10-Q 1 ftfc_10q-063012.htm FORM 10-Q ftfc_10q-063012.htm
United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q
(Mark One)
[ X ]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange act of 1934

For the quarterly period ended June 30, 2012

[    ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period From                                                  to                                                   .

Commission file number: 000-52613

FIRST TRINITY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Oklahoma 34-1991436
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
7633 East 63rd Place, Suite 230
Tulsa, Oklahoma 74133
(Address of principal executive offices)

(918) 249-2438
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ       No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,  non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, "accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer:  ¨
Accelerated filer:  ¨
Non-accelerated filer:  ¨
Smaller reporting company:  þ
       
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes o       No þ

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:  Common stock .01 par value as of August 10, 2012: 7,835,785 shares
 
 
 

 

FIRST TRINITY FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED JUNE 30, 2012

TABLE OF CONTENTS
 
PART I.  FINANCIAL INFORMATION
  Page Number
       
Item 1.  Consolidated Financial Statements
     
       
Consolidated Statements of Financial Position as of June 30, 2012 (Unaudited) and December 31, 2011
 
3
 
       
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)
 
4
 
       
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)
 
5
 
       
Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2012 and 2011 (Unaudited)
 
6
 
       
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)
 
7
 
       
Notes to Consolidated Financial Statements (Unaudited)
 
8
 
       
Item 2. Management’s Discussion and Analysis of Financial Condition, Results of Operations and Liquidity and Capital Resources
  23  
       
Item 4.  Controls and Procedures
 
44
 
       
Part II.  OTHER INFORMATION
     
       
Item 1.  Legal Proceedings
 
45
 
       
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
45
 
       
Item 3.  Defaults upon Senior Securities
 
45
 
       
Item 4.  Mine Safety Disclosures
 
45
 
       
Item 5.  Other Information
 
45
 
       
Item 6.  Exhibits
 
45
 
       
Signatures
 
46
 
       
Exhibit No. 31.1
     
Exhibit No. 31.2
     
Exhibit No. 32.1
     
Exhibit No. 32.2
     
Exhibit No 101.INS
     
Exhibit No. 101.SCH
     
Exhibit No. 101.CAL
     
Exhibit No. 101.DEF
     
Exhibit No. 101.LAB
     
Exhibit No. 101.PRE
     
 
 
2

 
 
PART I – FINANCIAL INFORMATION

Item 1.         Consolidated Financial Statements

First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Financial Position
 
   
June 30, 2012
   
December 31, 2011
 
    (Unaudited)        
Assets
           
Investments
           
Available-for-sale fixed maturity securities at fair value (amortized cost: $90,524,982 and $78,128,103 as of June 30, 2012 and December 31, 2011, respectively)
  $ 95,204,393     $ 81,051,207  
Available-for-sale equity securities at fair value (cost: $956,966 and $750,941 as of June 30, 2012 and December 31, 2011, respectively)
    1,153,656       898,893  
Mortgage loans on real estate
    8,542,194       1,985,394  
Investment real estate
    3,386,007       3,466,581  
Policy loans
    1,450,702       1,472,666  
Other long-term investments
    16,056,299       9,875,675  
Total investments
    125,793,251       98,750,416  
Cash and cash equivalents
    12,479,563       27,705,711  
Accrued investment income
    1,487,449       1,122,574  
Recoverable from reinsurers
    1,202,560       1,132,121  
Agents' balances and due premiums
    360,875       381,901  
Loans from premium financing, net
    836,124       1,022,416  
Deferred policy acquisition costs
    6,285,534       5,251,999  
Value of insurance business acquired
    7,696,803       7,912,469  
Property and equipment, net
    146,925       170,843  
Other assets
    1,844,425       1,297,205  
Total assets
  $ 158,133,509     $ 144,747,655  
Liabilities and Shareholders' Equity
               
Policy liabilities
               
Policyholders' account balances
  $ 92,529,902     $ 81,730,322  
Future policy benefits
    30,165,202       28,977,186  
Policy claims
    512,185       515,522  
Premiums paid in advance
    62,871       46,613  
Total policy liabilities
    123,270,160       111,269,643  
Deferred federal income taxes
    2,959,087       2,622,711  
Other liabilities
    711,428       2,457,188  
Total liabilities
    126,940,675       116,349,542  
Shareholders' equity
               
Common stock, par value $.01 per share, 20,000,000 shares authorized, and 7,974,373 and 6,798,535 issued and outstanding as of June 30, 2012 and December 31, 2011, respectively, and 566,404 subscribed as of December 31, 2011
    79,744       73,649  
Additional paid-in capital
    28,362,980       24,086,146  
Accumulated other comprehensive income
    4,102,303       2,696,224  
Accumulated earnings (deficit)
    (1,352,193 )     1,542,094  
Total shareholders' equity
    31,192,834       28,398,113  
Total liabilities and shareholders' equity
  $ 158,133,509     $ 144,747,655  
 
See notes to consolidated financial statements (unaudited).
 
