville, Missouri that included a 6,895 square foot building constructed on approximately 20% of this land at a cost of $1,752,397 (including closing costs of $44,864). The building is leased through October 31, 2028 plus three future five year extensions on November 1, 2028, November 1, 2033 and November 1, 2038. The terms of the lease have the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments are $9,463 through October 31, 2028.
TLIC and FBLIC are required to hold assets on deposit for the benefit of policyholders and other special deposits in accordance with statutory rules and regulations. As of December 31, 2014 and 2013, these required deposits had amortized costs that totaled $3,954,696 and $3,220,853, respectively. As of December 31, 2014 and 2013, these required deposits had fair values that totaled $4,057,740 and $3,097,372, respectively.
6. Allowance for Loan Losses from Mortgage Loans on Real Estate and Premium Financing Loans
Through June 30, 2012, FTCC financed amounts up to 80% of the premium on property and casualty insurance policies after a 20% or greater down payment was made by the policy owner. The premiums financed were collateralized by the amount of the unearned premium of the insurance policy. Policies that became delinquent were submitted for cancellation and recovery of the unearned premium, up to the amount of the loan balance, 25 days after a payment became delinquent. Loans from premium financing of $321,244 and $340,243 as of December 31, 2014 and 2013, respectively, are carried net of estimated loan losses of $197,538 and $206,858 as of December 31, 2014 and 2013, respectively.
The balances of and changes in the Company’s credit losses related to mortgage loans on real estate and loans from premium financing as of and for the year ended December 31, 2014 and 2013 are summarized as follows:
The components of total income tax expense (benefit) for the years ended December 31, 2014 and 2013 is summarized as follows:
A reconciliation of federal income tax expense (benefit) computed by applying the federal income tax rate of 34% to income before federal income tax expense for the years ended December 31, 2014 and 2013 is summarized as follows:
TLIC has net operating loss carry forwards of approximately $386,225, expiring in 2018 through 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.
The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, have not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 2011 through 2014 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.
FBLIC also 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. FBLIC reinsures initial amounts of risk on any one life in excess of $75,000 for individual life insurance with Optimum Re Insurance Company. FBLIC also reinsures its accidental death benefit portion of its life policies under a bulk agreement with Optimum Re Insurance Company.
Property and equipment as of December 31, 2014 and 2013 is summarized as follows:
The Company leases 6,769 square feet of office space pursuant to a five-year lease that began October 1, 2010. Under the terms of the home office lease, the monthly rent is $7,897 from October 1, 2010 through September 30, 2015. The Company incurred rent expense (including charges for the lessor’s building operating expenses above those specified in the lease agreement) of $69,886 and $76,192 for the years ended December 31, 2014 and 2013, respectively, under this lease. The Company received a $120,000 leasehold improvement allowance from the lessor on January 1, 2011 that is being amortized over the remaining non-cancellable lease term that reduced incurred rent expense by $25,263 for each of the years ended December 31, 2014 and 2013. Future minimum lease payments to be paid under non-cancellable lease agreements are $71,073 in 2015.
FBLIC owns approximately one-half acre of undeveloped land located in Jefferson City, Missouri with a carrying value of $135,892. FTCC also owned a small, undeveloped land parcel in Carthage, Mississippi with a carrying value of $36,000 that was sold during 2014.
TLIC is subject to Oklahoma laws and FBLIC is subject to Missouri laws that limit the amount of dividends insurance companies can pay to stockholders without approval of the respective Departments of Insurance. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the greater of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is capacity for TLIC to pay a dividend up to $2,167,518 in 2015 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $980,906 in 2015 without prior approval. FBLIC paid dividends of $1,500,000 and $850,000 to TLIC in 2014 and 2013, respectively. These dividends are eliminated in consolidation. TLIC has paid no dividends to FTFC.
Credit risk is limited by diversifying the Company’s investments. The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures accounts up to $250,000. Uninsured balances aggregate $6,494,515 as of December 31, 2014. 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.
The Petition also seeks to certify a class of individuals with similar claims but no class has been certified by the Court. FBLIC denies the allegations in the Petition and will continue to defend against them. It is the Company’s intention to vigorously defend the request for class certification, as well as to defend vigorously against the individual allegations. FBLIC filed a motion for partial summary judgment seeking summary judgment on the claims for violation of MMPA. The motion for partial summary judgment asked the Court to declare that the MMPA does not apply to insurance companies such as FBLIC and enter judgment for FBLIC on the petition. A hearing for the motion of summary judgment was held on February 25, 2015 and it was subsequently denied by the Court on March 2, 2015. The Company is unable to determine the potential magnitude of the claims in the event of a final certification and the plaintiffs prevailing on the substantive action.
The Company repurchased 185,313 shares of its common stock at a cost of $648,595 during 2012 from former members of the Board of Directors; repurchased 12,896 shares of its common stock at a cost of $45,136 from a former member of the Board of Directors and a charitable organization for which that former Director had donated 10,250 shares of the Company’s common stock during 2013 and repurchased 39,946 shares of its common stock at a cost of $161,573 from a former agent, the former spouse of the Company’s Chairman, Chief Executive Officer and President and the former Chairman of the Board of Directors during 2014.
The changes in the components of the Company’s accumulated other comprehensive income (loss) for the years ended December 31, 2014 and 2013 are summarized as follows:
The pretax components of the Company’s other comprehensive income (loss) and the related income tax expense for each component for the years ended December 31, 2014 and 2013 are summarized as follows:
The pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income to the Company’s consolidated statement of operations for the years ended December 31, 2014 and 2013 are summarized as follows: