Property was acquired in the acquisition of FLAC. FLAC occupies approximately 7,500 square feet of its building in Topeka, Kansas and 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.
The allowance for possible loan losses from financing casualty insurance premiums is a reserve established through a provision for possible loan losses charged to expense, which represents, in management’s judgment the known and inherent credit losses existing in the loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses inherent in the loan portfolio.
As a result of the Company’s purchase of FLAC, 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 the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”. The value of acquired insurance in force will be amortized over the expected remaining life of the insurance in force. For the amortization of the value of acquired insurance in force, the Company will periodically review its estimates of gross profits. The most significant assumptions involved in the estimation of gross profits include interest rate spreads, future financial market performance, business surrender/lapse rates, expenses and the impact of realized investment gains and losses. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company is required to record a charge or credit to amortization expense for the period in which an adjustment is made.
The Company uses the liability method of accounting for income taxes. Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under GAAP and balances determined using tax bases. A valuation allowance is established for the amount of the deferred tax asset that exceeds the amount of the estimated future taxable income needed to utilize the future tax benefits. We evaluate our deferred income tax assets, which are an offset of our deferred tax liabilities, for any necessary valuation allowances. In doing so, we consider our ability and potential for recovering income taxes associated with such assets, which involve significant judgment. Revisions to the assumptions associated with any necessary valuation allowances would be recognized in the financial statements in the period in which such revisions are made.
Life and annuity insurance operations, consisting of the operations of TLIC;
The primary sources of revenue for the Company are life insurance premium income and income from premium financing. Premium payments are classified as first-year, renewal and single. Renewal premiums are any premium payments made after the first year the policy is in force.
Revenues from premium financing were $503,885 and $183,927 for the years ended December 31, 2008 and 2007, respectively. The increase is due to expansion of the business.
Benefits and claims increased $128,087 and $596,484 in 2008 and 2007, respectively. The increase is due to increased business.
Certain costs related to the acquisition of life insurance policies are capitalized and amortized over the premium-paying period of the policies. These costs, which are referred to as deferred policy acquisition costs, include commissions and other costs of acquiring life insurance, which vary with, and are primarily related to, the production of new insurance contracts. The capitalized cost will be amortized over the life of the associated policies. In 2008 and 2007, capitalized cost was $553,292 and $592,637, respectively. Amortization of deferred policy acquisition costs for the years ended December 31, 2008 and 2007 was $114,673 and $133,122, respectively.
Commissions were $625,492 for the year ended December 31 2008, an increase of $124,836, compared to the year ended December 31, 2007. The increase is due to writing a larger volume of business.
Salaries and wages were $682,555 for the year ended December 31, 2008, an increase of $76,478, compared to the year ended December 31, 2007. The growth of the Company required additional employees.
Significant changes in the consolidated balance sheet of 2008 compared to 2007 reflect the operations of the Company, the acquisition of FLAC and capital transactions discussed below.
At December 31, 2008, the Company’s available-for-sale fixed maturities had a fair value of $18,207,905 and amortized cost of $18,203,764 compared to a fair value of $628,570 and an amortized cost of $627,167 at December 31, 2007. 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. The fixed maturities portfolio is invested in a variety of companies and U S Government sponsored agency securities.
At December 31, 2008 and 2007, the Company held loans from premium financing of $4,702,590 and $2,298,835, respectively. The loan balances at December 31, 2008 and 2007, respectively, are net of unearned interest of $124,950 and $63,830 and allowance for loan losses of $21,305 and $3,500.
At December 31, 2008, we had cash and cash equivalents totaling $5,669,795. The majority of our excess funds have been invested in money market mutual funds.
In addition to the measures described above, TLIC and FLAC 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 FLAC met during 2008, the SVL also requires the Company to perform annual cash flow testing for TLIC and FLAC. 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.
The Company has used the majority of its capital provided from the public offering to expand the premium finance business and to acquire a life insurance company. The operations of TLIC and FLAC 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.
The Company is authorized to contribute additional capital up to $2,300,000 to its life insurance subsidiary. We believe that our existing cash and cash equivalents at December 31, 2008 will be sufficient to fund our anticipated operating expenses. Funds will not be available to continue the expansion of the Company’s subsidiaries without borrowing funds. 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 agreement terminates April 30, 2009. The Company believes that the current cash and the funds available from the bank loan will provide cash to fund operating expenses and expansion of the subsidiaries. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect. The growth of the premium finance subsidiary is uncertain and will require additional capital if it continues to grow.
Management is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting. As allowed by SEC guidance, management excluded First Life America Corporation, a company that was acquired December 23, 2008 from its assessment of internal controls over financial reporting. This entity accounted for approximately 75% of total consolidated assets and no operating results or net income is included in the consolidated financial statements. Total assets of FLAC were $32,779,407 and net assets acquired were $2,695,234.
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, 2008 and 2007, 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.
The Company has three wholly owned subsidiaries, First Trinity Capital Corporation (“FTCC”) and Trinity Life Insurance Company, domiciled in Oklahoma (“TLIC”) and First Life America Corporation (“FLAC”), domiciled in Kansas. TLIC was incorporated in 2006 and commenced the sale of life insurance products in March 2007. FTCC was incorporated in 2006, and began operations in January 2007 providing financing for casualty insurance premiums.
The Company’s operations, prior to the acquisition of FLAC involved the sale of a modified payment whole life insurance policy with a flexible premium deferred annuity rider through its subsidiary 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.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.
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 is included in net investment income.
Deferred acquisition costs, related to annuities are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies. To the extent that realized gains and losses on fixed income securities result in adjustments to deferred acquisition costs, related to annuities, such adjustments are reflected as a component of the amortization of deferred acquisition costs.
As a result of the Company’s purchase of FLAC, 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 the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”. The value of acquired insurance in force will be amortized over 34 years, which is the expected remaining life of the insurance in force. For the amortization of the value of acquired insurance in force, the Company will periodically review its estimates of gross profits. The most significant assumptions involved in the estimation of gross profits include interest rate spreads, future financial market performance, business surrender/lapse rates, expenses and the impact of realized investment gains and losses. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company is required to record a charge or credit to amortization expense for the period in which an adjustment is made. At December 31, 2008, there is no accumulated amortization due to the purchase of FLAC occurring at the end of the year. The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years: Amortization in years one through five is as follows: $268,957, $249,408, $234.317, $213,770 and $191,704.
The common stock subscribed was issued during 2007 and has a $.01 par value, with dividend rights payable to holders of common stock on a pro rata basis.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company). Upon adoption, an entity was permitted to elect the fair value option irrevocably for any existing asset or liability within the scope of the standard. The adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to retained earnings as of the date of initial adoption. Retrospective application would not be permitted. The Company did not elect the fair value option for assets and liabilities currently held upon its adoption of SFAS No. 159. SFAS No. 159 did not have an impact on the Company’s results of operations, financial position or liquidity.
Proceeds from the maturity of fixed maturities during 2008 and 2007 were $625,000 and $300,000, respectively. There were no sales of fixed maturities during 2008 and 2007. There were no gross gains or gross losses realized on the maturity or sale of available for sale fixed maturities.
The Company’s investment in lottery prize cash flows was $4,464,280 and $0 at December 31, 2008 and 2007, respectively. The lottery prize cash flows are assignment of the future rights from lottery winners at a discounted price. Payments on these investments are made by state run lotteries.
The amortized cost and estimated fair value of lottery prize cash flows, by contractual maturity, at December 31, 2008 is shown below:
The outstanding balance of lottery prize cash flows, by state lottery at December 31, 2008, is shown below:
Future policy benefits for traditional life insurance policies are generally equal to the aggregate of (1) the present value of future benefit payments and related expenses, less the present value of future net premiums, and (2) any premium deficiency reserves. Assumptions as to mortality and persistency are based on the life insurance subsidiaries experience or industry experience, when the basis of the reserve is established. Interest rates range from 4% to 7.25% for setting insurance reserves. The mortality assumptions for traditional life insurance products use the 1975-80 Basic Table, Select and Ultimate and on the Company’s experience for final expense.
Future policy benefits for policy claims and other policyholder funds are generally equal to the present value of expected future payments based on the Company’s experience.
Policyholders’ account balances represent an accumulation of account deposits plus credited interest less withdrawals, expenses and mortality charges, if applicable. Interest crediting rates for individual annuities range from 4% to 6.5%. Interest crediting rates for premium deposit funds range from 3.5% to 4%.
