EDGAR 10-K Filing

Company CIK: 1395585
Filing Year: 2022
Filename: 1395585_10-K_2022_0001437749-22-005845.json

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ITEM 1. BUSINESS
Item 1. Business
Business Development
First Trinity Financial Corporation (the “Company” or “FTFC”) is the parent holding company of Trinity Life Insurance Company (“TLIC”), Family Benefit Life Insurance Company (“FBLIC”), Trinity Mortgage Corporation (“TMC”), formerly known as First Trinity Capital Corporation and Trinity American, Inc. (“TAI”). 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 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 products and annuity contracts 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 policies and annuity contracts. 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 Alabama, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, Texas, Utah and West Virginia. FBLIC is licensed in the states of Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia.
The Company owns 100% of TMC that was incorporated in 2006, and began operations in January 2007. TMC’s primary focus changed during 2020 from premium financing loans to originating, brokering and administrating residential and commercial mortgage loans for third parties.
The Company owns 100% of TAI (formerly known as Citizens American Life, Inc.). TAI was incorporated in Barbados, West Indies on March 24, 2016 for the primary purpose of forming a life insurance company producing United States (U.S.) dollar denominated life insurance policies and annuity contracts outside of the United States and Barbados. TAI is licensed as an Exempt Insurance Company under the Exempt Insurance Act of Barbados. TAI was initially involved in developing life insurance and annuity contracts through an association with distribution channels but is now issuing life insurance policies and annuity contracts. The Company’s acquisition of TAI was formally approved by Barbados regulators and the certifications were received in 2019.
Company Capitalization
Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through December 31, 2021, 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.
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.
In 2020, the Company paid a $0.05 per share cash dividend for a total of $393,178 and issued 791,339 shares of Class A common stock in connection with a 10% stock dividend to its Class A shareholders. The 10% stock dividend resulted in accumulated earnings being charged $8,657,249 with an offsetting credit of $8,657,249 to Class A common stock and additional paid-in capital.
During 2012, 2013, 2014 and 2015, the Company repurchased 247,580 shares of its common stock at a total cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’s current Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.
Company Recapitalization
On October 2, 2019, at the Company Annual Shareholders’ Meeting, FTFC’s shareholders approved the following proposals:
1.
An amendment and restatement of FTFC’s Certificate of Incorporation to authorize 40,000,000 shares of Class A common stock and 10,000,000 shares of Class B common stock and to establish the relative rights, preferences and privileges of, and the restrictions and limitations on, the Class A common stock and the Class B common stock.
2.
An amendment and restatement of FTFC’s Certificate of Incorporation to automatically reclassify each issued and outstanding share of our existing common stock as one (1) share of Class A common stock or, at the shareholder’s election, into one (1) share of new Class B common stock.
These proposals received Form A regulatory approval from the Oklahoma Insurance Department (“OID”) on February 27, 2020 and the Missouri Department of Commerce and Insurance (“MDCI”) on December 31, 2019, followed by formal adoption by FTFC’s Board of Directors on March 12, 2020. Effective March 12, 2020, FTFC’s Class B shareholders were entitled to elect a majority of FTFC’s Board of Directors (one-half plus one) but will only receive, compared to FTFC’s Class A shareholders, 85% of cash dividends, stock dividends or amounts due upon any FTFC merger, sale or liquidation event. FTFC’s Class B shareholders may also convert one share of FTFC’s Class B common stock for a .85 share of FTFC’s Class A common stock. FTFC’s Class A shareholders will elect the remaining Board of Directors members and will receive 100% of cash dividends, stock dividends or amounts due upon any Company merger, sale or liquidation event.
Acquisitions
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 $2,695,234 including direct cost associated with the acquisition of $195,234. The acquisition of FLAC 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% payable monthly, that was approved by OID. This surplus note is eliminated in consolidation.
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.
On December 28, 2011, TLIC acquired 100% of the outstanding common stock of FBLIC from FBLIC’s shareholders. The acquisition of FBLIC was accounted for as a purchase. The aggregate purchase price for the acquisition of FBLIC was $13,855,129. The acquisition of FBLIC was financed with the working capital of TLIC.
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.
On April 3, 2018, FTFC acquired 100% of the outstanding stock of TAI domiciled in Barbados, West Indies. The Barbados regulators approved the acquisition and supplied certifications during 2019. The aggregate purchase price for the acquisition of TAI was $250,000. The acquisition of TAI was financed with the working capital of FTFC.
Effective January 1, 2020, the Company acquired 100% of the outstanding common stock of K-TENN Insurance Company (“K-TENN”) from its sole shareholder in exchange for 168,866 shares of FTFC’s common stock. The acquisition of K-TENN was accounted for as a purchase. The aggregate purchase price of K-TENN was $1,746,240. Immediately subsequent to this acquisition, the $1,746,240 of net assets and liabilities of K-TENN along with the related life insurance business operations were contributed to TLIC.
On January 4, 2022, FTFC acquired Royalty Capital Life Insurance Company (“RCLIC”) from Royalty Capital Corporation (“Royalty”) in exchange for 722,644 shares of FTFC’s Class A common stock issued to unrelated parties. Royalty was dissolved immediately after FTFC acquired RCLIC and FTFC’s 722,644 shares of Class A common stock were distributed to the former Royalty shareholders during February 2022. On March 1, 2022, the MDCI approved FTFC’s contribution of RCLIC to FBLIC to be accounted for as a statutory merger in 2022. RCLIC was dissolved immediately after and RCLIC was merged into FBLIC.
Financial Information about Segments
The Financial Accounting Standards Board (“FASB”) guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units. The discussion of segment operating results that follows is being provided based on segment data prepared in accordance with this methodology.
Our business segments are as follows:
●
Life insurance operations, consisting of the life insurance operations of TLIC, FBLIC and TAI;
●
Annuity operations, consisting of the annuity operations of TLIC, FBLIC and TAI and
●
Corporate operations, which includes the results of the parent company and TMC after the elimination of intercompany amounts.
Please see below and Note 11 to the consolidated financial statements as of and for the years ended December 31, 2021 and 2020 for additional information regarding segment information.
Life Insurance and Annuity Operations
Our Life Insurance and Annuity Operations consists of issuing ordinary whole life insurance, endowments, modified premium whole life with an annuity rider, term, final expense and accidental death and dismemberment policies and annuity contracts. The policies 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. Our products are marketed through independent agents.
TLIC renewed its administrative services agreement with Investors Heritage Life Insurance Company (“IHLIC”) on September 1, 2017. Under the terms of this agreement, the services provided by IHLIC include underwriting, actuarial, policy issue, accounting, claims processing and other services incidental to the operations of TLIC. The agreement is effective for a period of five (5) years from September 1, 2017 through August 31, 2022 and includes a provision that the agreement may be terminated at any time by either party with a 180 day prior notice.
FBLIC renewed its administrative services agreement with IHLIC on November 1, 2017. Under the terms of this agreement, the services provided by IHLIC include underwriting, actuarial, policy issue, accounting, claims processing and other services incidental to the operations of FBLIC. The agreement is effective for a period of five (5) years from November 1, 2017 through October 31, 2022 and includes a provision that the agreement may be terminated at any time by either party with a 180 day prior notice.
TLIC continues to seek to serve middle income households and markets its products through independent agents. TLIC was originally licensed in Oklahoma and with the acquisition of FLAC in late 2008, expanded into Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio and Texas. 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. In 2018, FBLIC and TLIC were licensed in Montana. In 2019, TLIC was licensed in Tennessee. In 2020, TLIC was licensed in Alabama, Indiana, Louisiana, Mississippi, New Mexico, South Dakota and Utah. In 2021, TLIC was licensed in Georgia and West Virginia.
The following tables sets forth our direct collected life insurance premiums and annuity considerations by the policyholder’s state of residence at the time of premium collection and annuity consideration, for the most significant states in which we are licensed, for the years ended December 31, 2021 and 2020, in accordance with statutory accounting practices prescribed by the states of domicile of TLIC and FBLIC.
Year Ended December 31, 2021
Life
Annuity
State
Premiums
Percentage
Considerations
Percentage
Alabama
$ 843,151
2.92 %
$
0.00 %
Arizona
341,758
1.18 %
319,896
1.18 %
Arkansas
489,330
1.70 %
2,515
0.01 %
Colorado
919,815
3.19 %
308,654
1.14 %
Georgia
1,497,321
5.19 %
44,001
0.16 %
Illinois
1,903,424
6.59 %
48,465
0.18 %
Indiana
1,234,029
4.28 %
3,199
0.01 %
Kansas
1,954,708
6.77 %
831,673
3.08 %
Kentucky
932,317
3.23 %
-
0.00 %
Louisiana
833,068
2.89 %
-
0.00 %
Michigan
590,588
2.05 %
7,000
0.03 %
Missouri
1,371,098
4.75 %
70,458
0.26 %
Nebraska
245,945
0.85 %
363,880
1.35 %
North Carolina
2,804,312
9.72 %
11,300
0.04 %
North Dakota
77,487
0.27 %
6,381,134
23.61 %
Ohio
3,511,329
12.17 %
97,575
0.36 %
Oklahoma
1,130,185
3.92 %
1,081,878
4.00 %
Pennsylvania
1,154,791
4.00 %
742,343
2.75 %
Tennessee
936,309
3.24 %
2,400
0.01 %
Texas
4,475,015
15.49 %
15,951,287
59.04 %
Virginia
668,056
2.31 %
-
0.00 %
All other states
950,105
3.29 %
754,929
2.79 %
Total direct collected premiums and considerations
$ 28,864,141
100.00 %
$ 27,022,637
100.00 %
Year Ended December 31, 2020
Life
Annuity
State
Premiums
Percentage
Considerations
Percentage
Alabama
$ 709,574
2.73 %
$
0.00 %
Arizona
231,326
0.89 %
33,130
0.14 %
Arkansas
376,093
1.45 %
94,587
0.40 %
Colorado
855,451
3.29 %
150,654
0.64 %
Georgia
1,276,106
4.91 %
11,000
0.05 %
Illinois
1,781,789
6.86 %
50,300
0.21 %
Indiana
1,058,190
4.07 %
1,599
0.01 %
Kansas
2,082,420
8.02 %
1,059,771
4.48 %
Kentucky
832,856
3.21 %
-
0.00 %
Louisiana
754,293
2.90 %
-
0.00 %
Michigan
538,741
2.07 %
7,000
0.03 %
Missouri
1,120,081
4.31 %
160,008
0.68 %
Nebraska
207,078
0.80 %
260,872
1.10 %
North Carolina
2,508,090
9.66 %
11,300
0.05 %
North Dakota
83,400
0.32 %
6,688,722
28.29 %
Ohio
3,312,411
12.75 %
23,573
0.10 %
Oklahoma
1,141,303
4.39 %
492,433
2.08 %
Pennsylvania
1,052,264
4.05 %
406,053
1.72 %
Tennessee
773,158
2.98 %
2,000
0.01 %
Texas
4,066,596
15.68 %
13,799,662
58.34 %
Virginia
500,729
1.93 %
-
0.00 %
All other states
709,505
2.73 %
394,314
1.67 %
Total direct collected premiums and considerations
$ 25,971,454
100.00 %
$ 23,647,578
100.00 %
Reinsurance
TLIC cedes reinsurance under various agreements allowing management to control exposure to potential losses arising from large risks and providing additional capacity for growth and risk diversification. TLIC reinsures all amounts of risk on any one life in excess of $100,000 for individual life insurance with IHLIC, Optimum Re Insurance Company (“Optimum Re”), RGA Reinsurance Company and Wilton Reassurance Company (“Wilton Re”).
The Company also assumes reinsurance under various agreements allowing management to increase growth in assets and profitability. TLIC is a party to an Automatic Retrocession Pool Agreement (the “Reinsurance Pool”) with Optimum Re, Catholic Order of Foresters, American Home Life Insurance Company and Woodmen of the World. The agreement provides for automatic retrocession of coverage in excess of Optimum Re’s retention on business ceded to Optimum Re by the other parties to the Reinsurance Pool. TLIC’s maximum exposure on any one insured under the Reinsurance Pool is $100,000. As of January 1, 2008, the Reinsurance Pool stopped accepting new cessions.
Effective September 29, 2005, FLAC and Wilton Re executed a binding letter of intent whereby both parties agreed that FLAC would cede the simplified issue version of its Golden Eagle Whole Life (Final Expense) product to Wilton Re on a 50/50 quota share original term coinsurance basis. The letter of intent was executed on a retroactive basis to cover all applicable business issued by FLAC subsequent to January 1, 2005. Wilton Re agreed to provide various commission and expense allowances to FLAC in exchange for FLAC ceding 50% of the applicable premiums to Wilton Re as they were collected. As of June 24, 2006, Wilton Re terminated the reinsurance agreement for new business issued after the termination date.
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 amounts of risk. FBLIC reinsures initial amounts of risk on any one life in excess of $100,000 for individual life insurance with Optimum Re. TLIC and FBLIC also reinsure its accidental death benefit portion of their life policies under a bulk agreement with Optimum Re. To the extent that the reinsurance companies are unable to meet their obligations under the reinsurance agreements, TLIC and FBLIC remain primarily liable for the entire amount at risk.
Coinsurance
Effective January 1, 2018, TLIC entered into an annuity coinsurance agreement with an offshore annuity and life insurance company whereby 90% of TLIC’s annuity considerations originated after December 31, 2017 were ceded to the assuming company. The assuming company contractually reimburses TLIC for the related commissions, withdrawals, settlements, interest credited, submission costs, maintenance costs, marketing costs, excise taxes and other costs plus a placement fee. Effective April 1, 2020, the Company and an offshore annuity and life insurance company mutually agreed that the Quota Share under its existing reinsurance agreement shall be 0% for future business instead of the original contractual amount of 90%.
In accordance with this annuity coinsurance agreement, TLIC holds assets and recognizes a funds withheld liability for the benefit of the assuming company in an amount at least equal to the annuity reserves, in accordance with U.S. statutory accounting principles, generated by this ceded business. In addition, the assuming company maintains a trust related to this ceded business amounting to at least an additional 4% of assets above the annuity reserve required under U.S. statutory accounting principles. This coinsurance agreement may be terminated for new business by either party at any time upon 30 days prior written notice to the other party.
In 2019, TLIC entered into a life insurance coinsurance agreement with TAI, effective October 1, 2018, whereby 100% of TAI’s life insurance policies and annuity contracts issued after September 30, 2018 were ceded to TLIC. TLIC contractually reimburses TAI for the related commissions, submission costs, maintenance costs, marketing costs and other costs related to the production of life insurance policies and annuity contracts.
Competition
The U.S. life insurance industry is a mature industry that has experienced little to no growth. Competition is intense because the life insurance industry is consolidating, with larger, more efficient and more effective organizations emerging from consolidation. In addition, legislation became effective in the United States that permits commercial banks, insurance companies and investment banks to combine. These factors have increased competitive pressures in general.
Many domestic life insurance companies have significantly greater financial, marketing and other resources, longer business histories and more diversified lines of insurance products than we do. We also face competition from companies marketing in person as well as with direct mail and internet sales campaigns. Although we may be at a competitive disadvantage to these entities, we believe that our premium rates, policy features, marketing approaches and policyholder services are generally competitive with those of other life insurance companies selling similar types of products and provide us with niche marketing opportunities not actively pursued by other life insurance companies.
Governmental Regulation
TLIC and FBLIC, respectively, are subject to regulation and supervision by the OID and the MDCI. The insurance laws of Oklahoma and Missouri give the OID and MDCI broad regulatory authority, including powers to: (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus and (x) regulate the type and amount of permitted investments. TLIC and FBLIC can be required, under the solvency or guaranty laws of most states in which they do business, to pay assessments (up to prescribed limits) to fund policyholder losses or liabilities of other insurance companies that become insolvent. These assessments may be deferred or foregone under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes.
TLIC is subject to Oklahoma laws and FBLIC is subject to Missouri laws that limit the amount of dividends insurance companies can pay to stockholders without approval of the respective Departments of Insurance. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the 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. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is capacity for TLIC to pay a dividend up to $1,430,596 in 2022 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $1,495,631 in 2022 without prior approval. FBLIC paid no dividends to TLIC in 2021 and 2020. These dividends would be eliminated in consolidation. TLIC has paid no dividends to FTFC.
There are certain factors particular to the life insurance business which may have an adverse effect on the statutory operating results of TLIC and FBLIC. One such factor is that the costs associated with issuing a new policy in force is usually greater than the first year’s policy premium. Accordingly, in the early years of a new life insurance company, these initial costs and the required provisions for reserves often have an adverse effect on statutory operating results.
Employees
As of March 8, 2022, the Company had fifteen full-time employees and two part-time employees.

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ITEM 1A. RISK FACTORS

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ITEM 1B. UNRESOLVED STAFF COMMENTS

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ITEM 2. PROPERTIES
Item 2. Properties
On November 16, 2020, TLIC sold a 20,000 square feet office building and approximately three acres of land located in Topeka, Kansas with an aggregate carrying value of $1,078,037. The Company recorded a gross realized investment gain on sale of $240,374 based on an aggregate sales price of $1,318,411. The lease agreements discussed below were conveyed to the purchaser of the office building and land on November 16, 2020.
Prior to November 16, 2020, TLIC executed a 10,000 square feet lease agreement for five years effective 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. 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 payments are $18,508 from June 1, 2018 through May 31, 2019, $18,584 from June 1, 2019 through May 31, 2020 and $18,578 from June 1, 2020 through November 16, 2020.
Prior to November 16, 2020, TLIC renewed a lease agreement on 2,500 square feet of the Topeka, Kansas office building on September 1, 2015 to run through August 31, 2017 with an option for an additional three years through August 31, 2020. TLIC renewed the lease agreement effective September 1, 2020. This lease will run from September 1, 2020 to August 31, 2028 with an option for an additional 2 years through August 31, 2030. Beginning September 1, 2028, the lessee can terminate the lease with a 90-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 renewal lease agreement includes a $34,507 tenant improvement allowance that beginning September 1, 2020 is amortized over 96 months with interest at 5.00%. The lease payments are $4,293 from September 1, 2018 through August 31, 2019, $4,310 from September 1, 2019 through August 31, 2020 and $4,433 from September 1, 2020 through November 16, 2020.
TLIC owns approximately three acres of undeveloped land located in Topeka, Kansas with a carrying value of $409,436. FBLIC owns approximately one-half acre of undeveloped land located in Jefferson City, Missouri with a carrying value of $131,000.
During 2021, the Company foreclosed on residential mortgage loans of real estate totaling $458,587 and transferred those properties to investment real estate held for sale. During 2021, the Company sold investment real estate property with an aggregate carrying value of $528,178. The Company recorded a gross realized investment gain on sale of $289,840 based on an aggregate sales price of $818,018.
During 2020, the Company foreclosed on residential mortgage loans of real estate totaling $797,158 and transferred those properties to investment real estate held for sale. During 2020, the Company sold investment real estate property with an aggregate carrying value of $791,704. The Company recorded a gross realized investment gain on sale of $106,665 based on an aggregate sales price of $898,369.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
A lawsuit filed by the Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, in 2013 against former Company Board of Directors member Wayne Pettigrew and Mr. Pettigrew's company, Group & Pension Planners, Inc. (the "Defendants"), originally concluded on February 17, 2017. The lawsuit was filed in the District Court of Tulsa County, Oklahoma. In the lawsuit, the Company alleged that Mr. Pettigrew had defamed the Company by making untrue statements to certain shareholders of the Company, to the press and to regulators of the state of Oklahoma and had breached his fiduciary duties. Mr. Pettigrew denied the allegations.
The jury originally concluded that Mr. Pettigrew, while still a member of the Company’s Board of Directors, did, in fact, make untrue statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company and the jury awarded the Company $800,000 of damages against Mr. Pettigrew. In addition, the jury found that Mr. Pettigrew had defamed Mr. Zahn and intentionally inflicted emotional distress on Mr. Zahn and awarded Mr. Zahn $3,500,000 of damages against Mr. Pettigrew. In addition to the original damages awarded by the jury, the Company and Mr. Zahn began to aggressively communicate the correction of the untrue statements to outside parties.
Mr. Pettigrew appealed this decision. In February 2020, the Court of Civil Appeals of the state of Oklahoma reversed the judgments entered by the trial court and remanded the case for a new trial. The Court of Appeals reversal, however, was not final. The Company filed a Petition for Certiorari with the Oklahoma Supreme Court to request that it reverse and vacate the decision of the Court of Appeals. In December 2020, the Oklahoma Supreme Court declined to grant certiorari and remanded that the case be retried in the District Court of Tulsa County, Oklahoma.
