In December 2013, TLIC purchased one acre of land in Greensburg, Indiana and a 3,975 square foot building constructed on approximately 8% of this land at a cost of $2,393,687. The building is leased through October 31, 2027 with future lease extensions on November 1, 2017 and November 1, 2022 through October 31, 2022 and October 31, 2027, respectively. 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 as follows: $14,661 in 2014; $14,881 in 2015; $15,104 in 2016 and $15,331 in 2017.
Family Benefit Life owned approximately one and one-half acres of land located in Jefferson City, Missouri. A 6,100 square foot building (serving as Family Benefit Life’s headquarters) and a 2,200 square foot building (leased to a third party) are on one acre of this land and the other half acre is held for sale. In October 2012, both of the buildings and the related land were sold.
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 Family Benefit Life in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico. In late 2012, Family Benefit Life was initially licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia. In 2013, Family Benefit Life was initially licensed in Illinois and Pennsylvania.
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, included in the life insurance segment, for $2,500,000 and had additional acquisition related expenses of $195,000.
We hold fixed maturities and equity interests in a variety of companies. We continuously evaluate all of our investments based on current economic conditions, credit loss experience and other developments. We evaluate the difference between the cost/amortized cost and estimated fair value of our investments to determine whether any decline in fair value is other-than-temporary in nature. This determination involves a degree of uncertainty. If a decline in the fair value of a security is determined to be temporary, the decline is recognized in other comprehensive income (loss) within shareholders’ equity. If a decline in a security’s fair value is considered to be other-than-temporary, we then determine the proper treatment for the other-than-temporary impairment.
Commissions and other acquisition costs which vary with and are primarily related to the successful production of new and renewal insurance contracts are deferred and amortized in a systematic manner based on the related contract revenues or gross profits as appropriate. The recovery of deferred acquisition costs is dependent on the future profitability of the underlying business for which acquisition costs were incurred. Each reporting period, we evaluate the recoverability of the unamortized balance of deferred acquisition costs. We consider estimated future gross profits or future premiums; expected mortality or morbidity; interest earned and credited rates; persistency and expenses in determining whether the balance is recoverable.
Estimating liabilities for our long-duration insurance contracts requires management to make various assumptions, including policyholder persistency; mortality rates; investment yields; discretionary benefit increases; new business pricing and operating expense levels. We evaluate historical experience for these factors when assessing the need for changing current assumptions. However, since many of these factors are interdependent and subject to short-term volatility during the long-duration contract period, substantial judgment is required. Actual experience may emerge differently from that originally estimated. Any such difference would be recognized in the current year’s consolidated statement of operations.
The FASB and the IASB have a convergence program with the intent of developing global standards for several significant areas of accounting, including the accounting for insurance contracts. In June 2012, the FASB issued a statement that indicated that based on the nature and totality of differences between the FASB's and IASB's views, it is not likely that the two boards will achieve convergence on this project. The FASB further noted that the FASB and IASB have very different perspectives on the project, given that the U.S. has existing guidance on insurance contracts whereas there is currently no comprehensive IFRS accounting standard for insurance contracts. In June 2013, each board issued for comment an exposure draft of the accounting for insurance contracts that has significant differences from the other board's draft as well as from current GAAP. Both exposure drafts propose changes that, if ultimately adopted, could significantly impact the accounting by insurers, including the Company, for premiums, policyholders’ account balances, future policy benefits, policy claims and claims adjustment expenses, reinsurance and deferred acquisition costs. The Boards are reviewing the comments received on the exposure drafts and are expected to begin re-deliberations in the first quarter of 2014. As a result of this, it is currently unclear what changes, if any, may be made to the accounting for insurance contracts under GAAP as a result of this project. In addition, any new standards issued by the Boards regarding insurance contracts may involve methodologies for valuing insurance contract liabilities that may be significantly different from the methodologies required by current GAAP. It is also possible that the Boards could issue different final standards. In February 2014, the FASB announced that it has decided to consider targeted improvements to GAAP related to insurance contracts rather than a comprehensive overhaul of GAAP related to insurance contracts.
Please see Note 12 to the Consolidated Financial Statements for additional information regarding segment data.