Pursuant to the terms of the agreement with Optimum Re, FLAC generally pays no reinsurance premiums on first year individual business. However, SFAS No. 113 requires the unpaid premium to be recognized as a first year expense and amortized over the estimated life of the reinsurance policies. At December 31, 2008, the unpaid reinsurance premiums net of amortization totaled $4,439.
Effective September 29, 2005, FLAC and Wilton Re 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 Re 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 Re agreed to provide various commission and expense allowances to FLAC in exchange for FLAC ceding 50% of the applicable premiums to Wilton Re as they are collected. As of June 24, 2006, Wilton Re terminated the reinsurance agreement for new business issued after the termination date.
The Company files a consolidated federal income tax return with FTCC and does not file a consolidated return with TLIC or FLAC. TLIC and FLAC are taxed as a life insurance company under the provisions of the Internal Revenue Code and each must file a separate tax return until they have been a member of the filing group for five years.
There was no current federal income tax expense for the years 2008 and 2007.
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.
A valuation allowance has been established due to the uncertainty of loss carryforwards and unrealized investment losses. The net change in the allowance was $327,504 and $172,969 for the years 2008 and 2007, respectively.
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 2005 through 2008 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.
Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company experienced no material financial impact as a result of the adoption of SFAS No. 157.
Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.
The fair values presented below have been determined by using available market information and by applying appropriate valuation methodologies. Considerable judgment is applied in interpreting data to develop the estimates of fair value. These fair values may not be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the fair values. The methods and assumptions discussed below were used in calculating the fair values of the instruments.
The fair value of fixed maturities and equity securities are based on the principles required by SFAS No. 157, as previously discussed.
The fair value of commercial mortgage loans are based upon the present value of the expected future cash flows discounted at the appropriate rate for similar quality loans.
The fair value of investment real estate is based on an appraisal.
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 $21,305 at December 31, 2008 and $3,500 at December 31, 2007.
Only the portion of policyholders’ account balances related to products that are investment contracts (those without significant mortality or morbidity risk) are reflected in the table below. For fixed deferred annuities and other deposit contracts without life contingencies, fair values are calculated as the surrender value. For those balances that can be withdrawn by the customer at any time without prior notice or penalty, the fair value is estimated to be the amount payable to the customer as of the reporting date, which is generally the carrying value.
The insurance companies are subject to Kansas and Oklahoma laws, which limit the amount of dividends that insurance companies can pay to stockholders without approval of the respective Department of Insurance. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the lesser 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 no capacity to pay a dividend in 2009 without prior approval. There were no dividends paid or a return of capital to the parent company in 2008 and 2007.
The Company operates in three segments as shown in the following table. Given the limited nature of each subsidiary’s operations, the Company has a life insurance segment, consisting of the operations of TLIC, and a premium financing segment, consisting of the operations of FTCC. The asset segment information includes values relating to FLAC allocated to the life and annuity insurance operations. Results for the parent company, after elimination of intercompany amounts, are allocated to the corporate segment.
Pursuant to the terms of a stock purchase agreement, on December 23, 2008, the Company acquired 100% of the outstanding common stock of First Life America Corporation from an unaffiliated company (the “FLAC Acquisition”). The FLAC acquisition was accounted for as a purchase. Results of operations are not included in the consolidated financial statements. The Company acquired FLAC to expand its insurance operations in additional states and FLAC had insurance policies in force similar to the product that TLIC is currently selling.
Pro forma adjustments consist of: reduction in revenue due to using cash to pay for the acquisition, increase in revenue due to amortization of current market value adjustments over the life of the investments, reduction in amortization of deferred acquisition cost due to business acquired, amortization of value of business acquired and depreciation expense.
Guaranty fund assessments may be taken as a credit against premium taxes over a five-year period. These assessments, brought about by the insolvency of life and health insurers, are levied at the discretion of the various state guaranty fund associations to cover association obligations. It is management’s opinion that the effect of any future assessments would not be material to the financial position or results of operations of the Company because of the use of premium tax offsets.
On March 12, 2009 FTFC entered into a secured revolving credit loan agreement with the First National Bank of Muskogee. The agreement provides for loans up to $3,000,000 with an interest rate equal to the J.P. Morgan Chase Prime Rate at all times in effect plus the Prime Rate Margin of .25 of one percent. The rate shall have a floor of no less than 5% at any time. The agreement terminates April 30, 2009 and is subject to renewal at that time.