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 May 31, 2016. Beginning July 1, 2014, the lessee can terminate the lease with a 180 day written notice. The lease agreement calls for minimum monthly base lease payments of $17,535.
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.
We provide financing for casualty insurance premiums through independent property and casualty insurance agents. We are licensed in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma.
The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts. On May 16, 2012, the Company determined and then announced that FTCC would not accept new premium financing contracts after June 30, 2012. FTCC continues to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force. The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013. The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of Family Benefit Life Insurance Company, included in the life insurance segment, for $13,855,129. Given that the Family Benefit Life acquisition occurred in late December 2011, the acquisition only impacts the Company’s consolidated statement of financial position as of December 31, 2011 and not the Company’s consolidated statement of operations for the year ended December 31, 2011. Family Benefit Life’s 2012 operating results are reflected in the Company’s consolidated statement of operations for the year ended December 31, 2012.
The discussion and analysis of our financial condition, results of operations and liquidity and capital resources is based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We evaluate our estimates and assumptions continually, including those related to investments, deferred acquisition costs, loans from premium financing, allowance for loans losses from premium financing, value of insurance business acquired, policy liabilities, income taxes, regulatory requirements, contingencies and litigation. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies, judgments and estimates are the most critical to the preparation of our consolidated financial statements.
We evaluate our deferred income tax assets, which partially offset 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.
In May 2011, the FASB issued new guidance concerning fair value measurements and disclosure. The new guidance is the result of joint efforts by the FASB and the International Accounting Standards Board to develop a single, converged fair value framework on how to measure fair value and the necessary disclosures concerning fair value measurements. This guidance became effective for interim and annual periods beginning after December 15, 2011.
The Company’s adoption of this guidance resulted in a change in certain fair value footnote disclosures but did not have any effect on the Company’s results of operations, financial position or liquidity.
The Company’s adoption of the updated guidance resulted in a change in the presentation of the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.
Consolidated Condensed Results of Operations for the Year Ended December 31, 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 gains and losses on investment holdings can significantly impact revenues from period to period. The impact on total revenues of Family Benefit Life total revenues, acquired on December 28, 2011, for the year ended December 31, 2012 is summarized in the tables below.
Our premiums for the years ended December 31, 2012 and 2011 are summarized as follows:
The income from premium financing has steadily decreased during the past two years. There was a decrease of $65,633 for the year ended December 31, 2012.
The $919,541 increase in gross investment income for the year ended December 31, 2012, excluding Family Benefit Life gross investment income, is due to the 2012 investment of excess cash primarily in fixed maturity securities, other long-term investments (lottery receivables) and mortgage loans.
The net realized investment losses from the sale of investment real estate of $2,151 for the year ended December 31, 2011 resulted from proceeds of $49,000 for the sale of land that had a carrying value of $51,151 at the 2011 disposal date.
The $1,524,941 increase in benefits and claims for the year ended December 31, 2012, excluding Family Benefit Life benefits and claims, is primarily due to the following:
$577,158 increase in interest credited to policyholders primarily due to an increase in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits in excess of withdrawals).
$479,129 increase in the change in future policy benefits primarily relates to an increase in the number of final expense and ordinary policies in force.
Certain costs related to the successful acquisition of traditional life insurance policies are capitalized and amortized over the premium-paying period of the policies. Certain costs related to the successful acquisition of insurance and annuity policies that subject us to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed (i.e., limited-payment long-duration annuity contracts) are capitalized and amortized in relation to the present value of actual and expected gross profits on the policies. These acquisition costs, which are referred to as deferred policy acquisition costs, include commissions and other successful costs of acquiring life insurance, which vary with, and are primarily related to, the production of new and renewal insurance and annuity contracts.
For the year ended December 31, 2012 and 2011, capitalized costs were $2,302,070 and $2,262,751, respectively. Amortization of deferred policy acquisition costs for the year ended December 31, 2012 and 2011 were $512,546 and $230,284, respectively.
Our commissions for the year ended December 31, 2012 and 2011 are summarized as follows:
$91,333 decrease in annuity first year, single and renewal commissions that corresponds to $507,750 of decreased annuity considerations deposited.
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, for 2012, we intend to file a combined life insurance company federal tax return for TLIC and Family Benefit Life. 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.
Net income was $1,101,881 ($0.14 per common share basic and diluted) and $7,359,993 ($1.00 per common share basic and diluted) for the years ended December 31, 2012 and 2011, respectively.
The revenues and income (loss) before federal income taxes from our business segments for the years ended December 31, 2012 and 2011 are summarized as follows:
The $1,735,989 decrease in revenues from Life and Annuity Insurance Operations for the year ended December 31, 2012 is primarily due to the following:
The $6,905,709 decreased profitability from Life and Annuity Insurance Operations for the year ended December 31, 2012 is primarily due to the following:
$6,915,479 gain from the acquisition of Family benefit Life recognized in 2011
The $17,608,590 increase in available for sale fixed maturity securities for the year ended December 31, 2012 is primarily due to purchases of $23,432,839 in excess of sales and maturities of $9,511,967, net realized investment gains of $228,320, $4,193,385 increase in unrealized appreciation and premium amortization of $733,987. 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.
As of December 31, 2012, we held 35 available-for-sale fixed maturity securities with an unrealized loss of $133,611, fair value of $7,386,902 and amortized cost of $7,520,513.
As of December 31, 2011, we held nine fixed maturity securities available-for-sale with an unrealized loss of $84,771, fair value of $1,887,299 and amortized cost of $1,972,070. Since the Family Benefit Life available-for-sale fixed maturity securities were acquired on December 28, 2011, the amortized cost equaled the fair value as of December 31, 2011.
The $55,396 decrease in available-for-sale equity securities for the year ended December 31, 2012 is primarily due to sales of $1,114,426, purchases of $616,594, net realized investment gains of $442,737 and a $301 decrease 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 both December 31, 2012 and December 31, 2011 there were no available-for-sale equity securities in an unrealized loss position.
The $8,450,382 increase in mortgage loans for the year ended December 31, 2012 is primarily due to the origination of $9,143,326 of mortgage loans, $168,641 capitalization of loan origination fees less principal payments of $899,180 and discount accretion of $37,595. There was one loan more than 90 days past due as of December 31, 2012 with a remaining principal balance of $141,150. We have had discussions with the borrower and anticipate this loan being current in April 2013.
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 in 2012 and settlement dates in 2013. The $1,471,311 increase in other assets is primarily due to $601,530 of receivables for securities sold with trade dates in 2012 and settlement dates in 2013, $489,098 of increased recoverable federal and state income taxes, increased receivables of $143,408 and a $96,373 increase in guaranty funds.
Our liabilities as of December 31, 2012 and 2011 are summarized as follows:
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 in 2012 and settlement dates in 2013.
The $15,696,530 increase in policy liabilities is primarily due to deposits on annuity and deposit-type contracts exceeding withdrawals by $9,982,456, $3,330,592 of interest credited to policyholder account deposits, $2,088,374 of increased future policy benefit reserves, $201,999 of increased liabilities for policy claims and $93,109 of increased other policy liabilities.
The $996,680 decrease in other liabilities is due to a $1,226,000 decrease in deposits on pending applications and a $400,000 reduction in accrued liabilities due to payment of and reduction in bonuses accrued as of December 31, 2011. This decrease is partially offset by a $600,000 payable for securities purchased with trade dates in 2012 and settlement dates in 2013 and a $29,000 increase in accrued expenses.
As of December 31, 2012, we had cash and cash equivalents totaling $10,947,474. As of December 31, 2012, cash and cash equivalents of $3,124,376 and $2,752,713, respectively, of the total $10,947,474 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 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 capacity for TLIC to pay a dividend up to $377,777 in 2013 without prior approval. In addition, based on those limitations, there is the capacity for Family Benefit Life to pay a dividend up to $887,520 in 2013 without prior approval. Family Benefit Life paid $1,515,975 of dividends to TLIC in 2012 and received permission from the Missouri Department of Insurance to pay $581,300 of dividends in excess of the $934,675 limitation.
Our cash flows for the years ended December 31, 2012 and 2011 are summarized as follows:
The $23,456,492 of increased cash used for investing activities during the year ended December 31, 2012 was primarily related to the purchase of investments in fixed maturity securities, equity securities, mortgage loans and other long-term investments ( lottery receivables) in excess of maturities, sales and repayments of those investment types.
The increase in shareholders’ equity of $5,323,999 for the year ended December 31, 2012 is due to $1,786,267 of proceeds generated from the public stock offering (gross proceeds of $2,264,890 and offering expenses of $478,623), $3,084,446 of other comprehensive income, $1,101,881 of net income less $648,595 for purchases of 185,313 shares of treasury stock from former members of the Board of Directors.
Equity per common share outstanding increased 16.9% to $4.29 as of December 31, 2012 compared to $3.67 per share as of December 31, 2011, based upon 7,852,130 common shares outstanding and subscribed as of December 30, 2012 and 7,743,867 outstanding common shares as of December 31, 2011. The common shares outstanding and subscribed as of December 31, 2011 reflect the retrospective adjustment for the impact of the 2012 5% stock dividends declared by the Company on January 11, 2012 and issued to holders of shares of the Company as of March 10, 2012.
The Company issued 323,777 shares in connection with the 2011 stock dividend that resulted in accumulated deficit being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital. The Company issued 378,928 shares in connection with the 2012 stock dividend that resulted in accumulated deficit being charged $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital. The issuance of these stock dividends were non-cash investing and financing activities.
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 recovered from the disruptions in the capital markets and had unrealized appreciation on available-for-sale securities of $7,264,140 and $3,071,056 as of December 31, 2012 and 2011, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. This $4,939,973 increase in unrealized gain arising for the year ended December 31, 2012 has been offset by the net realized investment gain of $746,889 due to the sale and call activity for available-for-sale fixed maturity securities, sale of available-for-sale equity securities and sale of investment real estate during 2012.
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 2012 and 2011, 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 believe that our existing cash and cash equivalents as of December 31, 2012 will be sufficient to fund our anticipated operating expenses.
adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including and in connection with our divestiture or winding down of businesses such as FTCC;
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
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, 2012 and 2011, 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.
In 2011, the Company issued 323,777 shares in connection with a 5% share dividend payable to the holders of shares of the Company as of March 10, 2011. In 2012, the Company issued 378,928 shares in connection with another 5% share dividend payable to the holders of shares of the Company as of March 10, 2012. In conjunction with the 2011 and 2012 stock dividends, the non-cash impact on investing and financing activities is summarized as follows:
On December 28, 2011, the Company acquired Family Benefit Life Insurance Company. In conjunction with this acquisition, the cash impact on operating, investing and financing activities is summarized as follows:
TLIC purchased Family Benefit Life Insurance Company (“Family Benefit Life”) on December 28, 2011. Family Benefit Life is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in seven states. Family Benefit Life’s current product portfolio consists of whole life, term, accidental death and dismemberment, annuity, endowment and group life insurance products. The products are sold through independent agents in the states of Arizona, Colorado, Kansas, Missouri, Nebraska, New Mexico and Oklahoma. In late 2012, Family Benefit Life was initially licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia.
Mortgage loans are carried 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.
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
Property and equipment are carried at undepreciated or unamortized cost. Office furniture, equipment and computer software is recorded at cost or fair value at acquisition less accumulated depreciation or amortization using the straight-line method over the estimated useful life of the respective assets of three to ten years. Leasehold improvements are recorded at cost and depreciated over the remaining non-cancelable lease term.
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 6.75%. Interest crediting rates for deposit-type liabilities range from 3.00% to 5.25%.
