First Trinity Financial Corporation (“we”, “us”, “our”, or the “Company”) was incorporated on April 19, 2004 as Southwest Security Financial Corporation; the name was changed to First Trinity Financial Corporation on February 5, 2005, for the purpose of forming, owning, acquiring and managing life insurance and premium finance companies. During 2004 we raised $1,450,000 from two private placements of common stock. In June 2005 we registered an intrastate public stock offering in Oklahoma and completed the offering in February 2007, raising $14,025,000. We are a holding company that has three subsidiaries: FTCC which is a premium finance company and TLIC and FLAC are life insurance companies. We have capitalized TLIC with $2,700,000, and we commenced the sale of life insurance in March 2007. We have capitalized FTCC with a total of $4,000,000. FLAC has statutory capital and surplus of approximately $2,700,000.
The Company pursues business in both the life insurance and premium financing industries. TLIC markets its life insurance and annuity product to individuals and families through an agency force and the product is administered by a third party administrator, Investors Heritage Life Insurance Company (“IHLIC”). The Company also reinsures part of the risk on insurance policies written through a reinsurance agreement with IHLIC. Premium financing is marketed to property and casualty insurance agents. These agents finance loans to pay property and casualty insurance premiums for individuals and businesses with the Company’s premium financing subsidiary. The Company was a development stage company until commencing operations in 2007. Significant net losses have been incurred since inception. At December 31, 2008, the Company had an accumulated deficit of $2,590,516. The Company continues to incur losses, however the losses have resulted primarily from cost incurred while raising capital and establishing the subsidiary companies as well as losses resulting from writing new life insurance business.
The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance business. Pursuant to the terms of a stock purchase agreement, on December 23, 2008, the Company acquired 100% of the outstanding common stock of First Life America Corporation from an unaffiliated company. The FLAC acquisition was accounted for as a purchase. Results of operations are not included in the consolidated financial statements. The Company acquired FLAC to expand its insurance operations in additional states and FLAC had insurance policies in force similar to the product that TLIC is currently selling. FLAC is a life insurance and annuity company headquartered in Topeka, Kansas, offering life insurance and annuity products to the citizens of Kansas, Illinois, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas.
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We continually evaluate our estimates and assumptions, including those related to loans from premium financing, investments, deferred acquisition costs, property and equipment, value of insurance business acquired, policy liabilities and income taxes. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies, judgments and estimates are the most critical to the preparation of our consolidated financial statements.
Fixed maturities are comprised of bonds that are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable deferred taxes, reported in accumulated other comprehensive income or (loss). The amortized cost of fixed maturities is adjusted for amortization of premium and accretion of discount to maturity. Interest income, as well as the related amortization of premium and accretion of discount is included in net investment income under the effective yield method. The amortized cost of fixed maturities is written down to fair value when a decline in value is considered to be other-than-temporary.
Equity securities are comprised of common stock and are carried at fair value. The associated unrealized gains and losses, net of applicable deferred taxes are included in accumulated other comprehensive income (loss) The cost of equity securities 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.
A loan is considered impaired when, based on current information and events, it is probable that the Company 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 management 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. Management determines 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.
Deferred acquisition costs related to annuities are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies. To the extent that realized gains and losses on fixed income securities result in adjustments to deferred acquisition costs related to annuities, such adjustments are reflected as a component of the amortization of deferred acquisition costs.
Property and equipment, including the home office building of FLAC that was acquired in the acquisition of FLAC, are carried at cost. Depreciation on the office building is calculated over its estimated useful life. Office furniture and equipment is recorded at cost or fair value at acquisition less accumulated depreciation using the 200% declining balance method over the estimated useful life of the respective assets. The estimated useful life for the building is 39 years and furniture and equipment is 3 to 7 years.
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” 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 SFAS No. 131. Our business segments are as follows:
Please see Note 14 to the Consolidated Financial Statements for additional information regarding segment data.
Total consolidated revenues were $2,241,408 for the year ended December 31, 2008, an increase of $605,452, or 37%, from $1,635,956 for the year ended December 31, 2007. This increase is primarily attributable to life insurance premium income and interest income from financing casualty insurance premiums.