Consolidated Condensed Results of Operations for the Years Ended December 31, 2013 and 2012
Consolidated Condensed Financial Position as of December 31, 2013 and 2012
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 investment gains and losses can significantly impact revenues from period to period.
Our revenues for the years ended December 31, 2013 and 2012 are summarized as follows:
The increase of $1,339,713 in total revenues for the year ended December 31, 2013 is discussed below.
Our premiums for the years ended December 31, 2013 and 2012 are summarized as follows:
The $95,229 decrease in premiums for the year ended December 31, 2013 is primarily due to $716,413 of decreased whole life and term first year and renewal premiums and final expense first year premiums that exceeded an increase of $621,184 in final expense renewal premiums. The decreases in first year premiums are due to less new production. The decrease in whole life and term renewal premiums is as expected due to the Company’s focus on annuity and final expense production.
The income from premium financing has steadily decreased. There was a decrease of $58,346 for the year ended December 31, 2013.
As introduced above, the Company’s management decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. Specifically on May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continued to process payments and service all existing premium financing contracts after June 30, 2012 through the duration that the property and casualty premium financing contracts were in force. The Company virtually completed processing and servicing its premium finance operations on June 30, 2013 subject to minor refunds, minor collections of past due accounts and legal matters. The Company incurred minimal costs related to exiting its premium financing operations since resources were redeployed into its growing life and annuity insurance operations.
The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $915,009 for the year ended December 31, 2013 resulted from proceeds of $10,805,866 for these securities that had carrying values of $9,890,857 at the 2013 disposal dates.
The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $228,320 for the year ended December 31, 2012 resulted from proceeds of $9,511,967 for these securities that had carrying values of $9,283,647 at the 2012 disposal dates.
The $998 increase in other income for the year ended December 31, 2013 is primarily due to increased service fees.
The $360,077 increase in benefits and claims for the year ended December 31, 2013 is primarily due to the following:
$212,752 increase in the change in future policy benefits is as expected and primarily relates to policies being in force for an additional year.
The $319,091 increase in the 2013 amortization of deferred acquisition costs primarily reflects an actuarial adjustment to increase the average policy size of final expense products that resulted in a $200,000 reduction in the per policy non-commission acquisition costs that had historically been capitalized through 2013. The remainder of the decrease reflects a slight reduction in 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 $422,105 and $403,573 for the years ended December 31, 2013 and 2012, respectively. The $18,532 increase in the 2013 amortization of value of insurance business acquired primarily is as expected and reflects a slight increase in surrender activity of the insurance policies and contracts acquired in the Family Benefit Life acquisition.
The $295,644 decrease in commissions for the year ended December 31, 2013 is primarily due to:
$208,536 decrease in final expense first year commissions that correspond to the $132,136 decrease in final expense first year premiums.
$85,231 decrease in first year whole life and term commissions that corresponds to $123,268 of decreased first year whole life and term premiums.
$20,558 decrease in renewal whole life and term commissions that corresponds to a $461,009 decrease in renewal whole life and term premiums.
$54,188 increase in final expense renewal commissions that correspond to the $621,184 increase in final expense renewal premiums.
The $335,397 increase in other underwriting, insurance and acquisition expenses for the year ended December 31, 2013 is primarily attributed to the 2011 accrual of $250,000 of conversion costs related to the acquisition of Family Benefit Life and a 2012 decrease in salaries of $150,000 related to a reduction for estimated bonuses accrued in 2011 related to the acquisition of Family Benefit Life that were not ultimately paid during 2012. The remaining increase in other underwriting, insurance and acquisition expenses is primarily due to legal fees related to two cases. Please see Note 14 to the Consolidated Financial Statements for a description of the legal claims and assessments surrounding these two cases.
FTFC files a consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC or Family Benefit Life. TLIC and Family Benefit Life are taxed as life insurance companies under the provisions of the Internal Revenue Code. Life insurance companies must file separate tax returns until they have been a member of the consolidated filing group for five years. However, in 2013, we filed a combined life insurance company 2012 federal tax return for TLIC and Family Benefit Life and intend to also file a combined life insurance company 2013 federal tax return for TLIC and Family Benefit Life in 2014. Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes.
The revenues and income (loss) before federal income taxes from our business segments for the years ended December 31, 2013 and 2012 are summarized as follows:
The $548,533 increased profitability from Life and Annuity Insurance Operations for the year ended December 31, 2013 is primarily due to the following:
The $58,589 decrease in revenues from Premium Finance Operations for the year ended December 31, 2013 is due to decreased fee income as we discontinued offering premium finance contracts on July 1, 2012.
Our invested assets as of December 31, 2013 and 2012 are summarized as follows:
The $1,769,914 increase in available for sale fixed maturity securities for the year ended December 31, 2013 is primarily due to purchases of $17,407,413 in excess of sales and maturities of $10,805,866, net realized investment gains of $915,009, decrease in unrealized appreciation of $4,905,601 and premium amortization of $841,041. This portfolio is 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 fixed maturity securities portfolio is invested primarily in a variety of companies and U. S. government and foreign securities.
The $3,673,206 increase in investment real estate is primarily due to purchases of $4,011,307, sales of $180,000, net realized gains of $3,047 and depreciation of $161,148.
Other assets consist primarily of prepaid expenses, recoverable federal and state income taxes, advances, guaranty funds, other receivables and receivables for securities sold with trade dates and settlement dates in different accounting periods. The $1,172,844 increase in other assets is primarily due to $1,600,000 of increased advances to a third party to facilitate our purchase of discounted mortgage loans from the third party and $321,000 of increased recoverable federal and state income taxes that exceeded $601,530 of receivables for securities sold with trade dates in 2012 and settlement dates in 2013.
Other liabilities consist primarily of accrued expenses, account payables, deposits on pending policy applications, unearned investment income and payable for securities purchased with trade dates and settlement dates in different years.
The $20,839,883 increase in policy liabilities is primarily due to $21,776,839 of deposits on annuity and deposit-type contracts less withdrawals of $6,815,520, $3,745,992 of interest credited to policyholder accounts, $2,288,894 of increased future policy benefit reserves, $106,104 of decreased liabilities for policy claims and $50,218 of decreased other policy liabilities.
The $757,699 decrease in deferred federal income taxes during the year ended December 31, 2013 was due to a $975,631 decrease in deferred federal income taxes on the unrealized appreciation of available-for-sale fixed maturity and equity securities. This increase was partially offset by $217,932 of operating deferred taxes.
Our operations have been financed primarily through the private placement of equity securities and an intrastate public stock offering. Through December 31, 2013, we have received $27,119,480 from the sale of our shares. Our operations have been profitable and have generated $5,961,626 of net income from operations since we were incorporated in 2004. The Company issued 323,777 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2011, however, that resulted in accumulated earnings being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital. The Company also issued 378,928 shares in connection with a stock dividend paid to shareholders of record as of March 10, 2012, that resulted in accumulated earnings being charged an additional $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital. The impact of these two stock dividend charges of $5,270,288 to accumulated earnings (deficit) decreased the balance of accumulated deficit as of December 31, 2013 to $691,338 as shown in the accumulated earnings (deficit) balance in the December 31, 2013 consolidated statement of financial position.
As of December 31, 2013, we had cash and cash equivalents totaling $10,608,438. As of December 31, 2013, cash and cash equivalents of $6,083,984 and $2,770,244, respectively, of the total $10,608,438 were held by TLIC and Family Benefit Life and may not be available for use by FTFC due to the required pre-approval by the Oklahoma Insurance Department and Missouri Department of Insurance of any dividend or intercompany transaction to transfer funds to FTFC. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the 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 $1,283,361 in 2014 without prior approval. In addition, based on those limitations, there is the capacity for Family Benefit Life to pay a dividend up to $976,941 in 2014 without prior approval. Family Benefit Life paid dividends of $850,000 and $1,515,975 to TLIC in 2013 and 2012, respectively. These dividends are eliminated in consolidation.
The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures non-interest bearing accounts up to $250,000. Uninsured balances aggregate $2,576,504 as of December 31, 2013. 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.
Our cash flows for the years ended December 31, 2013 and 2012 are summarized as follows:
The $2,921,506 increase in cash provided by operating activities during the year ended December 31, 2013 is primarily due to increased net investment income and decreased commissions.