It remains the Company’s intention to again vigorously prosecute this action against the Defendants for damages and for correction of the defamatory statements. In the opinion of the Company’s management, the ultimate resolution of any contingencies that may arise from this litigation is not considered material in relation to the financial position or results of operations of the Company.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
None
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
(a)
Market Information
Trading of the Company’s common stock is limited and an established public market does not exist.
(b)
Holders
As of March 8, 2022, there were approximately 7,800 shareholders of the Company’s outstanding common stock.
On October 2, 2019, at the Company Annual Shareholders’ Meeting, FTFC’s shareholders approved the following proposals:
●
An amendment and restatement of FTFC’s Certificate of Incorporation to authorize 40,000,000 shares of Class A common stock and 10,000,000 shares of Class B common stock and to establish the relative rights, preferences and privileges of, and the restrictions and limitations on, the Class A common stock and the Class B common stock.
●
An amendment and restatement of FTFC’s Certificate of Incorporation to automatically reclassify each issued and outstanding share of our existing common stock as one (1) share of Class A common stock or, at the shareholder’s election, into one (1) share of new Class B common stock.
These proposals received Form A regulatory approval from the OID on February 27, 2020 and the MDCI on December 31, 2019, followed by formal adoption by FTFC’s Board of Directors on March 12, 2020. Effective March 12, 2020, FTFC’s Class B shareholders were entitled to elect a majority of FTFC’s Board of Directors (one-half plus one) but will only receive, compared to FTFC’s Class A shareholders, 85% of cash dividends, stock dividends or amounts due upon any FTFC merger, sale or liquidation event. FTFC’s Class B shareholders may also convert one share of FTFC’s Class B common stock for a .85 share of FTFC’s Class A common stock. FTFC’s Class A shareholders will elect the remaining Board of Directors members and will receive 100% of cash dividends, stock dividends or amounts due upon any Company merger, sale or liquidation event.
(c)
Dividends
Prior to 2020, we had never declared or paid cash dividends on our common stock. In 2020, our Board of Directors declared and paid cash dividends on our Class A common stock.
The timing, declaration and payment of future dividends to holders of our common stock fall within the discretion of our Board of Directors and will depend on our operating results, earnings, financial condition, the capital requirements of our business and other factors.
For additional information about cash dividends declared and paid in 2020, refer to “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Item 7) and Note 1 “Organization and Significant Accounting Policies” in the Notes to Consolidated Financial Statements of this Annual Report.
Although a cash dividend of $393,178 was paid to our shareholders in 2020, the Board of Directors of the Company has not adopted a dividend payment policy; however, dividends must necessarily depend upon the Company's earnings and financial condition, applicable legal restrictions, and other factors relevant at the time the Board of Directors considers the declaration of a cash dividend. Cash available for dividends to shareholders of the Company must initially come from income and capital gains earned on its investment portfolio and dividends paid by the Company’s subsidiaries.
Provisions of the Oklahoma Insurance Code relating to insurance holding companies subject transactions between the Company and TLIC and the Company and FBLIC, including dividend payments, to certain standards generally intended to prevent such transactions from adversely affecting the adequacy of life insurance subsidiaries' capital and surplus available to support policyholder obligations. In addition, under the Oklahoma General Corporation Act, the Company may not pay dividends if, after giving effect to a dividend, it would not be able to pay its debts as they become due in the usual course of business or if its total liabilities would exceed its total assets.
On January 10, 2011, the Company’s Board of Directors approved a 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold. The dividend was payable to the holders of shares of the Corporation as of March 10, 2011. Fractional shares were rounded to the nearest whole number of shares. The Company issued 323,777 shares in connection with the stock dividend.
On January 11, 2012, the Company’s Board of Directors approved another 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold. The dividend was payable to the holders of shares of the Corporation as of March 10, 2012. Fractional shares were rounded to the nearest whole number of shares. The Company issued 378,908 shares in connection with the stock dividend.
On November 12, 2020, the Company’s Board of Directors approved a 10% share dividend by which shareholders received a share of Class A common stock for each 10 shares of Class A common stock of the Company they hold. The dividend was payable to the holders of shares of the Corporation as of November 12, 2020. Fractional shares were rounded up to the nearest whole number of shares. The Company issued 791,339 shares in connection with the stock dividend.
(d)
Securities Authorized for Issuance Under Equity Compensation Plans
There are no plans under which equity securities are authorized for issuance.
(e)
Performance Graph - Not Required
(f)
Purchases of Equity Securities by Issuer
During 2012, 2013, 2014 and 2015, the Company repurchased 247,580 shares of its common stock at a total cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’s current Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
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.
As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core TLIC and FBLIC operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense, term and annuity products to predominately middle income households in the states of Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia through independent agents.
We also realize revenues from our investment portfolio, which is a key component of our operations. The revenues we collect as premiums from policyholders are invested to ensure future benefit payments under the policy contracts. Life insurance companies earn profits on the investment spread, which reflects the investment income earned on the premiums paid to the insurer between the time of receipt and the time benefits are paid out under policies. Changes in interest rates, changes in economic conditions and volatility in the capital markets can all impact the amount of earnings that we realize from our investment portfolio.
Our profitability in the life insurance and annuity segments is a function of our ability to accurately price the policies that we write, adequately value life insurance business acquired, administer life insurance company acquisitions at an expense level that validates the acquisition cost and invest the premiums and annuity considerations in assets that earn investment income with a positive spread.
Acquisitions
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 FLAC for $2,500,000 and had additional acquisition related expenses of $195,234.
In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of FBLIC for $13,855,129.
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 and assumed liabilities of $3,055,916.
In 2019, FTFC’s acquisition of TAI for $250,000 was approved by the Barbados, West Indies regulators.
Effective January 1, 2020, the Company acquired 100% of the outstanding common stock of K-TENN Insurance Company (“K-TENN”) from its sole shareholder in exchange for 168,866 shares of FTFC’s common stock. The aggregate purchase price of K-TENN was $1,746,240.
On January 4, 2022, FTFC acquired Royalty Capital Life Insurance Company (“RCLIC”) from Royalty Capital Corporation (“Royalty”) in exchange for 722,644 shares of FTFC’s Class A common stock issued to unrelated parties. Royalty was dissolved immediately after FTFC acquired RCLIC and FTFC’s 722,644 shares of Class A common stock were distributed to the former Royalty shareholders during February 2022. On March 1, 2022, the Missouri Department of Commerce and Insurance (“MDCI”) approved FTFC’s contribution of RCLIC to FBLIC to be accounted for as a statutory merger in 2022. RCLIC was dissolved immediately after and RCLIC was merged into FBLIC.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition, results of operations and liquidity and capital resources is based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We evaluate our estimates and assumptions continually, including those related to investments, deferred acquisition costs, value of insurance business acquired and policy liabilities. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies, judgments and estimates are the most critical to the preparation of our consolidated financial statements.
Investments in Fixed Maturity Securities
We hold fixed maturity interests in a variety of companies. We continuously evaluate all of our fixed maturity investments based on current economic conditions, credit loss experience and other developments. We evaluate the difference between the amortized cost and estimated fair value of our fixed maturity investments to determine whether any decline in fair value is other-than-temporary in nature. This determination involves a degree of uncertainty. If a decline in the fair value of a fixed maturity security is determined to be temporary, the decline is recognized in other comprehensive income (loss) within shareholders’ equity. If a decline in a security’s fair value is considered to be other-than-temporary, we then determine the proper treatment for the other-than-temporary impairment.
For fixed maturity securities, 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. 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.
The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security. It is not possible to accurately predict when it may be determined that a specific security will become impaired. Future adverse changes in market conditions, poor operating results of underlying fixed maturity investments and defaults on interest and principal payments could result in losses or an inability to recover the current carrying value of the fixed maturity investments, thereby possibly requiring an impairment charge in the future.
In addition, if a change occurs in our intent to sell temporarily impaired fixed maturity 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 fixed maturity security, we amortize the reduced book value back to the security’s expected recovery value over the remaining term of the fixed maturity investment. We continue to review the fixed maturity security for further impairment that would prompt another write-down in the book value.
Mortgage Loans on Real Estate
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.
While we utilize our best judgment and information available, the ultimate adequacy of this allowance is dependent upon a variety of factors beyond our control, including the performance of the residential and commercial mortgage loan portfolio, the economy and changes in interest rates. Our allowance for possible mortgage loan losses consists of specific valuation allowances established for probable losses on specific loans and a portfolio reserve for probable incurred but not specifically identified loans.
We consider mortgage loans on real estate impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the mortgage loan agreement. Impairment is measured on a loan-by-loan basis. Factors that we consider in determining impairment include payment status, collateral value of the real estate subject to the mortgage loan and the probability of collecting scheduled principal and interest payments when due. Mortgage loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the mortgage loan on real estate 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.
Deferred Policy Acquisition Costs
Commissions and other acquisition costs which vary with and are primarily related to the successful production of new and renewal insurance contracts are deferred and amortized in a systematic manner based on the related contract revenues or gross profits as appropriate. The recovery of deferred acquisition costs is dependent on the future profitability of the underlying business for which acquisition costs were incurred. Each reporting period, we evaluate the recoverability of the unamortized balance of deferred acquisition costs. We consider estimated future gross profits or future premiums; expected mortality or morbidity; interest earned and credited rates; persistency and expenses in determining whether the balance is recoverable.
If we determine a portion of the unamortized balance is not recoverable, it is immediately charged to amortization expense. The assumptions we use to amortize and evaluate the recoverability of the deferred acquisition costs involve significant judgment. A revision to these assumptions may impact future financial results. Deferred acquisition costs related to the successful production of new and renewal insurance business for traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities.
Deferred acquisition costs related to the successful production of new and renewal insurance and annuity products that subject us to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed (i.e., limited-payment long-duration annuity contracts) are 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 securities result in adjustments to deferred acquisition costs related to insurance and annuity products, such adjustments are reflected as a component of the amortization of deferred acquisition costs.
Deferred acquisition costs related to limited-payment long-duration insurance and annuity contracts are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from securities had actually been realized. This adjustment is included in the change in net unrealized appreciation (depreciation) on available-for-sale securities, a component of “Accumulated Other Comprehensive Income (Loss)” in the shareholders’ equity section of the statement of financial position.
Value of Insurance Business Acquired
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. The value of acquired insurance in force is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. The recovery of the value of insurance business acquired is dependent on the future profitability of the underlying business that was initially recorded in the purchases of FLAC and FBLIC. Each reporting period, we evaluate the recoverability of the unamortized balance of the value of insurance business acquired.
For the amortization of the value of acquired insurance in force, the Company reviews its estimates of gross profits each reporting period. The most significant assumptions involved in the estimation of gross profits include interest rate spreads; future financial market performance; business surrender and lapse rates; mortality and morbidity; expenses and the impact of realized investment gains and losses. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company is required to record a charge or credit to amortization expense for the period in which an adjustment is made.
As of December 31, 2021 and 2020, there was $4,421,379 and $4,146,901, respectively, of accumulated amortization of the value of insurance business acquired due to the purchases of FLAC and FBLIC. The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years:, $258,366 in 2022, $208,044 in 2023, $211,956 in 2024, $199,812 in 2025 and $201,919 in 2026.
Future Policy Benefits
Our liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. For life insurance and annuity products, expected mortality and morbidity is generally based on the Company’s historical experience or standard industry tables including a provision for the risk of adverse deviation.
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.
Estimating liabilities for our long-duration insurance contracts requires management to make various assumptions, including policyholder persistency, mortality rates, investment yields, discretionary benefit increases, new business pricing and operating expense levels.
Since many of these factors are interdependent and subject to short-term volatility during the long-duration contract period, 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.
Recent Accounting Pronouncements
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued updated guidance (Accounting Standards Update 2016-13) for the accounting for credit losses for financial instruments. The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance recoverables, including structured settlements that are recorded as part of reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments.
The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.
The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.
The updated guidance was effective for reporting periods beginning after December 15, 2019. As a Smaller Reporting Company, the effective date was recently changed and the delayed effective date is now for reporting periods beginning after December 15, 2022. 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 had been 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.
Intangibles - Goodwill and Other
In January 2017, the FASB issued updated guidance (Accounting Standards Update 2017-04) that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge by comparing a reporting unit’s fair value with its carrying amount and recognizing an impairment charge for the excess of the carrying amount over estimated fair value (i.e., Step 1 of current guidance).
The implied fair value of goodwill is currently determined in Step 2 by deducting the fair value of all assets and liabilities of the reporting unit (determined in the same manner as a business combination) from the reporting unit’s fair value as determined in Step 1 (including any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unit in Step 1). The updated guidance requires an entity to perform its annual, or interim, impairment test by either: (1) an initial qualitative assessment of factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact a reporting unit’s fair value and lead to the determination that it is more likely than not that the reporting unit’s fair value is less than its carrying value, including goodwill (consistent with current guidance), or (2) applying Step 1.
The Company adopted this guidance in first quarter 2020. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the FASB issued updated guidance (Accounting Standards Update 2018-12) to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. This update improves the timeliness of recognizing changes in the liability for future policy benefits, modifies the rate used to discount future cash flows, simplifies and improves accounting for certain market-based options or guarantees associated with deposit (i.e., account balance) contracts, simplifies the amortization of deferred acquisitions costs and expands required disclosures. The expanded disclosure requires an insurance entity to provide disaggregated roll forwards of beginning to ending balances of the following: liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities and deferred acquisition costs including disclosure about, changes to and effect of changes for significant inputs, judgments, assumptions and methods used in measurements.
The updated guidance was effective for reporting periods beginning after December 15, 2020. As a Smaller Reporting Company, the effective date has been changed twice and the delayed effective date is now for reporting periods beginning after December 15, 2024. Early adoption is permitted but not elected by the Company. With respect to the liability for future policyholder benefits for traditional and limited-payment contracts and deferred acquisition costs, an insurance entity may elect to apply the amendments retrospectively as of the beginning of the earliest period presented.
With respect to the market risk benefits, an insurance entity should apply the amendments retrospectively as of the beginning of the earliest period presented. The Company expects that the impact on the Company’s results of operations, financial position and liquidity at the date of adoption of the updated guidance in 2024 will be determined by the long-duration contracts then held by the Company and the economic conditions at that time.
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued amendments (Accounting Standards Update 2018-13) to modify the disclosure requirements related to fair value measurements including the consideration of costs and benefits of producing the modified disclosures.
The Company adopted this guidance in first quarter 2020. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued updated guidance (Accounting Standards Update 2019-12) for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The Company adopted this guidance in first quarter 2021. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Business Combinations - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
In October 2021, the FASB issued guidance (Accounting Standards Update 2021-08) for the accounting for revenue contracts with customers acquired in a business combination. The amendments in this Update address how to determine whether a contract liability is recognized by the acquirer in a business combination and provide specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments to this Update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification - Revenue from Contracts with Customers (“Topic 606”) at the acquisition date as if the acquirer had originated the contracts.
The amendments in this Update primarily address the accounting for contract assets and contract liabilities from revenue contracts with customers in a business combination. These amendments, however, also apply to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply. The amendments in this Update do not affect the accounting for other assets or liabilities that may arise from revenue contracts with customers in accordance with Topic 606 whether in or not in a business combination.
The amendments in this Update are effective for the Company as a public business entity for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments retrospectively to all business for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and prospectively to all business combinations that occur on or after the date of initial application. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
Business Segments
The FASB guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units. The discussion of segment operating results that follows is being provided based on segment data prepared in accordance with this methodology.
Our business segments are as follows:
●
Life insurance operations, consisting of the life insurance operations of TLIC, FBLIC and TAI;
●
Annuity operations, consisting of the annuity operations of TLIC, FBLIC and TAI and
●
Corporate operations, which includes the results of the parent company and TMC after the elimination of intercompany amounts.
Please see below and Note 11 to the consolidated financial statements as of and for the years ended December 31, 2021 and 2020 for additional information regarding segment information.
The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources.
FINANCIAL HIGHLIGHTS
Consolidated Condensed Results of Operations for the Years Ended December 31, 2021 and 2020
Years Ended December 31,
Amount Change
2021 less 2020
Premiums
$ 31,922,288
$ 28,047,507
$ 3,874,781
Net investment income
23,984,188
24,084,301
(100,113 )
Net realized investment gains
898,551
1,007,268
(108,717 )
Loss on other-than-temporary impairments
-
(801,340 )
801,340
Service fees
228,597
264,513
(35,916 )
Other income
82,617
188,756
(106,139 )
Total revenues
57,116,241
52,791,005
4,325,236
Benefits and claims
37,354,646
34,765,696
2,588,950
Expenses
16,088,307
13,944,515
2,143,792
Total benefits, claims and expenses
53,442,953
48,710,211
4,732,742
Income before federal income tax expense
3,673,288
4,080,794
(407,506 )
Federal income tax expense
815,918
902,104
(86,186 )
Net income
$ 2,857,370
$ 3,178,690
$ (321,320 )
Net income per common share basic and diluted
Class A common stock
$ 0.3266
$ 0.3638
$ (0.0372 )
Class B common stock
$ 0.2776
$ 0.2707
$ 0.0069
Consolidated Condensed Financial Position as of December 31, 2021 and 2020
Amount Change
December 31, 2021
December 31, 2020
2021 less 2020
Investment assets
$ 434,120,334
$ 422,960,668
$ 11,159,666
Assets held in trust under coinsurance agreement
106,210,246
112,160,307
(5,950,061 )
Other assets
119,428,354
108,474,294
10,954,060
Total assets
$ 659,758,934
$ 643,595,269
$ 16,163,665
Policy liabilities
$ 464,853,615
$ 441,412,797
$ 23,440,818
Funds withheld under coinsurance agreement
106,586,633
112,681,925
(6,095,292 )
Deferred federal income taxes
8,966,303
9,220,905
(254,602 )
Other liabilities
10,957,832
10,427,430
530,402
Total liabilities
591,364,383
573,743,057
17,621,326
Shareholders' equity
68,394,551
69,852,212
(1,457,661 )
Total liabilities and shareholders' equity
$ 659,758,934
$ 643,595,269
$ 16,163,665
Shareholders' equity per common share
Class A common stock
$ 7.8186
$ 7.9853
$ (0.1667 )
Class B common stock
$ 6.6458
$ 6.7875
$ (0.1417 )
Results of Operations - Years Ended December 31, 2021 and 2020
Revenues
Our primary sources of revenue are life insurance premium income and investment income. Premium payments are classified as first-year, renewal and single. In addition, realized gains and losses on investment holdings can significantly impact revenues from period to period.
Our revenues for the years ended December 31, 2021 and 2020 are summarized as follows:
Years Ended December 31,
Amount Change
2021 less 2020
Premiums
$ 31,922,288
$ 28,047,507
$ 3,874,781
Net investment income
23,984,188
24,084,301
(100,113 )
Net realized investment gains
898,551
1,007,268
(108,717 )
Loss on other-than-temporary impairments
-
(801,340 )
801,340
Service fees
228,597
264,513
(35,916 )
Other income
82,617
188,756
(106,139 )
Total revenues
$ 57,116,241
$ 52,791,005
$ 4,325,236
The $4,325,236 increase in total revenues for the year ended December 31, 2021 is discussed below.
Premiums
Our premiums for the years ended December 31, 2021 and 2020 are summarized as follows:
Years Ended December 31,
Amount Change
2021 less 2020
Ordinary life first year
$ 1,781,561
$ 1,535,750
$ 245,811
Ordinary life renewal
3,937,981
3,223,286
714,695
Final expense first year
5,907,114
5,758,708
148,406
Final expense renewal
20,295,632
17,529,763
2,765,869
Total premiums
$ 31,922,288
$ 28,047,507
$ 3,874,781
The $3,874,781 increase in premiums for the year ended December 31, 2021 is primarily due to a $2,765,869 increase in final expense renewal premiums, $714,695 increase in ordinary life renewal premiums, $245,811 increase in ordinary life first year premiums and a $148,406 increase in final expense first year premiums.
The increase in final expense renewal premiums reflects the persistency of prior years’ final expense production. 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 ordinary life renewal premiums and ordinary life first year premiums primarily reflects ordinary dollar denominated life insurance policies sold in the international market by TAI.
Other Income
The $106,139 decrease in other income is primarily due to a decrease in administrative service fees.