On January 10, 2011, the Company’s Board of Directors approved a 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold. The dividend was payable to the holders of shares of the Company as of March 10, 2011. Fractional shares were rounded to the nearest whole number of shares. The Company issued 323,777 shares in connection with the stock dividend 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.
On January 11, 2012, the Company’s Board of Directors approved another 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold. 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, 2012 and 2011 were 7,883,901 and 7,349,296, respectively. These weighted average shares reflect the retrospective adjustment for the impacts 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 first step of the impairment test involves comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. If the carrying value of a reporting unit exceeds the estimated fair value, a second step must be performed to measure the amount of goodwill impairment, if any. In the second step, the implied fair value of the reporting unit’s goodwill is determined in the same manner as goodwill is measured in a business combination (i.e., by measuring the fair value of the reporting unit’s assets, liabilities and unrecognized intangible assets and determining the remaining amount ascribed to goodwill) and comparing the amount of the implied goodwill to the carrying amount of the goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
The updated guidance is effective for the quarter ending March 31, 2013. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Based on management's review, the Company experienced no other-than-temporary impairments during the years ended December 31, 2012 and December 31, 2011.
Management believes that the Company will fully recover its cost basis in the securities held at December 31, 2012, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The remaining temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.
Net unrealized gains included in other comprehensive income for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized as of December 31, 2012 and 2011 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, 2012 and 2011 and the amount of realized investment gains (losses) on fixed maturity and equity securities available-for-sale and investment real estate for the years ended December 31, 2012 and 2011 are summarized as follows:
The outstanding principal balance of mortgage loans, by the most significant states, as of December 31, 2012 and 2011 are summarized as follows:
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. In addition, through September 30, 2012, Family Benefit Life owned one and one-half acres of land located in Jefferson City, Missouri with two buildings located on one acre of the land. The two buildings owned by Family Benefit Life located on one acre of the land were sold in October 2012.
The Company’s investment real estate as of December 31, 2012 and 2011 is summarized as follows:
The Company’s investment in lottery prize cash flows was $19,560,794 and $9,875,675 as of December 31, 2012 and 2011, 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, 2012 are summarized as follows:
The outstanding balance of lottery prize cash flows, by state lottery, as of December 31, 2012 and 2011 are summarized as follows:
The Company analyzes market valuations received to verify reasonableness and to understand the key assumptions used and the sources. Since the fixed maturity securities owned by the Company do not trade on a daily basis, the third party investment service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing. As the fair value estimates of the Company’s fixed maturity securities are based on observable market information rather than market quotes, the estimates of fair value on these fixed maturity securities are included in Level 2 of the hierarchy. The Company’s Level 2 investments include obligations of U.S. government agencies, state and political subdivisions, mortgage-backed securities, corporate bonds and foreign bonds.
The change in the fair value of the Company’s Level 3 equity securities, available-for-sale for the years ended December 31, 2012 and 2011 is summarized as follows:
The fair value of fixed maturity and equity securities are based on the principles previously discussed as Level 1, Level 2 and Level 3.
Unearned interest was $1,389 and $23,287 as of December 31, 2012 and 2011, respectively. Allowances for loan losses were $228,999 and $229,004 as of December 31, 2012 and 2011, respectively.
The balances of and changes in deferred acquisition costs as of and for the years ended December 31, 2012 and 2011 are summarized as follows:
The components of total income tax expense (benefit) for the years ended December 31, 2012 and 2011 is summarized as follows:
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2012 and 2011 are summarized as follows:
FTFC has net operating loss carry forwards of approximately $5,446,309 expiring in 2019 through 2027. TLIC has net operating loss carry forwards of approximately $3,297,214, expiring in 2018 through 2026. Net operating loss carry forwards of $1,061,226 (included in the TLIC amount above), expiring in 2018 through 2023, 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 2009 through 2012 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.