 
3

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues
                       
Premiums
  $ 1,806,830     $ 1,464,737     $ 3,862,969     $ 3,051,378  
Income from premium financing
    29,679       29,356       76,691       73,053  
Net investment income
    1,266,330       574,639       2,738,825       1,159,435  
Net realized investment gains
    24,271       23,600       92,811       25,350  
Other income
    3,986       154       11,810       2,785  
Total revenues
    3,131,096       2,092,486       6,783,106       4,312,001  
Benefits, Claims and Expenses
                               
Benefits and claims
                               
Increase in future policy benefits
    564,374       465,375       1,173,015       945,950  
Death benefits
    625,862       458,413       1,285,568       876,507  
Surrenders
    144,553       80,442       274,000       151,806  
Interest credited to policyholders
    845,504       364,665       1,632,136       707,351  
Dividend and accumulation benefits
    83,895       -       181,098       -  
Total benefits and claims
    2,264,188       1,368,895       4,545,817       2,681,614  
Policy acquisition costs deferred
    (478,514 )     (522,513 )     (1,425,925 )     (1,074,898 )
Amortization of deferred policy acquisition costs
    141,582       50,001       384,539       187,717  
Amortization of value of insurance business acquired
    108,011       53,192       215,666       114,477  
Commissions
    494,262       531,006       1,290,175       1,009,009  
Other underwriting, insurance and acquisition expenses
    969,585       643,153       1,814,395       1,357,483  
Total expenses
    1,234,926       754,839       2,278,850       1,593,788  
Total benefits, claims and expenses
    3,499,114       2,123,734       6,824,667       4,275,402  
Income (loss) before total federal income tax expense
    (368,018 )     (31,248 )     (41,561 )     36,599  
Current federal income tax expense
    12,500       -       66,780       3,663  
Deferred federal income tax expense (benefit)
    (10,939 )     (14,289 )     (56,014 )     31,666  
Total federal income tax expense (benefit)
    1,561       (14,289 )     10,766       35,329  
Net income (loss)
  $ (369,579 )   $ (16,959 )   $ (52,327 )   $ 1,270  
Net income (loss) per common share basic and diluted
  $ (0.05 )   $ (0.00 )   $ (0.01 )   $ 0.00  
 
See notes to consolidated financial statements (unaudited).
 
 
4

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net income (loss)
  $ (369,579 )   $ (16,959 )   $ (52,327 )   $ 1,270  
Other comprehensive income
                               
Total net unrealized gains arising during the period
    1,220,823       186,070       1,897,856       203,085  
Less: Net realized investment gains
    24,271       23,600       92,811       25,350  
Net unrealized gains
    1,196,552       162,470       1,805,045       177,735  
Adjustment to deferred acquisition costs
    (876 )     (3,583 )     (7,851 )     (6,093 )
Other comprehensive income before tax expense
    1,195,676       158,887       1,797,194       171,642  
Income tax expense
    254,235       52,835       391,115       74,043  
Total other comprehensive income
    941,441       106,052       1,406,079       97,599  
Total comprehensive income
  $ 571,862     $ 89,093     $ 1,353,752     $ 98,869  
 
See notes to consolidated financial statements (unaudited).
 
 
5

 

 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 2012 and 2011
(Unaudited)
 
   
Common
Stock
$.01 Par Value
   
Additional
Paid-in
Capital
   
Accumulated
Other
Comprehensive
Income
   
Accumulated
Earnings
(Deficit)
   
Total
Shareholders'
Equity
 
Balance as of January 1, 2011
  $ 62,533     $ 16,677,615     $ 3,305,370     $ (3,389,571 )   $ 16,655,947  
Stock dividend
    3,238       2,425,090       -       (2,428,328 )     -  
Subscriptions of common stock
    4,705       2,977,075       -       -       2,981,780  
Comprehensive income:
                                       
Net income
    -       -               1,270       1,270  
Other comprehensive income
    -       -       97,599       -       97,599  
Balance as of June 30, 2011
  $ 70,476     $ 22,079,780     $ 3,402,969     $ (5,816,629 )   $ 19,736,596  
                                         
Balance as of January 1, 2012
  $ 73,649     $ 24,086,146     $ 2,696,224     $ 1,542,094     $ 28,398,113  
Stock dividend
    3,789       2,838,171       -       (2,841,960 )     -  
Subscriptions of common stock
    2,306       1,438,663       -       -       1,440,969  
Comprehensive income:
                                       
Net loss
    -       -       -       (52,327 )     (52,327 )
Other comprehensive income
    -       -       1,406,079       -       1,406,079  
Balance as of June 30, 2012
  $ 79,744     $ 28,362,980     $ 4,102,303     $ (1,352,193 )   $ 31,192,834  
 
See notes to consolidated financial statements (unaudited).
 
 
6

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
   
Six Months Ended June 30,
 
   
2012
   
2011
 
Operating activities
           
Net income (loss)
  $ (52,327 )   $ 1,270  
Adjustments to reconcile net income (loss) to net cash provided byoperating activities:
               
Provision for depreciation
    103,720       106,404  
Accretion of discount on investments
    (58,700 )     (413,287 )
Realized investment gains
    (92,811 )     (25,350 )
Gain on sale of fixed asset
    (2,934 )     -  
Loss on sale of invested real estate
    -       2,150  
Amortization of policy acquisition cost
    384,539       187,717  
Policy acquisition cost deferred
    (1,425,925 )     (1,074,898 )
Loan origination fees deferred
    (121,694 )     -  
Amortization of value of insurance business acquired
    215,666       114,477  
Provision for deferred federal income tax
    (56,014 )     31,666  
Interest credited on policyholder deposits
    1,631,087       707,351  
Change in assets and liabilities:
               
Accrued investment income
    (364,875 )     (10,175 )
Policy loans
    21,964       (46,398 )
Allowance for loan losses
    (5,869 )     (207,452 )
Recoverable from reinsurers
    (70,439 )     (56,271 )
Agents' balances and due premiums
    21,026       (672 )
Other assets
    (547,220 )     58,988  
Future policy benefits
    1,188,016       984,325  
Policy claims
    (3,337 )     70,397  
Premiums paid in advance
    16,258       (2,534 )
Other liabilities
    (398,980 )     50,986  
Net cash provided by operating activities
    381,151       478,694  
                 