Net Investment Income
The major components of our net investment income for the years ended December 31, 2021 and 2020 are summarized as follows:
Years Ended December 31,
Amount Change
2021 less 2020
Fixed maturity securities
$ 7,121,593
$ 7,162,012
$ (40,419 )
Equity securities
121,585
100,817
20,768
Other long-term investments
4,806,506
5,166,428
(359,922 )
Mortgage loans
14,263,706
14,651,491
(387,785 )
Policy loans
163,893
153,316
10,577
Real estate
-
252,047
(252,047 )
Short-term and other investments
107,221
101,129
6,092
Gross investment income
26,584,504
27,587,240
(1,002,736 )
Investment expenses
(2,600,316 )
(3,502,939 )
(902,623 )
Net investment income
$ 23,984,188
$ 24,084,301
$ (100,113 )
The $1,002,736 decrease in gross investment income for the year ended December 31, 2021 is primarily due to $387,785 decrease in mortgage loans, $359,922 decrease in other long-term investments and a $252,047 decrease in real estate.
The $387,785 decline in mortgage loans investment income is due to decreased holdings of mortgage loans and lower gross effective yields on mortgage loan purchased. The $359,922 decline in investment income from other long-term investments is due to decreased holdings in this investment category. The $252,047 decline in investment income from real estate is due the November 16, 2020 sale of an office building and land located in Topeka, Kansas.
The $902,623 decrease in investment expense for the year ended December 31, 2021 is primarily related to decreased mortgage loan acquisition expenses and the sale of the Topeka, Kansas office building and land on November 16, 2020.
Net Realized Investment Gains
Our net realized investment gains result from sales of fixed maturity securities, mortgage loans on real estate, investment real estate, equity securities, other long-term investments and changes in the fair value of equity securities.
Our net realized investment gains for the years ended December 31, 2021 and 2020 are summarized as follows:
Years Ended December 31,
Amount Change
2021 less 2020
Fixed maturity securities available-for-sale:
Sale proceeds and maturities
$ 14,374,511
$ 22,381,124
$ (8,006,613 )
Amortized cost at sale date
13,760,736
21,827,950
(8,067,214 )
Net realized gains
$ 613,775
$ 553,174
$ 60,601
Mortgage loans on real estate:
Sale proceeds
$ 28,966,890
$ 6,345,816
$ 22,621,074
Cost at sale date
28,931,580
6,237,715
22,693,865
Net realized gains
$ 35,310
$ 108,101
$ (72,791 )
Investment real estate:
Sale proceeds
$ 818,018
$ 2,216,780
$ (1,398,762 )
Carrying value at sale date
528,178
1,869,741
(1,341,563 )
Net realized gains
$ 289,840
$ 347,039
$ (57,199 )
Equity securities at fair value:
Sale proceeds
$
$ -
$
Cost at sale date
-
-
-
Net realized gains
$
$ -
$
Other long-term investements:
Sale proceeds
$ 12,812,964
$ -
$ 12,812,964
Carrying value at sale date
12,896,303
-
12,896,303
Net realized gains
$ (83,339 )
$ -
$ (83,339 )
Equity securities, changes in fair value
$ 42,876
$ (1,046 )
$ 43,922
Net realized investment gains
$ 898,551
$ 1,007,268
$ (108,717 )
Loss on Other-Than-Temporary Impairments
During 2020, the Company impaired its bonds in an offshore drilling company with a total par value of $850,000 as a result of continuing unrealized losses. This impairment was considered fully credit-related, resulting in a charge to the statement of operations before tax of $801,340 for the year ended December 31, 2020. This charge represents the credit-related portion of the difference between the amortized cost basis of the security and its fair value. The Company has experienced no other-than-temporary impairments on fixed maturity available-for-sale securities during 2021.
Total Benefits, Claims and Expenses
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, 2021 and 2020 are summarized as follows:
Years Ended December 31,
Amount Change
2021 less 2020
Benefits and claims
Increase in future policy benefits
$ 12,121,912
$ 11,551,696
$ 570,216
Death benefits
11,054,856
9,469,318
1,585,538
Surrenders
1,198,363
1,156,546
41,817
Interest credited to policyholders
12,663,112
12,276,268
386,844
Dividend, endowment and supplementary life contract benefits
316,403
311,868
4,535
Total benefits and claims
37,354,646
34,765,696
2,588,950
Expenses
Policy acquisition costs deferred
(12,102,070 )
(11,856,420 )
(245,650 )
Amortization of deferred policy acquisition costs
6,932,504
5,327,177
1,605,327
Amortization of value of insurance business acquired
274,478
298,471
(23,993 )
Commissions
12,069,749
11,073,570
996,179
Other underwriting, insurance and acquisition expenses
8,913,646
9,101,717
(188,071 )
Total expenses
16,088,307
13,944,515
2,143,792
Total benefits, claims and expenses
$ 53,442,953
$ 48,710,211
$ 4,732,742
The $4,732,742 increase in total benefits, claims and expenses for the year ended December 31, 2021 is discussed below.
Benefits and Claims
The $2,588,950 increase in total benefits and claims for the year ended December 31, 2021 is primarily due to the following:
●
$1,585,538 increase in death benefits is primarily due to approximately $1,853,000 of increased final expense benefits that exceeded a $266,000 decrease in ordinary life benefits.
●
$570,216 increase in future policy benefits is primarily due to the increased number of life policies in force and the aging of existing life policies.
●
$386,844 increase in interest credited to policyholders is primarily due to an increase of approximately $11.1 million in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits and interest credited in excess of withdrawals) since December 31, 2020.
Deferral and Amortization of Deferred Acquisition Costs
Certain costs related to the successful acquisition of traditional life insurance policies are capitalized and amortized over the premium-paying period of the policies. Certain costs related to the successful acquisition of insurance and annuity policies that subject us to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed (i.e., limited-payment long-duration annuity contracts) are capitalized and amortized in relation to the present value of actual and expected gross profits on the policies.
These acquisition costs, which are referred to as deferred policy acquisition costs, include commissions and other successful costs of acquiring policies and contracts, which vary with, and are primarily related to, the successful production of new and renewal insurance and annuity contracts.
For the years ended December 31, 2021 and 2020, capitalized costs were $12,102,070 and $11,856,420, respectively. Amortization of deferred policy acquisition costs for the years ended December 31, 2021 and 2020 were $6,932,504 and $5,327,177.
The $245,650 increase in the 2021 acquisition costs deferred primarily relates to increased annuity production and final expense first year deferral of increased eligible commissions. There was a $1,605,327 increase in the 2021 amortization of deferred acquisition costs primarily due to the impact of increased mortality.
Amortization of Value of Insurance Business Acquired
The cost of acquiring insurance business is amortized over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was $274,478 and $298,471 for the years ended December 31, 2021 and 2020, respectively.
Commissions
Our commissions for the years ended December 31, 2021 and 2020 are summarized as follows:
Years Ended December 31,
Amount Change
2021 less 2020
Annuity
$ 807,782
$ 677,742
$ 130,040
Ordinary life first year
1,958,212
1,682,408
275,804
Ordinary life renewal
307,789
166,318
141,471
Final expense first year
7,039,287
6,849,600
189,687
Final expense renewal
1,956,679
1,697,502
259,177
Total commissions
$ 12,069,749
$ 11,073,570
$ 996,179
The $996,179 increase in commissions for the year ended December 31, 2021 is primarily due to a $275,804 increase in ordinary life first year commissions that corresponds to an $245,811 increase in ordinary life first year premiums, $259,177 increase in final expense renewal commissions that correspond to a $2,765,869 increase in final expense renewal premiums, $189,687 increase in final expense first year commissions that corresponded to a $148,406 increase in final expense first year premiums, $140,023 increase in ordinary life renewal commissions that correspond to a $714,695 increase in ordinary life renewal premiums and a $131,488 increase in annuity commissions that correspond to a $4,867,796 increase in retained annuity deposits.
Other Underwriting, Insurance and Acquisition Expenses
The $188,071 decrease in other underwriting, insurance and acquisition expenses for the year ended December 31, 2021 was primarily related to a decrease in the Company’s Chief Executive Officer bonus that exceeded increased legal fees related to acquisition activities and increased third party administration fees primarily related to maintaining increased number of policies in force and increased service requests to the third party administrator.
Federal Income Taxes
FTFC files a consolidated federal income tax return with TLIC, FBLIC and TMC. Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes.
For the years ended December 31, 2021 and 2020, current income tax expense (benefit) was ($76,513) and $127,701, respectively. Deferred federal income tax expense was $892,431 and $774,403 for the years ended December 31, 2021 and 2020, respectively.
Net Income Per Common Share Basic and Diluted
For the years ended December 31, 2021 and 2020, the net income allocated to the Class B shareholders is the total net income less shareholders’ cash dividends multiplied by the right to receive dividends at 85% for Class B shares (85,937) as of the reporting date divided by the allocated total shares (8,747,633) of Class A shares (8,661,696) and Class B shares (85,937) as of the reporting date.
For the year ended December 31, 2021, the net income allocated to the Class A shareholders of $2,829,299 is the total net income $2,857,370 less the net income allocated to the Class B shareholders $28,071. For the year ended December 31, 2020, the net income allocated to the Class A shareholders $3,151,325 is the total net income $3,178,690 less the net income allocated to the Class B shareholders $27,365.
The weighted average outstanding common shares basic for the years ended December 31, 2021 and 2020 were 8,661,696 for Class A shares and 101,102 for Class B shares. The weighted average Class A shares reflect the retrospective adjustment for the impacts of the 10% stock dividend declared by the Company on November 12, 2020 and issued to holders of Class A common stock shares of the Company as of November 12, 2020.
Business Segments
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, FBLIC and TAI and a corporate segment. Results for the parent company and the operations of TMC, after elimination of intercompany amounts, are allocated to the corporate segment.
The revenues and income before federal income taxes from our business segments for the years ended December 31, 2021 and 2020 are summarized as follows:
Years Ended December 31,
Amount Change
2021 less 2020
Revenues:
Life insurance operations
$ 36,727,984
$ 32,236,531
$ 4,491,453
Annuity operations
19,794,712
19,724,655
70,057
Corporate operations
593,545
829,819
(236,274 )
Total
$ 57,116,241
$ 52,791,005
$ 4,325,236
Income before federal income taxes:
Life insurance operations
$ 1,405,948
$ 337,686
$ 1,068,262
Annuity operations
2,203,412
2,986,150
(782,738 )
Corporate operations
63,928
756,958
(693,030 )
Total
$ 3,673,288
$ 4,080,794
$ (407,506 )
The increases and decreases of revenues and profitability from our business segments for the years ended December 31, 2021 and 2020 are summarized as follows:
Life Insurance
Annuity
Corporate
Operations
Operations
Operations
Total
Revenues
Premiums
$ 3,874,781
$ -
$ -
$ 3,874,781
Net invesment income
410,273
(439,518 )
(70,868 )
(100,113 )
Net realized investment gains
144,701
547,922
-
692,623
Service fees and other income
61,698
(38,347 )
(165,406 )
(142,055 )
Total revenue
4,491,453
70,057
(236,274 )
4,325,236
Benefits and claims
Increase in future policy benefits
570,216
-
-
570,216
Death benefits
1,585,538
-
-
1,585,538
Surrenders
41,817
-
-
41,817
Interest credited to policyholders
-
386,844
-
386,844
Dividend, endowment and supplementary life contract benefits
4,535
-
-
4,535
Total benefits and claims
2,202,106
386,844
-
2,588,950
Expenses
Policy acquisition costs deferred net of amortization
685,320
674,357
-
1,359,677
Amortization of value of insurance business acquired
(11,996 )
(11,997 )
-
(23,993 )
Commissions
864,691
131,488
-
996,179
Other underwriting, insurance and acquisition expenses
(316,930 )
(327,897 )
456,756
(188,071 )
Total expenses
1,221,085
465,951
456,756
2,143,792
Total benefits, claims and expenses
3,423,191
852,795
456,756
4,732,742
Income (loss) before federal income taxes (benefits)
$ 1,068,262
$ (782,738 )
$ (693,030 )
$ (407,506 )
Consolidated Financial Condition
Our invested assets as of December 31, 2021 and 2020 are summarized as follows:
Amount Change
December 31, 2021
December 31, 2020
2021 less 2020
Assets
Investments
Available-for-sale fixed maturity securities at fair value (amortized cost: $167,356,364 and $148,431,010 as of December 31, 2021 and 2020, respectively)
$ 184,077,038
$ 170,647,836
$ 13,429,202
Equity securities at fair value (cost: $285,558 and $183,219 as of December 31, 2021 and 2020, respectively)
348,218
203,003
145,215
Mortgage loans on real estate
177,508,051
174,909,062
2,598,989
Investment real estate
688,345
757,936
(69,591 )
Policy loans
2,272,629
2,108,678
163,951
Short-term investments
3,296,838
3,309,020
(12,182 )
Other long-term investments
65,929,215
71,025,133
(5,095,918 )
Total investments
$ 434,120,334
$ 422,960,668
$ 11,159,666
The $13,429,202 increase and $8,355,388 decrease in fixed maturity available-for-sale securities for the years ended December 31, 2021 and 2020, respectively, are summarized as follows:
Years Ended December 31,
Fixed maturity securities, available-for-sale, beginning
$ 170,647,836
$ 179,003,224
Purchases
33,163,143
4,010,067
Acquisition of K-TENN Insurance Company
-
800,000
Unrealized appreciation (depreciation)
(5,496,152 )
10,023,995
Net realized investment gains
613,775
553,174
Other-than-temporary impairment
-
(801,340 )
Sales proceeds
(13,224,511 )
(21,435,624 )
Maturities
(1,150,000 )
(945,500 )
Premium amortization
(477,053 )
(560,160 )
Increase (decrease)
13,429,202
(8,355,388 )
Fixed maturity securities, available-for-sale, ending
$ 184,077,038
$ 170,647,836
Fixed maturity securities available-for-sale are reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within accumulated other comprehensive income. The available-for-sale fixed maturity securities portfolio is invested in U.S. government, U.S. government agencies, state and political subdivisions, commercial and residential mortgage-backed securities, corporate bonds, asset-backed securities, exchange traded securities, foreign bonds, redeemable preferred securities and certificate of deposit
The $145,215 and $1,979 increases in equity securities available-for-sale for the years ended December 31, 2021 and 2020, respectively, are summarized as follows:
Years Ended December 31,
Equity securities, available-for-sale, beginning
$ 203,003
$ 201,024
Purchases
181,243
90,292
Sales proceeds
(89 )
-
Joint venture distribution
(78,904 )
(87,267 )
Net realized investment gains, sale of securities
-
Net realized investment gains (losses), changes in fair value
42,876
(1,046 )
Increase
145,215
1,979
Equity securities, available-for-sale, ending
$ 348,218
$ 203,003
Equity securities are reported at fair value with the change in fair value reflected in net realized investment gains within the consolidated statements of operations.
The $2,598,989 and $12,504,422 increases in mortgage loans on real estate for the years ended December 31, 2021 and 2020, respectively, are summarized as follows:
Years Ended December 31,
Mortgage loans on real estate, beginning
$ 174,909,062
$ 162,404,640
Purchases
107,238,975
77,131,267
Discount accretion
428,411
382,024
Net realized investment gains
35,310
108,101
Payments
(104,436,910 )
(64,250,033 )
Foreclosed - transferred to real estate
(458,587 )
(797,158 )
Increase in allowance for bad debts
(164,625 )
(36,516 )
Amortization of loan origination fees
(43,585 )
(33,263 )
Increase
2,598,989
12,504,422
Mortgage loans on real estate, ending
$ 177,508,051
$ 174,909,062
The $69,591 and $1,193,823 decreases in investment real estate for the years ended December 31, 2021 and 2020, respectively, are summarized as follows:
Years Ended December 31,
Investment real estate, beginning
$ 757,936
$ 1,951,759
Real estate acquired through mortgage loan foreclosure
458,587
797,158
Sales proceeds
(818,018 )
(2,216,780 )
Depreciation of building
-
(121,240 )
Net realized investment gains
289,840
347,039
Decrease
(69,591 )
(1,193,823 )
Investment real estate, ending
$ 688,345
$ 757,936
The $5,095,918 and $799,347 decreases in other long-term investments (comprised of lottery receivables) for the years ended December 31, 2021 and 2020, respectively, are summarized as follows:
Years Ended December 31,
Other long-term investments, beginning
$ 71,025,133
$ 71,824,480
Purchases
2,993,805
5,788,546
Discount accretion
4,806,580
5,168,004
Net realized investment (losses)
(83,339 )
-
Payments
(12,812,964 )
(11,755,897 )
Increase (decrease)
(5,095,918 )
(799,347 )
Other long-term investments, ending
$ 65,929,215
$ 71,025,133
Our assets other than invested assets as of December 31, 2021 and 2020 are summarized as follows:
Amount Change
December 31, 2021
December 31, 2020
2021 less 2020
Cash and cash equivalents
$ 42,528,046
$ 40,230,095
$ 2,297,951
Accrued investment income
4,879,290
5,370,508
(491,218 )
Recoverable from reinsurers
1,046,381
1,234,221
(187,840 )
Assets held in trust under coinsurance agreement
106,210,246
112,160,307
(5,950,061 )
Agents' balances and due premiums
1,713,050
2,154,322
(441,272 )
Deferred policy acquisition costs
49,717,323
44,513,669
5,203,654
Value of insurance business acquired
4,318,499
4,592,977
(274,478 )
Other assets
15,225,765
10,378,502
4,847,263
Assets other than investment assets
$ 225,638,600
$ 220,634,601
$ 5,003,999
The $2,297,951 increase in cash and cash equivalents for the year ended December 31, 2021 and the corresponding increase of $17,017,925 for the year ended December 31, 2020 are summarized in the Company’s consolidated statements of cash flows.
The $5,950,061 decrease in assets held in trust under the coinsurance agreement is due to a reduction in assets under TLIC’s annuity coinsurance agreement with an offshore annuity and life insurance company that is administered on a funds withheld basis.
The increase in deferred policy acquisition costs for the years ended December 31, 2021 and 2020, respectively, are summarized as follows:
Years Ended December 31,
Balance, beginning of year
$ 44,513,669
$ 38,005,639
Capitalization of commissions, sales and issue expenses
12,102,070
11,856,420
Amortization
(6,932,504 )
(5,327,177 )
Deferred acquisition costs allocated to investments
34,088
(21,213 )
Balance, end of year
$ 49,717,323
$ 44,513,669
Our other assets as of December 31, 2021 and December 31, 2020 are summarized as follows:
Amount Change
December 31, 2021
December 31, 2020
2021 less 2020
Federal and state income taxes recoverable
$ 7,104,791
$ 4,050,726
$ 3,054,065
Advances to mortgage loan originator
4,382,896
4,996,358
(613,462 )
Advances to private equity company
3,000,000
-
3,000,000
Lease asset - right to use
565,964
664,393
(98,429 )
Other receivables, prepaid assets and deposits
81,571
130,850
(49,279 )
Guaranty funds
49,256
63,869
(14,613 )
Notes receivable
41,287
472,306
(431,019 )
Total other assets
$ 15,225,765
$ 10,378,502
$ 4,847,263
There was a $3,054,065 increase in federal and state income taxes recoverable primarily due to federal and state tax withholdings on lottery receivables. In addition, the Company is working with the Tax Advocate Office of the Internal Revenue Service to recover its 2019 refund of $1,019,705.
The $3,000,000 increase in advances is due to one private equity company collateralized by construction loans.
The $431,019 decline in notes receivable is primarily due to repayment of a $400,000 loan from the estate of the Company’s former chairman.
There was a $613,462 decrease in advances to one mortgage loan originator who acquires residential mortgage loans for our life insurance companies.
Our liabilities as of December 31, 2021 and 2020 are summarized as follows:
Amount Change
December 31, 2021
December 31, 2020
2021 less 2020
Policy liabilities
Policyholders' account balances
$ 373,647,869
$ 362,519,753
$ 11,128,116
Future policy benefits
88,735,716
76,673,797
12,061,919
Policy claims
2,381,183
2,099,548
281,635
Other policy liabilities
88,847
119,699
(30,852 )
Total policy liabilities
464,853,615
441,412,797
23,440,818
Funds withheld under coinsurance agreement
106,586,633
112,681,925
(6,095,292 )
Deferred federal income taxes
8,966,303
9,220,905
(254,602 )
Other liabilities
10,957,832
10,427,430
530,402
Total liabilities
$ 591,364,383
$ 573,743,057
$ 17,621,326
The $12,061,919 increase in future policy benefits is primarily related to the production of new life insurance policies and the aging of existing policies.
