The Company leases 6,769 square feet of office space pursuant to an original five-year lease that began October 1, 2010 and was amended on October 1, 2015 for another five-year term. Under the terms of the original home office lease, the monthly rent was $7,897 from October 1, 2010 through September 30, 2015. Under the terms of the amended home office lease, the monthly rent is $8,461 from October 1, 2015 through September 30, 2016 with increases of 2% each twelve month period from October 1, 2016 through September 30, 2020. The Company incurred rent expense (including charges for the lessor’s building operating expenses above those specified in the lease agreement less monthly amortization of the leasehold improvement allowance received from the lessor) of $67,961 and $69,886 for the years ended December 31, 2015 and 2014, respectively, under this lease.
TLIC has also leased 10,000 square feet in the Topeka, Kansas office building under a lease that was renewed during 2006 to run through June 30, 2011 with a 90 day notice to terminate the lease by the lessee. This lease was renewed on June 1, 2011 to run through May 31, 2016. Beginning June 1, 2014, the lessee can terminate the lease with a 180 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 minimum monthly base lease payments of $17,750.
This 10,000 square feet lease was renewed on December 21, 2015 to be effective from June 1, 2016 through May 31, 2021 with the lessee’s 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 includes a $100,044 tenant improvement allowance that is amortized over the first five years of the renewed lease including interest at 5.00%. The lease agreement calls for monthly lease payments of $18,486 quantified as follows: $12,275 for base rent, $4,323 for reimbursement of operating costs and $1,888 for tenant improvements. If the lease continues after the first five years, the monthly lease payments are $17,850 quantified as follows: $13,527 for base rent and $4,323 for reimbursement of operating costs.
In addition, simultaneously with these sales, TLIC settled its two notes payable, collateralized by the held-for-sale buildings and land (including assignment of the tenant leases), with an aggregate payment to Grand Bank (the creditor) of $4,076,473. TLIC’s $3,009,265 promissory note was collateralized (including assignment of the tenant leases) by three properties, located in Indiana, Oklahoma and Texas, purchased for $4,940,647 in December 2013 and February 2014.
In December 2013, TLIC purchased one acre of land in Greensburg, Indiana that included a 3,975 square foot building constructed on approximately 8% of this land at a cost of $2,444,203 (including closing costs of $50,516). The building was leased through October 31, 2027 plus four future five year extensions effective on November 1, 2027, November 1, 2032, November 1, 2037 and November 1, 2042. The terms of the lease had the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were as follows: $14,661 in 2014; $14,881 in 2015; $15,104 in 2016; $15,331 in 2017; $15,561 in 2018 and $15,794 in 2019.
FBLIC owns approximately one-half acre of undeveloped land located in Jefferson City, Missouri with a carrying value of $135,892.
With the acquisition of FBLIC in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico. FBLIC also had initial licenses in Kansas, Nebraska and Oklahoma where TLIC was also licensed. In late 2012, FBLIC was licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia. In 2013, FBLIC was licensed in Illinois and Pennsylvania. In 2014, FBLIC was licensed in Georgia, Louisiana, Michigan, Mississippi, North Carolina, Ohio, Tennessee and Virginia. In 2015, FBLIC was licensed in Alabama and Utah.
The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance and annuity business. In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of First Life America Corporation for $2,500,000 and had additional acquisition related expenses of approximately $195,000.
We carry mortgage loans on real estate at unpaid balances, net of unamortized premium or discounts. Interest income and the amortization of premiums or discounts are included in net investment income. Mortgage loan fees, certain direct loan origination costs and purchase premiums and discounts on loans are recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. In certain circumstances, prepayments may be anticipated. We have established a valuation allowance for mortgage loans on real estate that are not supported by funds held in escrow. This allowance for possible loan losses from investments in mortgage loans on real estate is a reserve established through a provision for possible loan losses charged to expense which represents, in our judgment, the known and inherent credit losses existing in the residential and commercial mortgage loan portfolio. This allowance, in our judgment, is necessary to reserve for estimated loan losses inherent in the residential and commercial mortgage loan portfolio and reduces the carrying value of investments in mortgage loans on real estate to the estimated net realizable value on the consolidated statement of financial position.