Investing activities
               
Purchase of fixed maturity securities
    (16,395,307 )     (1,345,147 )
Maturities of fixed maturity securities
    1,334,554       600,000  
Sales of fixed maturity securities
    2,401,656       856,286  
Purchase of equity securities
    (502,553 )     -  
Sales of equity securities
    299,845       -  
Purchase of mortgage loans
    (6,773,120 )     (412,500 )
Payments on mortgage loans
    343,619       163,875  
Sale of invested real estate
    -       49,000  
Purchase of other long-term investments
    (6,952,500 )     (889,500 )
Payments on other long-term investments
    1,177,958       847,301  
Maturity of certificate of deposit
    -       102,273  
Loans made for premiums financed
    (868,497 )     (2,544,011 )
Loans repaid for premiums financed
    1,060,658       2,670,589  
Sales of furniture and equipment
    5,000       -  
Purchases of furniture and equipment
    (1,294 )     (118,729 )
Net cash used in investing activities
    (24,869,981 )     (20,563 )
                 
Financing activities
               
Policyholder account deposits
    9,989,031       4,671,868  
Policyholder account withdrawals
    (2,167,318 )     (891,003 )
Proceeds from public stock offering
    1,440,969       2,981,780  
Net cash provided by financing activities
    9,262,682       6,762,645  
                 
Increase (decrease) in cash
    (15,226,148 )     7,220,776  
Cash and cash equivalents, beginning of period
    27,705,711       12,985,278  
Cash and cash equivalents, end of period
  $ 12,479,563     $ 20,206,054  
 
See notes to consolidated financial statements (unaudited).
 
 
7

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
1.         Organization and Significant Accounting Policies

Nature of Operations

First Trinity Financial Corporation (the “Company”) is the parent holding company of Trinity Life Insurance Company, Family Benefit Life Insurance Company, First Trinity Capital Corporation and Southern Insurance Services, LLC.  The Company was incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a life insurance subsidiary.  The Company raised $1,450,000 from two private placement stock offerings during 2004.  On June 22, 2005, the Company’s intrastate public stock offering filed with the Oklahoma Department of Securities for $12,750,000, which included a 10% "over-sale" provision (additional sales of $1,275,000), was declared effective.  The offering was completed February 23, 2007.  The Company raised $14,025,000 from this offering.  On June 29, 2010, the Company commenced a public offering of its common stock registered with the U.S. Securities and Exchange Commission and the Oklahoma Department of Securities.  The offering was completed April 30, 2012.  The Company raised $11,000,010 from this offering.

The Company purchased First Life America Corporation (“FLAC”) on December 23, 2008.  On August 31, 2009, two of the Company’s subsidiaries, Trinity Life Insurance Company (“Old TLIC”) and FLAC, were merged, with FLAC being the surviving company.  Immediately following the merger, FLAC changed its name to Trinity Life Insurance Company (“TLIC”).  After the merger, the Company had two wholly owned subsidiaries, First Trinity Capital Corporation (“FTCC”) and TLIC, domiciled in Oklahoma.

TLIC is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in eight states primarily in the Midwest.  TLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment and annuity products.  The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years.  They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee.  The final expense is issued as either a simplified issue or as a graded benefit, determined by underwriting.  The products are sold through independent agents in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas.

The Company’s operations, prior to the acquisition of FLAC, involved the sale of a modified premium whole life insurance policy with a flexible premium deferred annuity rider through its subsidiary Old TLIC in the state of Oklahoma.

TLIC purchased Family Benefit Life Insurance Company (“Family Benefit Life”) on December 28, 2011.  Family Benefit Life is primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life and annuity insurance products to individuals in seven states.  Family Benefit Life’s current product portfolio consists of whole life, term, accidental death and dismemberment, annuity, endowment and group life insurance products.  The products are sold through independent agents in the states of Arizona, Colorado, Kansas, Missouri, Nebraska, New Mexico and Oklahoma.

FTCC was incorporated in 2006, and began operations in January 2007.  FTCC provides financing for casualty insurance premiums for individuals and companies and is licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma.

The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts.  On May 16, 2012, the Company determined and then announced that FTCC will not accept new premium financing contracts after June 30, 2012.  FTCC will continue to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force.  The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013.  The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.
 
 
8

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
1.         Organization and Significant Accounting Policies (continued)

The Company also owns 100% of Southern Insurance Services, LLC, (“SIS”), a limited liability company acquired in 2010, that operated as a property and casualty insurance agency but currently has no operations.

Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included.  The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results to be expected for the year ended December 31, 2012 or for any other interim period or for any other future year.  Certain financial information which is normally included in notes to consolidated financial statements prepared in accordance with U.S. GAAP, but which is not required for interim reporting purposes, has been condensed or omitted.  The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 2011.
 
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 and prior quarter financial statements to conform to current year and current quarter 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.

Common Stock

Common stock is fully paid, non-assessable and has a par value of $.01 per share.

On January 10, 2011, the Company’s Board of Directors approved a 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold.  The dividend was payable to the holders of shares of the Corporation as of March 10, 2011.  Fractional shares were rounded to the nearest whole number of shares.  The Company issued 323,777 shares in connection with the stock dividend that resulted in accumulated deficit being charged $2,428,328 with an offsetting credit of $2,428,328 to common stock and additional paid-in capital.  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 378,928 shares in connection with the stock dividend that resulted in accumulated deficit being charged $2,841,960 with an offsetting credit of $2,841,960 to common stock and additional paid-in capital.  These stock dividends were non-cash investing and financing activities.
 
 
9

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
1.         Organization and Significant Accounting Policies (continued)

Subsequent Events

Management has evaluated all events subsequent to June 30, 2012 through the date that these financial statements have been issued.

Recent Accounting Pronouncements

Fair Value Measurements and Disclosures

In May 2011, the Financial Accounting Standards Board (FASB) issued new guidance concerning fair value measurements and disclosure. The new guidance is the result of joint efforts by the FASB and the International Accounting Standards Board to develop a single, converged fair value framework on how to measure fair value and the necessary disclosures concerning fair value measurements. This guidance became effective for interim and annual periods beginning after December 15, 2011.

The Company’s adoption of this guidance resulted in a change in certain fair value footnote disclosures but did not have any effect on the Company’s results of operations, financial position or liquidity.

Presentation of Comprehensive Income
 
In June 2011, the FASB issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in shareholders’ equity.  The updated guidance requires that all nonowner changes in shareholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements.  The updated guidance was effective for the quarter ended March 31, 2012 and was applied retrospectively.
 
The Company’s adoption of the updated guidance resulted in a change in the presentation of the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.
 
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
 
In October 2010, the FASB issued updated guidance to address diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts.  This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred.  If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs.
 
The updated guidance was effective for the quarter ended March 31, 2012.  The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

Intangibles - Goodwill and Other
 
In September 2011, the FASB issued updated guidance that modifies the manner in which the two-step impairment test of goodwill is applied.  Under the updated guidance, an entity may assess qualitative 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 fair value of a reporting unit is less than its carrying value, including goodwill.  If an entity determines that it is more likely than not, it must perform an impairment test.
 
 
10

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
1.         Organization and Significant Accounting Policies (continued)

The first step of the impairment test involves comparing the estimated fair value of a reporting unit to its carrying value, including goodwill.  If the carrying value of a reporting unit exceeds the estimated fair value, a second step must be performed to measure the amount of goodwill impairment, if any.  In the second step, the implied fair value of the reporting unit’s goodwill is determined in the same manner as goodwill is measured in a business combination (i.e., by measuring the fair value of the reporting unit’s assets, liabilities and unrecognized intangible assets and determining the remaining amount ascribed to goodwill) and comparing the amount of the implied goodwill to the carrying amount of the goodwill.  If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
 
The updated guidance was effective for the quarter ended March 31, 2012.  The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.
 
 
11

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
2.         Investments

Fixed Maturity and Equity Securities Available-For-Sale

Investments in fixed maturity and equity securities available-for-sale as of June 30, 2012 and December 31, 2011 are summarized as follows:
 
June 30, 2012
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Fixed maturity securities
                       
U.S. government
  $ 2,560,373     $ 56,843     $ 18,934     $ 2,598,282  
Residential mortgage-backed securities
    121,241       65,862       -       187,103  
Corporate bonds
    86,198,751       4,803,085       341,751       90,660,085  
Foreign bonds
    1,644,617       191,352       77,046       1,758,923  
Total fixed maturity securities
  $ 90,524,982     $ 5,117,142     $ 437,731     $ 95,204,393  
 
Equity securities
 
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Mutual funds
  $ 356,840     $ 42,166     $ -     $ 399,006  
Corporate preferred stock
    247,960       21,200       -       269,160  
Corporate common stock
    352,166       133,324       -       485,490  
Total equity securities
    956,966       196,690       -       1,153,656  
Total fixed maturity and equity securities
  $ 91,481,948     $ 5,313,832     $ 437,731     $ 96,358,049  
 
 
December 31, 2011
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Fixed maturity securities
                       
U.S. government
  $ 2,762,683     $ 46,489     $ -     $ 2,809,172  
Residential mortgage-backed securities
    135,538       67,443       -       202,981  
Corporate bonds
    73,083,134       2,708,377       39,646       75,751,865  
Foreign bonds
    2,146,748       185,566       45,125       2,287,189  
Total fixed maturity securities
  $ 78,128,103     $ 3,007,875     $ 84,771     $ 81,051,207  
 
Equity securities
 
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Mutual funds
  $ 150,815     $ 32,707     $ -     $ 183,522  
Corporate preferred stock
    247,960       -       -       247,960  
Corporate common stock
    352,166       115,245       -       467,411  
Total equity securities
    750,941       147,952       -       898,893  
Total fixed maturity and equity securities
  $ 78,879,044     $ 3,155,827     $ 84,771     $ 81,950,100  
 
 
12

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)

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 June 30, 2012 and December 31, 2011 are summarized as follows:
 
June 30, 2012
 
Fair Value
   
Unrealized
Loss
   
Number of
Securities
 
Fixed maturity securities
                 
Less than 12 months
                 
Corporate bonds
  $ 10,745,621     $ 341,751       66  
U. S. government
    1,238,326       18,934       2  
Foreign bonds
    526,183       77,046       2  
Total fixed maturity securities
  $ 12,510,130     $ 437,731       70  
 
December 31, 2011
 
Fair Value
   
Unrealized
Loss
   
Number of
Securities
 
Fixed maturity securities
                 
Less than 12 months
                 
Corporate bonds
  $ 922,288     $ 39,646       5  
Foreign bonds
    965,011       45,125       4  
Total fixed maturity securities
  $ 1,887,299     $ 84,771       9  
 
As of June 30, 2012, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 69%.  As of December 31, 2011, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 90%.  Fixed maturity securities were 97% and 88% investment grade as rated by Standard & Poor’s as of June 30, 2012 and December 31, 2011, respectively.  There were no equity securities in an unrealized loss position as of June 30, 2012 and December 31, 2011.

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).
 
 
13

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)

2.         Investments (continued)

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.

Based on our review, the Company experienced no other-than-temporary impairments during the six months ended June 30, 2012 and year ended December 31, 2011.

Management believes that the Company will fully recover its cost basis in the securities held as of June 30, 2012, 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. 
 