Our shareholders’ equity as of December 31, 2013 and 2012 is summarized as follows:
The decrease in shareholders’ equity of $3,081,098 for the year ended December 31, 2013 is due to $22,772 of expenses incurred from a public stock offering (gross proceeds of $108,375 and offering expenses of $131,147), $3,902,513 of other comprehensive loss, $889,323 of net income less $45,136 for purchases of 12,896 shares of treasury stock 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.
Equity per common share outstanding decreased 9.1% to $3.90 as of December 31, 2013 compared to $4.29 per share as of December 31, 2012, based upon 7,851,984 common shares outstanding as of December 31, 2013 and 7,852,130 outstanding common shares as of December 31, 2012.
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 2013 or 2012. Our investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs.
We are subject to various market risks. The quality of our investment portfolio and the current level of shareholders’ equity continue to provide a sound financial base as we strive to expand our marketing to offer competitive products. Our investment portfolio had unrealized appreciation on available-for-sale securities of $2,360,624 and $7,264,140 as of December 31, 2013 and 2012, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. This $4,903,516 decrease in unrealized gains arising for the year ended December 31, 2013 has been offset by the 2013 net realized investment gains of $1,132,451 originating from the sale and call activity for available-for-sale fixed maturity securities, sale of available-for-sale equity securities and early payoffs of mortgage loans on real estate purchased at a discount.
In addition to the measures described above, TLIC and Family Benefit Life must comply with the NAIC 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 Family Benefit Life met during 2013 and 2012, the SVL also requires the Company to perform annual cash flow testing for TLIC and Family Benefit Life. 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 will service other expenses and commitments by: (1) using available cash, (2) dividends from TLIC and Family Benefit Life that are limited by law to the lesser of prior year net operating income or 10% of prior year-end surplus unless specifically approved by the controlling insurance department, (3) return of invested capital from FTCC as those operations are discontinued, (4) public and private offerings of our common stock and (5) corporate borrowings, if necessary.
We will use the majority of our capital provided from the public stock offerings to expand life insurance operations and acquire life insurance companies. The operations of TLIC and Family Benefit Life 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.
On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas, Missouri and South Dakota. The private placement was for 600,000 shares of the Company’s common stock for $8.50 per share. If all shares were sold, the Company would have received $4,335,000 after reduction for estimated offering expenses. This offering was suspended on March 8, 2013 and resulted in gross proceeds of $644,470 from the subscription of 75,820 shares of its common stock and incurred $321,944 in offering costs.
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, 2013 will be sufficient to fund our anticipated operating expenses.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Trinity Financial Corporation and Subsidiaries as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
On June 29, 2010, the Company commenced a public offering of its common stock registered with the U.S. Securities and Exchange Commission and the Oklahoma Department of Securities. The offering was completed April 30, 2012. The Company raised $11,000,010 from this offering.
On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas, Missouri and South Dakota. The private placement was for 600,000 shares of the Company’s common stock for $8.50 per share. If all shares would have been sold, the Company would have received $4,335,000 after reduction for estimated offering expenses. This offering was suspended on March 8, 2013 and resulted in gross proceeds of $644,470 from the subscription of 75,820 shares of its common stock and incurred $321,944 in offering costs.
TLIC is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in eight states primarily in the Midwest. TLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment and annuity products. The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense product is issued as either a simplified issue or as a graded benefit, determined by underwriting. TLIC also offers various annuity and deposit-type liability products. The products are sold through independent agents in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas.
FTCC was incorporated in 2006, and began operations in January 2007. 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.
The Company’s management decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. Specifically on May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continued to process payments and service all existing premium financing contracts after June 30, 2012 through the duration that the property and casualty premium financing contracts were in force. The Company virtually completed processing and servicing its premium finance operations on June 30, 2013 subject to minor refunds, minor collections of past due accounts and legal matters. The Company incurred minimal costs related to exiting its premium financing operations since resources were redeployed into its growing life and annuity insurance operations.
Other assets consist primarily of prepaid expenses, recoverable federal and state income taxes, guaranty funds, notes receivable, customer account balances receivable and receivables for securities sold with trade dates and settlement dates in different years. Other liabilities consist primarily of accrued expenses, account payables, deposits on pending policy applications, unearned investment income and payable for securities purchased with trade dates and settlement dates in different years.
The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the financial statement 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 2.25% to 5.00%. Interest crediting rates for deposit-type liabilities range from 3.00% to 5.25%.
Common stock is fully paid, non-assessable and has a par value of $.01 per share.
On January 11, 2012, the Company’s Board of Directors approved a 5% common stock dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they held. The dividend was payable to the holders of shares of the Company as of March 10, 2012. Fractional shares were rounded to the nearest whole number of shares. The Company issued 378,928 shares in connection with the stock dividend that resulted in accumulated earnings being charged $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital.
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, 2013 and 2012 were 7,852,014 and 7,883,901 respectively. These weighted average shares reflect the retrospective adjustment for the impact of the 5% stock dividend declared by the Company on January 11, 2012 and payable to holders of shares of the Company as of March 10, 2012.
The updated guidance is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted the updated guidance effective March 31, 2013, and such adoption did not have any effect on the Company’s results of operations, financial position or liquidity.
As of December 31, 2013, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 77%. As of December 31, 2012, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 93%.
Management believes that the Company will fully recover its cost basis in the securities held as of December 31, 2013, 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 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, 2013 and 2012 are summarized as follows:
The outstanding principal balance of mortgage loans, by the most significant states, as of December 31, 2013 and 2012 are summarized as follows:
There were two loans more than 90 days past due as of December 31, 2013 with remaining principal balances of $86,861. There was one loan more than 90 days past due as of December 31, 2012 with a remaining principal balance of $141,150. There were no mortgage loans in default as of December 31, 2013 and 2012. There was an allowance for losses established in 2013 that aggregated $58,195 as of December 31, 2013. As of December 31, 2013, $201,936 of cash and $203,841 of independent mortgage loan balances are held in escrow by a third party for the benefit of the Company related to its investment in mortgage loans on real estate with one loan originator.
The Company’s investment real estate as of December 31, 2013 and 2012 is summarized as follows:
The amortized cost and estimated fair value of lottery prize cash flows, by contractual maturity, as of December 31, 2013 are summarized as follows:
These private placement stocks represent investments in small development stage insurance holding companies. The fair value for these securities was determined through the use of unobservable assumptions about market participants. The Company has assumed a willing market participant would purchase the securities for the same price as the Company paid until such time as the development stage company commences operations.
The carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of December 31, 2013 and 2012, 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 amounts reported for these liabilities approximate their fair value.
Unearned interest was $1,389 as of December 31, 2012. Allowances for loan losses were $206,858 and $228,999 as of December 31, 2013 and 2012, respectively.
The balances of and changes in deferred acquisition costs as of and for the years ended December 31, 2013 and 2012 are summarized as follows:
A reconciliation of federal income tax expense (benefit) computed by applying the federal income tax rate of 35% to income before federal income tax expense for the years ended December 31, 2013 and 2012 is summarized as follows:
TLIC is a party to an Automatic Retrocession Pool Agreement (the “Reinsurance Pool”) with Optimum Re Insurance Company, Catholic Order of Foresters, American Home Life Insurance Company and Woodmen of the World. The agreement provides for automatic retrocession of coverage in excess of Optimum Re Insurance Company’s retention on business ceded to Optimum Re Insurance Company by the other parties to the Reinsurance Pool. TLIC’s maximum exposure on any one insured under the Reinsurance Pool is $50,000. As of January 1, 2008, the Reinsurance Pool stopped accepting new cessions.
Effective September 29, 2005, FLAC and Wilton Reassurance Company executed a binding letter of intent whereby both parties agreed that FLAC would cede the simplified issue version of its Golden Eagle Whole Life (Final Expense) product to Wilton Reassurance Company on a 50/50 quota share original term coinsurance basis. The letter of intent was executed on a retroactive basis to cover all applicable business issued by FLAC subsequent to January 1, 2005. Wilton Reassurance Company agreed to provide various commission and expense allowances to FLAC in exchange for FLAC ceding 50% of the applicable premiums to Wilton Reassurance Company as they are collected. As of June 24, 2006, Wilton Reassurance Company terminated the reinsurance agreement for new business issued after the termination date.
To the extent that the reinsurance companies are unable to meet their obligations under the reinsurance agreements, TLIC and Family Benefit Life remain primarily liable for the entire amount at risk.