Family Benefit Life 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. Family Benefit Life reinsures initial amounts of risk on any one life in excess of $50,000 for individual life insurance with Optimum Re. Family Benefit Life also reinsures its accidental death benefit portion of their life policies under a bulk agreement with Optimum Re.
Reinsurance assumed and ceded amounts for TLIC and Family Benefit Life for 2012 and 2011 are summarized as follows:
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 monthly lease payments are as follows: $9,130 in 2011 and 2012 and $9,371 in 2013 and 2014.
The future minimum lease payments to be received under the above non cancelable lease agreements are $360,072, $360,072, $235,220 and $87,675 for the years 2013 through 2016, respectively.
With respect to the 2,200 square foot building, Family Benefit Life entered into a one-year lease beginning August 1, 2010 and ending July 31, 2011. The lease could have been renewed annually if no termination notice was given by either party on or before May 1. No notice was given by either party on May 1, 2011 or May 1, 2012 and therefore the lease was renewed for additional one-year periods. The tenant paid Family Benefit Life $15,000 per year in monthly installments of $1,250. In connection with the October 2012 sale of the two buildings, the underlying third party lease was transferred to the new owner. The new owner also charged the Company $12,152 of rent during the last three months of 2012.
TLIC is domiciled in Oklahoma and prepares its statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Oklahoma Insurance Department. Family Benefit Life is domiciled in Missouri and prepares its statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Missouri Department of Insurance. Prescribed statutory accounting practices include publications of the NAIC, state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Statutory accounting practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions and valuing investments, deferred taxes, and certain assets on a different basis.
The statutory net income (loss) for TLIC amounted to $1,327,798 and ($831,650) for the years ended December 31, 2012 and 2011, respectively. The statutory surplus of TLIC was $5,277,775 and $4,703,946 as of December 31, 2012 and 2011, respectively. The statutory net income for Family Benefit Life amounted to $1,107,135 and $1,226,329 for the years ended December 31, 2012 and 2011, respectively. The statutory surplus of Family Benefit Life was $10,479,574 and $10,951,139 as of December 31, 2012 and 2011, respectively.
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 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 capacity for TLIC to pay a dividend up to $377,777 in 2013 without prior approval. In addition, based on those limitations, there is the capacity for Family Benefit Life to pay a dividend up to $887,520 in 2013 without prior approval. Family Benefit Life paid $1,515,975 of dividends to TLIC in 2012 and received permission from the Missouri Department of Insurance to pay $581,300 of dividends in excess of the $934,675 limitation.
During 2012, the Company purchased 185,313 shares of its common stock from former members of the Board of Directors at a cost of $648,595.
On March 8, 2013, the Company suspended the private placement of its common stock primarily in the states of Kansas, Missouri, and South Dakota. This offering began on August 15, 2012 and resulted in gross proceeds of $620,245 from the subscription of 72,970 of its common stock and incurred $290,163 in offering costs.
The Company acquired Family Benefit Life to expand its insurance operations into additional states. The net fair value of the Family Benefit Life assets acquired is included in the consolidated statement of financial position as of December 31, 2011. The results of operations of Family Benefit Life are not included in the consolidated statement of operations for the year ended December 31, 2011 due to the late 2011 acquisition date. Family Benefit Life’s financial position as of December 31, 2012 and its operating results for the year ended December 31, 2012 are reflected in the Company’s 2012 consolidated financial statements.
The following unaudited pro forma financial information has been prepared to present the results of operations of the Company assuming the acquisition of Family Benefit Life had occurred at the beginning of the year ended December 31, 2011. This pro forma information is supplemental and does not necessarily present the operations of the Company that would have occurred had the acquisition occurred on those dates and may not reflect the operations that will occur in the future.
Pro forma adjustments consist of the following: reduction in revenue due to the amortization of current market value adjustments over the life of the investments, reduction in deferred acquisition costs due to the business acquired, amortization of the value of insurance business acquired and deferred tax impact of these pro forma adjustments.
The unaudited pro forma financial information for the year ended December 31, 2011 is summarized as follows: