On January 1, 2011, the Company received a $120,000 leasehold improvement allowance from the lessor related to the original lease that was fully amortized by September 30, 2015 and reduced rent expense by $18,947 for the nine months ended September 30, 2015. In accordance with the amended lease on October 1, 2015, the Company was provided an allowance of $54,152 for leasehold improvements. As of December 31, 2016, the Company received $39,509 from the lessor and in 2017 will receive the remaining $14,643 upon the completion and certification of additional leasehold improvements. The leasehold improvement allowance is amortized over the remaining amended non-cancellable lease term and reduced rent expense by $8,627 for the year ended December 31, 2016 and $1,250 for the three months ended December 31, 2015. The future minimum lease payments to be paid under the amended non-cancellable lease agreement are $104,090, $106,189, $108,304 and $82,446 for the years 2017 through 2020, respectively.
On March 11, 2015, TLIC sold its investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044. TLIC recorded a gross realized investment gain on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119. In addition, simultaneously with these sales, TLIC settled its two notes payable with an aggregate payment to Grand Bank (the creditor) of $4,076,473.
First Trinity Financial Corporation (“we” “us”, “our”, “FTFC” or the “Company”) conducts operations as an insurance holding company emphasizing ordinary life insurance products and annuity contracts in niche markets. We are no longer operating a premium finance company, financing casualty insurance premiums. As an insurance provider, we collect premiums and annuity considerations 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 and term products and annuity contracts to predominately middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas through independent agents.
Prior to June 30, 2012, we provided financing for casualty insurance premiums for individuals and companies through independent property and casualty insurance agents through our wholly owned subsidiary FTCC. FTCC was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC has made no premium financing loans since June 30, 2012.
In addition, if a change occurs in our intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that we will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result. If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, we amortize the reduced book value back to the security’s expected recovery value over the remaining term of the bond. We continue to review the security for further impairment that would prompt another write-down in the book value.
As a result of our purchases of FLAC and FBLIC, an asset was recorded in the application of purchase accounting to recognize the value of acquired insurance in force. The Company’s value of acquired insurance in force is an intangible asset with a definite life and is amortized under FASB guidance.
Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality and morbidity and interest rate assumptions are “locked-in” upon the issuance of new insurance with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to provide for expected future losses on a product by establishing premium deficiency reserves.
Since many of these factors are interdependent and subject to short-term volatility during the long-duration contract period, however, substantial judgment is required. Actual experience may emerge differently from that originally estimated. Any such difference would be recognized in the current year’s consolidated statement of operations.
In August 2014, the FASB issued guidance to address the diversity in practice in determining when there is substantial doubt about an entity's ability to continue as a going concern and when an entity must disclose certain relevant conditions and events. The new guidance requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The new guidance allows the entity to consider the mitigating effects of management's plans that will alleviate the substantial doubt and requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans.
In February 2015, the FASB issued updated guidance that makes targeted amendments to the current consolidation accounting guidance. The update is in response to accounting complexity concerns, particularly from the asset management industry. The guidance simplifies consolidation accounting by reducing the number of approaches to consolidation, provides a scope exception to registered money market funds and similar unregistered money market funds and ends the indefinite deferral granted to investment companies from applying the variable interest entity guidance. The updated guidance is effective for annual and interim periods beginning after December 15, 2015. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
This guidance is effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance will be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and early adoption is not permitted. The Company is evaluating this guidance but expects the primary impact will be the recognition of unrealized gains and losses on available-for-sale equity securities in net income. Currently, all unrealized gains and losses on available-for-sale equity securities are recognized in other comprehensive income (loss).
The effect of the adoption of this guidance on the Company’s results of operations, financial position and liquidity is primarily dependent on the fair value of the available-for-sale equity securities in future periods and the existence of a deferred tax asset related to available-for-sale securities in future periods that have not yet been fully assessed.
The accounting applied by the lessor is largely unchanged from that applied under previous U.S. GAAP. Key aspects of the lessor accounting model, however, were aligned with the revenue recognition guidance of Codification Topic 606. The previous accounting model for leverage leases continues to apply only to those leveraged leases that commenced before the effective date of Codification Update 2016-02 Leases (Topic 842).
In March 2016, the FASB issued updated guidance that eliminates the requirement to retroactively apply the equity method of accounting when an investment that was previously accounted for using another method of accounting becomes qualified to apply the equity method due to an increase in the level of ownership interest or degree of influence. If the investment was previously accounted for as an available-for-sale security, any related unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for the equity method is recognized through earnings. The updated guidance is effective for reporting periods beginning after December 15, 2016, and is to be applied prospectively. 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.
In November 2016, the FASB issued specific guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents when there are transfers between cash, cash equivalents and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. 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.
The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted in certain situations. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Our revenues for the years ended December 31, 2016 and 2015 are summarized as follows:
The $4,817,836 increase in total revenues for the year ended December 31, 2016 is discussed below.
Our premiums for the years ended December 31, 2016 and 2015 are summarized as follows:
The $3,048,474 increase in premiums for the year ended December 31, 2016 is primarily due to the following: $1,229,440 increase in final expense first year premiums, $1,424,944 increase in final expense renewal premiums and $317,890 increase in consideration received for supplementary contracts with life contingencies.
The increase in final expense first year premiums represents management’s focus on expanding final expense production by contracting new, independent agents in expanded locations. The increase in final expense renewal premiums reflects the persistency of prior years’ final expense production. Our marketing efforts are focused on final expense and annuity production and we have not been focused on whole life and term production for the past few years.
The major components of our net investment income for the years ended December 31, 2016 and 2015 are summarized as follows:
The $2,435,586 increase in gross investment income for the year ended December 31, 2016 is primarily due to increases in investment holdings in mortgage loans and other long-term investments.
Although investments in fixed maturity securities decreased by $5.2 million for the twelve months ended December 31, 2016, we benefited from the late 2015 purchase of fixed maturity securities and held those securities throughout 2016 resulting in increased investment income from fixed maturity securities.
On March 11, 2015, the Company sold its investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044 as of March 11, 2015. The Company recorded a gross profit on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119.
During 2016 the Company foreclosed on seven residential mortgage loans of real estate totaling $394,427 and transferred those properties to investment real estate that are now held for sale. The Company reduced the carrying value of this residential real estate obtained through foreclosure to the lower of acquisition cost or net realizable value. On November 30, 2016, the Company sold one investment real estate property with an aggregate carrying value of $63,931. The Company recorded a gross realized investment loss on this sale of $20,662 based on an aggregate sales price of $43,269.
In 2015, management also impaired one mortgage loan on real estate investment that was in foreclosure and reduced that investment by $23,737 from its carrying value to its net realizable value expected at the time of ultimate resale.
Our benefits, claims and expenses are primarily generated from benefit payments, surrenders, interest credited to policyholders, change in reserves, commissions and other underwriting, insurance and acquisition expenses. Benefit payments can significantly impact expenses from period to period. Our benefits, claims and expenses for the years ended December 31, 2016 and 2015 are summarized as follows:
The $4,355,604 increase in total benefits, claims and expenses for the year ended December 31, 2016 is discussed below.
$1,301,433 increase in interest credited to policyholders is primarily due to an increase of approximately $47.7 million in the amount of policyholders’ account balances in the consolidated statement of financial position (deposits and interest credited in excess of withdrawals) since December 31, 2015.
The $2,108,115 increase in commissions for the year ended December 31, 2016 is primarily due to:
$440,584 increase in annuity first year, single and renewal commissions is due to the Company now paying renewal commission on two annuity products amounting to $383,072. These renewal commissions are half of the first year commissions and are paid if the annuity contract is still in force in the second year.
The $680,150 increase in other underwriting, insurance and acquisition expenses for the year ended December 31, 2016 was primarily related to increased acquisition and maintenance costs associated with increased final expense production, increased salaries and benefits due to increased staffing levels and increased salary and bonus levels, increased legal fees from contested litigation, write-off and recording of bad debt expense on uncollectible receivables of the premium finance business and tenant improvements on the Topeka, Kansas office building.
For the years ended December 31, 2016 and 2015, current income tax expense was $37,404 and $405,546, respectively. Deferred federal income tax benefit was $208,361 and $830,704 for the years ended December 31, 2016 and 2015, respectively.
Net income was $2,590,739 ($0.33 per common share basic and diluted) and $2,382,708 ($0.31 per common share basic and diluted) for the years ended December 31, 2016 and 2015, respectively.
Net income per common share basic and diluted is calculated using the weighted average number of common shares outstanding and subscribed during the year. The weighted average outstanding and subscribed common shares basic and diluted for the years ended December 31, 2016 and 2015 were 7,802,593 and 7,804,566, respectively.
The $3,148,903 increase in revenues from Life Insurance Operations for the year ended December 31, 2016 is primarily due to the following:
The $14,159 increased profitability from Life Insurance Operations for the year ended December 31, 2016 is primarily due to the following:
The $1,488,830 increase in revenues from Annuity Operations for the year ended December 31, 2016 is due to the following:
The $335,655 increased profitability from Annuity Operations for the year ended December 31, 2016 is due to the following:
The $180,103 increase in revenues from Corporate Operations for the year ended December 31, 2016 is primarily due to $106,700 of increased net investment income, $56,445 of increased other income and $16,958 of decreased realized losses.
Our invested assets as of December 31, 2016 and 2015 are summarized as follows:
The $5,244,872 decrease and $23,904,598 increase in fixed maturity available-for-sale securities for the years ended December 31, 2016 and 2015, respectively, are summarized as follows:
The $254,393 decrease and $221,443 increase in equity securities available-for-sale for the years ended December 31, 2016 and 2015, respectively, are summarized as follows:
The $15,596,368 and $20,125,185 increase in mortgage loans on real estate for the years ended December 31, 2016 and 2015, respectively, are summarized as follows:
The $180,115 increase and $6,838,532 decrease in investment real estate for the years ended December 31, 2016 and 2015, respectively, are summarized as follows:
The $15,221,946 and $9,785,002 increases in other long-term investments (comprised of lottery receivables) for the years ended December 31, 2016 and 2015, respectively, are summarized as follows:
Our assets other than invested assets as of December 31, 2016 and 2015 are summarized as follows:
The $25,176,359 increase in cash and cash equivalents for the year ended December 31, 2016 and the corresponding amount for the year ended December 31, 2015 are summarized in the Company’s consolidated statements of cash flows.
The $349,200 increase in 2016 agents’ balances and due premiums is primarily due to a $337,409 increase in agents’ balances. This increase is due to increased production of final expense policies resulting in increased advances of commissions to agents. The Company closely monitors commission advances and has not historically experienced nor expects to experience future collection problems.
Our other assets as of December 31, 2016 and December 31, 2015 are summarized as follows:
There was a $6,286,370 increase in the receivable for securities sold which represents the timing of unsettled trades for fixed maturity and equity securities available-for-sale as of December 31, 2016.
During the year ended December 31, 2016, the Company increased its advances to one mortgage loan originator who acquires residential mortgage loans for our life insurance companies by $2,112,316.
On April 15, 2016, the Company renewed its previous one-year loan of $400,000 to its former Chairman. The renewed loan also has a term of one year and a contractual interest rate of 5.00%. The loan is collateralized by 100,000 shares of the Company’s Class A Common stock owned by the former Chairman.
Our liabilities as of December 30, 2016 and 2015 are summarized as follows:
The $4,802,103 increase in future policy benefits during the year ended December 31, 2016 is primarily related to the production of new life insurance policies, initial sales of policies to older age bands (resulting in increased mortality reserve charges) and the aging of existing policies.
The $660,260 increase in deferred federal income taxes during the year ended December 31, 2016 was due to $868,621 of increased deferred federal income taxes on the unrealized appreciation of fixed maturity and equity securities available-for-sale and $208,361 of operating deferred federal tax benefit.
Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through December 31, 2016, we have received $27,119,480 from the sale of our shares.
The Company raised $1,450,000 from two private placements during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012; and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings.
As of December 31, 2016, we had cash and cash equivalents totaling $34,223,945. As of December 31, 2016, cash and cash equivalents of $18,069,762 and $14,094,515, respectively, were held by FBLIC and TLIC and may not be available for use by FTFC due to the required pre-approval by the OID and Missouri Department of Insurance of any dividend or intercompany transaction to transfer funds to FTFC. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the greater of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year.
The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures interest and non-interest bearing accounts up to $250,000. Uninsured balances aggregate $22,117,921 and $5,957,248 as of December 31, 2016 and December 31, 2015, respectively. The increase in uninsured balances of $16,160,673 between December 31, 2016 and December 31, 2015 is primarily due to annuity production in the last half of 2016 that has not been invested.
Our cash flows for the years ended December 31, 2016 and 2015 are summarized as follows:
The increase in shareholders’ equity of $6,065,232 for the year ended December 31, 2016 is due to $3,474,493 of other comprehensive income and net income of $2,590,739.
We have audited the accompanying consolidated statements of financial position of First Trinity Financial Corporation and Subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), 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, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement. The Company acquired assets of $3,644,839 (including cash), assumed liabilities of $3,055,916 and recorded a gain on reinsurance assumption of $588,923. During third quarter 2015, the Company completed its evaluation of assets, liabilities and gain associated with the reinsurance assumption and adjusted the assets, liabilities and gain on reinsurance assumption initially estimated and recorded in second quarter 2015.
The Company owns 100% of TLIC. TLIC owns 100% of FBLIC. TLIC and FBLIC are primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life insurance and annuity products to individuals. TLIC’s and FBLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment and annuity products. The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense is issued as either a simplified issue or as a graded benefit, determined by underwriting. The TLIC and FBLIC products are sold through independent agents. TLIC is licensed in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas. FBLIC is licensed in the states of Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia.
Certain reclassifications have been made in the prior year financial statements to conform to current year classifications. These reclassifications had no effect on previously reported net income or shareholders' equity.
Equity securities available-for-sale is comprised of mutual funds, common stocks and preferred stocks that are carried at fair value. The associated unrealized gains and losses, net of applicable income taxes, are included in accumulated other comprehensive income. The cost of equity securities available-for-sale is written down to fair value when a decline in value is considered to be other-than-temporary. Dividends from these investments are recognized in net investment income when declared.
The Company evaluates the difference between the cost or 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.
Investment real estate in buildings held for the production of income is carried at cost less accumulated depreciation. Depreciation on investment real estate in buildings held for the production of income is calculated over an estimated useful life of 19 years. Investment real estate in land held for both the production of income and for sale is carried at cost.
The allowance for possible loan losses from investments in mortgage loans on real estate and loans from premium financing is a reserve established through a provision for possible loan losses charged to expense which represents, in the Company’s judgment, the known and inherent credit losses existing in the residential and commercial mortgage loan and premium financing loan portfolios. The allowance, in the judgment of the Company, is necessary to reserve for estimated loan losses inherent in the residential and commercial mortgage loan and premium finance loan portfolios and reduces the carrying value of investments in mortgage loans on real estate and premium finance loans to the estimated net realizable value on the consolidated statement of financial position.
Other liabilities consist primarily of accrued expenses, accounts payable, deposits on pending policy applications, payable for securities purchased and unearned investment income.
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, 2016 and 2015 were 7,802,593 and 7,804,566 respectively.
Management has evaluated all events subsequent to December 31, 2016 through the date that these financial statements have been issued.
The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity) and that have a major effect on a reporting entity's operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance was effective for the quarter ending March 31, 2015. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.
The updated guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
In September 2015, the FASB issued updated guidance regarding business combinations that requires an acquirer to recognize post-close measurement adjustments for provisional amounts in the period the adjustment amounts are determined rather than retrospectively. The acquirer is also required to recognize, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the provisional amount, calculated as if the accounting had been completed at the acquisition date. The updated guidance is to be applied prospectively effective for annual and interim periods beginning after December 15, 2015. In connection with business combinations which have already been completed, the adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
In February 2016, the FASB issued updated guidance regarding leases that generally requires the lessee and lessor to recognize lease assets and lease liabilities on the statement of financial position. A lessee should recognize on the statement of financial position a liability to make lease payments and an asset representing its right-to-use the underlying assets for the lease term. Optional payments to extend the lease or purchase the underlying leased asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise the option(s). If the lease has a term of 12 months or less, a lessee can make an election to recognize lease expenses for such leases on a straight-line basis over the lease term. There is a differentiation between finance leases and operating leases for the lessee in the statements of operations and cash flows. Finance leases recognize interest on the lease liability separately from the right-to-use the asset whereas an operating lease recognizes a single lease cost allocated over the lease term on a generally straight-line basis. All cash payments are within operating activities in the statement of cash flows except finance leases classify repayments of the principal portion of the lease liability within financing activities.
The updated guidance is effective for reporting periods beginning after December 15, 2019. Early adoption is permitted for reporting periods beginning after December 15, 2018. Based on the financial instruments currently held by the Company, there would not be a material effect on the Company’s results of operations, financial position or liquidity if the new guidance were able to be adopted in the current accounting period. The impact on the Company’s results of operations, financial position or liquidity at the date of adoption of the updated guidance will be determined by the financial instruments held by the Company and the economic conditions at that time.
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, 2016 and 2015 are summarized as follows:
As of December 31, 2015, the Company held 290 available-for-sale fixed maturity securities with an unrealized loss of $5,720,175, fair value of $69,044,947 and amortized cost of $74,765,122. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2015 coupled with a downturn in the Chinese economy, decreases in the value of commodities and a drop in oil prices. The ratio of the fair value to the amortized cost of these 290 securities is 92%.
As of December 31, 2016, the Company has three available-for-sale equity securities with an unrealized loss of $6,454, fair value of $185,473 and cost of $191,927. The ratio of fair value to cost of these securities is 97%.
Fixed maturity securities were 92% and 94% investment grade as rated by Standard & Poor’s as of December 31, 2016 and December 31, 2015, respectively.
The outstanding principal balance of mortgage loans, by the most significant states, as of December 31, 2016 and 2015 are summarized as follows:
There were no mortgage loans in default or in the foreclosure process as of December 31, 2016. There were three mortgage loans in default and in the foreclosure process with a remaining principal balance of $196,606 as of December 31, 2015.
During 2016 the Company foreclosed on seven residential mortgage loans of real estate totaling $394,427 and transferred those properties to investment real estate that are now held for sale.
There are allowances for losses on mortgage loans of $244,427 and $183,348 as of December 31, 2016 and 2015, respectively. As of December 31, 2016, $525,063 of independent mortgage loan balances are held in escrow by a third party for the benefit of the Company related to its investment in mortgage loans on real estate with one loan originator. As of December 31, 2015, $534,330 of independent mortgage loan balances are held in escrow by a third party for the benefit of the Company related to its investment in mortgage loans on real estate with one loan originator.
As introduced above, during 2016 the Company foreclosed on seven residential mortgage loans of real estate totaling $394,427 and transferred those properties to investment real estate that are now held for sale. The Company reduced the carrying value of this residential real estate obtained through foreclosure to the lower of acquisition cost or net realizable value. On November 30, 2016, the Company sold one investment real estate property with an aggregate carrying value of $63,931. The Company recorded a gross realized investment loss on sale of $20,662 based on an aggregate sales price of $43,269.
On March 11, 2015, the Company sold its investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044. The Company recorded a gross realized investment gain on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119.
The Company’s investment in lottery prize cash flows was $46,788,873 and $31,566,927 as of December 31, 2016 and 2015, respectively. The lottery prize cash flows are assignments of the future rights from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries.
The outstanding balance of lottery prize cash flows, by state lottery, as of December 31, 2016 and 2015 are summarized as follows:
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 assets and liabilities include fixed maturity securities with quoted prices that are traded less frequently than exchange-traded instruments or assets and liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes U.S. Government and agency mortgage-backed debt securities, state and political subdivision securities, corporate debt securities and foreign debt securities.
The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 2016 and 2015 is summarized as follows:
These private placement stocks represent investments in small insurance holding companies. The fair value for these securities was determined through the use of unobservable assumptions about market participants. The Company has assumed a willing market participant would purchase the securities for the same price as the Company paid until such time as these small insurance holding companies commence operations.
Fair values for Level 1 and Level 2 assets for the Company’s fixed maturity and equity securities available-for-sale are primarily based on prices supplied by a third party investment service. The third party investment service provides quoted prices in the market which use observable inputs in developing such rates.
The Company’s fixed maturity and equity securities available-for-sale portfolio is highly liquid and allows for a high percentage of the portfolio to be priced through pricing services.
The change in the fair value of the Company’s Level 3 equity securities available-for-sale for the years ended December 31, 2016 and 2015 is summarized as follows:
The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment was required to interpret market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.