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.
In May 2014, the FASB issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing services will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services.
If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is 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), along with the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations and management's plans that are intended to mitigate those conditions. The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter.
The updated guidance is effective for annual and interim periods beginning after December 15, 2015. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Please see below and Note 13 to the Consolidated Financial Statements for the years ended December 31, 2015 and 2014 and as of December 31, 2015 and 2014 for additional information regarding segment information.
Consolidated Condensed Results of Operations for the Years Ended December 31, 2015 and 2014
Consolidated Condensed Financial Position as of December 31, 2015 and 2014
Our revenues for the years ended December 31, 2015 and 2014 are summarized as follows:
Our premiums for the years ended December 31, 2015 and 2014 are summarized as follows:
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 the past few years.
The decline in gross investment income from real estate is due to the March 11, 2015 sale by TLIC of 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. 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.
The $193,253 increase in investment expenses for the year ended December 31, 2015 is primarily related to fees and expenses associated with the increased investments in mortgage loans, the expenses incurred during the second half of 2015 in engaging an investment advisor and expenses incurred with the sale of investment real estate on March 11, 2015. The investment real estate sale included expensing the remaining loan origination fees, interest on the note payable and closing costs.
The net realized investment losses from the sales of equity securities available-for-sale of $1,902 for the year ended December 31, 2015 resulted from proceeds of $533,817 for these securities that had carrying values of $535,719 at the 2015 disposal dates.
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.
The $2,660,538 increase in benefits and claims for the year ended December 31, 2015 is primarily due to the following:
$1,242,111 increase in interest credited to policyholders is primarily due to an approximate $57.1 million increase in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits and interest credited in excess of withdrawals) during 2015.
$889,551 increase in future policy benefits primarily related to the existing policies in force aging one additional year combined with an increase in the number of policies in force.
For the years ended December 31, 2015 and 2014, capitalized costs were $5,204,940 and $2,351,163, respectively. Amortization of deferred policy acquisition costs for the years ended December 31, 2015 and 2014 were $1,563,625 and $1,212,426, respectively.
Our commissions for the years ended December 31, 2015 and 2014 are summarized as follows:
The $2,478,084 increase in commissions for the year ended December 31, 2015 is primarily due to:
$1,627,079 increase in final expense first year commissions that correspond to the $1,342,804 increase in final expense first year premiums.
The $898,112 increase in other underwriting, insurance and acquisition expenses for the year ended December 31, 2015 was primarily related to increased acquisition and maintenance costs associated with increased final expense and annuity production, increased third party administration fees primarily related to the increased number of policies in force, increased services and the conversion of the assumption reinsurance to the existing legacy system, increased legal fees associated with the two cases being contested, increased salaries and benefits due to increased staffing levels and the asset growth bonus paid to our Chairman, President and Chief Executive Officer related to the Company exceeding $250 million in U.S. GAAP assets during 2015.
Net income was $2,382,708 ($0.31 per common share basic and diluted) and $1,925,511 ($0.25 per common share basic and diluted) for the years ended December 31, 2015 and 2014, 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, 2015 and 2014 were 7,804,566 and 7,831,108, respectively.
The revenues and income before federal income taxes from our business segments for the years ended December 31, 2015 and 2014 are summarized as follows:
The $1,772,873 increase in revenues from Life Insurance Operations for the year ended December 31, 2015 is primarily due to the following:
The $2,274,249 increase in revenues from Annuity Operations for the year ended December 31, 2015 is due to the following:
The $329,628 increased profitability from Annuity Operations for the year ended December 31, 2015 is due to the following:
The $24,651 decrease in revenues from Corporate Operations for the year ended December 31, 2015 is primarily due to $16,957 of decreased realized gains, $7,210 of decreased other income and $484 of decreased net investment income.
The $159,923 decrease in Corporate Operations profitability for the year ended December 31, 2015 is primarily due to $135,272 of increased operating expenses, $16,957 of decreased realized gains, $7,210 of decreased other income and $484 of decreased net investment income.
Our invested assets as of December 31, 2015 and 2014 are summarized as follows:
The $20,125,185 increase in mortgage loans for the year ended December 31, 2015 is primarily due to the purchase of mortgage loans of $29,780,501, discount accretion of $167,772, realized gains on the early pay off of loans purchased at a discount of $112,537 and capitalization of loan origination fees of $90,000 in excess of principal payments of $9,882,604, amortization of loan origination fees of $62,402, charges to the allowance for bad debts of $56,882 and an impairment of a mortgage loan in foreclosure of $23,737.
The $6,838,532 decrease in investment real estate is primarily due to our March 11, 2015 sale of 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 both December 31, 2014 and March 11, 2015. 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 remaining $145,488 difference is the depreciation of the Topeka building that is held for the production of income.
The decrease in property, plant and equipment is due to 2015 depreciation.
The $307,023 increase in other assets is primarily due to a $652,531 increase in receivables from mortgage loans and other long-term assets (lottery receivables) and a $196,250 increase in the renewal of the note receivable from its former Chairman in excess of decreased recoverable federal and state income taxes of $491,941, decreased prepaid expenses of $30,206 and a decrease in guaranty funds of $16,211.
Our liabilities as of December 30, 2015 and 2014 are summarized as follows:
The building was leased through October 31, 2028 plus three future five year extensions on November 1, 2028, November 1, 2033 and November 1, 2038. The terms of the lease had the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were $9,463 through October 31, 2028.
The $2,165,543 decrease in deferred federal income taxes during the year ended December 31, 2015 was due to $830,704 of operating deferred tax benefits and $1,334,839 of increased deferred federal income benefits on the unrealized depreciation of available-for-sale fixed maturity and equity securities. The $830,704 deferred tax benefit is primarily due to a reduction in the valuation allowances on deferred tax assets as it is probable that a portion of the net operating loss carryforwards on the consolidated federal income tax returns of FTFC and FTCC will be utilized due to projected taxable income in future years demonstrated by the taxable income generated in 2015.
Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through December 31, 2015, we have received $27,119,480 from the sale of our shares.
The historic impact of these two stock dividend charges of $5,270,138 decreased during 2011 and 2012 the balance of accumulated earnings and resulted in a reported balance as of December 31, 2015 of $4,999,707, as shown in the accumulated earnings caption in the December 31, 2015 consolidated statement of financial position.
As of December 31, 2015, we had cash and cash equivalents totaling $9,047,586. As of December 31, 2015, cash and cash equivalents of $4,094,054 and $2,970,846, respectively, of the total $9,047,586 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 MDOI 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.
Our cash flows for the years ended December 31, 2015 and 2014 are summarized as follows:
The $874,761 increase in cash provided by operating activities during the year ended December 31, 2015 is primarily due to increases in net investment income of $2,737,695, premiums of $1,727,743, short-term investments of $1,682,543, taxes of $318,631 and policy loans of $72,071 that exceeded increase in commissions of $2,712,499, other underwriting, insurance and acquisition expenses of $2,567,264 and benefits of $408,811.
The $19,625,906 decrease in cash used for investing activities during the year ended December 31, 2015 was primarily related to $13,383,839 of increased 2015 purchases of fixed maturity securities, $10,255,086 of increased purchases of other long-term investments (lottery receivables), $5,662,910 of decreased 2015 sales and maturity of fixed maturity securities, $2,875,276 of increased 2015 purchases of mortgage loans and $652,459 increased purchases of equity securities that exceeded $7,047,246 of increased proceeds from the 2015 sale of investment real estate held for sale, $2,817,857 of decreased purchases of real estate held for sale, $2,214,761 of increased 2015 payments of mortgage loans, $743,487 of increased payments of long-term investments and $328,737 of increased 2015 sales of equity securities.
The $18,090,397 increase in cash provided by financing activities for the year ended December 31, 2015 resulted from $28,507,213 of increased 2015 policyholder account deposits in excess of increased withdrawals of $2,386,800 and $122,930 of 2015 decreased purchases of treasury shares and $8,152,946 less funds available in 2015 due to both the settlement of and issuance of note payable proceeds of $4,076,473 in 2015 and 2014.
The decrease in shareholders’ equity of $2,995,295 for the year ended December 31, 2015 is due to $5,339,360 of other comprehensive loss and $38,643 for the purchase of 9,425 shares of treasury stock from the former chairman of FTFC that exceeded net income of $2,382,708.
Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy. We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds.
We believe gradual increases in interest rates do not present a significant liquidity exposure for the life insurance policies and annuity contracts. We maintain conservative durations in our fixed maturity portfolio. As of December 31, 2015, cash and cash equivalents, short-term investments, 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 8.4% 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.
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. We believe that our existing cash and cash equivalents as of December 31, 2015 will be sufficient to fund our anticipated operating expenses.
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
We have audited the accompanying consolidated statements of financial position of First Trinity Financial Corporation and Subsidiaries (the Company) as of December 31, 2015 and 2014, 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, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
In conjunction with this 2015 reinsurance assumption transaction, the cash and non-cash impact on operating, investing and financing activities is summarized as follows:
First Trinity Financial Corporation (the “Company”) is the parent holding company of Trinity Life Insurance Company (“TLIC”), Family Benefit Life Insurance Company (“FBLIC”) and First Trinity Capital Corporation (“FTCC”). The Company was incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a life insurance subsidiary.
The Company owns 100% of FTCC that was incorporated in 2006, and began operations in January 2007. FTCC provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC currently has no operations other than minor premium refunds and collections of past due accounts and accounts involved in litigation.
The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital. As a result, the Company’s accumulated earnings as of December 31, 2015, as shown in the consolidated statement of financial position was negatively impacted in 2011 ($2,428,328) and 2012 ($2,841,810) and all periods thereafter by the $5,270,138 charge from the two stock dividends.
On December 23, 2008, FTFC acquired 100% of the outstanding common stock of First Life America Corporation (“FLAC”) from an unaffiliated company. The acquisition of FLAC was accounted for as a purchase. The aggregate purchase price for FLAC was approximately $2,695,000 (including direct cost associated with the acquisition of approximately $195,000). The acquisition of FLAC was financed with the working capital of FTFC.
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 TLIC.
Fixed maturity securities 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 income taxes, reported in accumulated other comprehensive income. The amortized cost of fixed maturity securities available-for-sale is adjusted for amortization of premium and accretion of discount to maturity.
If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, the Company amortizes the reduced book value back to the security's expected recovery value over the remaining term of the bond. The Company continues to review the security for further impairment that would prompt another write-down in the value.
Other liabilities consist primarily of accrued expenses, accounts payable, deposits on pending policy applications, 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, 2015 and 2014 were 7,804,566 and 7,831,108 respectively.
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. As such, the performance target that affects vesting should not be reflected in estimating that fair value of the award at the grant date. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest.
If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is 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), along with the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations and management's plans that are intended to mitigate those conditions.
In January 2016, the FASB issued updated guidance regarding financial instruments. This guidance intends to enhance reporting for financial instruments and addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The significant amendments in this update generally require equity investments to be measured at fair value with changes in fair value recognized in net income, require the use of an exit price notion when measuring the fair value of financial instruments for disclosure purposes and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. This guidance also intends to enhance the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. 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).
As of December 31, 2015, the fair value of the Company’s available-for-sale equity securities is $892,800 reflecting a cost of $790,215, gross unrealized gains of $123,231 and gross unrealized losses of $20,646. The gross unrealized loss of $20,646 as of December 31, 2015 consists of three available-for-sale equity securities that have a fair value of $225,630 and a cost of $246,276. As of December 31, 2015, the Company has a deferred tax related to available-for-sale securities of $663,953 for which the Company has analyzed and determined that there is no need for a valuation allowance. 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.
Investments in fixed maturity and equity securities available-for-sale as of December 31, 2015 and 2014 are summarized as follows:
As of December 31, 2015, the Company has three available-for-sale equity securities with an unrealized loss of $20,646, fair value of $225,630 and cost of $246,276. The ratio of fair value to cost of these securities is 92%.
As of December 31, 2014, the Company held one available-for-sale equity security with an unrealized loss of $1,700, fair value of $48,300 and cost of $50,000. The ratio of fair value to cost of this security is 97%.
Based on management’s review, the Company experienced one other-than-temporary impairment during the year ended December 31, 2015. There were no impairments during the year ended December 31, 2014. Except for one other-than-temporary impairment recorded during 2015, management believes that the Company will fully recover its cost basis in the securities held as of December 31, 2015, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The remaining temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.
Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity and equity securities available-for-sale, mortgage loans on real estate and investment real estate for the years ended December 31, 2015 and 2014 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, 2015 and 2014 and the amount of realized investment gains (losses) on fixed maturity and equity securities available-for-sale, mortgage loans on real estate and investment real estate for the years ended December 31, 2015 and 2014 are summarized as follows:
The Company’s mortgage loans by property type as of December 31, 2015 and 2014 are summarized as follows:
The Company utilizes the ratio of the carrying value of individual residential and commercial mortgage loans compared to the individual appraisal value to evaluate the credit quality of its mortgage loans on real estate (commonly referred to as the loan-to-value ratio). The Company’s residential and commercial mortgage loans on real estate by credit quality using this ratio as of December 31, 2015 and 2014 are summarized as follows:
There were five loans with a remaining principal balance of $531,026 that were more than 90 days past due as of December 31, 2015. There were six loans with a remaining principal balance of $431,072 that were more than 90 days past due as of December 31, 2014.
The principal balances of the 650 residential mortgage loans owned by the Company as of December 31, 2015 that aggregated to $57,310,263 ranged from a low of $6,251 to a high of $876,540 and the interest rates ranged from 5.00% to 18.34%. The principal balances of the five commercial mortgage loans owned by the Company as of December 31, 2015 that aggregated to $1,464,655 ranged from a low of $122,449 to a high of $469,265 and the interest rates ranged from 5.75% to 8.25%.
The principal balances of the 471 residential mortgage loans owned by the Company as of December 31, 2014 that aggregated to $36,687,140 ranged from a low of $2,760 to a high of $669,982 and the interest rates ranged from 5.71% to 16.07%. The principal balances of the eight commercial mortgage loans owned by the Company as of December 31, 2014 that aggregated to $1,962,593 ranged from a low of $8,048 to a high of $483,558 and the interest rates ranged from 5.75% to 8.25%.
The Company’s investment in lottery prize cash flows was $31,566,927 and $21,781,925 as of December 31, 2015 and 2014, 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 amortized cost and estimated fair value of lottery prize cash flows, by contractual maturity, as of December 31, 2015 are summarized as follows:
The outstanding balance of lottery prize cash flows, by state lottery, as of December 31, 2015 and 2014 are summarized as follows:
Major categories of net investment income for the years ended December 31, 2015 and 2014 are 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 commences operations.
The change in the fair value of the Company’s Level 3 equity securities available-for-sale for the year ended December 31, 2015 and 2014 is summarized as follows:
The fair values for mortgage loans are estimated using discounted cash flow analyses. For residential mortgage loans, the discount rate used was indexed to the LIBOR yield curve adjusted for an appropriate credit spread. For commercial mortgage loans, the discount rate used was assumed to be the interest rate on the last commercial mortgage acquired by the Company.
As of December 31, 2014, $540,049 of independent mortgage loan balances are held in escrow by a third party for the benefit of the Company related to its investment in $12,892,150 of mortgage loans on real estate with one loan originator. In addition, the Company had an additional $126,466 allowance for possible loan losses in the remaining $25,757,583 of investments in mortgage loans on real estate as of December 31, 2014.
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, 2015 and 2014 are summarized as follows (excluding $21,755,620 and $12,892,150 of mortgage loans on real estate as of December 31, 2015 and 2014, 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, 2015 and 2014 are summarized as follows:
FTFC files a consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC or FBLIC. TLIC and FBLIC are taxed as life insurance companies under the provisions of the Internal Revenue Code. Life insurance companies must file separate tax returns until they have been a member of the consolidated filing group for five years. However, in 2015 and 2014, TLIC and FBLIC filed combined life insurance company 2014 and 2013 federal tax returns and intend to also file a combined life insurance company 2015 federal tax return for TLIC and FBLIC in 2016.
The components of total income tax benefit for the years ended December 31, 2015 and 2014 are 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, 2015 and 2014 are summarized as follows:
FTFC has net operating loss carryforwards of $5,610,801 expiring in 2024 through 2033. FTFC has capital loss carryforwards of approximately $42,500 expiring in 2018. During 2015, FTFC utilized $62,403 of the net operating loss carryforward existing as of January 1, 2015 to offset 2015 federal taxable income. During 2014, FTFC utilized $317,222 of the net operating loss carryforward existing as of January 1, 2014 to offset 2014 federal taxable income.
Due to FTFC’s taxable income generated in 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 $2,000,000 during 2015 and $1,695,996 during 2014 since it is probable that a portion of the net operating loss carryforwards will be utilized.
On December 24, 2009, TLIC entered into a five year lease of approximately 7,500 square feet of its building in Topeka, Kansas with an option for the lessee to renew the lease for five additional years. On September 28, 2014, TLIC entered into a two year lease effective January 1, 2015 with the same lessee for the same office space. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments are as follows: $9,130 in 2012, $9,371 in 2013 and 2014 and $8,696 for 2015 and 2016.
TLIC has also leased 10,000 square feet in the Topeka, Kansas office building under a lease that was renewed during 2006 to run through June 30, 2011 with a 90 day notice to terminate the lease by the lessee. This lease was renewed on June 1, 2011 to run through May 31, 2016. Beginning June, 2014, the lessee can terminate the lease with a 180 day written notice. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance. The lease agreement calls for minimum monthly base lease payments of $17,750.
This 10,000 square feet lease was renewed on December 21, 2015 to be effective from June 1, 2016 through May 31, 2021 with the lessee’s 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 includes a $100,044 tenant improvement allowance that is amortized over the first five years of the renewed lease including interest at 5.00%. The lease agreement calls for monthly lease payments of $18,486 quantified as follows: $12,275 for base rent, $4,323 for reimbursement of operating costs and $1,888 for tenant improvements. If the lease continues after the first five years, the monthly lease payments are $17,850 quantified as follows: $13,527 for base rent and $4,323 for reimbursement of operating costs.
Effective August 29, 2005, TLIC executed a lease agreement for 2,500 square feet of the Topeka, Kansas office building. The base lease period commenced on September 1, 2005 and ended on August 31, 2010. The lease automatically renewed on September 1, 2010, for another five years with a 90 day notice by the lessee to terminate the lease. This lease was renewed on September 1, 2015 to run through August 31, 2017 with an option for an additional three years through August 31, 2020.
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 as of both December 31, 2014 and March 11, 2015. 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, collateralized by the held-for-sale buildings and land (including assignment of the tenant leases), with an aggregate payment to Grand Bank (the creditor) of $4,076,473. TLIC’s $3,009,265 promissory note was collateralized (including assignment of the tenant leases) by three properties, located in Indiana, Oklahoma and Texas, purchased for $4,940,647 in December 2013 and February 2014.