Property and equipment as of December 31, 2013 and 2012 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 of $76,192 and $76,136 for the years ended December 31, 2013 and 2012, respectively, under this lease and other minor leases. The terms of the lease have the lessor responsible for paying real estate taxes, building insurance and building and ground maintenance subject to the lessor’s rights to assess the lessee for increases in these expenses compared to the base year of 2011. The Company received a $120,000 leasehold improvement allowance from the lessor that is being amortized over the non-cancellable lease term that reduced incurred rent expense by $25,263 for each of the years ended December 31, 2013 and 2012. Future minimum lease payments to be paid under non-cancellable lease agreements are $94,764 for 2014 and $71,073 in 2015.
TLIC owns approximately six and one-half acres of land located in Topeka, Kansas. A 20,000 square foot office building has been constructed on approximately one-half of this land. On December 24, 2009, TLIC entered into a five year lease of approximately 7,500 square feet of its building in Topeka, Kansas with an option for the lessee to renew the lease for five additional years. The terms of the lease have the lessor responsible for paying real estate taxes, building insurance and building and ground maintenance subject to the lessor’s rights to assess the lessee for increases in these expenses compared to the base year of 2010. The monthly lease payments are as follows: $9,130 in 2012 and $9,371 in 2013 and 2014.
TLIC has also leased 10,000 square feet in the Topeka, Kansas office building under a lease that was renewed during 2006 to run through June 30, 2011 with a 90 day notice to terminate the lease by the lessee. This lease was renewed on July 1, 2011 to run through June 30, 2016. Beginning July 1, 2014, the lessee can terminate the lease with a 180 day written notice. The terms of the lease have the lessor responsible for paying real estate taxes, building insurance and building and ground maintenance. The lease agreement calls for minimum monthly base lease payments of $17,535.
Effective August 29, 2005, TLIC executed a lease agreement for 2,500 square feet of the Topeka, Kansas office building. The base lease period commenced on September 1, 2005 and ended on August 31, 2010. The lease automatically renewed on August 15, 2010, for another five years with a 90 day notice by the lessee to terminate the lease. The lease agreement called for minimum monthly base lease payments of $4,332 through August 31, 2010. The terms of the lease have the lessor responsible for paying real estate taxes, building insurance and building and ground maintenance. The lease payments decreased to $3,100 per month for the period September 1, 2010 through August 31, 2015.
TLIC is subject to Oklahoma laws and Family Benefit Life 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 $1,283,361 in 2014 without prior approval. In addition, based on those limitations, there is the capacity for Family Benefit Life to pay a dividend up to $976,941 in 2014 without prior approval. Family Benefit Life paid dividends of $850,000 and $1,515,975 to TLIC in 2013 and 2012, respectively. These dividends are eliminated in consolidation.
The Company has a life insurance segment, consisting of the operations of TLIC and Family Benefit Life, and a premium financing segment, consisting of the operations of FTCC and SIS. Results for the parent company, after elimination of intercompany amounts, are allocated to the corporate segment. These segments as of and for the years ended December 31, 2013 and 2012 are summarized as follows:
The Petition asserts claims for breach of contract and anticipatory breach of contract and alleges that Family Benefit Life breached, and will anticipatorily breach, the Decreasing Term to 95 policies of insurance by not providing a dividend sufficient to purchase a one year term life insurance policy which would keep the death benefit under the Decreasing Term to 95 policies the same as that provided during the first year of coverage under the policy. In addition to these claims, the Petition asserts claims for negligent misrepresentation, fraud, and violation of the Missouri Merchandising Practices Act. It alleges that during its sale of the Decreasing Term to 95 policies, Family Benefit Life represented that the owners of these policies would always be entitled to dividends to purchase a one-year term life insurance policy and that the owners would have a level death benefit without an increase in premium.
During 2012, the Company repurchased 185,313 shares of its common stock from former members of the Board of Directors at a cost of $648,595. During 2013, the Company repurchased 12,896 shares of its common stock for $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.
The changes in the components of the Company’s accumulated other comprehensive income (loss) for the years ended December 31, 2013 and 2012 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, 2013 and 2012 are summarized as follows:
(a) These items appear within net realized investment gains in the consolidated statement of operations.