TLIC and FBLIC are required to hold assets on deposit for the benefit of policyholders and other special deposits in accordance with statutory rules and regulations. As of December 31, 2016 and 2015, these required deposits had amortized costs that totaled $4,099,405 and $3,989,742, respectively. As of December 31, 2016 and 2015, these required deposits had fair values that totaled $4,125,116 and $4,034,042, respectively.
Through June 30, 2012, FTCC financed amounts up to 80% of the premium on property and casualty insurance policies after a 20% or greater down payment was made by the policy owner. The premiums financed were collateralized by the amount of the unearned premium of the insurance policy. Policies that became delinquent were submitted for cancellation and recovery of the unearned premium, up to the amount of the loan balance, 25 days after a payment became delinquent. Loans from premium financing of $320,996 as of December 31, 2015 are carried net of estimated loan losses of $197,172 as of December 31, 2015. In 2016 the Company established a full allowance for uncollectible receivables against the premium financing asset. In late December of 2016, the Company wrote off the asset by netting the allowance for uncollectible receivables against the premium financing asset. The Company has made no premium financing loans since June 30, 2012.
The balances of and changes in the Company’s credit losses related to mortgage loans on real estate and loans from premium financing as of and for the years ended December 31, 2016 and 2015 are summarized as follows (excluding $25,523,757 and $21,755,620 of mortgage loans on real estate as of December 31, 2016 and 2015, respectively, with one loan originator where independent mortgage loan balances are held in escrow by a third party for the benefit of the Company):
The balances of and changes in deferred acquisition costs as of and for the years ended December 31, 2016 and 2015 are summarized as follows:
A reconciliation of federal income tax benefit computed by applying the federal income tax rate of 34% to income before federal income tax expense for the years ended December 31, 2016 and 2015 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, 2016 and 2015 are summarized as follows:
Due to FTFC’s taxable income generated in 2016, 2015 and 2014 and FTFC’s projected taxable income in future years, the valuation allowance on FTFC’s net operating loss carryforward was reduced by $1,699,953 during 2016 and $2,000,000 during 2015 since it is probable the entire net operating loss carryforwards will be utilized.
FBLIC has net operating loss carry forwards of $55,409, generated in 2016 that expires in 2031. The utilization of those losses is restricted by the tax laws and some or all of the losses may not be available for use.
FBLIC also participates in reinsurance in order to provide risk diversification, additional capacity for future growth and limit the maximum net loss potential arising from large risk. FBLIC reinsures initial amounts of risk on any one life in excess of $75,000 for individual life insurance with Optimum Re. TLIC and FBLIC also reinsure the accidental death benefit portion of their life policies under a bulk agreement with Optimum Re.
On January 1, 2011, the Company received a $120,000 leasehold improvement allowance from the lessor related to the original lease that was fully amortized by September 30, 2015 and reduced rent expense by $18,947 for the nine months ended September 30, 2015. In accordance with the amended lease on October 1, 2015, the Company was provided an allowance of $54,152 for leasehold improvements. As of December 31, 2016, the Company received $39,509 from the lessor. The leasehold improvement allowance is amortized over the remaining amended non-cancellable lease term and reduced rent expense by $8,627 for the year ended December 31, 2016 and $1,250 for the three months ended December 31, 2015. The future minimum lease payments to be paid under the amended non-cancellable lease agreement are $104,090, $106,189, $108,304 and $82,446 for the years 2017 through 2020, respectively.
This 10,000 square feet lease was renewed for five years to be effective from June 1, 2016 through May 31, 2021, with an option for an additional five years from June 1, 2021 through May 31, 2026. Beginning June 1, 2021, the lessee can terminate the lease with a 120 day written notice. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance with partial reimbursement from the lessee. The lease agreement calls for a monthly lease payment of $16,598 from June 1, 2016 through June 30, 2016 quantified as follows: $12,275 for base rent and $4,323 for reimbursement of operating cost. Starting July 1, 2016, the lease agreement includes an $88,833 tenant improvement allowance that is amortized over 59 months with interest at 5.00%. The monthly lease payment is $18,299 from July 1, 2016 through May 31, 2021 quantified as follows: $12,275 for base rent, $4,323 for reimbursement of operating costs and $1,701 for tenant improvements. If the lease continues after the first five years, the lease agreement calls for monthly payments of $17,850 quantified as follows: $13,527 for base rent and $4,323 for reimbursement of operating costs.