Net unrealized gains included in other comprehensive income 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 June 30, 2012 and December 31, 2011 are summarized as follows:
 
   
June 30, 2012
   
December 31, 2011
 
Unrealized appreciation on available-for-sale securities
  $ 4,876,101     $ 3,071,056  
Adjustment to deferred acquisition costs
    (33,447 )     (25,596 )
Deferred income taxes
    (740,351 )     (349,236 )
Net unrealized appreciation on available-for-sale securities
  $ 4,102,303     $ 2,696,224  
 
The amortized cost and fair value of fixed maturity available-for-sale securities as of June 30, 2012, by contractual maturity, are summarized as follows:
 
   
Available-for-Sale
 
   
Amortized Cost
   
Fair Value
 
Due in one year or less
  $ 2,781,528     $ 2,863,780  
Due in one year through five years
    27,203,476       28,668,401  
Due after five years through ten years
   
48,691,516
      51,108,966  
Due after ten years
   
11,727,221
      12,376,143  
Due at multiple maturity dates
    121,241       187,103  
    $
90,524,982
    $ 95,204,393  
 
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.
 
 
14

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
2.         Investments (continued)

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity and equity securities available-for-sale for the three and six months ended June 30, 2012 and 2011 are summarized as follows:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Proceeds
  $ 1,825,015     $ 926,173     $ 4,036,055     $ 1,456,286  
Gross realized gains
    27,082       24,006       95,622       25,756  
Gross realized losses
    (2,811 )     (406 )     (2,811 )     (406 )
 
The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the three  and six months ended June 30, 2012 and 2011 and the amount of realized investment gains on fixed maturity and equity securities available-for-sale for the three and six months ended June 30, 2012 and 2011 are summarized as follows:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Change in unrealized investment gains:
                       
Available-for-sale securities:
                       
Fixed maturity securities
  $ 1,232,073     $ 142,672     $ 1,756,307     $ 178,622  
Equity securities
    (35,521 )     19,798       48,738       (887 )
Other realized investment gains:
                               
Available-for-sale securities:
                               
Fixed maturity securities
    20,955       23,600       89,495       25,350  
Equity securities
    3,316       -       3,316       -  
 
Major categories of net investment income for the three and six months ended June 30, 2012 and 2011 are summarized as follows:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Fixed maturity securities
  $ 1,137,978     $ 564,729     $ 2,559,055     $ 1,149,602  
Equity securities
    15,605       4,113       28,166       8,206  
Mortgage loans
    113,705       29,923       152,026       57,675  
Real estate
    93,476       93,469       186,951       177,807  
Policy loans
    23,837       8,206       48,830       15,436  
Short-term and other investments
    5,583       1,818       14,628       11,040  
Gross investment income
    1,390,184       702,258       2,989,656       1,419,766  
Investment expenses
    (123,854 )     (127,619 )     (250,831 )     (260,331 )
Net investment income
  $ 1,266,330     $ 574,639     $ 2,738,825     $ 1,159,435  
 
Included in invested assets are securities and other assets having amortized cost values of $3,221,575 and $2,671,077 and fair values of $3,240,821 and $2,713,063as of June 30, 2012 and December 31, 2011, respectively, which have been placed on deposit with various state insurance departments.
 
 
15

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
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 and liabilities include fixed maturity and equity securities that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  The Company’s Level 2 assets and liabilities include fixed maturity securities with quoted prices that are traded less frequently than exchange-traded instruments or assets and liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.  This category generally includes U.S. Government and agency mortgage-backed debt securities and corporate debt securities.

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 and asset-backed securities 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/out of the Level 3 category as of the beginning of the period in which the reclassifications occur.
 
 
16

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
3.         Fair Value Measurements (continued)

The Company’s fair value hierarchy for those financial instruments measured and carried at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 is summarized as follows:
 
June 30, 2012
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Fixed maturity securities, available-for-sale
                   
U.S. government
  $ -     $ 2,598,282     $ -     $ 2,598,282  
Residential mortgage-backed securities
    -       187,103       -       187,103  
Corporate bonds
    -       90,660,085       -       90,660,085  
Foreign bonds
    -       1,758,923       -       1,758,923  
Total fixed maturity securities
  $ -     $ 95,204,393     $ -     $ 95,204,393  
Equity securities, available-for-sale
                               
Mutual funds
  $ 309,626     $ 89,380     $ -     $ 399,006  
Corporate preferred stock
    -       269,160       -       269,160  
Corporate common stock
    407,990       -       77,500       485,490  
Total equity securities
  $ 717,616     $ 358,540     $ 77,500     $ 1,153,656  
 
December 31, 2011
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Fixed maturity securities, available-for-sale
                   
U.S. government
  $ -     $ 2,809,172     $ -     $ 2,809,172  
Residential mortgage-backed securities
    -       202,981       -       202,981  
Corporate bonds
    -       75,751,865       -       75,751,865  
Foreign bonds
    -       2,287,189       -       2,287,189  
Total fixed maturity securities
  $ -     $ 81,051,207     $ -     $ 81,051,207  
Equity securities, available-for-sale
                               
Mutual funds
  $ -     $ 183,522     $ -     $ 183,522  
Corporate preferred stock
    -       247,960       -       247,960  
Corporate common stock
    389,911       -       77,500       467,411  
Total equity securities
  $ 389,911     $ 431,482     $ 77,500     $ 898,893  
 
At June 30, 2012, Level 3 financial instruments consisted of two private placement common stocks that have no active trading.  These stocks represent investments in small development stage 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 the development stage company commences operations.

Fair values for Level 1 and Level 2 assets for the Company’s fixed maturity and equity securities available-for-sale are primarily based on prices supplied by its third party investment service.  The third party investment service provides quoted prices in the market which use observable inputs in developing such rates.
 
 
17

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
3.         Fair Value Measurements (continued)

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 agencies, mortgage-backed securities, corporate bonds and foreign bonds.

The Company’s equity securities are included in Level 1 except for mutual funds and the preferred stock included in Level 2 and the private placement common stocks included in Level 3.  Level 1 for these equity securities is appropriate since they trade on a daily basis, are based on quoted market prices in active markets and based upon unadjusted prices.  Level 2 for the mutual funds and preferred stock is appropriate since they are not actively traded as of June 30, 2012.  The Company’s fixed maturity and equity securities portfolio is highly liquid and allows for a high percentage of the portfolio to be priced through pricing services.

The Company uses various financial instruments in the normal course of its business.  The Company’s insurance contracts are excluded from fair value of financial instruments accounting guidance and, therefore, are not included in the amounts discussed below.
 
 
18

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
3.         Fair Value Measurements (continued)

The carrying value and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of June 30, 2012 and December 31, 2011, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:

Financial Instruments Disclosed, But Not Carried, at Fair Value:
 
   
June 30, 2012
 
   
Carrying
Amount
   
Fair
Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets
                             
Mortgage loans on real estate
                             
Commercial
  $ 2,338,782     $ 2,411,070     $ -     $ -     $ 2,411,070  
Residential
    6,203,412       6,203,412       -       -       6,203,412  
Policy loans
    1,450,702       1,450,702       -       -       1,450,702  
Other long-term investments
    16,056,299       18,216,221       -       -       18,216,221  
Cash and cash equivalents
    12,479,563       12,479,563       12,479,563       -       -  
Accrued investment income
    1,487,449       1,487,449       -       -       1,487,449  
Loans from premium financing
    836,124       836,124       -       -       836,124  
Total financial assets
  $ 40,852,331     $ 43,084,541     $ 12,479,563     $ -     $ 30,604,978  
Financial liabilities
                                       
Policyholders' account balances
  $ 92,529,902     $ 90,965,339     $ -     $ -     $ 90,965,339  
Policy claims
    512,185       512,185       -       -       512,185  
Total financial liabilities
  $ 93,042,087     $ 91,477,524     $ -     $ -     $ 91,477,524  
 
   
December 31, 2011
 
   
Carrying
Amount
   
Fair
Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets
                             
Mortgage loans on real estate
                             
Commercial
  $ 1,856,160     $ 1,934,303     $ -     $ -     $ 1,934,303  
Residential
    129,234       131,319       -       -       131,319  
Policy loans
    1,472,666       1,472,666       -       -       1,472,666  
Other long-term investments
    9,875,675       11,610,716       -       -       11,610,716  
Cash and cash equivalents
    27,705,711       27,705,711       27,705,711       -       -  
Accrued investment income
    1,122,574       1,122,574       -       -       1,122,574  
Loans from premium financing
    1,022,416       1,022,416       -       -       1,022,416  
Total financial assets
  $ 43,184,436     $ 44,999,705     $ 27,705,711     $ -     $ 17,293,994  
Financial liabilities
                                       
Policyholders' account balances
  $ 81,730,322     $ 80,609,804     $ -     $ -     $ 80,609,804  
Policy claims
    515,522       515,522       -       -       515,522  
Total financial liabilities
  $ 82,245,844     $ 81,125,326     $ -     $ -     $ 81,125,326  
 
 
19

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
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:

Mortgage Loans on Real Estate

The fair values for commercial and residential mortgage loans are estimated using discounted cash flow analyses, using the actual spot rate yield curve in effect at the end of the period.  The residential mortgages have been recently purchased and therefore the spot rate yield curve equaled the purchase price.

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 applicable rates.

Cash and Cash Equivalents, Policy Loans and Accrued Investment Income
 
The carrying value of these financial instruments approximates their fair values.

Loans from Premium Financing

The carrying value of loans from premium financing is net of unearned interest and any estimated loan losses and approximates fair value.  Estimated loan losses were $223,135 and $229,004 as of June 30, 2012 and December 31, 2011, respectively.

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.
 
 
20

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
4.         Segment Data

The Company has a life insurance segment, consisting of the operations of TLIC and Family Benefit Life, and a premium financing segment, consisting of the operations of FTCC and SIS.  Results for the parent company, after elimination of intercompany amounts, are allocated to the corporate segment.  These segments for the three and six months ended June 30, 2012 and 2011 and assets as of June 30, 2012 and December 31, 2011 are summarized as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
Life and annuity insurance operations
  $ 3,084,028     $ 2,066,682     $ 6,667,631     $ 4,237,677  
Premium finance operations
    29,752       27,173       76,808       71,187  
Corporate operations
    17,316       (1,369 )     38,667       3,137  
Total
  $ 3,131,096     $ 2,092,486     $ 6,783,106     $ 4,312,001  
Income (loss) before income taxes:
                               
Life and annuity insurance operations
  $ (163,236 )   $ 70,833     $ 336,147     $ 323,207  
Premium finance operations
    (91,400 )     (21,273 )     (104,155 )     (74,842 )
Corporate operations
    (113,382 )     (80,808 )     (273,553 )     (211,766 )
Total
  $ (368,018 )   $ (31,248 )   $ (41,561 )   $ 36,599  
Depreciation and amortization expense:
                               
Life and annuity insurance operations
  $ 283,796     $ 160,671     $ 681,274     $ 383,505  
Premium finance operations
    927       927       1,854       1,854  
Corporate operations
    16,534       18,824       20,797       23,239  
Total
  $ 301,257     $ 180,422     $ 703,925     $ 408,598  
                                 
 
   
June 30, 2012
   
December 31, 2011
                 
Assets:
                               
Life and annuity insurance operations
  $ 150,566,678     $ 137,931,960                  
Premium finance operations
    1,756,466       1,864,370                  
Corporate operations
    5,810,365       4,951,325                  
Total
  $ 158,133,509     $ 144,747,655                  
 
 
21

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2012
(Unaudited)
 
5.         Allowance for Loss on Premium Finance Contracts

The progression of the Company’s allowance for loss related to loans from premium financing for the three and six months ended June 30, 2012 and 2011 is summarized as follows:
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Allowance at beginning of period
  $ 221,520     $ 443,071     $ 229,004     $ 443,071  
Entries to statement of financial position
    1,615       (191,991 )     (5,869 )     (191,991 )
Entries to statement of operations
    -       (15,461 )     -       (15,461 )
                                 
Allowance at end of period
  $ 223,135     $ 235,619     $ 223,135     $ 235,619  
 
 
6.         Federal Income Taxes

The provision for federal income taxes is based on the liability method of accounting for income taxes.  Deferred income taxes are provided for the cumulative temporary differences between balances of assets and liabilities determined under GAAP and the balances using tax bases.  A valuation allowance has been established due to the uncertainty of certain loss carryforwards.

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, has not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 2008 through 2011 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.
 
 
7.         Contingent Liabilities

Guaranty fund assessments may be taken as a credit against premium taxes over a five-year period.  These 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.
 
 
22

 
 
Item 2.  Management's Discussion and Analysis of Financial Condition, Results of Operations and Liquidity and Capital Resources

The following is a discussion and analysis of our financial condition, results of operations and liquidity and capital resources.

FINANCIAL HIGHLIGHTS

Consolidated Results of Operations for the Three Months Ended June 30, 2012

·  
Net loss of $369,579, or $0.05 per share basic and diluted (7,969,304 shares)
·  
Premiums of $1,806,830
·  
Net investment income of $1,266,330
·  
Total revenues of $3,131,096
·  
Benefits and claims of $2,264,188
·  
Expenses of $1,234,926
·  
Federal income tax expense of $1,561

Consolidated Results of Operations for the Six Months Ended June 30, 2012

·  
Net loss of $52,327, or $0.01 per share basic and diluted (7,906,452 shares)
·  
Premiums of $3,862,969
·  
Net investment income of $2,738,825
·  
Total revenues of $6,783,106
·  
Benefits and claims of $4,545,817
·  
Expenses of $2,278,850
·  
Federal income tax expense of $10,766

Consolidated Financial Position as of June 30, 2012

·  
Total investments of $125,793,251, available-for-sale fixed maturity securities comprise over 75% of total investments
·  
Total assets of $158,133,509
·  
Total policy liabilities of $123,270,160, policyholders’ account balances and future policy benefits comprise over 99% of total policy liabilities
·  
Total liabilities of $126,940,675
·  
Shareholders’ equity of $31,192,834, or book value per common share of over $3.91 (7,974,373 shares)

Overview

First Trinity Financial Corporation  (“we” “us”, “our”, or the Company) conducts operations as an insurance holding company emphasizing ordinary life insurance products in niche markets and a premium finance company, financing casualty insurance premiums.

As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders.  Our core 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 Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas through independent agents.  With the acquisition of Family Benefit Life in late 2011, we will be expanding into Arizona, Colorado, Missouri and New Mexico in 2012.

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.
 
 
23

 

We provide financing for casualty insurance premiums through independent property and casualty insurance agents.  We are licensed in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma.

The Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts.  On May 16, 2012, the Company determined and then announced that FTCC will not accept new premium financing contracts after June 30, 2012.  FTCC will continue to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force.  The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013.  The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.

Recent Acquisitions

The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance business.  In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of First Life America Corporation, included in the life insurance segment, for $2,500,000 and had additional acquisition related expenses of $195,000.  In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of Family Benefit Life Insurance Company, also included in the life insurance segment, for $13,855,129.

Our profitability in the life insurance segment is a function of our ability to accurately price the policies that we write, adequately value life insurance business acquired and administer life insurance company acquisitions at an expense level that validates the acquisition cost.  Profitability in the premium financing segment is dependent on the Company’s ability to compete in that sector, maintain low administrative costs and minimize losses.

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.  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, loans from premium financing, allowance for loans losses from premium financing, value of insurance business acquired, policy liabilities, regulatory requirements, contingencies and litigation.  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.

For a description of the Company’s critical accounting policies and estimates, please refer to “Item 7 — Management’s Discussion and Analysis of Financial Condition, Results of Operations and Liquidity and Capital Resources— Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  The Company considers its most critical accounting estimates to be those applied to investments in fixed maturities and equity securities, deferred policy acquisition costs, loans from premium financing, value of insurance business acquired, future policy benefits and federal income taxes.  Except as discussed below, there have been no material changes to the Company’s critical accounting policies and estimates since December 31, 2011.

Recent Accounting Pronouncements

Fair Value Measurements and Disclosures

In May 2011, the Financial Accounting Standards Board (FASB) issued new guidance concerning fair value measurements and disclosure. The new guidance is the result of joint efforts by the FASB and the International Accounting Standards Board to develop a single, converged fair value framework on how to measure fair value and the necessary disclosures concerning fair value measurements. This guidance became effective for interim and annual periods beginning after December 15, 2011.
 
 
24

 

The Company’s adoption of this guidance resulted in a change in certain fair value footnote disclosures but did not have any effect on the Company’s results of operations, financial position or liquidity.

Presentation of Comprehensive Income
 
In June 2011, the FASB issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in shareholders’ equity.  The updated guidance requires that all nonowner changes in shareholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements.  The updated guidance was effective for the quarter ended March 31, 2012 and was applied retrospectively.
 
The Company’s adoption of the updated guidance resulted in a change in the presentation of the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.
 
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
 
In October 2010, the FASB issued updated guidance to address diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts.  This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred.  If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs.
 
The updated guidance was effective for the quarter ended March 31, 2012.  The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

Intangibles - Goodwill and Other
 
In September 2011, the FASB issued updated guidance that modifies the manner in which the two-step impairment test of goodwill is applied.  Under the updated guidance, an entity may assess qualitative 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 fair value of a reporting unit is less than its carrying value, including goodwill.  If an entity determines that it is more likely than not, it must perform an impairment test.

The first step of the impairment test involves comparing the estimated fair value of a reporting unit to its carrying value, including goodwill.  If the carrying value of a reporting unit exceeds the estimated fair value, a second step must be performed to measure the amount of goodwill impairment, if any.  In the second step, the implied fair value of the reporting unit’s goodwill is determined in the same manner as goodwill is measured in a business combination (i.e., by measuring the fair value of the reporting unit’s assets, liabilities and unrecognized intangible assets and determining the remaining amount ascribed to goodwill) and comparing the amount of the implied goodwill to the carrying amount of the goodwill.  If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.
 
The updated guidance was effective for the quarter ended March 31, 2012.  The adoption of this guidance did not have any effect on the Company’s results of operations, financial position or liquidity.

Business Segments

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 and annuity insurance operations, consisting of the operations of TLIC and Family Benefit Life;
·  
Premium finance operations, consisting of the operations of FTCC and SIS; and
·  
Corporate operations, which includes the results of the parent company after the elimination of intercompany amounts.
 
Please see below and Note 4 to the Consolidated Financial Statements for the three and six months ended June 30, 2012 and 2011 and as of June 30, 2012 and December 31, 2011 for additional information regarding segment data.
 
 
25

 

Results of Operations – Three Months Ended June 30, 2012 and 2011

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.  The impact on total revenues of Family Benefit Life total revenues, acquired on December 28, 2011, for the three months ended June 30, 2012 is summarized in the tables below.

Our revenues for the three months ended June 30, 2012 and 2011 are summarized as follows:
 
   
Three Months Ended June 30,
   
Total
Increase
   
Percentage change
 
Family Benefit Life
   
Net
Increase
 
   
2012
   
2011
   
2012 less 2011
   
2012 to 2011
 
2012 Results
   
2012 less 2011
 
Premiums
  $ 1,806,830     $ 1,464,737     $ 342,093       23.4 %   $ 193,832     $ 148,261  
Income from premium financing
    29,679       29,356       323       1.1 %     -       323  
Net investment income
    1,266,330       574,639       691,691       120.4 %     428,035       263,656  
Net realized investment gains
    24,271       23,600       671       2.8 %     -       671  
Other income
    3,986       154       3,832       2488.3 %     1,595       2,237  
Total revenues
  $ 3,131,096     $ 2,092,486     $ 1,038,610       49.6 %   $ 623,462     $ 415,148  
 
The increase of $415,148 in total revenues for the three months ended June 30, 2012, excluding Family Benefit Life revenues, is discussed below.

Premiums

Our premiums for the three months ended June 30, 2012 and 2011 are summarized as follows:
 
   
Three Months Ended June 30,
   
Increase (decrease)
   
Percentage change
   
2012
   
2011
   
2012 less 2011
   
2012 to 2011
Family Benefit Life
  $ 193,832     $ -     $ 193,832       -  
Whole life and term first year
    37,220       29,302       7,918       27.0 %
Whole life and term renewal
    490,924       504,635       (13,711 )     -2.7 %
Final expense first year
    270,604       284,922       (14,318 )     -5.0 %
Final expense renewal
    814,250       645,878       168,372       26.1 %
Total premiums
  $ 1,806,830     $ 1,464,737     $ 342,093       23.4 %
 
The $148,261 increase in premiums for the three months ended June 30, 2012, excluding Family Benefit Life premiums of $193,832, is primarily due to a $168,372 increase in final expense renewal premiums.

Premiums from whole life and term products should increase during the remainder of 2012.  The captive agents were focused on a public stock offering that began on June 29, 2010 and ended on April 30, 2012.  During those 22 months, the captive agents were not actively marketing whole life and term products.  These agents are now focused on whole life and term product sales.  Therefore, premiums from sales of whole life and term products should increase during the remainder of 2012.
 
 
26

 
 
Income from Premium Financing

The income from premium financing has steadily decreased during the past two years.  However, there was a slight increase of $323 in second quarter 2012.

As introduced above, the Company’s management has decided to focus on the Company’s core life and annuity insurance business and discontinue offering premium finance contracts.  On May 16, 2012, the Company determined and then announced that FTCC will not accept new premium financing contracts after June 30, 2012.  FTCC will continue to process payments and service all existing premium financing contracts after June 30, 2012 and through the duration that the property and casualty premium financing contracts are in force.  The Company estimates that FTCC will be processing and servicing its premium finance operations through June 30, 2013.  The Company will incur minimal costs related to exiting its premium financing operations since resources will be redeployed into its growing life and annuity insurance operations.

Net Investment Income

The major components of our net investment income for the three months ended June 30, 2012 and 2011 are summarized as follows:
 
   
Three Months Ended June 30,
   
Total
Increase
   
Percentage change
 
Family Benefit Life
   
Net
Increase (decrease)
 
   
2012
   
2011
   
2012 less 2011
   
2012 to 2011
 
2012 Results
   
2012 less 2011