In February 2014, TLIC purchased one acre of land in Houston, Texas that included a 9,195 square foot building constructed on approximately 25% of this land at a cost of $977,013 (including closing costs of $31,063). The building was leased through December 31, 2023 plus four future five year extensions effective on January 1, 2024, January 1, 2029, January 1, 2034 and January 1, 2039. The terms of the lease had the lessee responsible for paying real estate taxes and building insurance. TLIC was responsible for building and ground maintenance. The monthly lease payments were $5,833 through December 31, 2019.
TLIC’s $1,067,208 promissory note was collateralized (including assignment of the tenant leases) by the February 2014 TLIC purchase of three-fourths of an acre of land in Harrisonville, Missouri that included a 6,895 square foot building constructed on approximately 20% of this land at a cost of $1,752,397 (including closing costs of $44,864). The building was leased through October 31, 2028 plus three future five year extensions on November 1, 2028, November 1, 2033 and November 1, 2038. The terms of the lease had the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were $9,463 through October 31, 2028.
The Company has a life insurance segment, consisting of the life insurance operations of TLIC and FBLIC, an annuity segment, consisting of the annuity operations of TLIC and FBLIC and a corporate segment. Results for the parent company and the operations of FTCC, after elimination of intercompany amounts, are allocated to the corporate segment.
The Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, filed an action in the District Court of Tulsa County, Oklahoma in 2013, Case No. CJ-2013-03385, against former Company Board of Directors member, Wayne Pettigrew and Mr. Pettigrew’s company, Group & Pension Planners, Inc. (the “Defendants”). The petition filed in the case alleges that Mr. Pettigrew, during and after the time he was a member of the Company’s Board of Directors, made defamatory statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company. The defendants are alleged to have made defamatory statements to certain shareholders of the Company, to the press and to the Oklahoma Insurance Department and the Oklahoma Department of Securities. Mr. Pettigrew has denied the allegations.
The Board of Directors, represented by independent counsel, concluded that there was no action to be taken against Mr. Zahn and that the allegations by Mr. Pettigrew were without substance. The Company has been informed by the Oklahoma Insurance Department that it would take no action and also informed that the Oklahoma Department of Securities, after its investigation of the allegations, concluded that no proceedings were needed with respect to the alleged matters.
On June 18, 2015, plaintiffs filed an amended petition. Like the original Petition, the amended Petition asserts claims for breach of contract and anticipatory breach of contract, and alleges that FBLIC breached, and will anticipatorily breach, the Decreasing Term to 95 policies of insurance by not providing a dividend sufficient to purchase a one year term life insurance policy which would keep the death benefit under the Decreasing Term to 95 policies the same as that provided during the first year of coverage under the policy. It also asserts claims for negligent misrepresentation, fraud, and violation of the Missouri Merchandising Practices Act (“MMPA”). It alleges that during its sale of the Decreasing Term to 95 policies, FBLIC represented that the owners of these policies would always be entitled to dividends to purchase a one-year term life insurance policy and that the owners would have a level death benefit without an increase in premium.
FBLIC denies the allegations in the amended Petition and will continue to defend against them.
On February 1, 2016, the plaintiffs asked that the Court certify the case as a class action. With their motion, Plaintiffs filed an affidavit from an actuary stating the opinion that FBLIC has collected at least $2,548,939 in premiums on the Decreasing Term to 95 policies. This presumably is the amount that Plaintiffs will seek to be refunded to policyholders if the policies are declared void. FBLIC intends to oppose the request for class certification, as well as to defend vigorously against the individual allegations. The Company is unable to determine the potential magnitude of the claims in the event of a final certification and the plaintiffs prevailing on this substantive action.
17. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
The changes in the components of the Company’s accumulated other comprehensive income (loss) for the years ended December 31, 2015 and 2014 are summarized as follows:
17. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss) (continued)