The $11,128,116 increase and $564,085 decrease in policyholders’ account balances for the years ended December 31, 2021 and 2020, respectively, are summarized as follows:
Years Ended December 31,
Policyholders' account balances, beginning
$ 362,519,753
$ 363,083,838
Deposits
28,708,203
24,283,570
Withdrawals
(35,383,965 )
(39,476,015 )
Funds withheld under coinsurance agreement
5,140,766
2,352,092
Interest credited
12,663,112
12,276,268
Increase (decrease)
11,128,116
(564,085 )
Policyholders' account balances, ending
$ 373,647,869
$ 362,519,753
The $254,602 decrease in deferred federal income taxes was due to $1,147,033 of decreased deferred federal income taxes on the unrealized appreciation of fixed maturity securities available-for-sale and $892,431 of operating deferred federal tax expense.
The $6,095,292 decrease in funds withheld under coinsurance agreement is due to the liability related to TLIC’s annuity coinsurance agreement with an offshore annuity and life insurance company.
The $281,635 increase in policy claims is due to an increase in the number of final expense claims.
Our other liabilities as of December 31, 2021 and December 31, 2020 are summarized as follows:
Amount Change
December 31, 2021
December 31, 2020
2021 less 2020
Mortgage loans suspense
$ 7,533,274
$ 5,967,403
$ 1,565,871
Payable for securities purchased
1,465,173
378,046
1,087,127
Accrued expenses payable
728,000
748,000
(20,000 )
Lease liability
565,964
664,393
(98,429 )
Suspense accounts payable
435,471
2,555,255
(2,119,784 )
Unclaimed funds
159,627
79,946
79,681
Accounts payable
61,307
72,124
(10,817 )
Unearned investment income
91,206
71,325
19,881
Deferred revenue
63,250
-
63,250
Guaranty fund assessments
21,000
25,000
(4,000 )
Other payables, withholdings and escrows
(166,440 )
(134,062 )
(32,378 )
Total other liabilities
$ 10,957,832
$ 10,427,430
$ 530,402
The increase in mortgage loan suspense of $1,565,871 is primarily due to timing of principal loan payments on mortgage loans.
As of December 31, 2021, the Company had $1,465,173 in security purchases where the trade date and settlement date were in different financial reporting periods compared to $378,046 of security purchases overlapping financial reporting periods as of December 31, 2020.
The $2,119,784 decrease in suspense accounts payable is due to decreased deposits on policy applications that had not been issued as of the financial reporting date.
Liquidity and Capital Resources
Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through December 31, 2021, we have received $27,119,480 from the sale of our shares and recorded $1,746,240 from the exchange of our shares to acquire K-TENN in 2020.
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.
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.
In 2020, the Company paid a $0.05 per share cash dividend for a total of $393,178 and issued 791,339 shares of class A common stock in connection with a 10% stock dividend to its Class A shareholders. The 10% stock dividend resulted in accumulated earnings being charged $8,657,249 with an offsetting credit of $8,657,249 to common stock and additional paid-in capital.
During 2012, 2013, 2014 and 2015, the Company repurchased 247,580 shares of its common stock at a total cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’s current Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.
As of December 31, 2021, we had cash and cash equivalents totaling $42,528,046. As of December 31, 2021, cash and cash equivalents of $10,920,018 and $28,880,493, respectively, totaling $39,800,511 were held by TLIC and FBLIC and may not be available for use by FTFC due to the required pre-approval by the OID and MDCI 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.
Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is capacity for TLIC to pay a dividend up to $1,430,596 in 2022 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $1,495,631 in 2022 without prior approval. FBLIC has paid no dividends to TLIC in 2021 and 2020. Dividends paid by FBLIC would be eliminated in consolidation. TLIC has paid no dividends to FTFC.
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 $40,431,952 and $32,645,110 as of December 31, 2021 and December 31, 2020, respectively. Other funds are invested in mutual funds that invest in U.S. government securities. We monitor the solvency of all financial institutions in which we have funds to minimize the exposure for loss. The Company has not experienced any losses in such accounts.
On September 15, 2021, the Company renewed its $1.5 million line of credit with a bank to provide working capital and funds for expansion. The terms of the line of credit allows for advances, repayments and re-borrowings through a maturity date of September 15, 2022. Any outstanding advances will incur interest at a variable interest rate of the prime rate set forth in the Wall Street Journal plus 1% per annum adjusting monthly based on a 360 day year with a minimum interest rate floor of 4.5%. The non-utilized portion of the $1.5 million line of credit will be assessed a 1% non usage fee calculated in arrears and paid at the maturity date. No amounts were outstanding on this line of credit as of December 31, 2021 and December 31, 2020.
Our cash flows for the years ended December 31, 2021 and 2020 are summarized as follows:
Years Ended December 31,
Amount Change
2021 less 2020
Net cash provided by operating activities
$ 18,942,356
$ 17,444,839
$ 1,497,517
Net cash provided by (used in) investing activities
(9,968,643 )
15,158,709
(25,127,352 )
Net cash used in financing activities
(6,675,762 )
(15,585,623 )
8,909,861
Increase in cash
2,297,951
17,017,925
(14,719,974 )
Cash and cash equivalents, beginning of period
40,230,095
23,212,170
17,017,925
Cash and cash equivalents, end of period
$ 42,528,046
$ 40,230,095
$ 2,297,951
The $18,942,356 and $17,444,839 cash provided by operating activities for the years ended December 31, 2021 and 2020, respectively, are summarized as follows:
Years Ended December 31,
Amount Change
2021 less 2020
Premiums collected
$ 31,934,472
$ 27,758,682
$ 4,175,790
Net investment income collected
19,737,349
18,941,159
796,190
Service fees and other income collected
311,214
453,270
(142,056 )
Death benefits paid
(10,585,381 )
(8,758,651 )
(1,826,730 )
Surrenders paid
(1,198,363 )
(1,156,546 )
(41,817 )
Dividends and endowments paid
(318,630 )
(313,625 )
(5,005 )
Commissions paid
(11,669,284 )
(11,337,696 )
(331,588 )
Other underwriting, insurance and acquisition expenses paid
(8,158,256 )
(8,146,528 )
(11,728 )
Taxes paid
(2,977,551 )
(2,876,559 )
(100,992 )
(Increased) decreased advances to mortgage loan originator
613,462
(559,571 )
1,173,033
Increased advances to private equity company
(3,000,000 )
-
(3,000,000 )
Increased (decreased) deposits of pending policy applications
(2,119,784 )
2,535,089
(4,654,873 )
Decreased funds under coinsurance agreement
4,995,535
2,323,976
2,671,559
(Increased) decreased short-term investments
12,182
(1,477,933 )
1,490,115
Increased policy loans
(163,951 )
(81,332 )
(82,619 )
Increased mortgage loan suspense
1,589,336
184,976
1,404,360
Other
(59,994 )
(43,872 )
(16,122 )
Cash provided by operating activities
$ 18,942,356
$ 17,444,839
$ 1,497,517
Please see the consolidated statements of cash flows for the years ended December 31, 2021 and 2020 for a summary of the components of net cash provided by (used in) investing activities and financing activities.
Our shareholders’ equity as of December 31, 2021 and 2020 is summarized as follows:
Amount Change
December 31, 2021
December 31, 2020
2021 less 2020
Class A common stock, par value $.01 per share (40,000,000 shares authorized as of December 31, 2021 and 2020, 8,909,276 issued as of December 31, 2021 and 2020, 8,661,696 outstanding as of December 31, 2021 and 2020)
$ 89,093
$ 89,093
$ -
Class B common stock, par value $.01 per share (10,000,000 shares authorized, 101,102 issued and outstanding as of December 31, 2021 and 2020)
1,011
1,011
-
Additional paid-in capital
39,078,485
39,078,485
-
Treasury stock, at cost (247,580 shares as of December 31, 2021 and 2020)
(893,947 )
(893,947 )
-
Accumulated other comprehensive income
13,203,827
17,518,858
(4,315,031 )
Accumulated earnings
16,916,082
14,058,712
2,857,370
Total shareholders' equity
$ 68,394,551
$ 69,852,212
$ (1,457,661 )
The decrease in shareholders’ equity of $1,457,661 for the year ended December 31, 2021 is due to a $4,315,031 decrease in accumulated other comprehensive income that exceeded net income of $2,857,370.
The Company issued 791,339 shares of Class A common stock in connection with the 2020 stock dividend that resulted in accumulated earnings being charged $8,657,249 with an offsetting credit of $8,657,249 to common stock and additional paid-in capital. The issuance of these stock dividends were non-cash investing and financing activities.
The liquidity requirements of our life insurance companies are met primarily by funds provided from operations. Premium and annuity consideration deposits, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. There were no liquidity issues in 2021 or 2020. Our investments include marketable debt securities that could be readily converted to cash for liquidity needs. We are subject to various market risks. The quality of our investment portfolio and the current level of shareholders’ equity continue to provide a sound financial base as we strive to expand our marketing to offer competitive products.
Our investment portfolio had unrealized appreciation (depreciation) on available-for-sale securities of $16,720,674 and $22,216,826 as of December 31, 2021 and 2020, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. A decrease of $4,882,377 in unrealized gains arising for year ended December 31, 2021 and 2020 net realized investment gains of $613,775 originating from the sale, calls and other-than-temporary impairments for fixed maturity securities available-for-sale resulting in net unrealized losses on investments of $5,496,152.
A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. 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.
One of our significant risks relates to the fluctuations in interest rates. Regarding interest rates, the value of our available-for-sale fixed maturity securities investment portfolio will increase or decrease in an inverse relationship with fluctuations in interest rates, while net investment income earned on newly acquired available-for-sale fixed maturity securities increases or decreases in direct relationship with interest rate changes.
From an income perspective, we are exposed to rising interest rates which could be a significant risk, as TLIC's and FBLIC’s annuity business is impacted by changes in interest rates. Life insurance company policy liabilities bear fixed rates. From a liquidity perspective, our fixed rate policy liabilities are relatively insensitive to interest rate fluctuations. We believe gradual increases in interest rates do not present a significant liquidity exposure for the life insurance policies and annuity contracts. We maintain conservative durations in our fixed maturity portfolio.
As of December 31, 2021, 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 13.2% of total policy liabilities. If interest rates rise significantly in a short time frame, there can be no assurance that the life insurance industry, including the Company, would not experience increased levels of surrenders and reduced sales, and thereby be materially adversely affected.
In addition to the measures described above, TLIC and FBLIC must comply with the National Association of Insurance Commissioners promulgated Standard Valuation Law ("SVL") which specifies minimum reserve levels and prescribes methods for determining them, with the intent of enhancing solvency. Upon meeting certain tests, which TLIC and FBLIC met during 2021, the SVL also requires the Company to perform annual cash flow testing for TLIC and FBLIC. This testing is designed to ensure that statutory reserve levels will maintain adequate protection in a variety of potential interest rate scenarios. The Actuarial Standards Board of the American Academy of Actuaries also requires cash flow testing as a basis for the actuarial opinion on the adequacy of the reserves which is a required part of the annual statutory reporting process.
Our marketing plan could be modified to emphasize certain product types and reduce others. New business levels could be varied in order to find the optimum level. We believe that our current liquidity, current bond portfolio maturity distribution and cash position give us substantial resources to administer our existing business and fund growth generated by direct sales.
The operations of TLIC and FBLIC may require additional capital contributions to meet statutory capital and surplus requirements mandated by state insurance departments. Life insurance contract liabilities are generally long term in nature and are generally paid from future cash flows or existing assets and reserves. We will service other expenses and commitments by: (1) using available cash, (2) dividends from TLIC and FBLIC that are limited by law to the greater of prior year net operating income or 10% of prior year-end surplus unless specifically approved by the controlling insurance department, (3) public and private offerings of our common stock and (4) corporate borrowings, if necessary.
Effective January 1, 2019, the Company entered into a revised advance agreement with one loan originator. As of December 31, 2021, the Company has outstanding advances to this loan originator totaling $4,382,896. The advances are secured by $8,361,908 of residential mortgage loans on real estate that are assigned to the Company. The Company has committed to fund up to an additional $2,117,104 to the loan originator that would result in additional security in the form of residential mortgage loans on real estate to be assigned to the Company.
Effective January 1, 2019, the Company also entered into a revised escrow agreement with the same loan originator. According to the revised terms of the escrow agreement, as of December 31, 2021, $795,730 of additional and secured residential mortgage loan balances on real estate are held in escrow by the loan originator. As of December 31, 2021, $611,176 of that escrow amount is available to the Company as additional collateral on $4,382,896 of advances to the loan originator. The remaining December 31, 2021 escrow amount of $184,554 is available to the Company as additional collateral on its investment of $36,910,814 in residential mortgage loans on real estate.
As a result of COVID-2019, which was declared a pandemic on March 11, 2020, the United States Federal, State and Local Governments, and other countries around the world have taken measures that continue to limit economic output. Due to the decline in economic activity, the Company is faced with uncertainty as of the date of this report on its operations when considering its revenue sources and potential future liquidity needs. Management is actively monitoring the situation and the impact to the Company’s operations. As the pandemic continues, should liquidity conditions worsen in the short-term, management will work with its financial institutions to assist with liquidity needs. Consequently, the Company has adapted its operations to continue to provide and perform all business activities despite the pandemic and in accordance with the guidelines of the U.S. Centers for Disease Control and Prevention.
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, 2021 will be sufficient to fund our anticipated operating expenses.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements. The forward-looking statements are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning; and include, but are not limited to, statements regarding the outlook of our business and financial performance. These forward-looking statements are subject to change and uncertainty, which are, in many instances, beyond our control and have been made based upon our expectations and beliefs concerning future developments and their potential effect upon us. There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be as anticipated. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. These factors include among others:
●
general economic conditions and financial factors, including the performance and fluctuations of fixed income, equity, real estate, credit capital and other financial markets;
●
differences between actual experience regarding mortality, morbidity, persistency, surrenders, investment returns, and our pricing assumptions establishing liabilities and reserves or for other purposes;
●
the effect of increased claims activity from natural or man-made catastrophes, pandemic disease (including COVID-2019) , or other events resulting in catastrophic loss of life;
●
adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities;
●
inherent uncertainties in the determination of investment allowances and impairments and in the determination of the valuation allowance on the deferred income tax asset;
●
investment losses and defaults;
●
competition in our product lines;
●
attraction and retention of qualified employees and agents;
●
ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks;
●
the availability, affordability and adequacy of reinsurance protection;
●
the effects of emerging claim and coverage issues;
●
the cyclical nature of the insurance business;
●
interest rate fluctuations;
●
changes in our experiences related to deferred policy acquisition costs;
●
the ability and willingness of counterparties to our reinsurance arrangements and derivative instruments to pay balances due to us;
●
impact of medical epidemics and viruses;
●
domestic or international military actions;
●
the effects of extensive government regulation of the insurance industry;
●
changes in tax and securities law;
●
changes in statutory or U.S. generally accepted accounting principles (“GAAP”), practices or policies;
●
regulatory or legislative changes or developments;
●
the effects of unanticipated events on our disaster recovery and business continuity planning;
●
failures or limitations of our computer, data security and administration systems;
●
risks of employee error or misconduct;
●
the assimilation of life insurance businesses we acquire and the sound management of these businesses and
●
the availability of capital to expand our business.
It is not our corporate policy to make specific projections relating to future earnings, and we do not endorse any projections regarding future performance made by others. In addition, we do not publicly update or revise forward-looking statements based on the outcome of various foreseeable or unforeseeable developments.
FIRST TRINITY FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
Consolidated Financial Statements Page
Numbers
Report of Independent Registered Public Accounting Firm (PCAOB ID 718)
Consolidated Statements of Financial Position
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss) ..
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of First Trinity Financial Corporation
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of First Trinity Financial Corporation and Subsidiaries (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Amortization of Deferred Policy Acquisition Costs - Refer to Notes 1 and 6
Critical Audit Matter Description
The Company’s products include traditional life insurance contracts and annuities in which certain acquisition costs are capitalized and the expenses are deferred into future periods. Management amortizes the capitalized costs of traditional life insurance products over the premium paying period of the products based on assumptions developed and consistent with assumptions used in determining the products future policy benefit liabilities. Amortization of annuity products and certain limited payment life insurance products are amortized based on actual and expected future gross profits. The unamortized deferred policy acquisition cost asset was $ 49.7 million as of December 31, 2021.
The recovery of the unamortized deferred policy acquisition cost asset is dependent on the future profitability of the related products. Management periodically reviews the recoverability by developing an actuarial study of the present value of future profits of the products, and reduces the asset when the asset is shown to not be recoverable.
As a result, the audit of this area requires a high degree of judgment due to the complex nature of determining the amortization for the period and creation of actuarial studies for recoverability.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the amortization of the unamortized deferred policy acquisition cost asset and consideration of the recoverability of the asset included, among others, the following:
●
We gained an understanding of the processes utilized and controls implemented in amortizing the deferred policy acquisition
●
We obtained previous actuarial recoverability studies, and any current updates to the studies
●
We tested data utilized by management for completeness and accuracy
●
We engaged an independent actuarial specialist to assist with the review and evaluation of the assumptions and methodologies used by management for the study of recoverability
Future Policy Benefits - Refer to Note 1
Critical Audit Matter Description
Liabilities for amounts payable under the Company’s life insurance products are recorded as future policy benefits liabilities. Such liabilities are established based on actuarial assumptions at the time policies are issued. Management applies considerable judgement in developing the actuarial assumptions based on expectations of future economic conditions and policyholder behavior. These assumptions are developed at the time the contracts are issued, or in the case of a business combination, at the time the contracts are purchased. If actual experience is adverse in nature when compared to the original assumptions in developing the future policy benefits liability, management may be required to establish premium deficiency reserves. The Company’s future policy benefits liability was $ 88.7 million as of December 31, 2021.
The audit of future policy benefits requires a high degree of auditor judgment when considering the complex actuarial assumptions and models management utilizes.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the liability for future policy benefits included the following procedures, among others:
●
We gained an understanding of the processes utilized and controls implemented in determining the valuation of future policy benefits
●
We tested the underlying data used by management in developing the valuation and the completeness and accuracy of the data
●
We obtained original assumption information and subsequent experience studies
●
We engaged an independent actuarial specialist to evaluate the actuarial assumptions and methodologies for reasonableness, to develop an independent estimate of future policy benefits on a sample basis and to evaluate management’s development of experience studies.
We have served as the Company’s auditor since 2004.
/s/ Kerber, Eck & Braeckel LLP
Springfield, Illinois
March 8, 2022
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Financial Position
December 31, 2021
December 31, 2020
Assets
Investments
Available-for-sale fixed maturity securities at fair value (amortized cost: $167,356,364 and $148,431,010 as of December 31, 2021 and 2020, respectively)
$ 184,077,038 $ 170,647,836
Equity securities at fair value (cost: $285,558 and $183,219 as of December 31, 2021 and 2020, respectively)
348,218 203,003
Mortgage loans on real estate
177,508,051 174,909,062
Investment real estate
688,345 757,936
Policy loans
2,272,629 2,108,678
Short-term investments
3,296,838 3,309,020
Other long-term investments
65,929,215 71,025,133
Total investments
434,120,334 422,960,668
Cash and cash equivalents
42,528,046 40,230,095
Accrued investment income
4,879,290 5,370,508
Recoverable from reinsurers
1,046,381 1,234,221
Assets held in trust under coinsurance agreement
106,210,246 112,160,307
Agents' balances and due premiums
1,713,050 2,154,322
Deferred policy acquisition costs
49,717,323 44,513,669
Value of insurance business acquired
4,318,499 4,592,977
Other assets
15,225,765 10,378,502
Total assets
$ 659,758,934 $ 643,595,269
Liabilities and Shareholders' Equity
Policy liabilities
Policyholders' account balances
$ 373,647,869 $ 362,519,753
Future policy benefits
88,735,716 76,673,797
Policy claims
2,381,183 2,099,548
Other policy liabilities
88,847 119,699
Total policy liabilities
464,853,615 441,412,797
Funds withheld under coinsurance agreement
106,586,633 112,681,925
Deferred federal income taxes
8,966,303 9,220,905
Other liabilities
10,957,832 10,427,430
Total liabilities
591,364,383 573,743,057
Shareholders' equity
Class A common stock, par value $.01 per share (40,000,000 shares authorized as of December 31, 2021 and 2020, 8,909,276 issued as of December 31, 2021 and 2020, 8,661,696 outstanding as of December 31, 2021 and 2020)
89,093 89,093
Class B common stock, par value $.01 per share (10,000,000 shares authorized, 101,102 issued and outstanding as of December 31, 2021 and 2020)
1,011 1,011
Additional paid-in capital
39,078,485 39,078,485
Treasury stock, at cost (247,580 shares as of December 31, 2021 and 2020)
(893,947 ) (893,947 )
Accumulated other comprehensive income
13,203,827 17,518,858
Accumulated earnings
16,916,082 14,058,712
Total shareholders' equity
68,394,551 69,852,212
Total liabilities and shareholders' equity
$ 659,758,934 $ 643,595,269
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31,
Revenues
Premiums
$ 31,922,288 $ 28,047,507
Net investment income
23,984,188 24,084,301
Net realized investment gains
898,551 1,007,268
Loss on other-than-temporary impairments
- (801,340 )
Service fees
228,597 264,513
Other income
82,617 188,756
Total revenues
57,116,241 52,791,005
Benefits, Claims and Expenses
Benefits and claims
Increase in future policy benefits
12,121,912 11,551,696
Death benefits
11,054,856 9,469,318
Surrenders
1,198,363 1,156,546
Interest credited to policyholders
12,663,112 12,276,268
Dividend, endowment and supplementary life contract benefits
316,403 311,868
Total benefits and claims
37,354,646 34,765,696
Policy acquisition costs deferred
(12,102,070 ) (11,856,420 )
Amortization of deferred policy acquisition costs
6,932,504 5,327,177
Amortization of value of insurance business acquired
274,478 298,471
Commissions
12,069,749 11,073,570
Other underwriting, insurance and acquisition expenses
8,913,646 9,101,717
Total expenses
16,088,307 13,944,515
Total benefits, claims and expenses
53,442,953 48,710,211
Income before total federal income tax expense (benefit)
3,673,288 4,080,794
Current federal income tax expense (benefit)
(76,513 ) 127,701
Deferred federal income tax expense
892,431 774,403
Total federal income tax expense
815,918 902,104
Net income
$ 2,857,370 $ 3,178,690
Net income per common share basic and diluted
Class A common stock
$ 0.3266 $ 0.3638
Class B common stock
$ 0.2776 $ 0.2707
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31,
Net income
$ 2,857,370 $ 3,178,690
Other comprehensive income (loss)
Total net unrealized investment gains (losses) arising during the period
(4,882,377 ) 9,775,829
Less net realized investment gains (losses)
613,775 (248,166 )
Net unrealized investment gains (losses)
(5,496,152 ) 10,023,995
Adjustment to deferred acquisition costs
(34,088 ) 21,213
Other comprehensive income (loss) before federal income tax expense (benefit)
(5,462,064 ) 10,002,782
Federal income tax expense (benefit)
(1,147,033 ) 2,100,584
Total other comprehensive income (loss)
(4,315,031 ) 7,902,198
Total comprehensive income (loss)
$ (1,457,661 ) $ 11,080,888
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2021 and 2020
Class A
Class B
Accumulated
Common
Common
Additional
Other
Total
Stock
Stock
Paid-in
Treasury
Comprehensive
Accumulated
Shareholders'
$.01 Par Value
$.01 Par Value
Capital
Stock
Income
Earnings
Equity
Balance as of January 1, 2020
$ 80,502 $ - $ 28,684,598 $ (893,947 ) $ 9,616,660 $ 19,930,449 $ 57,418,262
Comprehensive income:
Net income
- - - - - 3,178,690 3,178,690
Other comprehensive income
- - - - 7,902,198 - 7,902,198
Shareholders' cash dividend
- - - - - (393,178 ) (393,178 )
Shareholders' stock dividend
7,914 - 8,649,335 - - (8,657,249 ) -
Acquisition of K-TENN Insurance Company
1,688 - 1,744,552 - - - 1,746,240
Recapitalization
(1,011 ) 1,011 - - - - -
Balance as of December 31, 2020
$ 89,093 $ 1,011 $ 39,078,485 $ (893,947 ) $ 17,518,858 $ 14,058,712 $ 69,852,212
Comprehensive income:
Net income
- - - - - 2,857,370 2,857,370
Other comprehensive loss
- - - - (4,315,031 ) - (4,315,031 )
Balance as of December 31, 2021
$ 89,093 $ 1,011 $ 39,078,485 $ (893,947 ) $ 13,203,827 $ 16,916,082 $ 68,394,551
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
Operating activities
Net income
$ 2,857,370 $ 3,178,690
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for depreciation
- 121,240
Accretion of discount on investments
(4,757,938 ) (4,989,868 )
Net realized investment gains
(898,551 ) (1,007,268 )
Loss on other-than-temporary impairments
- 801,340
Amortization of policy acquisition cost
6,932,504 5,327,177
Policy acquisition cost deferred
(12,102,070 ) (11,856,420 )
Amortization of loan origination fees
43,585 33,263
Amortization of value of insurance business acquired
274,478 298,471
Allowance for mortgage loan losses
164,625 36,516
Provision for deferred federal income tax expense
892,431 774,403
Interest credited to policyholders
12,663,112 12,276,268
Change in assets and liabilities:
Policy loans
(163,951 ) (81,332 )
Short-term investments
12,182 (1,477,933 )
Accrued investment income
491,218 (162,195 )
Recoverable from reinsurers
187,840 10,512
Assets held in trust under coinsurance agreement
4,995,535 2,323,976
Agents' balances and due premiums
441,272 (532,221 )
Other assets
(4,847,263 ) (3,953,350 )
Future policy benefits
12,061,919 11,507,824
Policy claims
281,635 700,155
Other policy liabilities
(30,852 ) (22,488 )
Other liabilities (excludes change in payable of securities purchased of $1,087,127 and $377,481 in 2021 and 2020, respectively)
(556,725 ) 4,138,079
Net cash provided by operating activities
18,942,356 17,444,839
Investing activities
Purchases of fixed maturity securities
(33,163,143 ) (4,010,067 )
Maturities of fixed maturity securities
1,150,000 945,500
Sales of fixed maturity securities
13,224,511 21,435,624
Purchases of equity securities
(181,243 ) (90,292 )
Sales of equity securities
89 -
Acquisition of K-TENN Insurance Company
- 1,110,299
Joint venture distribution
78,904 87,267
Purchases of mortgage loans
(107,238,975 ) (77,131,267 )
Payments on mortgage loans
104,436,910 64,250,033
Purchases of other long-term investments
(2,993,805 ) (5,788,546 )
Collections on other long-term investments
12,812,964 11,755,897
Sales of real estate
818,018 2,216,780
Net change in receivable and payable for securities sold and purchased
1,087,127 377,481
Net cash provided by (used in) investing activities
(9,968,643 ) 15,158,709
Financing activities
Policyholders' account deposits
28,708,203 24,283,570
Policyholders' account withdrawals
(35,383,965 ) (39,476,015 )
Shareholders' cash dividends
- (393,178 )
Net cash used in financing activities
(6,675,762 ) (15,585,623 )
Increase in cash and cash equivalents
2,297,951 17,017,925
Cash and cash equivalents, beginning of period
40,230,095 23,212,170
Cash and cash equivalents, end of period
$ 42,528,046 $ 40,230,095
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Supplemental Disclosure - Cash and Non-Cash Impact on Operating, Investing and Financing Activities
During 2021 and 2020, the Company foreclosed on residential mortgage loans of real estate totaling $458,587 and $797,158, respectively, and transferred those properties to investment real estate that are now held for sale.
In conjunction with these foreclosures, the non-cash impact on investing activities is summarized as follows:
Year Ended
Year Ended
December 31, 2021
December 31, 2020
Reductions in mortgage loans due to foreclosure
$ 458,587 $ 797,158
Investment real estate held-for-sale acquired through foreclosure
(458,587 ) (797,158 )
Net cash used in investing activities
$ - $ -
In 2020, the Company issued 791,339 shares of Class A common stock in connection with a 10% share dividend payable to the holders of shares of Class A common stock of the Company as of November 12, 2020. In conjunction with the 2020 stock dividends, the non-cash impact on investing and financing activities is summarized as follows:
Year Ended
December 31, 2020
Fair value of Class A common stock shares issued in connection with the stock dividend (791,339 shares issued in 2020)
$ 8,657,249
Reduction in accumulated earnings due to stock dividend
(8,657,249 )
Increase in Class A common stock, par value $.01 due to stock dividend
7,914
Increase in additional paid-in-capital due to the stock dividend
8,649,335
Change in shareholders' equity due to the stock dividend
$ -
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Supplemental Disclosure - Cash and Non-Cash Impact on Operating, Investing and Financing Activities
On January 1, 2020, the Company acquired K-TENN Insurance Company. The Company acquired assets of $1,916,281 (including cash) and assumed liabilities of $170,041.
In conjunction with this 2020 acquisition, the cash and non-cash impact on operating, investing and financing activities is summarized as follows.
December 31, 2020
Cash used in acquisition of K-TENN Insurance Company
$ -
Cash provided in acquisition of K-TENN Insurance Company
1,110,299
Increase in cash from acquisition of K-TENN Insurance Company
1,110,299
Fair value of assets acquired in acquisition of K-TENN Insurance Company (excluding cash)
Available-for-sale fixed maturity securities
800,000
Policy loans
1,045
Accrued investment income
Due premiums
3,986
Other assets
Total fair value of assets acquired (excluding cash)
805,982
Fair value of liabilities assumed in acquisition of K-TENN Insurance Company
Future policy benefits
150,583
Other policy liabilities
9,212
Other liabilities
10,246
Total fair value of liabilities assumed
170,041
Fair value of net assets acquired in acquisition of K-TENN Insurance Company (excluding cash)
635,941
Fair value of net assets acquired in acquisition of K-TENN Insurance Company (including cash)
$ 1,746,240
See notes to consolidated financial statements.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
1. Organization and Significant Accounting Policies
First Trinity Financial Corporation (the “Company” or “FTFC”) is the parent holding company of Trinity Life Insurance Company (“TLIC”), Family Benefit Life Insurance Company (“FBLIC”), Trinity Mortgage Corporation (“TMC”), formerly known as First Trinity Capital Corporation and Trinity American, Inc. (“TAI”). 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 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 product 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 Alabama, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Montana, Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, Texas, Utah and West Virginia. FBLIC is licensed in the states of Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia.
The Company owns 100% of TMC that was incorporated in 2006, and began operations in January 2007. TMC’s primary focus changed during 2020 from premium financing loans to originating, brokering and administrating residential and commercial mortgage loans for third parties.
The Company owns 100% of TAI (formerly known as Citizens American Life, Inc.). TAI was incorporated in Barbados, West Indies on March 24, 2016 for the primary purpose of forming a life insurance company producing United States of America (U.S.) dollar denominated life insurance policies and annuity contracts outside of the United States and Barbados. TAI is licensed as an Exempt Insurance Company under the Exempt Insurance Act of Barbados. TAI was initially involved in developing life insurance and annuity contracts through an association with distribution channels but is now issuing life insurance policies and annuity contracts. The Company’s acquisition of TAI was formally approved by Barbados regulators and the certifications were received in 2019.
Company Capitalization
The Company raised $1,450,000 from two private placement stock offerings 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.
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.
In 2020, the Company paid a $0.05 per share cash dividend for a total of $393,178 and issued 791,339 shares of Class A common stock in connection with a 10% stock dividend to its Class A shareholders. The 10% stock dividend resulted in accumulated earnings being charged $8,657,249 with an offsetting credit of $8,657,249 to common stock and additional paid-in capital. On January 1, 2020, the Company issued 168,866 shares in connection with its acquisition of K-TENN Insurance Company (“K-TENN”).
The Company has also purchased 247,580 shares of treasury stock at a cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’s Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
1. Organization and Significant Accounting Policies (continued)
Company Recapitalization
On October 2, 2019, at the Company Annual Shareholders’ Meeting, FTFC’s shareholders approved the following proposals:
●
An amendment and restatement of FTFC’s Certificate of Incorporation to authorize 40,000,000 shares of Class A common stock and 10,000,000 shares of Class B common stock and to establish the relative rights, preferences and privileges of, and the restrictions and limitations on, the Class A common stock and the Class B common stock.
●
An amendment and restatement of FTFC’s Certificate of Incorporation to automatically reclassify each issued and outstanding share of our existing common stock as one (1) share of Class A common stock or, at the shareholder’s election, into one (1) share of new Class B common stock.
These proposals received Form A regulatory approval from the Oklahoma Insurance Department (“OID”) on February 27, 2020 and the Missouri Department of Commerce and Insurance (“MDCI”) on December 31, 2019, followed by formal adoption by FTFC’s Board of Directors on March 12, 2020. Effective March 12, 2020, FTFC’s Class B shareholders were entitled to elect a majority of FTFC’s Board of Directors (one-half plus one) but will only receive, compared to FTFC’s Class A shareholders, 85% of cash dividends, stock dividends or amounts due upon any FTFC merger, sale or liquidation event. FTFC’s Class B shareholders may also convert one share of FTFC’s Class B common stock for a .85 share of FTFC’s Class A common stock. FTFC’s Class A shareholders will elect the remaining Board of Directors members and will receive 100% of cash dividends, stock dividends or amounts due upon any Company merger, sale or liquidation event.
Acquisition of Other Companies
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 $2,695,234 including direct costs associated with the acquisition of $195,234. The acquisition of FLAC 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% payable monthly, that was approved by the Oklahoma Insurance Department (“OID”). This surplus note is eliminated in consolidation.
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.
On December 28, 2011, TLIC acquired 100% of the outstanding common stock of FBLIC from FBLIC’s shareholders. The acquisition of FBLIC was accounted for as a purchase. The aggregate purchase price for the acquisition of FBLIC was $13,855,129. The acquisition of FBLIC was financed with the working capital of TLIC.
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, assumed liabilities of $3,055,916 and recorded a gain on reinsurance assumption of $588,923.
On April 3, 2018, FTFC acquired 100% of the outstanding stock of TAI domiciled in Barbados, West Indies. The Barbados regulators approved the acquisition and supplied certifications during 2019. The aggregate purchase price for the acquisition of TAI was $250,000. The acquisition of TAI was financed with the working capital of FTFC.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
1. Organization and Significant Accounting Policies (continued)
Effective January 1, 2020, the Company acquired 100% of the outstanding common stock of K-TENN insurance company (“K-TENN”) from its sole shareholder in exchange for 168,866 shares of FTFC’s common stock. The acquisition of K-TENN was accounted for as a purchase. The aggregate purchase price of K-TENN was $1,746,240. Immediately subsequent to this acquisition, the $1,746,240 of net assets and liabilities of K-TENN along with the related life insurance business operations were contributed to TLIC.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
Principles of Consolidation
The consolidated financial statements include the accounts and operations of the Company and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
Reclassifications
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.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.
Investments
Fixed maturity securities comprised of bonds and redeemable preferred securities 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.
Interest income on fixed maturity securities, as well as the related amortization of premium and accretion of discount, is included in net investment income under the effective yield method. Dividend income on redeemable preferred securities are recognized in net investment income when declared. The amortized cost of fixed maturity securities available-for-sale are written down to fair value when a decline in value is considered to be other-than-temporary.
The Company evaluates the difference between the cost or amortized cost and estimated fair value of its fixed maturity securities 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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
1. Organization and Significant Accounting Policies (continued)
The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management's judgment as to the financial position and future prospects of the entity issuing the security. It is not possible to accurately predict when it may be determined that a specific security will become impaired. Future adverse changes in market conditions, poor operating results of underlying investments and defaults on mortgage loan payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future.
Likewise, if a change occurs in the Company’s intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that the Company 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, 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.
Equity securities are comprised of mutual funds and common stocks and are carried at fair value. The associated unrealized gains and losses are included in net realized investment gains (losses). Dividends from these investments are recognized in net investment income when declared.
Mortgage loans are carried at unpaid balances, net of unamortized premium or discounts. Interest income and the amortization of premiums or discounts are included in net investment income. Mortgage loan fees, certain direct loan origination costs, and purchase premiums and discounts on loans are recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. In certain circumstances, prepayments may be anticipated. The Company has established a valuation allowance for mortgage loans on real estate that are not supported by funds held in escrow.
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 was 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. Investment real estate obtained through foreclosure on mortgage loans on real estate is carried at the lower of acquisition cost or net realizable value.
Policy loans are carried at unpaid principal balances. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned.
Other long-term investments are comprised of lottery prize receivables and are carried at amortized cost. Interest income and the accretion of discount are included in net investment income.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and money market instruments.
Short-term investments
Short-term investments include funds that have a maturity of more than 90 days but less than one year at the date of purchase.
Investment Income and Realized Gains and Losses on Sales of Investments
Interest and dividends earned on investments are included in net investment income. Realized gains and losses on sales of investments are recognized in operations on the specific identification basis.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
1. Organization and Significant Accounting Policies (continued)
Deferred Policy Acquisition Costs
Commissions and other acquisition costs which vary with and are primarily related to the successful production of new business are deferred and amortized in a systematic manner based on the related contract revenues or gross profits as appropriate. Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense.
Deferred acquisition costs for the successful production of traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities. Deferred acquisition costs related to the successful production of insurance and annuity products that subject the Company to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed (i.e., limited-payment long-duration annuity contracts) 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 insurance and annuity products, such adjustments are reflected as a component of the amortization of deferred acquisition costs. Deferred acquisition costs related to limited-payment long-duration insurance and annuity contracts are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from available-for-sale securities had actually been realized. This adjustment is included in the change in net unrealized appreciation (depreciation) on available-for-sale securities, a component of “Accumulated Other Comprehensive Income (Loss)” in the shareholders’ equity section of the statement of financial position.
Allowance for Loan Losses from Mortgage Loans
The 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 the Company’s judgment, the known and inherent credit losses existing in the residential and commercial mortgage loan portfolio. The allowance, in the judgment of the Company, is necessary to reserve for estimated loan losses inherent in the residential and commercial mortgage loan portfolios 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.
While the Company utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the residential and commercial mortgage loan portfolios, the economy and changes in interest rates. The Company’s allowance for possible mortgage loan losses consists of specific valuation allowances established for probable losses on specific loans and a portfolio reserve for probable incurred but not specifically identified loans.
Mortgage loans are 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 mortgage loan agreement. Factors considered by the Company in determining impairment include payment status, collateral value of the real estate subject to the mortgage loan, and the probability of collecting scheduled principal and interest payments when due.
Mortgage loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The Company determines the significance of payment delays and shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the mortgage 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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
1. Organization and Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation or amortization. Office furniture, equipment and computer software is recorded at cost or fair value at acquisition less accumulated depreciation or amortization using the straight-line method over the estimated useful life of the respective assets of three to ten years. Leasehold improvements are recorded at cost and depreciated over the remaining non-cancellable lease term.
Reinsurance
The Company cedes reinsurance under various agreements allowing management to control exposure to potential losses arising from large risks and providing additional capacity for growth. Estimated reinsurance recoverable balances are reported as assets and are recognized in a manner consistent with the liabilities related to the underlying reinsured ceded contracts. The Company also assumes reinsurance under various agreements allowing management to increase growth in assets and profitability. Estimated reinsurance payable balances are reported as liabilities and are recognized in a manner consistent with the assets related to the underlying assumed reinsurance contracts.
Value of Insurance Business Acquired
As a result of the Company’s 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 Financial Accounting Standards Board (“FASB”) guidance. The value of acquired insurance in force is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits.
For the amortization of the value of acquired insurance in force, the Company periodically reviews its estimates of gross profits. The most significant assumptions involved in the estimation of gross profits include interest rate spreads, future financial market performance, business surrender/lapse rates, mortality and morbidity, expenses and the impact of realized investment gains and losses. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company is required to record a charge or credit to amortization expense for the period in which an adjustment is made.
As of December 31, 2021 and 2020, there was $4,421,379 and $4,146,901, respectively, of accumulated amortization of the value of insurance business acquired due to the purchases of FLAC and FBLIC. The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years:, $258,366 in 2022, $208,044 in 2023, $211,956 in 2024, $199,812 in 2025 and $201,919 in 2026.
Other Assets and Other Liabilities
Other assets consist primarily of advances to mortgage loan originator, receivable for securities sold, federal and state income taxes recoverable, guaranty funds, notes receivable, prepaid assets, deposits, other receivables and property and equipment.
Other liabilities consist primarily of accrued expenses payable, accounts payable, remittance and suspense items not allocated, payable for securities purchased, guaranty fund assessments, unclaimed funds, deferred revenue, unearned investment income, withholdings, escrows and other payables.
Policyholders’ Account Balances
The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the financial statement date. This liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Interest crediting rates for individual annuities range from 2.25% to 4.50%. Interest crediting rates for deposit-type liabilities range from 2.50% to 4.00%.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
1. Organization and Significant Accounting Policies (continued)
Future Policy Benefits
The Company’s liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. For life insurance and annuity products, expected mortality and morbidity is generally based on the Company’s historical experience or standard industry tables including a provision for the risk of adverse deviation. Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality, 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 by establishing premium deficiency reserves.
Policy Claims
Policy claim liabilities represent the estimated liabilities for claims reported plus estimated incurred but not yet reported claims developed from trends of historical market data applied to current exposure.
Federal Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are provided for cumulative temporary differences between balances of assets and liabilities determined under U.S. GAAP and balances determined using tax bases. A valuation allowance is established for the amount of the deferred tax asset that exceeds the amount of the estimated future taxable income needed to utilize the future tax benefits.
Common Stock
Class A and Class B common stock are fully paid, non-assessable and has a par value of $.01 per share.
Treasury Stock
Treasury stock, representing shares of the Company’s common stock that have been reacquired after having been issued and fully paid, is recorded at the reacquisition cost and the shares are no longer outstanding.
Accumulated Other Comprehensive Income (Loss)
FASB guidance requires the inclusion of unrealized gains or losses on available-for-sale securities, net of tax, as a component of other comprehensive income (loss). Unrealized gains and losses recognized in accumulated other comprehensive income (loss) that are later recognized in net income through a reclassification adjustment are identified on the specific identification method. In addition, deferred acquisition costs related to limited-payment long-duration insurance and annuity contracts are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from available-for-sale securities had actually been realized. This adjustment is included in the change in net unrealized appreciation (depreciation) on available-for-sale securities, a component of “Accumulated Other Comprehensive Income (Loss)” in the shareholders’ equity section of the statement of financial position.
Revenues and Expenses
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 in a systematic manner based on the related contract revenues or gross profits as appropriate.
Acquisition costs for traditional life insurance contracts are deferred to the extent deemed recoverable and are amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities. Traditional life insurance products are treated as long-duration contracts since they generally remain in force for the lifetime of the insured.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
1. Organization and Significant Accounting Policies (continued)
Deferred acquisition costs related to insurance and annuity products that subject the Company to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies. These types of insurance and annuity contracts are treated as long-duration insurance contracts since they generally remain in force for an extended period.
Net Income Per Common Share Basic and Diluted
For the years ended December 31, 2021 and 2020, the net income allocated to the Class B shareholders is the total net income less shareholders’ cash dividends multiplied by the right to receive dividends at 85% for Class B shares (85,937) as of the reporting date divided by the allocated total shares (8,747,633) of Class A shares (8,661,696) and Class B shares (85,937) as of the reporting date.
For the year ended December 31, 2021, the net income allocated to the Class A shareholders of $2,829,299 is the total net income $2,857,370 less the net income allocated to the Class B shareholders $28,071. For the year ended December 31, 2020, the net income allocated to the Class A shareholders $3,151,325 is the total net income $3,178,690 less the net income allocated to the Class B shareholders $27,365.
The weighted average outstanding common shares basic for the years ended December 31, 2021 and 2020 were 8,661,696 for Class A shares and 101,102 for Class B shares. The weighted average Class A shares reflect the retrospective adjustment for the impacts of the 10% stock dividend declared by the Company on November 12, 2020 and issued to holders of Class A common stock shares of the Company as of November 12, 2020.
Subsequent Events
On January 4, 2022, FTFC acquired Royalty Capital Life Insurance Company (“RCLIC”) from Royalty Capital Corporation (“Royalty”) in exchange for 722,644 shares of FTFC’s Class A common stock issued to unrelated parties. Royalty was dissolved immediately after FTFC acquired RCLIC and FTFC’s 722,644 shares of Class A common stock were distributed to the former Royalty shareholders during February 2022. On March 1, 2022, the Missouri Department of Commerce and Insurance (“MDCI”) approved FTFC’s contribution of RCLIC to FBLIC to be accounted for as a statutory merger in 2022. RCLIC was dissolved immediately after and RCLIC was merged into FBLIC.
Management has evaluated all events subsequent to December 31, 2021 through the date that these financial statements have been issued.
Recent Accounting Pronouncements
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued updated guidance (Accounting Standards Update 2016-13) for the accounting for credit losses for financial instruments. The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance recoverables, including structured settlements that are recorded as part of reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments.
The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
1. Organization and Significant Accounting Policies (continued)
The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.
The updated guidance was effective for reporting periods beginning after December 15, 2019. As a Smaller Reporting Company, the effective date was recently changed and the delayed effective date is now for reporting periods beginning after December 15, 2022. 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 had been 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.
Intangibles - Goodwill and Other
In January 2017, the FASB issued updated guidance (Accounting Standards Update 2017-04) that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge by comparing a reporting unit’s fair value with its carrying amount and recognizing an impairment charge for the excess of the carrying amount over estimated fair value (i.e., Step 1 of current guidance).
The implied fair value of goodwill is currently determined in Step 2 by deducting the fair value of all assets and liabilities of the reporting unit (determined in the same manner as a business combination) from the reporting unit’s fair value as determined in Step 1 (including any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unit in Step 1). The updated guidance requires an entity to perform its annual, or interim, impairment test by either: (1) an initial qualitative assessment of factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact a reporting unit’s fair value and lead to the determination that it is more likely than not that the reporting unit’s fair value is less than its carrying value, including goodwill (consistent with current guidance), or (2) applying Step 1.
The Company adopted this guidance in first quarter 2020. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the FASB issued updated guidance (Accounting Standards Update 2018-12) to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. This update improves the timeliness of recognizing changes in the liability for future policy benefits, modifies the rate used to discount future cash flows, simplifies and improves accounting for certain market-based options or guarantees associated with deposit (i.e., account balance) contracts, simplifies the amortization of deferred acquisitions costs and expands required disclosures. The expanded disclosure requires an insurance entity to provide disaggregated roll forwards of beginning to ending balances of the following: liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities and deferred acquisition costs including disclosure about, changes to and effect of changes for significant inputs, judgments, assumptions and methods used in measurements.
The updated guidance was effective for reporting periods beginning after December 15, 2020. As a Smaller Reporting Company, the effective date has been changed twice and the delayed effective date is now for reporting periods beginning after December 15, 2024. Early adoption is permitted but not elected by the Company. With respect to the liability for future policyholder benefits for traditional and limited-payment contracts and deferred acquisition costs, an insurance entity may elect to apply the amendments retrospectively as of the beginning of the earliest period presented.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
1. Organization and Significant Accounting Policies (continued)
With respect to the market risk benefits, an insurance entity should apply the amendments retrospectively as of the beginning of the earliest period presented. The Company expects that the impact on the Company’s results of operations, financial position and liquidity at the date of adoption of the updated guidance in 2024 will be determined by the long-duration contracts then held by the Company and the economic conditions at that time.
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued amendments (Accounting Standards Update 2018-13) to modify the disclosure requirements related to fair value measurements including the consideration of costs and benefits of producing the modified disclosures.
The Company adopted this guidance in first quarter 2020. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued updated guidance (Accounting Standards Update 2019-12) for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The Company adopted this guidance in first quarter 2021. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Business Combinations - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers
In October 2021, the FASB issued guidance (Accounting Standards Update 2021-08) for the accounting for revenue contracts with customers acquired in a business combination. The amendments in this Update address how to determine whether a contract liability is recognized by the acquirer in a business combination and provide specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments to this Update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification - Revenue from Contracts with Customers (“Topic 606”) at the acquisition date as if the acquirer had originated the contracts.
The amendments in this Update primarily address the accounting for contract assets and contract liabilities from revenue contracts with customers in a business combination. These amendments, however, also apply to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply. The amendments in this Update do not affect the accounting for other assets or liabilities that may arise from revenue contracts with customers in accordance with Topic 606 whether in or not in a business combination.
The amendments in this Update are effective for the Company as a public business entity for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments retrospectively to all business for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and prospectively to all business combinations that occur on or after the date of initial application. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
2. Investments
Fixed Maturity Securities
Investments in fixed maturity securities as of December 31, 2021 and 2020 are summarized as follows:
Gross
Gross
Amortized Cost
Unrealized
Unrealized
Fair
or Cost
Gains
Losses
Value
December 31, 2021
Fixed maturity securities
U.S. government and U.S. government agencies
$ 428,153 $ 812 $ 1,952 $ 427,013
States and political subdivisions
8,463,941 689,564 24,553 9,128,952
Commercial mortgage-backed securities
3,458,408 252 34,265 3,424,395
Residential mortgage-backed securities
11,081 13,195 - 24,276
Corporate bonds
116,230,579 12,731,684 100,882 128,861,381
Asset-backed securities
5,278,819 57,290 17,806 5,318,303
Exchange traded securities
549,334 - 32,734 516,600
Foreign bonds
31,286,049 3,493,469 46,192 34,733,326
Redeemable preferred securities
1,250,000 - 17,600 1,232,400
Certificate of deposits
400,000 10,392 - 410,392
Total fixed maturity securities
$ 167,356,364 $ 16,996,658 $ 275,984 $ 184,077,038
December 31, 2020
Fixed maturity securities
U.S. government and U.S. government agencies
$ 430,735 $ 3,568 $ - $ 434,303
States and political subdivisions
8,830,403 891,285 31,932 9,689,756
Residential mortgage-backed securities
14,022 14,420 - 28,442
Corporate bonds
106,387,417 16,859,782 111,840 123,135,359
Asset-backed securities
2,052,174 32,908 47,813 2,037,269
Exchange traded securities
500,000 - 200 499,800
Foreign bonds
29,616,259 4,641,338 59,230 34,198,367
Certificate of deposits
600,000 24,540 - 624,540
Total fixed maturity securities
$ 148,431,010 $ 22,467,841 $ 251,015 $ 170,647,836
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
2. Investments (continued)
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, 2021 and 2020 are summarized as follows:
Unrealized
Number of
Fair Value
Loss
Securities
December 31, 2021
Fixed maturity securities
Less than 12 months in an unrealized loss position
U.S. government and U.S. government agencies
$ 301,195 $ 1,952 2
States and political subdivisions
337,421 1,724 2
Commercial mortgage-backed securities
3,323,141 34,265 7
Corporate bonds
10,991,840 100,882 30
Asset-backed securities
3,475,854 9,544 8
Exchange traded securities
516,600 32,734 2
Redeemable preferred securities
482,400 17,600 2
Foreign bonds
2,408,472 46,192 6
Total less than 12 months in an unrealized loss position
21,836,923 244,893 59
More than 12 months in an unrealized loss position
States and political subdivisions
626,754 22,829 1
Asset-backed securities
345,299 8,262 1
Total more than 12 months in an unrealized loss position
972,053 31,091 2
Total fixed maturity securities in an unrealized loss position
$ 22,808,976 $ 275,984 61
December 31, 2020
Fixed maturity securities
Less than 12 months in an unrealized loss position
States and political subdivisions
$ 625,098 $ 31,932 1
Corporate bonds
878,716 41,508 3
Asset-backed securities
1,047,443 47,813 3
Exchange traded securities
499,800 200 2
Foreign bonds
285,569 28,282 4
Total less than 12 months in an unrealized loss position
3,336,626 149,735 13
More than 12 months in an unrealized loss position
Corporate bonds
1,084,205 70,332 3
Foreign bonds
532,875 30,948 1
Total more than 12 months in an unrealized loss position
1,617,080 101,280 4
Total fixed maturity securities in an unrealized loss position
$ 4,953,706 $ 251,015 17
As of December 31, 2021, the Company held 61 available-for-sale fixed maturity securities with an unrealized loss of $275,984, fair value of $22,808,976 and amortized cost of $23,084,960. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2021. The ratio of the fair value to the amortized cost of these 61 securities is 99%.
As of December 31, 2020, the Company held 17 available-for-sale fixed maturity securities with an unrealized loss of $251,015, fair value of $4,953,706 and amortized cost of $5,204,721. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2020. The ratio of the fair value to the amortized cost of these 17 securities is 95%.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
2. Investments (continued)
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 based on all of the factors considered. Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value.
For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors. The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings. The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss). Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains (losses) in the consolidated statements of operations. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of operations in the periods incurred as the difference between fair value and cost.
The Company recorded one other-than-temporary impairment during 2020. During 2020, the Company impaired its bonds in an offshore drilling company with a total par value of $850,000 as a result of continuing unrealized losses. This impairment was considered fully credit-related, resulting in a charge to the statement of operations before tax of $801,340 for the year ended December 31, 2020. This charge represents the credit-related portion of the difference between the amortized cost basis of the security and its fair value. The Company experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securities during 2020.
There were no impairments during the year ended December 31, 2021.
Management believes that the Company will fully recover its cost basis in the securities held as of December 31, 2021, 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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
2. Investments (continued)
Net unrealized gains included in other comprehensive income (loss) for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized as of December 31, 2021 and 2020 are summarized as follows:
December 31, 2021
December 31, 2020
Unrealized appreciation on available-for-sale securities
$ 16,720,674 $ 22,216,826
Adjustment to deferred acquisition costs
(6,969 ) (41,057 )
Deferred income taxes
(3,509,878 ) (4,656,911 )
Net unrealized appreciation on available-for-sale securities
$ 13,203,827 $ 17,518,858
The amortized cost and fair value of fixed maturity available-for-sale securities as of December 31, 2021, by contractual maturity, are summarized as follows:
December 31, 2021
Fixed Maturities Available-For-Sale Securities
Amortized Cost
Fair Value
Due in one year or les
$ 2,808,783 $ 2,846,451
Due in one year through five years
37,361,054 39,055,956
Due after five years through ten years
39,395,049 42,867,654
Due after ten years
83,071,989 94,625,906
Due at multiple maturity dates
4,719,489 4,681,071
$ 167,356,364 $ 184,077,038
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
2. Investments (continued)
Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity securities available-for-sale, equity securities, investment real estate, mortgage loans on real estate and other long-term investments for the years ended December 31, 2021 and 2020 are summarized as follows:
Years Ended December 31,
Fixed Maturity Securities
Equity Securities
Investment Real Estate
Proceeds
$ 14,374,511 $ 22,381,124 $ 89 $ - $ 818,018 $ 2,216,780
Gross realized gains
780,266 643,648 89 - 289,840 347,039
Gross realized losses
(166,491 ) (90,474 ) - - - -
Loss on other-than- temporary impairment
- (801,340 ) - - - -
Years Ended December 31,
Mortgage Loans on Real Estate
Other Long-Term Investments
Proceeds
$ 28,966,890 $ 6,345,816 $ 12,812,964 $ -
Gross realized gains
39,727 108,101 - -
Gross realized losses
(4,417 ) - (83,339 ) -
Loss on other-than- temporary impairment
- - - -
The accumulated change in net unrealized investment gains (losses) for fixed maturity available-for-sale securities for the years ended December 31, 2021 and 2020 and the amount of net realized investment gains (losses) on fixed maturity securities available-for-sale, equity securities, investment real estate, mortgage loans on real estate and other long-term investments for the years ended December 31, 2021 and 2020 are summarized as follows:
Years Ended December 31,
Change in unrealized investment gains (losses):
Available-for-sale securities:
Fixed maturity securities
$ (5,496,152 ) $ 10,023,995
Net realized investment gains (losses):
Available-for-sale securities:
Fixed maturity securities
613,775 553,174
Equity securities, sale of securities
89 -
Equity securities, changes in fair value
42,876 (1,046 )
Investment real estate
289,840 347,039
Mortgage loans on real estate
35,310 108,101
Other long-term investments
(83,339 ) -
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
2. Investments (continued)
Mortgage Loans on Real Estate
The Company’s mortgage loans by property type as of December 31, 2021 and 2020 are summarized as follows:
December 31, 2021
December 31, 2020
Residential mortgage loans
$ 169,368,048 $ 163,906,373
Commercial mortgage loans by property type
Apartment
175,121 -
Industrial
1,170,544 670,708
Lodging
280,836 290,889
Office building
2,285,403 4,596,331
Retail
4,228,099 5,444,761
Total commercial mortgage loans by property type
8,140,003 11,002,689
Total mortgage loans
$ 177,508,051 $ 174,909,062
The Company utilizes the ratio of the carrying value of individual 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 (includes apartment, industrial, lodging, office building and retail) mortgage loans on real estate by credit quality using this ratio as of December 31, 2021 and 2020 are summarized as follows:
December 31,
Residential Mortgage Loans
Commercial Mortgage Loans
Total Mortgage Loans
Loan-To-Value Ratio
Over 70%
to 80% $ 52,292,906 $ 53,905,657 $ 1,069,973 $ - $ 53,362,879 $ 53,905,657
Over 60%
to 70% 50,445,981 50,752,236 1,359,831 1,608,934 51,805,812 52,361,170
Over 50%
to 60% 26,492,616 27,493,242 1,496,664 2,391,856 27,989,280 29,885,098
Over 40%
to 50% 19,235,027 13,875,675 312,648 786,143 19,547,675 14,661,818
Over 30%
to 40% 7,843,501 7,846,306 1,471,023 1,176,419 9,314,524 9,022,725
Over 20%
to 30% 9,482,943 5,538,886 1,916,446 2,774,020 11,399,389 8,312,906
Over 10%
to 20% 2,737,111 3,699,228 513,418 2,072,994 3,250,529 5,772,222
10%
or less 837,963 795,143 - 192,323 837,963 987,466
Total
$ 169,368,048 $ 163,906,373 $ 8,140,003 $ 11,002,689 $ 177,508,051 $ 174,909,062
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
2. Investments (continued)
The outstanding principal balance of mortgage loans, by state, as of December 31, 2021 and 2020 are summarized as follows:
December 31, 2021
December 31, 2020
Amount
Percentage
Amount
Percentage
Alabama
$ 788,026 0.44 % $ 1,205,848 0.69 %
Arizona
726,676 0.41 % 1,111,244 0.64 %
Arkansas
723,456 0.41 % 618,038 0.35 %
California
8,890,865 5.01 % 8,054,996 4.61 %
Colorado
55,838 0.03 % 56,621 0.03 %
Connecticut
3,735,358 2.10 % 985,525 0.56 %
Delaware
61,318 0.03 % 520,569 0.30 %
District of Columbia
- 0.00 % 720,000 0.41 %
Florida
48,603,579 27.38 % 41,034,631 23.46 %
Georgia
7,852,783 4.42 % 9,918,563 5.67 %
Hawaii
- 0.00 % 227,068 0.13 %
Idaho
- 0.00 % 212,409 0.12 %
Illinois
3,606,147 2.03 % 5,018,145 2.87 %
Indiana
1,884,980 1.06 % 916,706 0.52 %
Kansas
389,644 0.22 % 375,870 0.21 %
Kentucky
76,259 0.04 % - 0.00 %
Louisiana
149,861 0.08 % 503,787 0.29 %
Maine
124,733 0.07 % 126,414 0.07 %
Maryland
508,856 0.29 % 589,487 0.34 %
Massachusetts
1,141,814 0.64 % 2,005,130 1.15 %
Michigan
429,905 0.24 % 236,135 0.14 %
Minnesota
866,964 0.49 % 880,922 0.50 %
Mississippi
37,128 0.02 % 80,830 0.05 %
Missouri
5,894,094 3.32 % 2,283,186 1.31 %
Montana
700,000 0.39 % - 0.00 %
Nevada
- 0.00 % 11,668 0.01 %
New Jersey
9,558,374 5.38 % 8,683,341 4.96 %
New Mexico
80,415 0.05 % 80,975 0.05 %
New York
9,948,828 5.60 % 4,915,742 2.81 %
North Carolina
1,733,732 0.98 % 2,356,697 1.35 %
Ohio
6,809,487 3.84 % 4,732,716 2.71 %
Oklahoma
645,008 0.36 % 510,194 0.29 %
Oregon
105,446 0.06 % 563,014 0.32 %
Pennsylvania
794,333 0.45 % 637,063 0.36 %
South Carolina
1,004,438 0.57 % 728,933 0.42 %
Tennessee
2,737,512 1.54 % 4,211,195 2.41 %
Texas
55,003,626 31.02 % 67,127,667 38.38 %
Utah
- 0.00 % 2,000,000 1.14 %
Vermont
220,093 0.12 % 231,266 0.13 %
Virginia
1,081,200 0.61 % 400,502 0.23 %
Washington
811,405 0.46 % 325,369 0.19 %
Wisconsin
432,389 0.24 % 208,905 0.12 %
Mortgage loan allowance and unamortized origination fees
(706,519 ) -0.40 % (498,309 ) -0.30 %
$ 177,508,051 100 % $ 174,909,062 100 %
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
2. Investments (continued)
During 2021, the Company foreclosed on residential mortgage loans of real estate totaling $458,587 and transferred those properties to investment real estate held for sale. During 2020, the Company foreclosed on residential mortgage loans of real estate totaling $797,158 and transferred those properties to investment real estate held for sale.
The principal balances of the 1,086 residential mortgage loans owned by the Company as of December 31, 2021 that aggregated to $169,368,048 ranged from a low of $930 to a high of $2,135,625 and the interest rates ranged from 3.43% to 25.64%. The principal balances of the 26 commercial (includes apartment, industrial, lodging, office building and retail) mortgage loans owned by the Company as of December 31, 2021 that aggregated to $8,140,003 ranged from a low of $14,515 to a high of $1,075,350 and the interest rates ranged from 5.97% to 10.51%.
The principal balances of the 1,260 residential mortgage loans owned by the Company as of December 31, 2020 that aggregated to $163,906,373 ranged from a low of $262 to a high of $974,550 and the interest rates ranged from 3.43% to 25.64%. The principal balances of the 28 commercial (includes industrial, lodging, office building and retail) mortgage loans owned by the Company as of December 31, 2020 that aggregated to $11,002,689 ranged from a low of $9,293 to a high of $2,000,000 and the interest rates ranged from 6.21% to 10.51%.
There were 10 mortgage loans with a remaining principal balance of $1,717,496 that were more than 90 days past due as of December 31, 2021. There was one mortgage loan in default and in the foreclosure process with a remaining principal balance of $484,400 as of December 31, 2021.
There were 24 loans with a remaining principal balance of $3,979,997 that were more than 90 days past due as of December 31, 2020. There were no mortgage loans in default or in the foreclosure process as of December 31, 2020.
There are allowances for losses on mortgage loans of $706,519 and $541,894 as of December 31, 2021 and 2020, respectively. As of December 31, 2021, $795,730 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, 2020, $766,667 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.
In 2021 and 2020 the Company did not experience any impairment on mortgage loan investments.
Investment real estate
On November 16, 2020, TLIC sold a 20,000 square feet office building and approximately three acres of land located in Topeka, Kansas with an aggregate carrying value of $1,078,037. The Company recorded a gross realized investment gain on sale of $240,374 based on an aggregate sales price of $1,318,411.
TLIC owns approximately three acres of undeveloped land located in Topeka, Kansas with a carrying value of $409,436.
FBLIC owns approximately one-half acre of undeveloped land located in Jefferson City, Missouri with a carrying value of $131,000.
During 2021, the Company foreclosed on residential mortgage loans of real estate totaling $458,587 and transferred those properties to investment real estate held for sale. During 2021, the Company sold investment real estate property with an aggregate carrying value of $528,178. The Company recorded a gross realized investment gain on sale of $289,840 based on an aggregate sales price of $818,018.
During 2020, the Company foreclosed on residential mortgage loans of real estate totaling $797,158 and transferred those properties to investment real estate held for sale. During 2020, the Company sold investment real estate property with an aggregate carrying value of $791,704. The Company recorded a gross realized investment gain on sale of $106,665 based on an aggregate sales price of $898,369.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
2. Investments (continued)
The Company’s investment real estate as of December 31, 2021 and 2020 is summarized as follows:
December 31,
Land - held for investment
$ 540,436 $ 540,436
Residential real estate - held for sale
147,909 217,500
Total investment in real estate
$ 688,345 $ 757,936
Other Long-Term Investments
The Company’s investment in lottery prize cash flows was $65,929,215 and $71,025,133 as of December 31, 2021 and 2020, 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, 2021 are summarized as follows:
December 31, 2021
Amortized Cost
Fair Value
Due in one year or less
$ 12,224,287 $ 12,490,448
Due in one year through five years
34,102,657 38,666,991
Due after five years through ten years
13,862,868 18,493,808
Due after ten years
5,739,403 11,016,719
$ 65,929,215 $ 80,667,966
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
2. Investments (continued)
The outstanding balance of lottery prize cash flows, by state lottery, as of December 31, 2021 and 2020 are summarized as follows:
December 31, 2021
December 31, 2020
Amount
Percentage
Amount
Percentage
Arizona
$ 383,181 0.58 % $ 418,672 0.59 %
California
6,757,460 10.25 % 7,361,932 10.37 %
Connecticut
2,515,625 3.82 % 2,649,985 3.73 %
Florida
- 0.00 % 49,470 0.07 %
Georgia
3,710,308 5.63 % 4,245,463 5.98 %
Illinois
669,246 1.02 % 727,077 1.02 %
Indiana
5,411,453 8.21 % 5,927,346 8.35 %
Maine
78,497 0.12 % 157,136 0.22 %
Massachusetts
14,753,225 22.38 % 16,519,603 23.26 %
Michigan
229,980 0.35 % 247,786 0.35 %
Missouri
82,794 0.13 % 91,881 0.13 %
New Jersey
219,330 0.33 % 429,240 0.60 %
New York
22,286,381 33.79 % 23,089,597 32.51 %
Ohio
3,855,506 5.85 % 4,298,468 6.05 %
Oregon
78,848 0.12 % 112,728 0.16 %
Pennsylvania
1,348,166 2.04 % 1,632,023 2.30 %
Texas
2,331,444 3.54 % 2,479,933 3.49 %
Virginia
47,433 0.07 % 59,759 0.08 %
Vermont
897,936 1.36 % 247,065 0.35 %
Washington
272,402 0.41 % 279,969 0.39 %
$ 65,929,215 100.00 % $ 71,025,133 100.00 %
Major categories of net investment income for the years ended December 31, 2021 and 2020 are summarized as follows:
Years Ended December 31,
Fixed maturity securities
$ 7,121,593 $ 7,162,012
Equity securities
121,585 100,817
Other long-term investments
4,806,506 5,166,428
Mortgage loans
14,263,706 14,651,491
Policy loans
163,893 153,316
Real estate
- 252,047
Short-term and other investments
107,221 101,129
Gross investment income
26,584,504 27,587,240
Investment expenses
(2,600,316 ) (3,502,939 )
Net investment income
$ 23,984,188 $ 24,084,301
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
3. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) on the measurement date. The Company also considers the impact on fair value of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity.
The Company holds fixed maturity and equity securities that are measured and reported at fair market value on the statement of financial position. The Company determines the fair market values of its financial instruments based on the fair value hierarchy 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 1 - Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets include equity securities that are traded in an active exchange market.
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, U.S. government agencies, state and political subdivisions, commercial and residential mortgage-backed securities, corporate bonds, asset-backed securities, exchange traded securities, foreign bonds, redeemable preferred securities and certificate of deposit
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company’s Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments where independent pricing information was not able to be obtained for a significant portion of the underlying assets.
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 and out of the Level 3 category as of the beginning of the period in which the reclassifications occur.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
3. Fair Value Measurements (continued)
The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 2021 and 2020 is summarized as follows:
Level 1
Level 2
Level 3
Total
December 31, 2021
Fixed maturity securities, available-for-sale
U.S. government and U.S. government agencies
$ - $ 427,013 $ - $ 427,013
States and political subdivisions
- 9,128,952 - 9,128,952
Commercial mortgage-backed securities
- 3,424,395 - 3,424,395
Residential mortgage-backed securities
- 24,276 - 24,276
Corporate bonds
- 128,861,381 - 128,861,381
Asset-backed securities
- 5,318,303 - 5,318,303
Exchange traded securities
- 516,600 - 516,600
Foreign bonds
- 34,733,326 - 34,733,326
Redeemable preferred securities
- 1,232,400 - 1,232,400
Certificate of deposit
- 410,392 - 410,392
Total fixed maturity securities
$ - $ 184,077,038 $ - $ 184,077,038
Equity securities
Mutual funds
$ - $ 76,816 $ - $ 76,816
Corporate common stock
207,979 - 63,423 271,402
Total equity securities
$ 207,979 $ 76,816 $ 63,423 $ 348,218
December 31, 2020
Fixed maturity securities, available-for-sale
U.S. government and U.S. government agencies
$ - $ 434,303 $ - $ 434,303
States and political subdivisions
- 9,689,756 - 9,689,756
Residential mortgage-backed securities
- 28,442 - 28,442
Corporate bonds
- 123,135,359 - 123,135,359
Asset-backed securities
- 2,037,269 - 2,037,269
Exchange traded securities
- 499,800 - 499,800
Foreign bonds
- 34,198,367 - 34,198,367
Certificate of deposit
- 624,540 - 624,540
Total fixed maturity securities
$ - $ 170,647,836 $ - $ 170,647,836
Equity securities
Mutual funds
$ - $ 84,242 $ - $ 84,242
Corporate common stock
51,629 - 67,132 118,761
Total equity securities
$ 51,629 $ 84,242 $ 67,132 $ 203,003
As of December 31, 2021 and 2020, Level 3 financial instruments consisted of two private placement common stocks that have no active trading and a joint venture investment with a mortgage loan originator.
These private placement common 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 significant operations. The joint venture investment with a mortgage loan originator is accounted for under the equity method of accounting.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
3. Fair Value Measurements (continued)
Fair values for Level 1 and Level 2 assets for the Company’s fixed maturity available-for-sale securities and equity securities 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 analyzes market valuations received to verify reasonableness and to understand the key assumptions used and the sources. Since the fixed maturity securities owned by the Company do not trade on a daily basis, the third party investment service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing. As the fair value estimates of the Company’s fixed maturity securities are based on observable market information rather than market quotes, the estimates of fair value on these fixed maturity securities are included in Level 2 of the hierarchy. The Company’s Level 2 investments include obligations of U.S. government, U.S. government agencies, state and political subdivisions, commercial and residential mortgage-backed securities, corporate bonds, asset-backed securities, exchange traded securities, foreign bonds, redeemable preferred securities and certificate of deposit.
The Company’s equity securities are included in Level 1 and Level 2 and the private placement common stocks and joint venture investment are included in Level 3. Level 1 for the equity securities classified as such is appropriate since they trade on a daily basis, are based on quoted market prices in active markets and are based upon unadjusted prices. Level 2 for those equity securities classified as such is appropriate since they are not actively traded.
The Company’s fixed maturity available-for-sale securities and equity securities are 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, 2021 and 2020 is summarized as follows:
December 31,
Beginning balance
$ 67,132 $ 64,107
Joint venture net income
75,195 90,292
Joint venture distribution
(78,904 ) (87,267 )
Ending balance
$ 63,423 $ 67,132 9
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
3. Fair Value Measurements (continued)
Fair Value of Financial Instruments
The carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of December 31, 2021 and 2020, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:
Carrying
Fair
Amount
Value
Level 1
Level 2
Level 3
December 31, 2021
Financial assets
Mortgage loans on real estate
Commercial
$ 8,140,003 $ 8,917,023 $ - $ - $ 8,917,023
Residential
169,368,048 187,336,689 - - 187,336,689
Policy loans
2,272,629 2,272,629 - - 2,272,629
Short-term investments
3,296,838 3,296,838 3,296,838 - -
Other long-term investments
65,929,215 80,667,966 - - 80,667,966
Cash and cash equivalents
42,528,046 42,528,046 42,528,046 - -
Accrued investment income
4,879,290 4,879,290 - - 4,879,290
Total financial assets
$ 296,414,069 $ 329,898,481 $ 45,824,884 $ - $ 284,073,597
Financial liabilities
Policyholders' account balances
$ 373,647,869 $ 373,412,607 $ - $ - $ 373,412,607
Policy claims
2,381,183 2,381,183 - - 2,381,183
Total financial liabilities
$ 376,029,052 $ 375,793,790 $ - $ - $ 375,793,790
December 31, 2020
Financial assets
Mortgage loans on real estate
Commercial
$ 11,002,689 $ 11,085,406 $ - $ - $ 11,085,406
Residential
163,906,373 184,802,993 - - 184,802,993
Policy loans
2,108,678 2,108,678 - - 2,108,678
Short-term investments
3,309,020 3,309,020 3,309,020 - -
Other long-term investments
71,025,133 89,264,246 - - 89,264,246
Cash and cash equivalents
40,230,095 40,230,095 40,230,095 - -
Accrued investment income
5,370,508 5,370,508 - - 5,370,508
Total financial assets
$ 296,952,496 $ 336,170,946 $ 43,539,115 $ - $ 292,631,831
Financial liabilities
Policyholders' account balances
$ 362,519,753 $ 380,666,901 $ - $ - $ 380,666,901
Policy claims
2,099,548 2,099,548 - - 2,099,548
Total financial liabilities
$ 364,619,301 $ 382,766,449 $ - $ - $ 382,766,449
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
3. Fair Value Measurements (continued)
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.
The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying financial statements and notes thereto:
Fixed Maturity Securities and Equity Securities
The fair value of fixed maturity securities and equity securities are based on the principles previously discussed as Level 1, Level 2 and Level 3.
Mortgage Loans on Real Estate
The fair values for mortgage loans are estimated using discounted cash flow analyses. For both residential and commercial mortgage loans, the discount rate used was indexed to the LIBOR yield curve adjusted for an appropriate credit spread.
Cash and Cash Equivalents, Short-Term Investments, Accrued Investment Income and Policy Loans
The carrying value of these financial instruments approximates their fair values. Cash and cash equivalents and short-term investments are included in Level 1 of the fair value hierarchy due to their highly liquid nature.
Other Long-Term Investments
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 the average FTSE Pension Liability Index in effect at the end of each period.
Investment Contracts - Policyholders’ Account Balances
The fair value for liabilities under investment-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and the nonperformance risk of the liabilities.
The fair values for insurance contracts other than investment-type contracts are not required to be disclosed.
Policy Claims
The carrying amounts reported for these liabilities approximate their fair value.
4. Special Deposits
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, 2021 and 2020, these required deposits had amortized costs that totaled $4,673,271 and $4,464,398, respectively. As of December 31, 2021 and 2020, these required deposits had fair values that totaled $4,715,350 and $4,531,967, respectively.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
5. Allowance for Loan Losses from Mortgage Loans on Real Estate
As of December 31, 2021, $795,730 of independent residential mortgage loans on real estate are held in escrow by a third party for the benefit of the Company. As of December 31, 2021, $611,176 of that escrow amount is available to the Company as additional collateral on $4,382,896 of advances to the loan originator. The remaining December 31, 2021 escrow amount of $184,554 is available to the Company as additional collateral on its investment of $36,910,814 in residential mortgage loans on real estate. In addition, the Company has an additional $706,519 allowance for possible loan losses in the remaining $140,597,237 of investments in mortgage loans on real estate as of December 31, 2021.
As of December 31, 2020, $766,667 of independent residential mortgage loans on real estate are held in escrow by a third party for the benefit of the Company. As of December 31, 2020, $431,523 of that escrow amount is available to the Company as additional collateral on $4,996,358 of advances to the loan originator. The remaining December 31, 2020 escrow amount of $335,144 is available to the Company as additional collateral on its investment of $67,028,720 in residential mortgage loans on real estate. In addition, the Company has an additional $541,894 allowance for possible loan losses in the remaining $107,880,342 of investments in mortgage loans on real estate as of December 31, 2020.
The balances of and changes in the Company’s credit losses related to residential and commercial (includes apartment, industrial, lodging, office building and retail) mortgage loans on real estate as of and for the years ended December 31, 2021 and 2020 are summarized as follows (excluding $36,910,814 and $67,028,720 of mortgage loans on real estate as of December 31, 2021 and 2020, respectively, with one loan originator where independent mortgage loan balances are held in escrow by a third party for the benefit of the Company):
Years Ended December 31,
Residential Mortgage Loans
Commercial Mortgage Loans
Total
Allowance, beginning
$ 486,604 $ 443,057 $ 55,290 $ 62,321 $ 541,894 $ 505,378
Charge offs
- - - - - -
Recoveries
- - - - - -
Provision
188,558 43,547 (23,933 ) (7,031 ) 164,625 36,516
Allowance, ending
$ 675,162 $ 486,604 $ 31,357 $ 55,290 $ 706,519 $ 541,894
Allowance, ending:
Individually evaluated for impairment
$ - $ - $ - $ - $ - $ -
Collectively evaluated for impairment
$ 675,162 $ 486,604 $ 31,357 $ 55,290 $ 706,519 $ 541,894
Carrying Values:
Individually evaluated for reserve allowance
$ - $ - $ - $ - $ - $ -
Collectively evaluated for reserve allowance
$ 132,457,234 $ 96,877,653 $ 8,140,003 $ 11,002,689 $ 140,597,237 $ 107,880,342
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
6. Deferred Policy Acquisition Costs
The balances of and changes in deferred acquisition costs as of and for the years ended December 31, 2021 and 2020 are summarized as follows:
Balance, beginning of year
$ 44,513,669 $ 38,005,639
Capitalization of commissions, sales and issue expenses
12,102,070 11,856,420
Amortization
(6,932,504 ) (5,327,177 )
Deferred acquisition costs allocated to investments
34,088 (21,213 )
Balance, end of year
$ 49,717,323 $ 44,513,669
7. Federal Income Taxes
FTFC filed 2020 and 2019 consolidated federal income tax returns that included TLIC, FBLIC, FTFC and TMC since all companies had been members of a consolidated group for five years.
Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes.
A reconciliation of federal income tax expense computed by applying the federal income tax rate of 21% to income before federal income tax expense for the years ended December 31, 2021 and 2020, respectively, is summarized as follows:
Years Ended December 31,
Expected tax expense
$ 771,390 $ 856,967
Difference in book versus tax basis of available-for-sale securities
142,199 (179,854 )
Net operating losses
122,654 44,547
Discount amortization
60,066 (13,094 )
Policy loans
32,494 (16,128 )
Non taxable international losses
31,864 22,027
Mortgage loans
11,822 12,852
Future policy benefits
(1,672 ) 9,011
Reinsurance recoverable
(31,356 ) 6,813
Adjustment of prior years' taxes
(154,921 ) (46,466 )
Capital gain taxes
(188,534 ) 152,306
Other
19,912 53,123
Total income tax expense
$ 815,918 $ 902,104
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
7. Federal Income Taxes (continued)
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, 2021 and 2020 are summarized as follows:
December 31,
Deferred tax liabilities:
Net unrealized investment gains
$ 3,509,878 $ 4,656,911
Deferred policy acquisition costs
8,794,233 7,775,267
Value of insurance business acquired
906,884 964,525
Reinsurance recoverable
216,819 248,175
Due premiums
79,368 87,937
Available-for-sale fixed maturity securities
42,030 -
Investment real estate
23,425 23,425
Other
26,949 18,635
Total deferred tax liabilities
13,599,586 13,774,875
Deferred tax assets:
Policyholders' account balances and future policy benefits
3,761,239 3,591,696
Net operating loss carryforward
683,720 679,303
Mortgage loans
148,369 104,645
Available-for-sale fixed maturity securities
- 100,582
Policy claims
- 32,494
Unearned investment income
19,154 14,978
Available-for-sale equity securities
11,860 20,864
Dividend liability
8,941 9,408
Total deferred tax assets
4,633,283 4,553,970
Net deferred tax liabilities
$ 8,966,303 $ 9,220,905
FTFC has net operating loss carryforwards of $2,570,700 expiring in 2029 through 2033. During 2021, FTFC utilized $129,363 of the net operating loss carryforward existing as of January 1, 2021 to offset 2021 federal taxable income. During 2020, FTFC utilized $985,666 of the net operating loss carryforward existing as of January 1, 2020 to offset 2020 federal taxable income. TLIC has net operating loss carryforwards of $685,110 as of December 31, 2021. TLIC generated $150,397 and $534,713 of net operating losses during 2021 and 2020, respectively and due to the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act) the 2020 operating loss of $534,713 was available to be carried back five years to offset prior taxes incurred utilizing the statutory tax rate in effect for the year of the carryback. TLIC’s $685,110 net operating loss is fully available to offset future TLIC taxable income and does not expire.
The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, have not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 2018 through 2021 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
8. Reinsurance
TLIC participates in ceded and assumed reinsurance in order to provide risk diversification, additional capacity for future growth and limit the maximum net loss potential arising from large risks. TLIC reinsures all amounts of risk on any one life in excess of $100,000 for individual life insurance with Investors Heritage Life Insurance Company, Optimum Re Insurance Company (“Optimum Re”), RGA Reinsurance Company and Wilton Reassurance Company (“Wilton Re”).
TLIC is a party to an Automatic Retrocession Pool Agreement (the “Reinsurance Pool”) with Optimum Re, Catholic Order of Foresters, American Home Life Insurance Company and Woodmen of the World. The agreement provides for automatic retrocession of coverage in excess of Optimum Re’s retention on business ceded to Optimum Re by the other parties to the Reinsurance Pool. TLIC’s maximum exposure on any one insured under the Reinsurance Pool is $100,000. As of January 1, 2008, the Reinsurance Pool stopped accepting new cessions.
Effective September 29, 2005, FLAC and Wilton Re executed a binding letter of intent whereby both parties agreed that FLAC would cede the simplified issue version of its Golden Eagle Whole Life (Final Expense) product to Wilton Re on a 50/50 quota share original term coinsurance basis. The letter of intent was executed on a retroactive basis to cover all applicable business issued by FLAC subsequent to January 1, 2005. Wilton Re agreed to provide various commission and expense allowances to FLAC in exchange for FLAC ceding 50% of the applicable premiums to Wilton Re as they were collected. As of June 24, 2006, Wilton Re terminated the reinsurance agreement for new business issued after the termination date.
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 risks. FBLIC reinsures initial amounts of risk on any one life in excess of $100,000 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.
To the extent that the reinsurance companies are unable to meet their obligations under the reinsurance agreements, TLIC and FBLIC remain primarily liable for the entire amount at risk.
Statutory reinsurance assumed and ceded amounts for TLIC and FBLIC for 2021 and 2020 are summarized as follows:
Premiums assumed
$ 4,745,854 $ 3,023,178
Commissions and expense allowances assumed
1,920,939 1,494,464
Benefits assumed
78,203 88,171
Reserve credits assumed
5,714,631 2,944,668
In force amount assumed
78,467,315 56,417,493
Premiums ceded
1,679,793 2,130,523
Commissions and expense allowances ceded
50,407 80,383
Benefits ceded
3,036,438 2,234,094
Reserve credits ceded
103,209,641 104,593,282
In force amount ceded
50,756,838 57,739,638
Effective January 1, 2018, TLIC entered into an annuity coinsurance agreement with an offshore annuity and life insurance company whereby 90% of TLIC’s annuity considerations originated after December 31, 2017 were ceded to the assuming company. The assuming company contractually reimburses TLIC for the related commissions, withdrawals, settlements, interest credited, submission costs, maintenance costs, marketing costs, excise taxes and other costs plus a placement fee. Effective April 1, 2020, the Company and an offshore annuity and life insurance company mutually agreed that the Quota Share under its existing reinsurance agreement shall be 0% for future business instead of the original contractual amount of 90%.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
8. Reinsurance (continued)
In accordance with this annuity coinsurance agreement, TLIC holds assets and recognizes a funds withheld liability for the benefit of the assuming company in an amount at least equal to the annuity reserves in accordance with U.S. statutory accounting principles generated by this ceded business. In addition, the assuming company maintains a trust related to this ceded business amounting to at least an additional 4% of assets above the annuity reserve required under U.S. statutory accounting principles. This coinsurance agreement may be terminated for new business by either party at any time upon 30 days prior written notice to the other party.
In 2019, TLIC entered into a life insurance coinsurance agreement with TAI, effective October 1, 2018, whereby 100% of TAI’s life insurance policies and annuity contracts issued after September 30, 2018 were ceded to TLIC. TLIC contractually reimburses TAI for the related commissions, submission costs, maintenance costs, marketing costs and other costs related to the production of life insurance policies and annuity contracts. These transactions are eliminated in consolidation.
9. Leases
The Company leases 7,302 square feet of office space in Tulsa, Oklahoma. The lease began on October 1, 2015 and ended on September 30, 2020. The Company signed an amended lease agreement effective August 1, 2020 and ending on September 30, 2027. The amended lease agreement provides for the expansion of the existing premises from 6,769 square feet to 7,302 square feet. 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 $109,695 and $85,198 for the years ended December 31, 2021 and 2020, respectively.
In accordance with the current lease, the Company was provided an allowance of $54,152 for leasehold improvements. For the amended lease, the Company was provided allowance of $77,000 for leasehold improvements. The leasehold improvement allowance is amortized over the non-cancellable lease term and reduced rent expense by $13,750 and $8,123 for the years ended December 31, 2021 and 2020, respectively. The future minimum lease payments to be paid under the non-cancellable lease agreement are $116,029, $118,365, $120,720, $123,130 and $125,576 for the years 2022, 2023, 2024, 2025 and 2026, respectively.
On November 16, 2020, TLIC sold a 20,000 square feet office building and approximately three acres of land located in Topeka, Kansas with an aggregate carrying value of $1,078,037. The Company recorded a gross realized investment gain on sale of $240,374 based on an aggregate sales price of $1,318,411. The lease agreements discussed below were conveyed to the purchaser of the office building and land on November 16, 2020.
Prior to November 16, 2020, TLIC executed a 10,000 square feet lease agreement for five years effective 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. 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 payments are $18,508 from June 1, 2018 through May 31, 2019, $18,584 from June 1, 2019 through May 31, 2020 and $18,578 from June 1, 2020 through November 16, 2020.
Prior to November 16, 2020, TLIC renewed a lease agreement on 2,500 square feet of the Topeka, Kansas office building on September 1, 2015 to run through August 31, 2017 with an option for an additional three years through August 31, 2020. TLIC renewed the lease agreement effective September 1, 2020. This lease will run from September 1, 2020 to August 31, 2028 with an option for an additional 2 years through August 31, 2030. Beginning September 1, 2028, the lessee can terminate the lease with a 90-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 renewal lease agreement includes a $34,507 tenant improvement allowance that beginning September 1, 2020 is amortized over 96 months with interest at 5.00%. The lease payments are $4,293 from September 1, 2018 through August 31, 2019, $4,310 from September 1, 2019 through August 31, 2020 and $4,433 from September 1, 2020 through November 16, 2020.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
10. Shareholders’ Equity and Statutory Accounting Practices
TLIC is domiciled in Oklahoma and prepares its statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the OID. FBLIC is domiciled in Missouri and prepares its statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the MDCI. Prescribed statutory accounting practices include publications of the National Association of Insurance Commissioners, state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Statutory accounting practices primarily differ from U.S. GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions and valuing investments, deferred taxes, and certain assets on a different basis.
The statutory net income (loss) for TLIC amounted to ($563,056) and ($1,526,638) for the years ended December 31, 2021 and 2020, respectively. The statutory capital and surplus of TLIC was $14,305,969 and $13,638,231 as of December 31, 2021 and 2020, respectively. The statutory net income for FBLIC amounted to $1,559,666 and $799,751 for the years ended December 31, 2021 and 2020, respectively. The statutory capital and surplus of FBLIC was $11,786,573 and $10,259,330 as of December 31, 2021 and 2020, respectively.
TLIC is subject to Oklahoma laws and FBLIC is subject to Missouri laws that limit the amount of dividends insurance companies can pay to stockholders without approval of the respective Departments of Insurance. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the 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. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is capacity for TLIC to pay a dividend up to $1,430,596 in 2022 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $1,495,631 in 2022 without prior approval. FBLIC paid no dividends to TLIC in 2021 and 2020. These dividends would be eliminated in consolidation. TLIC has paid no dividends to FTFC.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
11. Segment Data
The Company has a life insurance segment, consisting of the life insurance operations of TLIC, FBLIC and TAI, an annuity segment, consisting of the annuity operations of TLIC, FBLIC and TAI and a corporate segment. Results for the parent company and the operations of TMC, after elimination of intercompany amounts, are allocated to the corporate segment.
These segments as of and for the years ended December 31, 2021 and 2020 are summarized as follows:
Year Ended December 31,
Revenues:
Life insurance operations
$ 36,727,984 $ 32,236,531
Annuity operations
19,794,712 19,724,655
Corporate operations
593,545 829,819
Total
$ 57,116,241 $ 52,791,005
Income before income taxes:
Life insurance operations
$ 1,405,948 $ 337,686
Annuity operations
2,203,412 2,986,150
Corporate operations
63,928 756,958
Total
$ 3,673,288 $ 4,080,794
Depreciation and amortization expense:
Life insurance operations
$ 6,179,866 $ 4,733,751
Annuity operations
1,070,701 1,046,400
Total
$ 7,250,567 $ 5,780,151
December 31,
Assets:
Life insurance operations
$ 133,378,698 $ 120,484,734
Annuity operations
521,742,643 518,257,307
Corporate operations
4,637,593 4,853,228
Total
$ 659,758,934 $ 643,595,269
12. Concentrations of Credit Risk
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 $40,431,952 as of December 31, 2021. 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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
13. Contingent Liabilities
A lawsuit filed by the Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, in 2013 against former Company Board of Directors member Wayne Pettigrew and Mr. Pettigrew's company, Group & Pension Planners, Inc. (the "Defendants"), originally concluded on February 17, 2017. The lawsuit was filed in the District Court of Tulsa County, Oklahoma. In the lawsuit, the Company alleged that Mr. Pettigrew had defamed the Company by making untrue statements to certain shareholders of the Company, to the press and to regulators of the state of Oklahoma and had breached his fiduciary duties. Mr. Pettigrew denied the allegations.
The jury originally concluded that Mr. Pettigrew, while still a member of the Company’s Board of Directors, did, in fact, make untrue statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company and the jury awarded the Company $800,000 of damages against Mr. Pettigrew. In addition, the jury found that Mr. Pettigrew had defamed Mr. Zahn and intentionally inflicted emotional distress on Mr. Zahn and awarded Mr. Zahn $3,500,000 of damages against Mr. Pettigrew. In addition to the original damages awarded by the jury, the Company and Mr. Zahn began to aggressively communicate the correction of the untrue statements to outside parties.
Mr. Pettigrew appealed this decision. In February 2020, the Court of Civil Appeals of the state of Oklahoma reversed the judgments entered by the trial court and remanded the case for a new trial. The Court of Appeals reversal, however, was not final. The Company filed a Petition for Certiorari with the Oklahoma Supreme Court to request that it reverse and vacate the decision of the Court of Appeals. In December 2020, the Oklahoma Supreme Court declined to grant certiorari and remanded that the case be retried in the District Court of Tulsa County, Oklahoma.
It remains the Company’s intention to again vigorously prosecute this action against the Defendants for damages and for correction of the defamatory statements. In the opinion of the Company’s management, the ultimate resolution of any contingencies that may arise from this litigation is not considered material in relation to the financial position or results of operations of the Company.
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.
14. Related Party Transactions
On June 28, 2021, the Company received payment of a $400,000 on a loan with interest at 5.00% from the estate of the Company’s former chairman. This loan is included in the December 31, 2020, other assets in the consolidated statements of financial position.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
15. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
The changes in the components of the Company’s accumulated other comprehensive income (loss) for the years ended December 31, 2021 and 2020 are summarized as follows:
Unrealized
Appreciation
Accumulated
(Depreciation) on
Adjustment to
Other
Available-For-Sale
Deferred Acquisition
Comprehensive
Securities
Costs
Income
Year Ended December 31, 2021
Balance as of January 1, 2021
$ 17,551,279 $ (32,421 ) $ 17,518,858
Other comprehensive loss before reclassifications, net of tax
(3,857,078 ) 26,929 (3,830,149 )
Less amounts reclassified from accumulated other comprehensive income, net of tax
484,882 - 484,882
Other comprehensive loss
(4,341,960 ) 26,929 (4,315,031 )
Balance as of December 31, 2021
$ 13,209,319 $ (5,492 ) $ 13,203,827
Year Ended December 31, 2020
Balance as of January 1, 2020
$ 9,632,323 $ (15,663 ) $ 9,616,660
Other comprehensive income before reclassifications, net of tax
7,722,905 (16,758 ) 7,706,147
Less amounts reclassified from accumulated other comprehensive income, net of tax
(196,051 ) - (196,051 )
Other comprehensive income
7,918,956 (16,758 ) 7,902,198
Balance as of December 31, 2020
$ 17,551,279 $ (32,421 ) $ 17,518,858
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, 2021 and 2020 are summarized as follows:
Income Tax
Expense
Pretax
(Benefit)
Net of Tax
Year Ended December 31, 2021
Other comprehensive loss:
Change in net unrealized losses on available-for-sale securities:
Unrealized holding losses arising during the period
$ (4,882,377 ) $ (1,025,299 ) $ (3,857,078 )
Reclassification adjustment for net gains included in operation
613,775 128,893 484,882
Net unrealized losses on investments
(5,496,152 ) (1,154,192 ) (4,341,960 )
Adjustment to deferred acquisition costs
34,088 7,159 26,929
Total other comprehensive loss
$ (5,462,064 ) $ (1,147,033 ) $ (4,315,031 )
Year Ended December 31, 2020
Other comprehensive income:
Change in net unrealized gains on available-for-sale securities:
Unrealized holding gains arising during the period
$ 9,775,829 $ 2,052,924 $ 7,722,905
Reclassification adjustment for net losses included in operation
(248,166 ) (52,115 ) (196,051 )
Net unrealized gains on investments
10,023,995 2,105,039 7,918,956
Adjustment to deferred acquisition costs
(21,213 ) (4,455 ) (16,758 )
Total other comprehensive income
$ 10,002,782 $ 2,100,584 $ 7,902,198
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021 and 2020
15. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (continued)
Realized gains and losses on the sales of investments are determined based upon the specific identification method and include provisions for other-than-temporary impairments where appropriate.
The pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income to the Company’s consolidated statements of operations for the years ended December 31, 2021 and 2020 are summarized as follows:
Years Ended December 31,
Reclassification Adjustments
Realized gains (losses) on sales of securities (a)
$ 613,775 $ (248,166 )
Income tax expense (benefit) (b)
128,893 (52,115 )
Total reclassification adjustments
$ 484,882 $ (196,051 )
(a) These items appear within net realized investment gains and loss on other-than-temporary impairments in the consolidated statements of operations.
(b) These items appear within federal income taxes in the consolidated statements of operations.
16. Line of Credit
On September 15, 2021, the Company renewed its $1.5 million line of credit with a bank to provide working capital and funds for expansion. The terms of the line of credit allows for advances, repayments and re-borrowings through a maturity date of September 15, 2022. Any outstanding advances will incur interest at a variable interest rate of the prime rate set forth in the Wall Street Journal plus 1% per annum adjusting monthly based on a 360 day year with a minimum interest rate floor of 4.5%. The non-utilized portion of the $1.5 million line of credit will be assessed a 1% non usage fee calculated in arrears and paid at the maturity date. No amounts were outstanding on this line of credit as of December 30, 2021 and December 31, 2020.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (“Certifying Officers”), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as amended (“Exchange Act”) as of the end of the fiscal period covered by this Annual Report on Form 10-K (“Annual Report”). Based upon such evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is made known to management, including our Certifying Officers, as appropriate, to allow timely decisions regarding disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operating, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. As of the end of the period covered by this Annual Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Certifying Officers, of the effectiveness of the design and operation of the Company’s internal controls over financial reporting as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act. The standard measures adopted by management in making its evaluation are the measures in the Internal-Control Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon such evaluation, management has determined that internal control over financial reporting was effective as of December 31, 2021.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
Limitations on the Effectiveness of Controls
The Company’s management, including the Certifying Officers, does not expect that the disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes to Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2022 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2022 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2022 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days subsequent to December 31, 2021.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2022 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days subsequent to December 31, 2021.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2022 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days subsequent to December 31, 2021.
Item 15. Exhibits
The exhibits are listed in the Exhibit Index, which is incorporated herein by reference.
Item 16. Form 10-K Summary
None.
EXHIBIT INDEX
Exhibit
Number
Description of Exhibit
3.1
Amended Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 17, 2009.
3.2
By-laws, as amended and restated, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed May 1, 2009.
3.3
Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 30, 2020.
4.1
Specimen Stock Certificate, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 10-SB filed April 30, 2007.
10.1
Employment Agreement of Gregg E. Zahn, President, dated June 7, 2010, incorporated by reference as Exhibit 10.1 of the Company’s Current Report on Form 8-K filed June 11, 2010.
10.2
Amendment to Employment Agreement of Gregg E. Zahn, President, dated December 8, 2011, incorporated by reference as Exhibit 10.6 of the Company’s Current Report on Form 8-K filed December 13, 2011.
10.3
Employment Agreement of Jeffrey J. Wood, dated December 8, 2011, incorporated by reference as Exhibit 10.4 of the Company’s Current Report on Form 8-K filed December 13, 2011.
10.4
Amended and Restated Employment Agreement of Gregg E. Zahn, President, dated September 5, 2017, incorporated by reference as Exhibit 10.26 of the Company’s Current Report on Form 8-K filed September 8, 2017.
10.5
Amended and Restated Employment Agreement of Jeffrey J. Wood, dated March 14, 2019, incorporated by reference as Exhibit 10.28 of the Company’s Current Report on Form 8-K filed March 20, 2019.
10.6
2019 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.15 of the Company’s Current Report on Form 8-K filed March 13, 2020.
10.7
Employment Agreement of William S. Lay, dated December 6, 2021 incorporated by reference as Exhibit 10.16 of the Company’s Current Report on Form 8-K filed December 7, 2021.
21.1*
Subsidiaries of First Trinity Financial Corporation.
24.1*
Powers of Attorney (included in the signature pages hereto, and incorporated herein by reference).
31.1*
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.
31.2*
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer.
32.1*
Section 1350 Certification of Principal Executive Officer.
32.2*
Section 1350 Certification of Principal Financial Officer.
EXHIBIT INDEX (continued)
Exhibit
Number
Description of Exhibit
101.INS**
Inline XBRL Instance
101.SCH**
Inline XBRL Taxonomy Extension Schema
101.CAL**
Inline XBRL Taxonomy Extension Calculation
101.DEF**
Inline XBRL Taxonomy Extension Definition
101.LAB**
Inline XBRL Taxonomy Extension Labels
101.PRE**
Inline XBRL Taxonomy Extension Presentation
Cover Page Interactive Data (formatted as Inline XBRL and continued in Exhibit 101)
**XBRL
Information is furnished and not filed as part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
* Filed herewith
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST TRINITY FINANCIAL CORPORATION
Date March 10, 2022 By /s/ Gregg E. Zahn
Gregg E. Zahn
President, Chief Executive Officer and Director
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST TRINITY FINANCIAL CORPORATION
Date March 10, 2022 By /s/ Jeffrey J. Wood
Jeffrey J. Wood
Chief Financial Officer
SIGNATURES
In accordance with the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /s/ Gregg E. Zahn
Date March 10, 2022
Gregg E. Zahn
Chairman of the Board, President, Chief Executive Officer and Director
By /s/ William S. Lay
Date March 10, 2022
William S. Lay
Vice President, Chief Investment Officer and Director
By /s/ Bill H. Hill
Date March 10, 2022
Bill H. Hill, Director
By /s/ Will W. Klein
Date March 10, 2022
Will W. Klein, Director
By /s/ Gerald J. Kohout
Date March 10, 2022
Gerald J. Kohout, Director
By /s/ Charles W, Owens
Date March 10, 2022
Charles W. Owens, Director
By /s/ George E. Peintner
Date March 10, 2022
George E, Peintner, Director
By /s/ Gary L. Sherrer
Date March 10, 2022
Gary L. Sherrer, Director

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (“Certifying Officers”), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as amended (“Exchange Act”) as of the end of the fiscal period covered by this Annual Report on Form 10-K (“Annual Report”). Based upon such evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is made known to management, including our Certifying Officers, as appropriate, to allow timely decisions regarding disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operating, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. As of the end of the period covered by this Annual Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Certifying Officers, of the effectiveness of the design and operation of the Company’s internal controls over financial reporting as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act. The standard measures adopted by management in making its evaluation are the measures in the Internal-Control Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon such evaluation, management has determined that internal control over financial reporting was effective as of December 31, 2021.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
Limitations on the Effectiveness of Controls
The Company’s management, including the Certifying Officers, does not expect that the disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes to Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the fiscal quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None
Part III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2022 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2022 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2022 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days subsequent to December 31, 2021.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2022 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days subsequent to December 31, 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference from the Company’s proxy statement for the 2022 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days subsequent to December 31, 2021.

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits
The exhibits are listed in the Exhibit Index, which is incorporated herein by reference.