Revenues from life insurance premiums were $1,572,599 and $972,547 for the years ended December 31, 2008 and 2007, respectively. All insurance sales were made in the state of Oklahoma. Premium increase is due to writing new business.
Net investment income for 2008 was $116,845, a decrease of $270,351 from 2007 results. This decrease is primarily due to a decrease in short term investment rates and using cash to fund premium finance loans.
Third party administration fees were $169,341 for the year ended December 31, 2008, an increase of $44,107 compared to the year ended December 31, 2007. The increase was due to an escalation clause in the fees in the administration service agreement and for providing additional services.
Other underwriting, insurance and acquisition expenses were $713,949 for the year ended December 31, 2008, an increase of $56,711, compared to the year ended December 31, 2007. The increase is due to an expansion of the business.
Income tax expense for 2008 was ($832). Federal income taxes are calculated based on the earnings of TLIC. Certain items included in income reported for financial statements are not included in taxable income for the current year, resulting in deferred income taxes. Deferred income taxes totaled ($832) and taxes currently payable were $0. In 2007 total income tax expense was $832.
During 2008 net loss decreased $6,555 compared to 2007 results and loss per share remained flat at $.09 loss per share, while equity per share decreased 4% to $1.94 compared to $2.03 per share at December 31, 2007. The decrease in the net loss was primarily attributable to the commencement of operations of the life insurance and premium finance company.
At December 31, 2008, the Company’s available-for-sale equity securities had a fair value of $213,752 to a fair value of $0 at December 31, 2007. This portfolio is reported at fair value with unrealized gains and losses, net of applicable deferred taxes, reflected as a separate component in shareholders’ equity. The equity securities portfolio is invested in a variety of companies.
Shown below is a progression of the Company’s loans from premium financing for the years ended December 31, 2008 and 2007, respectively.
The Company has maintained significant cash and short-term balances, principally to have funds available to capitalize its subsidiaries and for acquisitions.
Deferred policy acquisition costs increased $438,619 and $459,515 during 2008 and 2007, respectively, net of amortization of $114,673 and $133,122 during 2008 and 2007, respectively. Policy acquisition expenses related to new insurance sales were capitalized in the amount of $553,292 and $592,637 during 2008 and 2007, respectively.
Total policy liabilities as of December 31, 2008 and 2007 were $31,256,906 and $621,906, respectively. Approximately 99.7% of the 2008 total consists of future policy benefit reserves and policyholder deposits on pending policy application liabilities represent less than 1% of the total.
For insurance regulatory and rating purposes, TLIC and FLAC report on the basis of statutory accounting principles (“SAP”). To provide a more detailed understanding of FTFC insurance operations, the following are SAP basis assets, statutory capital and surplus, and net income for TLIC and FLAC for the years ended December 31, 2008 and 2007:
Statutory capital and surplus, specifically the component called surplus, is used to fund the expansion of an insurance company’s first-year individual life and accident and health sales. The first-year commission and underwriting expenses on such sales will normally consume a very high percentage of, if not exceed, first-year premiums. Accordingly, a statutory loss may occur on these sales the first year of the policy.
Since inception, our operations have been financed primarily through the private placement of equity securities and an intrastate public stock offering. Through December 31, 2008, we received $15,475,000 from the sale of our shares. Our operations have not been profitable and have generated significant operating losses since we were incorporated in 2004.
During 2008, the Company had cash flow from operations of $109,083 compared to negative cash flow of $(327,429) in 2007. The increase in cash flow can be attributed primarily to life insurance premiums received.
The Company is subject to various market risks. However, the most significant such risks relate to fluctuations in interest rates. Regarding interest rates, the value of the Company’s fixed-maturity investment portfolio will increase or decrease in an inverse relationship with fluctuations in interest rates, while net investment income earned on newly-acquired fixed-maturities increases or decreases in direct relationship with interest rate changes. From an income perspective, the Company is exposed to rising interest rates which could be a significant risk, as TLIC’s and FLAC’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, the Company’s fixed rate policy liabilities are relatively insensitive to interest rate fluctuations. Accordingly, the Company believes gradual increases in interest rates do not present a significant liquidity exposure for the life insurance policies. The Company maintains conservative durations in its fixed-maturity portfolio. At December 31, 2008 cash and fixed-maturity investments with maturities of less than one year equaled eighteen percent 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.
We have audited the accompanying consolidated balance sheets of First Trinity Financial Corporation and Subsidiaries (the Company) as of December 31, 2008 and 2007, 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.
FLAC is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in eight states primarily in the Midwest. FLAC’s current product portfolio consists of 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 products are sold through independent agents in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas. FLAC was purchased December 23, 2008 and had statutory capital and surplus of $2,700,455. Operating results of FLAC are not included in these financial statements.
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.
Realized gains and losses on sales of investments are recognized in operations on the specific identification basis. Interest and dividends earned on investments is included in net investment income.
Deferred acquisition costs related to annuities are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains and (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 (Loss)” in the shareholders’ equity section of the balance sheet.
Loans from premium financing are carried at their outstanding unpaid principal balances, net of unearned interest, charge-offs and an allowance for loan losses. Interest on loans is earned based on the interest method for computing unearned interest. The rule of 78’s is used to calculated the amount of the interest charge to be forgiven in the event that a loan is repaid prior to the agreed upon number of monthly payments. When serious doubt concerning collectability arises, loans are placed on a nonaccrual basis, generally if no payment is received after ninety days all accrued and uncollected interest income is reversed against current period operations. Interest income on nonaccrual loans is recognized only when the loan is paid in full. Loan origination fees and costs are charged to expense as incurred.
Other assets consist primarily of prepaid expenses and federal and state income tax recoverables. Other liabilities consist primarily of accrued expenses and payables resulting from purchases of securities that had not yet been settled at the balance sheet date.
The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date. This liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance.
Certain costs directly related to the sale of the Company’s securities were capitalized against the proceeds from the sales. These costs include legal fees, accounting, recruiting and training expenses, commissions, printing, and other expenses related to the offering.
Revenues on traditional life insurance products consist of direct premiums reported as earned when due. Liabilities for future policy benefits are provided and acquisition costs are amortized by associating benefits and expenses with earned premiums to recognize related profits over the life of the contracts. Acquisition costs are amortized over the premium paying period using the net level premium method. Traditional life insurance products are treated as long duration contracts since they are ordinary whole life insurance products, which generally remain in force for the lifetime of the insured.
Net loss per common share is calculated using the weighted average number of common shares outstanding during the year. Shares sold during the public stock offering were treated as outstanding and used in the computation of earnings per share, although certificates for the shares were not issued until after the offering was complete in February 2007. There were no contingencies after October 2005 that prevented the shares from being issued. All shares sold during the periods are considered to be outstanding for one half of the month in which they were sold. The weighted average outstanding common shares for the years ended December 31, 2008 and 2007 were 5,805,000 and 5,778,568, respectively.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. It applies to other pronouncements that require or permit fair value but does not require any new fair value measurements. The statement defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” SFAS No. 157 establishes a fair value hierarchy to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets. The highest possible level should be used to measure fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company). In February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157,” which provides a one-year deferral of the application of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted SFAS No. 157 and FAS 157-2 effective January 1, 2008. The adoption of these standards did not have a material effect on the Company’s results of operations, financial position or liquidity.
In October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and amends SFAS No. 157 by adding an illustrative example of key considerations used in determining the fair value of a financial asset when the market for that financial asset is not active. FAS 157-3 was effective upon issuance and did not have a material impact on our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits an entity to irrevocably elect fair value on a contract-by-contract basis as the initial and subsequent measurement attribute for many financial assets and liabilities and certain other items. Entities electing the fair value option would be required to recognize changes in fair value in earnings and to expense up-front costs and fees associated with the item for which the fair value option is elected. Entities electing the fair value option are required to distinguish on the face of the balance sheet the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. An entity can accomplish this by either reporting the fair value and non-fair value carrying amounts as separate line items or aggregating those amounts and disclosing parenthetically the amount of fair value included in the aggregate amount.
In January 2009, the FASB issued FASB Staff Position EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20.” EITF 99-20-1 affects all entities with certain beneficial interests in securitized financial assets within the scope of EITF Issue No. 99-20. In determining other-than-temporary-impairment, Issue 99-20 requires reliance on market participant assumptions about future cash flows. While SFAS No. 115 uses these same assumptions, it permits the use of reasonable management judgment on the probability that the holder will be unable to collect all amounts due. EITF 99-20-1 brings the impairment model on beneficial interest held by a transferor in securitized financial assets to be similar to the impairment model of SFAS No. 115. EITF 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008. The adoption of this standard did not have a material impact on our financial position or results of operations.
The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value in light of all the factors considered. Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. For any securities that are other-than-temporarily impaired, the security is adjusted to fair value and the resulting losses are recognized in realized gains/losses in the consolidated statements of operations.
There were no securities in an unrealized loss position at December 31, 2008 and 2007.
Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Net investment income arose from the following sources for the years ended December 31:
The mortgage loans are geographically concentrated in the states of Colorado (98.50%) and Arizona (1.50%) at December 31, 2008.
There were no loans in default and there was no allowance for losses at December 31, 2008.
FLAC has a $100,000 line of credit from a bank. The line of credit expires on December 31, 2009, and interest is accrued on the outstanding principal balance at Bank of America’s Prime Rate. The line of credit was obtained solely to secure the issuance of standby letters of credit. The standby letters of credit are used to guarantee reserve credits taken by Optimum Re Insurance Company (“Optimum Re”). At December 31, 2008, FLAC has a $65,000 letter of credit secured by the line of credit agreement. The Company has pledged a certificate of deposit with a market value of $65,000 as collateral for the letter of credit. As of December 31, 2008, the Company has not borrowed against this line of credit and does not anticipate utilizing the line of credit.
At December 31, 2008, FLAC had fixed maturities that have a fair value of $2,097,622 and TLIC had cash in the amount of $325,000 that is on deposit with governmental authorities or trustees as required by certain insurance laws.
Unearned interest was $124,950 and $63,830 at December 31, 2008 and 2007, respectively. Allowances for loan losses were $21,305 and $3,500 at December 31, 2008 and 2007, respectively.
FLAC 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. The remaining land is classified as real estate held for investment. FLAC occupies approximately 7,500 square feet of the building and the remaining 12,500 square feet is leased.
A summary of property and equipment at December 31, 2008 and 2007 is as follows:
FLAC and TLIC participate in reinsurance in order to provide risk diversification, additional capacity for future growth and limit the maximum net loss potential arising from large risk. TLIC reinsures all amounts of risk on any one life in excess of $55,000 for individual life insurance with Investors Heritage Life Insurance Company and Munich American Reassurance Company. All amounts of risk in excess of TLIC’s retention on individual life insurance are ceded to its reinsurers. At December 31, 2008 and 2007, TLIC ceded $23,576,690 and $11,990,854, respectively of insurance inforce and received reserve credit of $3,899 and $4,759. During 2008 and 2007, TLIC paid $8,379 and $1,357, respectively, of reinsurance premiums.
FLAC participates in reinsurance with Optimum Re and Wilton Reassurance Company (“Wilton Re”) to reinsure portions of the life insurance risks it underwrites. Pursuant to the terms of the agreements, FLAC retains a maximum coverage exposure of $50,000 on any one insured. At December 31, 2008, FLAC ceded inforce amounts totaling $20,716,162 of ordinary business and $23,171,000 of accidental death benefit risk.
FTFC has net operating loss carry forwards of approximately $2,460,000, expiring in 2019 through 2023, TLIC has net operating loss carry forwards of approximately $291,000, expiring in 2021 through 2023 and FLAC has net operating loss carry forwards of $1,219,940, expiring in 2017 through 2023 and capital loss carry forwards of $63,727, expiring in 2011 and 2013 that may be available to offset future taxable income. The use of FLAC losses are restricted by the tax laws and some or all of the losses may not be available for use.
The Company leases approximately 2,517 square feet of office space pursuant to a three-year lease that began July 1, 2008 and leased approximately 200 square feet on a month to month basis during 2008. Under the terms of the leases, the monthly rent expense for the 2,517 square feet is $3,041 through June 30, 2009, $3,146 from July 1, 2009 through June 30, 2010 and $3,251 from July 1, 2010 through June 30, 2011 and the month to month lease is $300 per month. The Company incurred rent expense of $31,562 and $17,244 for the years 2008 and 2007, respectively. Future minimum lease payments are $37,126, $38,384 and $19,507 for the years 2009, 2010 and 2011, respectively.
FLAC occupies approximately 7,500 square feet of its building in Topeka, Kansas. FLAC has leased 10,000 square feet under a lease that was renewed during 2006 to run through June 30, 2011 with a 90 day notice to terminate the lease by the lessee. The lease agreement calls for minimum monthly base lease payments of $15,757.
The future minimum lease payments to be received under non cancelable lease agreements are approximately $53,258 and $35,505 for the years 2009 and 2010, respectively.
Credit risk is limited by diversifying the investments. The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures accounts up to $250,000 at each banking institution. Other funds are invested in mutual funds that invest in U.S. government securities. Uninsured balances aggregate $474,236 at December 31, 2008. The Company has not experienced any losses in such accounts. The Company has lottery prize receivables due from the State of Massachusetts in the amount of $2,604,914.
The Company holds fixed maturities and equity securities that are measured and reported at fair market value on the balance sheet. The Company determines the fair market values of its financial instruments based on the fair value hierarchy established in SFAS No. 157 that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value, 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. Level 2 assets and liabilities include debt 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 and corporate debt securities.
In accordance with SFAS No. 157, 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 following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 2008.
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 from the Citigroup pension discount curve.
The insurance subsidiaries are domiciled in Oklahoma and Kansas and prepare their statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Oklahoma and Kansas Departments of Insurance. Prescribed statutory accounting practices include publications of the NAIC, state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Statutory accounting practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions and valuing investments, deferred taxes, and certain assets on a different basis.
The statutory net loss for TLIC amounted to $(238,936) and $(184,953) for the years ended December 31, 2008 and 2007, respectively, and the statutory net loss for FLAC amounted to $(1,057,821) for the year ended December 31, 2008 and a net gain of $34,623 for the year ended December 31, 2007. The statutory surplus of TLIC was $2,242,226 and $2,290,252 at December 31, 2008 and 2007, respectively, and statutory surplus of FLAC was $2,700,455 and $3,801,256 at December 31, 2008 and 2007, respectively.
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, requires a “management approach” (how management internally evaluates the operating performance of its business units) in the presentation of business segments. The segment data that follows has been prepared in accordance with SFAS No. 131.
SFAS No. 130, “Reporting Comprehensive Income”, requires the inclusion of unrealized gains or losses on available-for-sale securities in other comprehensive income (loss). The components of comprehensive loss, net of related federal income taxes, are as follows:
The aggregate purchase price for the FLAC acquisition was approximately $2,695,000 (including direct cost associated with the acquisition of approximately $195,000). The FLAC acquisition was financed with the working capital of FTFC. On December 31, 2008, FTFC made FLAC a 15 year loan in the form of a surplus note in the amount of $250,000 with an interest rate of 6% with interest payable monthly. In the event of liquidation, and in all other situations, the claims under the surplus note are subordinated to policyholder, claimant and beneficiary claims as well as debts owed to all other classes of creditors, other than surplus note holders, and that all repayment of principal and payment of interest are not payable and shall not be paid until approved by the Kansas Insurance Commissioner.
The following unaudited pro forma information has been prepared to present the results of operations of the Company assuming the acquisition of First Life America Corporation had occurred at the beginning of the years ended December 31, 2008 and 2007. This pro forma information is supplemental and does not necessarily present the operations of the Company that would have occurred had the acquisitions occurred on those dates and may not reflect the operations that will occur in the future:
On March 16, 2009, FLAC received notification from the Ohio Department of Insurance that it was in violation of Ohio Administrative Code 3901-3-04 (C)(1)(f) as its operating loss in the last twelve-month period or any shorter period of time, is greater than 50% of its remaining surplus as regards to policyholders in excess of the minimum required.