The statutory net income for TLIC amounted to $1,927,154 and $2,191,094 for the years ended December 31, 2016 and 2015, respectively. The statutory capital and surplus of TLIC was $11,129,493 and $10,771,192 as of December 31, 2016 and 2015, respectively. The statutory net income for FBLIC amounted to $6,645 and $548,318 for the years ended December 31, 2016 and 2015, respectively. The statutory capital and surplus of FBLIC was $9,141,799 and $10,308,963 as of December 31, 2016 and 2015, respectively.
These segments as of and for the years ended December 31, 2016 and 2015 are summarized as follows:
Credit risk is limited by diversifying the Company’s investments. The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures accounts up to $250,000. Uninsured balances aggregate $22,117,921 as of December 31, 2016. Other funds are invested in mutual funds that invest in U.S. government securities. The Company monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. The Company has not experienced any losses in such accounts. The Company’s lottery prize receivables due from various states and the geographical distribution of the Company’s mortgage loans by state are summarized in Note 2.
The main difference between the original Petition and the amended Petition is that the amended Petition also seeks equitable relief based on two new theories: that the Decreasing Term to 95 policies should be reformed so that they will provide a level death benefit for a level premium payment until the policyholder reaches 95 years of age; and alternatively, Count VIII of the amended Petition asks the Court to (1) find that the dividend provisions in the Decreasing Term to 95 policies violate Missouri law, specifically, § 376.360 RSMo.; (2) order that the policies are void ab initio; and (3) order that FBLIC return all premiums collected under these policies. In addition, as part of the MMPA claim, plaintiffs are now alleging that FBLIC undertook a fraudulent scheme to sell the Decreasing Term to 95 policies as a level premium for level benefit even though FBLIC never intended to pay dividends for the life of the policies and that part of this alleged fraudulent scheme included having a dividend option which is not allowed under Missouri law. FBLIC denies the allegations in the amended Petition and will continue to defend against them.
As stated above, FBLIC filed a Counterclaim and TLIC filed the Federal Lawsuit against Doyle Nimmo. Doyle Nimmo submitted a claim and tendered the defense of these claims to Utica Mutual Insurance Company under a policy providing Insurance Agents and Brokers Errors and Omissions Liability coverage. On November 4, 2015, Utica Mutual Insurance Company filed a lawsuit against Doyle Nimmo and other interested parties, including FBLIC and TLIC. The lawsuit is pending in the District Court for the Western District of Missouri and asks the Court to determine whether the Errors and Omissions policy provides coverage for the lawsuits filed against Doyle Nimmo. Utica Mutual Insurance Company does not seek a monetary judgment against FBLIC or TLIC. All parties to the lawsuit pending in the Circuit Court of Greene County, Missouri agreed to waive their right to a trial by jury and have all claims submitted to the Judge for decision. The trial in that case is scheduled to begin on November 27, 2017.
Guaranty fund 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. In most states, guaranty fund assessments may be taken as a credit against premium taxes, typically over a five-year period.
In 2015, the Company repurchased 9,425 shares of its common stock at a cost of $38,643 from the former Chairman of the Board of Directors. These items are included as treasury stock transactions in the consolidated statements of financial position and in the consolidated statements of changes in shareholders’ equity.
In April 2015, the Company loaned $400,000 to the former Chairman of the Board of Directors replacing a previous $203,750 loan through a cash disbursement of $186,250 and $10,000 representing interest from the previous $200,000 loan. This loan was renewed in April 2016. The 2016 and 2015 loans both have terms of one year and contractual interest rates of 5.00%. The loans are collateralized by 100,000 shares of the Company’s Class A common stock owned by the former Chairman. This loan is included in other assets in the consolidated statements of financial position.
15. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
The pretax components of the Company’s other comprehensive income (loss) and the related income tax expense (benefit) for each component for the years ended December 31, 2016 and 2015 are summarized as follows:
The pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income (loss) to the Company’s consolidated statement of operations for the years ended December 31, 2016 and 2015 are summarized as follows: