Family Benefit Life owns 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) have been constructed on one acre of this land and the other 0.5 acres is held for sale.
With respect to the 2,200 square foot building located in Jefferson City Missouri, Family Benefit Life entered into a one-year lease beginning August 1, 2010 and ending July 31, 2011. The lease can be renewed annually if no termination notice is given by either party on or before May 1. No notice was given by either party on May 1, 2011 and therefore the lease was renewed for an additional one-year period. The tenant pays Family Benefit Life $15,000 per year in monthly installments of $1,250.
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. 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.
Deferred acquisition costs related to the successful production of new and renewal insurance business for traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities.
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 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.
The allowance for possible loan losses from financing property and 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 and reduces the carrying value of loans from premium financing to the estimated net realizable value on the statement of financial position.
While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of the loan portfolio, the economy and changes in interest rates. The Company’s allowance for possible loan losses consists of specific valuation allowances established for probable losses on specific loans and a portfolio reserve for probable incurred but not specifically identified loans.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by us in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis.
As a result of our purchases of FLAC and Family Benefit Life, an asset was recorded in the application of purchase accounting to recognize the value of acquired insurance in force. The Company’s value of acquired insurance in force is an intangible asset with a definite life and is amortized under Financial Accounting Standards Board (“FASB”) guidance. The value of acquired insurance in force is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. The recovery of the value of insurance business acquired is dependent on the future profitability of the underlying business that was initially recorded in the purchases of FLAC and Family Benefit Life. Each reporting period, we evaluate the recoverability of the unamortized balance of the value of insurance business acquired.
We use 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 basis. 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.
Other costs related directly to the acquisition activities described in point 2 above that would not have been incurred by the insurance entity had the acquisition contract transaction not occurred.
The concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets and are not relevant when measuring the fair value of financial assets and liabilities.
The amendments also change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements. The amendments change the following:
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income (“ASU 2011-05”). The new pronouncement improves the comparability, consistency and transparency of financial reporting by increasing the prominence of items reported in other comprehensive income and facilitates the convergence of U.S. GAAP and IFRS. ASU 2011-05 eliminates the option of presenting components of other comprehensive income as part of the statement of changes in shareholders’ equity. ASU 2011-05 requires that all nonowner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In a single continuous statement, the following shall be presented: components of net income, net income, components of comprehensive income, total for other comprehensive income and the total of comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. ASU 2011-05 indicates that regardless of whether comprehensive income is presented in a single continuous statement or in two separate but consecutive statements, reclassification adjustments between net income and other comprehensive income are required to be presented on the face of the financial statements. ASU 2011-05 is effective for public companies for interim and annual periods beginning on or after December 15, 2011. Early adoption is permitted.
FASB guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units. The discussion of segment operating results that follows is being provided based on segment data prepared in accordance with this methodology.
Our 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. During 2011, we experienced a gain from the acquisition of Family Benefit Life.
Net investment income decreased 6.1% from $2,441,334 for the year ended December 31, 2010 to $2,291,761 for the year ended December 31, 2011, a decrease of $149,573.
Gross investment income increased 10.1% from $2,627,127 for the year ended December 31, 2010 to $2,893,214 for the year ended December 31, 2011, an increase of $266,087. The cash provided by continued insurance operations has provided a larger invested asset base that the company has continued to invest. However, it has been difficult throughout 2011 to locate adequate yield in investment grade securities.
Investment expenses, however, increased 223.7% from $185,793 for the year ended December 31, 2010 to $601,453 for the year ended December 31, 2011, an increase of $415,660. The increased investment expenses are primarily attributed to the following increases: $187,000 increase in real estate taxes, $130,000 increase in investment advisory management services and a $94,000 increase in depreciation of the real estate held for investment due to the change on January 1, 2011 of the useful life of the building from 39 year to 19 years. The Company engaged a new investment advisory management firm in late 2011 with the goal of reducing these expenses in 2012.
Net realized investment gains were $606,935 and $159,300 for the years ended December 31, 2011 and 2010, respectively, an increased net realized investment gain of $447,635. The increased net realized investment gains are primarily due to sales of fixed maturity available-for-sale securities and call activity during 2011.
The 2011 net realized investment gains from the sales of fixed maturity securities available-for-sale of $606,935 resulted from sale proceeds of $4,671,870 on fixed maturity securities available-for-sale having a $4,064,935 carrying value at the 2011 disposal dates.
The 2010 net realized investment gains from the sales of fixed maturity available-for-sale securities of $139,172 resulted from sale proceeds of $1,868,930 on fixed maturity available-for-sale securities having a $1,729,758 carrying value at the 2010 disposal dates.
We have recorded no other-than-temporary impairments in 2011 and 2010. 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. All of these fixed maturity securities available-for-sale had a fair value to cost ratio equal to or greater than 90%. As of December 31, 2010, we held five fixed maturity securities available-for-sale with an unrealized loss of $43,118, fair value of $1,467,816 and amortized cost of $1,510,934. All of these fixed maturity securities available-for-sale had a fair value to cost ratio equal to or greater than 94%.
Total consolidated benefits, claims and expenses decreased 2.3% from $8,936,496 for the year ended December 31, 2010 to $8,733,988 for the year ended December 31, 2011, a decrease of $202,508.
Benefits and claims increased 4.8% from $5,063,553 for the year ended December 31, 2010 to $5,308,825 for the year ended December 31, 2011, an increase of $245,272.
The increase in benefits and claims is primarily due to the following:
The $221,065 decrease in the amortization of deferred acquisition costs primarily reflects the impact of a 2011 change in the methodology of deferring and amortizing deferred acquisition costs as explained below.
A summary of the impact of this 2011 methodology change on the deferral and amortization of deferred acquisition costs for the year ended December 31, 2011 and 2010 is as follows:
Commissions increased 36.3% from $1,673,975 for the year ended December 30, 2010 to $2,281,934 for the year ended December 31, 2011, an increase of $607,959. The increase is primarily due to:
$410,025 increase in final expense first year commissions that corresponds to the $338,463 increase in final expense first year premiums.
$378,283 increase in annuity first year, single and renewal commissions that corresponds to the $8,853,768 of increased 2011 annuity considerations deposited.
$46,091 increase in final expense renewal commissions that corresponds to the $431,401 increase in final expense renewal year premiums.
$304,000 decrease in salaries and wages primarily due to decreased 2011 staffing levels and 2011 staffing resources utilized on the public stock offering that were capitalized as offering costs that reduced additional paid in capital in the shareholders’ equity section of the statement of financial position.
$98,000 decrease in agency costs due to the focus of our captive agents on the public stock offering where those agency costs are capitalized as offering costs that reduced additional paid in capital in the shareholders’ equity section of the statement of financial position.
$93,000 decrease in travel and entertainment and other home office expenses related to a 2011 cost containment program.
$41,000 decrease in employee benefits primarily due to decreased staffing levels.
$303,000 increase in professional fees primarily related to engagement of actuaries, lawyers and other professionals to assist with due diligence and other acquisition activities and stock dividend fees.
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 a life insurance companies under the provisions of the Internal Revenue Code and must file separate tax returns until they have been a member of the consolidated filing group for five years. 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. For the years ended December 31, 2011 and 2010, deferred income tax expense (benefit) was $96,183 and ($206,526), respectively. Current income taxes were $34,095 for the year ended December 31, 2011. There were no current income taxes for the year ended December 31, 2010.
For the years ended December 31, 2011 and 2010, respectively, there was net income of $7,359,993 and $91,336.
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. This was a non-cash investing and financing activity. It is anticipated that approximately 378,000 shares will be issued in connection with the 2012 stock dividend that will result in accumulated deficit being charged by approximately $2,835,000 with an offsetting credit of approximately $2,835,000 to common stock and additional paid-in capital. This will also be a non-cash investing and financing activity.
Revenues from Life and Annuity Insurance Operations increased 88.5% from $8,495,479 for year ended December 31, 2010 to $16,011,386 for the year ended December 31, 2011, an increase of $7,515,907. The increase in revenue from 2010 to 2011 primarily relates to the $6,915,479 gain from the acquisition of Family Benefit Life and $447,635 of increased net realized investment gains.
The loss before total federal income taxes from Premium Finance Operations was $212,706 and $340,395 for the years ended December 31, 2011 and 2010, respectively. The $127,689 decreased loss from 2010 to 2011 is primarily attributable to a decrease in allowance for loan losses, 2011 loan production intentionally decreased with reduced loan issuance made through profitable agencies primarily in Oklahoma and decreased 2011 costs to operate our premium finance operations.
The loss before total federal income taxes from Corporate Operations was $535,278 and $510,830 for the years ended December 31, 2011 and 2010, respectively. The $24,448 increased loss from 2010 to 2011 is primarily due to increased operating expenses related to the 2011 stock dividend processing and transferring.
As of December 31, 2011, our available-for-sale fixed maturity securities had a fair value of $81,051,207 and amortized cost of $78,128,103 compared to a fair value of $26,623,318 and an amortized cost of $23,183,633 as of December 31, 2010. The increase is primarily due to the $56,252,307 in fair value of the available-for-sale fixed maturity securities acquired in the Family Benefit Life acquisition. 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 in a variety of companies and U. S. Government securities.
As of December 31, 2011, we held the following additional invested assets: mortgage loans on real estate of $1,985,394; investment real estate of $3,466,581; policy loans of $1,472,666 and other long-term investments of $9,875,675. The other long-term investments are comprised of lottery prize receivables.
Please see the summary of total acquisition date fair value of the net assets acquired from Family Benefit Life summarized previously to ascertain the amount of increased investments derived from this acquisition.
Total investments were $98,750,416 and $38,640,777 as of December 31, 2011 and December 31, 2010, respectively. Please see the summary of total acquisition date fair value of the net assets acquired from Family Benefit Life summarized previously to ascertain the amount of increased investments derived from this acquisition.
Deferred policy acquisition costs were $5,251,999 and $3,234,285 as of December 31, 2011 and December 31, 2010, respectively. Policy acquisition expenses related to new insurance sales were capitalized in the amount of $2,262,751 and $1,773,199 for the years ended December 31, 2011 and 2010, respectively. Amortization of deferred acquisition costs for the years ended December 31, 2011 and 2010 was $230,284 and $451,349, respectively.
The progression of the Company’s loans from premium financing for the years ended December 31, 2011 and December 31, 2010 is summarized as follows:
Total liabilities as of December 31, 2011 and December 31, 2010 were $116,349,542 and $44,932,914, respectively. Please see the summary of total acquisition date fair value of the net assets acquired from Family Benefit Life summarized previously to ascertain the amount of increased liabilities derived from this acquisition.
Total policy liabilities as of December 31, 2011 were $111,269,643 and were composed of policyholders’ account balances of $81,730,322; future policy benefits of $28,977,186; policy claims of $515,522 and premiums paid in advance of $46,613. Please see the summary of total acquisition date fair value of the net assets acquired from Family Benefit Life summarized previously to ascertain the amount of increased liabilities derived from this acquisition.
Total policy liabilities as of December 31, 2010 were $44,115,568 and were composed of policyholders’ account balances of $30,261,070; future policy benefits of $13,444,284; policy claims of $367,306 and premiums paid in advance of $42,908. Please see the summary of total acquisition date fair value of the net assets acquired from Family Benefit Life summarized previously to ascertain the amount of increased liabilities derived from this acquisition.
The liability for deferred federal income taxes was $2,622,711 and $294,705 as of December 31, 2011 and December 31, 2010, respectively, an increase of $2,328,006. $2,258,650 of the increase in deferred federal income taxes relates to the Family Benefit Life acquisition. $1,222,984 of the increase is due to net unrealized gains on available-for-sale securities. The remaining $965,666 of the increase is due to the net deferred taxes arising from the temporary differences of the U.S. GAAP fair value of the net assets acquired compared to the carrying value for tax purposes.
Other liabilities as of December 31, 2011 and December 31, 2010 were $2,457,188 and $523,271, respectively. Other liabilities include deposits on pending policy applications, accrued expenses, accounts payable and unearned investment income. The $1,933,917 increase in other liabilities during 2011 is primarily due to a $1,100,000 increase in deposits on pending applications; $95,000 representing the remaining unearned liability for a $120,000 leasehold improvement credit granted by a lessor in December 2010 that is being amortized to rental expense over the remaining lease term; $86,000 of liabilities for estimated future guaranty fund assessments, $497,000 related to the acquisition of Family Benefit Life and $156,000 of accrued liabilities and other payables.
Our operations have been financed primarily through the private placement of equity securities and an intrastate public stock offering. Through December 31, 2011, we have received $24,746,215 from the sale of our shares. Our operations have been profitable and have generated $3,970,422 of net income from operations since we were incorporated in 2004 as shown in the accumulated earnings balance in the December 31, 2011 consolidated statement of financial position. 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 impact of this stock dividend charge of $2,428,328 to accumulated earnings (deficit) decreased the balance as of December 31, 2011 to $1,542,094.
Net cash provided by financing activities for the years ended December 31, 2011 and 2010 was $18,200,368 and $7,493,318, respectively. The 2011 increase in cash of $10,707,050 provided by financing activities resulted from a net increase in policy deposits of $8,591,326 for the year ended December 31, 2011 and a net increase of $2,115,724 in the net proceeds from the public stock offering.
Equity per common share outstanding and subscribed increased 51.7% to $3.67 as of December 31, 2011 compared to $2.42 per share at December 31, 2010, based upon 7,733,186 common shares outstanding and subscribed as of December 31, 2011 and 6,894,275 outstanding common shares as of December 31, 2010. These common shares outstanding and subscribed reflect the retrospective adjustment for the impact of the 2011 and 2012 5% stock dividends declared by the Company on January 10, 2011 and paid to holders of shares of the Company as of March 10, 2011 and declared by the Company on January 11, 2012 and payable to holders of shares on the Company as of March 10, 2012.
One of the significant risks relates to the fluctuations in interest rates. Regarding interest rates, the value of our available-for-sale fixed maturity securities investment portfolio will increase or decrease in an inverse relationship with fluctuations in interest rates, while net investment income earned on newly acquired available-for-sale fixed maturity securities increases or decreases in direct relationship with interest rate changes. From an income perspective, we are exposed to rising interest rates which could be a significant risk, as TLIC's and Family Benefit Life’s annuity business is subject to variable interest rates. The life insurance company's life insurance policy liabilities bear fixed rates. From a liquidity perspective, our fixed rate policy liabilities are relatively insensitive to interest rate fluctuations. We believe gradual increases in interest rates do not present a significant liquidity exposure for the life insurance policies. We maintain conservative durations in our fixed maturity portfolio. As of December 31, 2011, cash and the fair value of fixed maturity available-for-sale securities with maturities of less than one year and the fair value of lottery receivables with maturities of less than one year equaled 28.4% of total policy liabilities. If interest rates rise significantly in a short time frame, there can be no assurance that the life insurance industry, including the Company, would not experience increased levels of surrenders and reduced sales, and thereby be materially adversely affected.
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 2011 and 2010, 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.
Our marketing plan could be modified to emphasize certain product types and reduce others. New business levels could be varied in order to find the optimum level. We believe that our current liquidity, current bond portfolio maturity distribution and cash position give us substantial resources to administer our existing business and fund growth generated by direct sales. 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) dividends from FTCC and (4) corporate borrowings, if necessary.
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 public offering is for 1,333,334 shares of the Company’s common stock for $7.50 per share. All these shares were sold as of February 17, 2012 and the Company has now received $8.5 million after reduction for offering expenses and sales commissions. The Company has registered an additional 133,334 shares of its common stock to cover over subscriptions. The Company is now selling these oversubscriptions. The sale of all the additional shares would provide the Company with an additional $850,000 after reduction for offering expenses and sales commissions.
The offering was extended on June 28, 2011 and will end on June 28, 2012 unless all the Company’s shares are sold before then. As of December 31, 2011, the Company has received gross proceeds of $9,271,215 from the subscription of 1,236,162 shares of its common stock in this offering and incurred $1,404,300 in offering costs. The proceeds were originally deposited in an escrow account that was released from escrow by the Oklahoma Department of Securities in August 2010 after the offering exceeded $1,000,000 in gross proceeds. Those proceeds were made available to the Company in August 2010. Proceeds from the sale of shares of the Company’s common stock in this public offering after August 2010 were available to the Company without being held in escrow.
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.
Funds will not be available to continue the expansion of the Company’s subsidiaries without borrowing funds or raising additional capital. As introduced above, we have begun a public offering to generate additional funding. We intend to use the proceeds to finance future acquisitions of life insurance companies or blocks of life insurance business, provide up to $3.0 million of capital and/or surplus to TLIC as needed to maintain adequate capital and increase working capital. 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.
We have audited the accompanying consolidated statements of financial position of First Trinity Financial Corporation and Subsidiaries (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
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, 2011 and 2010, 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 offering was extended on June 28, 2011 and will end on June 28, 2012, unless all the Company’s shares are sold before then. As of December 31, 2011, the Company has received gross proceeds of $9,271,215 from the subscription of 1,236,162 shares of its common stock in this offering and incurred $1,404,300 in offering costs. The proceeds were originally deposited in an escrow account that was released from escrow by the Oklahoma Department of Securities in August 2010 after the offering exceeded $1,000,000 in gross proceeds. Proceeds from the sale of shares of the Company’s common stock in this public offering after August 2010 were available to the Company without being held in escrow.
The Company purchased First Life America Corporation (“FLAC”) on December 23, 2008. On August 31, 2009, two of the Company’s subsidiaries, Trinity Life Insurance Company (“Old TLIC”) and FLAC, were merged, with FLAC being the surviving company. Immediately following the merger, FLAC changed its name to Trinity Life Insurance Company (“TLIC”). After the merger, the Company had two wholly owned subsidiaries, First Trinity Capital Corporation (“FTCC”) and TLIC, domiciled in Oklahoma.
FTCC was incorporated in 2006, and began operations in January 2007 providing financing for casualty insurance premiums. 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 also owns 100% of Southern Insurance Services, LLC, (“SIS”), a limited liability company acquired in 2010, that operated as a property and casualty insurance agency but currently has no operations.
The Company evaluates the difference between the cost/amortized cost and estimated fair value of its investments to determine whether any decline in 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 recorded as an unrealized loss in stockholders' equity. If a decline in a security's fair value is considered to be other-than-temporary, the Company then determines the proper treatment for the other-than-temporary impairment. For fixed maturity securities available-for-sale, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security; and the amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security. For equity securities available-for-sale, the amount of any other-than-temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security.
As of December 31, 2011 and 2010 there was $827,409 and $604,958, respectively, of accumulated amortization of the value of insurance business acquired due to the purchase of FLAC that occurred at the end of 2008. The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years: $463,663 in 2012, $445,656 in 2013, $429,468 in 2014, $412,077 in 2015 and $395,047 in 2016. As of December 31, 2011, there was no amortization of the value of insurance business acquired due to the purchase of Family Benefit Life that occurred at the end of 2011.
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.
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 Corporation 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 deficit being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital. This was a non-cash investing and financing activity.
On January 11, 2012, the Company’s Board of Directors approved another 5% share dividend by which shareholders will receive a share of Common Stock for each 20 shares of common stock of the Company they hold. The dividend is payable to the holders of shares of the Corporation as of March 10, 2012. Fractional shares will be rounded to the nearest whole number of shares. It is anticipated that approximately 378,000 shares will be issued in connection with the stock dividend that will result in accumulated deficit being charged by approximately $2,835,000 with an offsetting credit of approximately $2,835,000 to common stock and additional paid-in capital. This will also be a non-cash investing and financing activity.
FASB guidance requires the inclusion of unrealized gains or losses on available-for-sale securities, net of tax, as a component of other comprehensive income. Unrealized gains and losses recognized in accumulated other comprehensive income that are later recognized in net income through a reclassification adjustment are identified on the specific identification method.
Deferred acquisition costs related to insurance and annuity products that subject the Company 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 are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies. These insurance and annuity contracts are treated as long-duration insurance contracts since the Company is subject to risk from policyholder mortality and morbidity over an extended period.
Management has evaluated all events subsequent to December 31, 2011 through the date that these financial statements have been issued. Please see Note 17.
In October 2010, the FASB issued Accounting Standards Update No. 2010-26, Financial Services - Insurance (Topic 944), Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU 2010-26”). The new guidance requires that an insurance entity capitalize only the following as acquisition costs related directly to the successful acquisition of new or renewal insurance contracts:
All other acquisition costs should be charged to expense as incurred. In addition, administrative costs, rent, depreciation, occupancy, equipment and all other general overhead costs are considered indirect costs and should be charged to expense as incurred. ASU 2010-26 is effective for interim and annual reporting periods beginning after December 15, 2011. Early adoption is permitted, but only at the beginning of an entity’s annual reporting period. The Company will adopt ASU 2010-26 in first quarter 2012. The Company has assessed the guidance and has determined that it will not have a significant financial impact since the Company utilizes a dynamic model whereby deferred acquisition costs on the statement of financial position only include policies currently in force. This current dynamic model results in immediate amortization of all deferred acquisition costs on the statement of operations where the policy is no longer in force. Once adopted, the above defined acquisition costs will only be capitalized directly related to the successful acquisition of new or renewal insurance contracts. After adoption, these acquisition costs will be amortized on the statement of operations.
Requirements specific to measuring the fair value of an instrument classified in shareholders’ equity.
Quantitative information about the observable inputs used in a fair value measurement of items categorized within Level 3 of the fair value hierarchy should be disclosed.
Categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position but for which fair value is required to be disclosed.
In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220 - Deferral of Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”). ASU 2011-12 indefinitely defers the requirement to present reclassification adjustments out of accumulated other comprehensive income by components in both the statement in which net income is presented and the statement in which other comprehensive income is presented.
All securities in an unrealized loss position as of the financial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position as of December 31, 2011 and 2010 are summarized as follows:
As of December 31, 2011, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 90%. As of December 31, 2010, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 94%. Fixed maturity securities were 88% and 87% investment grade as rated by Standard & Poor’s as of December 31, 2011 and December 31, 2010, respectively.
There were no equity securities in an unrealized loss position as of December 31, 2011 and December 31, 2010.
The amortized cost and fair value of fixed maturity available-for-sale securities as of December 31, 2011, by contractual maturity, are summarized as follows:
Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity available-for-sale securities for the years ended December 31, 2011 and 2010 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, 2011 and 2010 and the amount of realized investment gains (losses) on fixed maturity and equity securities for the years ended December 31, 2011 and 2010 are summarized as follows:
The Company’s mortgage loans by property type as of December 31, 2011 and 2010 are summarized as follows:
The mortgage loans are geographically concentrated in the states of Colorado (49%), Georgia (25%), Florida (20%), Missouri (4%) and Oklahoma (2%) as of December 31, 2011.
There were no loans more than 90 days past due at December 31, 2011. There were no mortgage loans in default at December 31, 2011 and there was no allowance for losses as of December 31, 2011 and 2010.
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, Family Benefit Life owns one and one-half acres of land located in Jefferson City, Missouri with two buildings located on one acre of the land.
The Company’s investment real estate as of December 31, 2011 and 2010 is summarized as follows:
The Company’s investment in lottery prize cash flows was $9,875,675 and $6,886,529 as of December 31, 2011 and 2010, 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.
Major categories of net investment income for the years ended December 31, 2011 and 2010 are summarized as follows:
The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur.
The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 2011 and 2010 is summarized as follows:
The following methods and assumptions were used in estimating the “fair value” disclosures for financial instruments in the accompanying financial statements and notes thereto:
The fair values for mortgage loans are estimated using discounted cash flow analyses, using the actual spot rate yield curve in effect at the end of the period.
The carrying value of these financial instruments approximates their fair values.
Other long-term investments are comprised of lottery prize receivables and fair value is derived by using a discounted cash flow approach. Projected cash flows are discounted using applicable rates.
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 $229,004 and $443,071 as of December 31, 2011 and 2010, respectively.
Unearned interest was $23,287 and $35,519 as of December 31, 2011 and 2010, respectively. Allowances for loan losses were $229,004 and $443,071 at December 31, 2011 and 2010, respectively.
The Company’s balance of and changes in credit losses related to loans from premium financing as of and for the years ended December 31, 2011 and 2010 are summarized as follows:
The components of total income tax expense (benefit) for the years ended December 31, 2011 and 2010 is summarized as follows:
FTFC has net operating loss carry forwards of approximately $4,848,606 expiring in 2019 through 2026. TLIC has net operating loss carry forwards of approximately $2,006,255, expiring in 2018 through 2026. Net operating loss carry forwards of $1,061,225 (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.
To the extent that the reinsurance companies are unable to meet their obligations under the reinsurance agreements, TLIC remains primarily liable for the entire amount at risk.
The Company leased approximately 2,517 square feet of office space pursuant to a three-year lease that began July 1, 2008 and leased 950 square feet of office space effective December 15, 2009 that terminated December 31, 2010. On June 17, 2010, the Company agreed to lease an additional 4,252 square feet of expansion office space whereby effective October 1, 2010, the Company would lease for five years a combined 6,769 square feet. Under the terms of the home office leases as amended, the monthly rent expense for the 2,517 square feet was $3,041 through June 30, 2009, $3,146 from July 1, 2009 through June 30, 2010, $3,251 from July 1, 2010 through September 30, 2010 and $7,897 from October 1, 2010 through September 30, 2015. The 950 square feet lease was $1,225 per month. The Company incurred rent expense of $72,809 and $73,155 for the years ended December 31, 2011 and 2010, respectively. Future minimum lease payments to be paid under non cancelable lease agreements are $94,764 for each of the years 2012 through 2014 and $71,073 in 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 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 for TLIC to pay a dividend in 2012 without prior approval. In addition, based on those limitations, there is the capacity for Family Benefit Life to pay a dividend up to $934,675 in 2012 without prior approval. There were no dividends paid or a return of capital to the parent company in 2011 and 2010.
Credit risk is limited by diversifying the Company’s investments. The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation currently insures all non-interest bearings accounts. Other funds are invested in mutual funds that invest in U.S. government securities. Uninsured balances aggregate $4,150,280 as of December 31, 2011. The Company has not experienced any losses in such accounts. The company has lottery prize receivables due from the states of New York, Massachusetts, California and Illinois in the amounts of $4,312,142; $2,131,982; $1,004,025 and $661,767, respectively.
During the Tender Offer, TLIC accepted tenders of 869,669 shares meeting the minimum condition requirements during the original and subsequent offers which expired on December 9, 2011 and December 21, 2011, respectively, and promptly paid for the shares tendered. The shares tendered represented 98.1% of the issued and outstanding shares not owned by TLIC. Prior to October 20, 2011, TLIC purchased 401,381 Family Benefit Life common shares. These purchases brought the aggregate shares held by TLIC to 1,271,050 shares, or 98.7% of the 1,287,640 shares issued and outstanding. TLIC acquired the remaining 16,590 issued and outstanding shares of Family Benefit Life by initiating and completing a merger under the corporation laws of the state of Missouri. TLIC paid an aggregate of $13,855,129 for the acquisition of 100% of the issued and outstanding shares of Family Benefit Life.