10-Q 1 ftfc_10q-033113.htm FORM 10-Q ftfc_10q-033113.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 March 31, 2013

[    ]
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 May 13, 2013: 7,776,164 shares

 
 

 
 
FIRST TRINITY FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED MARCH 31, 2013

TABLE OF CONTENTS
 
PART I.  FINANCIAL INFORMATION
 
Page Number
       
Item 1.  Consolidated Financial Statements
     
       
Consolidated Statements of Financial Position as of March 31, 2013 (Unaudited) and December 31, 2012
 
3
 
       
Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012 (Unaudited)
 
4
 
       
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (Unaudited)
 
5
 
       
Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2013 and 2012 (Unaudited)
 
6
 
       
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (Unaudited)
 
7
 
       
Notes to Consolidated Financial Statements (Unaudited)
 
9
 
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
24
 
       
Item 4.  Controls and Procedures
 
39
 
       
Part II.  OTHER INFORMATION
     
       
Item 1.  Legal Proceedings
 
40
 
       
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
40
 
       
Item 3.  Defaults upon Senior Securities
 
40
 
       
Item 4.  Mine Safety Disclosures
 
40
 
       
Item 5. Other Information
 
40
 
       
Item 6. Exhibits
 
40
 
       
Signatures
 
41
 
       
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
 
   
March 31, 2013
   
December 31, 2012
 
Assets
 
(Unaudited)
       
Investments
           
Available-for-sale fixed maturity securities at fair value (amortized cost: $96,248,154 and $91,543,308 as of March 31, 2013 and December 31, 2012, respectively)
  $ 103,544,487     $ 98,659,797  
Available-for-sale equity securities at fair value (cost: $697,980 and $695,846 as of March 31, 2013 and December 31, 2012, respectively)
    857,929       843,497  
Mortgage loans on real estate
    12,722,725       10,435,776  
Investment real estate
    2,818,478       2,858,765  
Policy loans
    1,498,415       1,488,035  
Other long-term investments
    22,715,572       19,560,794  
Total investments
    144,157,606       133,846,664  
Cash and cash equivalents
    5,801,546       10,947,474  
Accrued investment income
    1,451,311       1,417,218  
Recoverable from reinsurers
    1,279,829       1,188,371  
Agents' balances and due premiums
    373,389       358,729  
Loans from premium financing, net
    135,643       261,072  
Deferred policy acquisition costs
    7,412,298       7,028,820  
Value of insurance business acquired
    7,414,052       7,508,895  
Property and equipment, net
    153,305       124,558  
Other assets
    2,953,840       2,768,516  
Total assets
  $ 171,132,819     $ 165,450,317  
Liabilities and Shareholders' Equity
               
Policy liabilities
               
Policyholders' account balances
  $ 99,855,190     $ 95,043,370  
Future policy benefits
    31,667,959       31,065,560  
Policy claims
    612,023       717,521  
Other policy liabilities
    96,864       139,722  
Total policy liabilities
    132,232,036       126,966,173  
Deferred federal income taxes
    3,261,461       3,301,524  
Other liabilities
    1,425,089       1,460,508  
Total liabilities
    136,918,586       131,728,205  
Shareholders' equity
               
Common stock, par value $.01 per share, 20,000,000 shares authorized, and 7,974,373 issued as of March 31, 2013 and December 31, 2012 and 7,776,164 and 7,789,060 outstanding as of March 31, 2013 and December 31, 2012, respectively, and 75,820 and 63,070 subscribed as of March 31, 2013 and December 31, 2012, respectively
    80,502       80,374  
Additional paid-in capital
    28,710,485       28,707,648  
Treasury stock, at cost (198,209 and 185,313 shares as of March 31, 2013 and December 31, 2012, respectively)
    (693,732 )     (648,595 )
Accumulated other comprehensive income
    5,933,971       5,780,670  
Accumulated earnings (deficit)
    183,007       (197,985 )
Total shareholders' equity
    34,214,233       33,722,112  
Total liabilities and shareholders' equity
  $ 171,132,819     $ 165,450,317  
 
See notes to consolidated financial statements (unaudited).
 
 
3

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
   
Three Months Ended March 31,
 
   
2013
   
2012
 
Revenues
           
Premiums
  $ 1,927,550     $ 2,056,139  
Income from premium financing
    1,094       47,012  
Net investment income
    1,651,623       1,472,495  
Net realized investment gains
    149,269       68,540  
Other income
    1,925       7,824  
Total revenues
    3,731,461       3,652,010  
Benefits, Claims and Expenses
               
Benefits and claims
               
Increase in future policy benefits
    590,691       608,641  
Death benefits
    493,866       659,706  
Surrenders
    129,036       129,447  
Interest credited to policyholders
    903,040       786,632  
Dividend, endowment and supplementary life contract benefits
    52,830       97,203  
Total benefits and claims
    2,169,463       2,281,629  
Policy acquisition costs deferred
    (641,535 )     (947,411 )
Amortization of deferred policy acquisition costs
    257,538       242,957  
Amortization of value of insurance business acquired
    94,844       107,655  
Commissions
    518,642       795,913  
Other underwriting, insurance and acquisition expenses
    982,381       844,810  
Total expenses
    1,211,870       1,043,924  
Total benefits, claims and expenses
    3,381,333       3,325,553  
Income before total federal income tax expense (benefit)
    350,128       326,457  
Current federal income tax expense
    47,524       54,280  
Deferred federal income tax benefit
    (78,388 )     (45,075 )
Total federal income tax expense (benefit)
    (30,864 )     9,205  
Net income
  $ 380,992     $ 317,252  
Net income per common share basic and diluted
  $ 0.05     $ 0.04  
 
See notes to consolidated financial statements (unaudited).

 
4

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)

   
Three Months Ended March 31,
 
   
2013
   
2012
 
Net income
  $ 380,992     $ 317,252  
Other comprehensive income
               
Total net unrealized gains arising during the period
    341,411       677,033  
Less net realized investment gains
    149,269       68,540  
Net unrealized gains
    192,142       608,493  
Less adjustment to deferred acquisition costs
    516       6,975  
Other comprehensive income before income tax expense
    191,626       601,518  
Income tax expense
    38,325       136,880  
Total other comprehensive income
    153,301       464,638  
Total comprehensive income
  $ 534,293     $ 781,890  
 
See notes to consolidated financial statements (unaudited).
 
5

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 2013 and 2012
(Unaudited)
 
   
Common
Stock
$.01 Par Value
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income
   
Accumulated
Earnings
(Deficit)
   
Total
Shareholders'
Equity
 
Balance as of January 1, 2012
  $ 73,649     $ 24,086,146     $ -     $ 2,696,224     $ 1,542,094     $ 28,398,113  
Stock dividend
    3,780       2,831,220       -       -       (2,835,000 )     -  
Subscriptions of common stock
    1,971       1,254,516       -       -       -       1,256,487  
Comprehensive income:
                                               
Net income
    -       -       -       -       317,252       317,252  
Other comprehensive income
    -       -       -       464,638       -       464,638  
Balance as of March 31, 2012
  $ 79,400     $ 28,171,882     $ -     $ 3,160,862     $ (975,654 )   $ 30,436,490  
                                                 
Balance as of January 1, 2013
  $ 80,374     $ 28,707,648     $ (648,595 )   $ 5,780,670     $ (197,985 )   $ 33,722,112  
Subscriptions of common stock
    128       2,837       -       -       -       2,965  
Repurchase of common stock
    -       -       (45,137 )     -       -       (45,137 )
Comprehensive income:
                                               
Net income
    -       -       -       -       380,992       380,992  
Other comprehensive income
    -       -       -       153,301       -       153,301  
Balance as of March 31, 2013
  $ 80,502     $ 28,710,485     $ (693,732 )   $ 5,933,971     $ 183,007     $ 34,214,233  
 
See notes to consolidated financial statements (unaudited).
 
 
6

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
   
Three Months Ended March 31,
 
   
2013
   
2012
 
Operating activities
           
Net income
  $ 380,992     $ 317,252  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for depreciation
    51,974       52,056  
Accretion of discount on investments
    (209,431 )     (233,047 )
Net realized investment gains
    (149,269 )     (68,540 )
Gain on sale of fixed asset
    -       (2,934 )
Amortization of policy acquisition cost
    257,538       242,957  
Policy acquisition cost deferred
    (641,535 )     (947,411 )
Mortgage loan origination fees deferred
    (48,031 )     -  
Amortization of loan origination fees
    11,438       -  
Amortization of value of insurance business acquired
    94,844       107,655  
Provision for deferred federal income tax benefit
    (78,388 )     (45,075 )
Interest credited to policyholders
    903,040       788,130  
Change in assets and liabilities:
               
Accrued investment income
    (34,093 )     (153,740 )
Policy loans
    (10,380 )     (7,462 )
Allowance for mortgage and premium finance loan losses
    46,371       (7,484 )
Recoverable from reinsurers
    (91,458 )     (31,956 )
Agents' balances and due premiums
    (14,660 )     1,290  
Other assets
    (185,324 )     (169,705 )
Future policy benefits
    602,399       611,384  
Policy claims
    (105,498 )     (42,004 )
Other policy liabilities
    (42,858 )     34,618  
Other liabilities
    (35,419 )     (132,289 )
Net cash provided by operating activities
    702,252       313,695  
                 
Investing activities
               
Purchases of fixed maturity securities
    (6,649,734 )     (11,490,292 )
Maturities of fixed maturity securities
    825,000       859,481  
Sales of fixed maturity securities
    962,518       1,351,559  
Purchases of equity securities
    (2,134 )     (500,565 )
Purchases of mortgage loans
    (2,866,116 )     (1,715,776 )
Payments on mortgage loans
    689,827       22,225  
Purchases of other long-term investments
    (3,697,065 )     (4,353,500 )
Payments on other long-term investments
    937,922       689,277  
Loans made for premiums financed
    -       (361,741 )
Loans repaid for premiums financed
    125,429       564,271  
Sales of furniture and equipment
    -       5,000  
Purchases of furniture and equipment
    (40,435 )     -  
Net cash used in investing activities
    (9,714,788 )     (14,930,061 )
                 
Financing activities
               
Policyholders' account deposits
    5,573,147       8,065,887  
Policyholders' account withdrawals
    (1,664,367 )     (1,202,822 )
Purchases of treasury stock
    (45,137 )     -  
Proceeds from public and private stock offerings
    2,965       1,256,487  
Net cash provided by financing activities
    3,866,608       8,119,552  
                 
Decrease in cash
    (5,145,928 )     (6,496,814 )
Cash and cash equivalents, beginning of period
    10,947,474       27,705,711  
Cash and cash equivalents, end of period
  $ 5,801,546     $ 21,208,897  
 
See notes to consolidated financial statements (unaudited).
 
 
7

 
 
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Supplemental Disclosures

In 2012, the Company issued approximately 378,000 shares in connection with a 5% share dividend payable to the holders of shares of the Company as of March 10, 2012.  In conjunction with the 2012 stock dividend, the non-cash impact on investing and financing activities is summarized as follows:

 
   
Three Months Ended March 31, 2012
 
Fair value of shares issued in connection with the stock dividend (378,000 share issued in 2012)
  $ 2,835,000  
Reduction in accumulated earnings (deficit) due to the stock dividend
    (2,835,000 )
Increase in common stock, par value $.01 due to the stock dividend
    3,780  
Increase in additional paid-in-capital due to the stock dividend
    2,831,220  
Change in shareholders' equity due to the stock dividend
  $ -  
 
 
8

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2013
(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.

On August 15, 2012, the Company commenced a private placement of its common stock primarily in the states of Kansas, Missouri and South Dakota.  The private placement was for 600,000 shares of the Company’s common stock for $8.50 per share.  If all shares were sold, the Company would have received $4,335,000 after reduction for estimated offering expenses.  This offering was suspended on March 8, 2013 and resulted in gross proceeds of $644,470 from the subscription of 75,820 shares of its common stock and incurred $338,333 in offering costs.

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.

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.  Family Benefit Life has recently been licensed in Arkansas, Illinois, Indiana, Kentucky, North Dakota, Pennsylvania, South Dakota, Texas and West Virginia.

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 would not accept new premium financing contracts after June 30, 2012.  FTCC has continued to process payments and service all existing premium financing contracts after June 30, 2012 and will 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.
 
 
9

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2013
(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 primarily 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 months ended March 31, 2013 are not necessarily indicative of the results to be expected for the year ended December 31, 2013 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, 2012.

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 11, 2012, 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 held.  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 approximately 378,000 shares in connection with the stock dividend that resulted in accumulated deficit being charged $2,835,000 with an offsetting credit of $2,835,000 to common stock and additional paid-in capital.  This stock dividend was a non-cash investing and financing activity.

Subsequent Events

Management has evaluated all events subsequent to March 31, 2013 through the date that these financial statements have been issued.

 
10

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2013
(Unaudited)
 
1.       Organization and Significant Accounting Policies (continued)

Recent Accounting Pronouncements

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
 
In February 2013, the Financial Accounting Standards Board (“FASB”) issued updated guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement of income or in the notes, separately for each component of comprehensive income, the current period reclassifications out of accumulated other comprehensive income by the respective line items of net income affected by the reclassification.
 
The updated guidance is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted the updated guidance effective March 31, 2013, and such adoption did not have any effect on the Company’s results of operations, financial position or liquidity.
 
Testing Indefinite-Lived Intangible Assets for Impairment
 
In July 2012, the FASB issued updated guidance regarding the impairment test applicable to indefinite-lived intangible assets that is similar to the impairment guidance applicable to goodwill.  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 the fair value of the indefinite-lived intangible asset and lead to the determination that it is more likely than not that the fair value of the asset is less than its carrying value.  If an entity determines that it is more likely than not that the fair value of the intangible asset is less than its carrying value, an impairment test must be performed.  The impairment test requires an entity to calculate the estimated fair value of the indefinite-lived intangible asset.  If the carrying value of the indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess.
 
The updated guidance was effective for the quarter ended March 31, 2013, but early adoption was permitted.  The Company adopted the updated guidance effective December 31, 2012, and such adoption 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
March 31, 2013
(Unaudited)

2.       Investments

Fixed Maturity and Equity Securities Available-For-Sale

Investments in fixed maturity and equity securities available-for-sale as of March 31, 2013 and December 31, 2012 are summarized as follows:
 
March 31, 2013 (unaudited)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Fixed maturity securities
                       
U.S. government
  $ 2,585,745     $ 261,436     $ 28,646     $ 2,818,535  
States and political subdivisions
    263,470       2,401       3,588       262,283  
Residential mortgage-backed securities
    98,624       73,921       -       172,545  
Corporate bonds
    89,038,802       6,768,320       89,131       95,717,991  
Foreign bonds
    4,261,513       342,443       30,823       4,573,133  
Total fixed maturity securities
    96,248,154       7,448,521       152,188       103,544,487  
 
Equity securities
 
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Mutual funds
    164,581       39,368       -       203,949  
Corporate preferred stock
    347,905       24,955       -       372,860  
Corporate common stock
    185,494       95,626       -       281,120  
Total equity securities
    697,980       159,949       -       857,929  
Total fixed maturity and equity securities
  $ 96,946,134     $ 7,608,470     $ 152,188     $ 104,402,416  
 
December 31, 2012
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Fixed maturity securities
                               
U.S. government
  $ 2,577,074     $ 256,628     $ 5,769     $ 2,827,933  
States and political subdivisions
    264,854       1,970       4,539       262,285  
Residential mortgage-backed securities
    107,229       67,890       -       175,119  
Corporate bonds
    84,325,622       6,578,982       83,812       90,820,792  
Foreign bonds
    4,268,529       344,630       39,491       4,573,668  
Total fixed maturity securities
    91,543,308       7,250,100       133,611       98,659,797  
 
Equity securities
 
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Mutual funds
    162,447       40,795       -       203,242  
Corporate preferred stock
    347,905       24,415       -       372,320  
Corporate common stock
    185,494       82,441       -       267,935  
Total equity securities
    695,846       147,651       -       843,497  
Total fixed maturity and equity securities
  $ 92,239,154     $ 7,397,751     $ 133,611     $ 99,503,294  
 
 
12

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2013
(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 March 31, 2013 and December 31, 2012 are summarized as follows:
 
March 31, 2013 (unaudited)
 
Fair Value
   
Unrealized
Loss
   
Number of
Securities
 
Fixed maturity securities
                 
Less than 12 months
                 
 U.S. government
  $ 1,401,354     $ 28,646       3  
 States and political subdivisions
    104,915       3,588       1  
 Corporate bonds
    5,493,222       78,515       33  
Total less than 12 months
    6,999,491       110,749       37  
More than 12 months
                       
 Corporate bonds
    252,752       10,616       2  
 Foreign bonds
    574,878       30,823       4  
Total more than 12 months
    827,630       41,439       6  
Total fixed maturity securities
  $ 7,827,121     $ 152,188       43  
                     
 
December 31, 2012
 
Fair Value
   
Unrealized
Loss
   
Number of
Securities
 
Fixed maturity securities
                       
Less than 12 months
                       
 U.S. government
  $ 594,232     $ 5,769       1  
 States and political subdivisions
    104,243       4,539       1  
 Corporate bonds
    5,772,021       83,812       28  
 Foreign bonds
    916,406       39,491       5  
Total fixed maturity securities
  $ 7,386,902     $ 133,611       35  
 
As of March 31, 2013, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 92%.  As of December 31, 2012, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 93%.  Fixed maturity securities were 95% investment grade as rated by Standard & Poor’s as of March 31, 2013 and December 31, 2012, respectively.  There were no equity securities in an unrealized loss position as of March 31, 2013 and December 31, 2012.

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.

 
13

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2013
(Unaudited)

2.       Investments (continued)

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.

Based on management’s review, the Company experienced no other-than-temporary impairments during the three months ended March 31, 2013 and the year ended December 31, 2012.  Management believes that the Company will fully recover its cost basis in the securities held at March 31, 2013, 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. 

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 March 31, 2013 and December 31, 2012, are summarized as follows:

   
(Unaudited)
March 31, 2013
   
December 31, 2012
 
Unrealized appreciation on available-for-sale securities
  $ 7,456,282     $ 7,264,140  
Adjustment to deferred acquisition costs
    (38,815 )     (38,299 )
Deferred income taxes
    (1,483,496 )     (1,445,171 )
Net unrealized appreciation on available-for-sale securities
  $ 5,933,971     $ 5,780,670  
 
The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of March 31, 2013, by contractual maturity, are summarized as follows:
 
   
March 31, 2013 (Unaudited)
 
   
Fixed Maturity Available-For-Sale Securities
   
Other Long-Term Investments
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
Due in one year or less
  $ 3,901,769     $ 3,963,390     $ 3,775,155     $ 3,795,743  
Due in one year through five years
    33,815,777       36,764,752       9,840,758       10,709,876  
Due after five years through ten years
    46,604,234       50,213,242       6,314,428       7,934,425  
Due after ten years
    11,827,750       12,430,558       2,785,231       4,265,989  
Due at multiple maturity dates
    98,624       172,545       -       -  
    $ 96,248,154     $ 103,544,487     $ 22,715,572     $ 26,706,033  

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
March 31, 2013
(Unaudited)
2.       Investments (continued)

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity securities available-for-sale and mortgage loans on real estate for the three months ended March 31, 2013 and 2012 are summarized as follows:
 
   
Three Months Ended March 31, (Unaudited)
 
   
Fixed Maturity Securities
   
Mortgage Loans on Real Estate
 
   
2013
   
2012
   
2013
   
2012
 
Proceeds
  $ 1,787,518     $ 2,211,040     $ 689,009     $ -  
Gross realized gains
    51,013       68,540       102,515       -  
Gross realized losses
    (4,259 )     -       -       -  

 
The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the three months ended March 31, 2013 and 2012 and the amount of realized investment gains on fixed maturity securities available-for-sale and mortgage loans on real estate for the three months ended March 31, 2013 and 2012 are summarized as follows:
 
   
Three Months Ended March 31, (Unaudited)
 
   
2013
   
2012
 
Change in unrealized investment gains:
           
Available-for-sale securities:
           
Fixed maturity securities
  $ 179,844     $ 524,234  
Equity securities
    12,298       84,259  
Net realized investment gains (losses):
               
Available-for-sale securities:
               
Fixed maturity securities
    46,754       68,540  
Mortgage loans on real estate
    102,515       -  
 
Major categories of net investment income for the three months ended March 31, 2013 and 2012 are summarized as follows:
 
   
Three Months Ended March 31, (Unaudited)
 
   
2013
   
2012
 
Fixed maturity securities
  $ 1,098,833     $ 1,223,324  
Equity securities
    7,315       12,561  
Other long-term investments
    395,635       197,753  
Mortgage loans
    210,022       38,321  
Policy loans
    24,104       24,993  
Real estate
    90,710       93,475  
Short-term and other investments
    10,428       9,045  
Gross investment income
    1,837,047       1,599,472  
Investment expenses
    (185,424 )     (126,977 )
Net investment income
  $ 1,651,623     $ 1,472,495  

 
15

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2013
(Unaudited)

2.       Investments (continued)

Included in invested assets are securities and other assets having amortized cost values of $3,405,881 and $3,981,060 and fair values of $3,610,301 and $4,219,334 as of March 31, 2013 and December 31, 2012, respectively, which have been placed on deposit with various state insurance departments.
 
 
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 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 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.

 
16

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2013
(Unaudited)

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 March 31, 2013 and December 31, 2012 is summarized as follows:

March 31, 2013 (Unaudited)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Fixed maturity securities, available-for-sale
                       
U.S. government
  $ -     $ 2,818,535     $ -     $ 2,818,535  
States and political subdivisions
    -       262,283       -       262,283  
Residential mortgage-backed securities
    -       172,545       -       172,545  
Corporate bonds
    -       95,717,991       -       95,717,991  
Foreign bonds
    -       4,573,133       -       4,573,133  
                                 
Total fixed maturity securities
  $ -     $ 103,544,487     $ -     $ 103,544,487  
                                 
Equity securities, available-for-sale
                               
Mutual funds
  $ -     $ 203,949     $ -     $ 203,949  
Corporate preferred stock
    -       372,860       -       372,860  
Corporate common stock
    228,620       -       52,500       281,120  
                                 
Total equity securities
  $ 228,620     $ 576,809     $ 52,500     $ 857,929  
 
December 31, 2012
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Fixed maturity securities, available-for-sale
                               
U.S. government
  $ -     $ 2,827,933     $ -     $ 2,827,933  
States and political subdivisions
    -       262,285       -       262,285  
Residential mortgage-backed securities
    -       175,119       -       175,119  
Corporate bonds
    -       90,820,792       -       90,820,792  
Foreign bonds
    -       4,573,668       -       4,573,668  
                                 
Total fixed maturity securities
  $ -     $ 98,659,797     $ -     $ 98,659,797  
                                 
Equity securities, available-for-sale
                               
Mutual funds
  $ -     $ 203,242     $ -     $ 203,242  
Corporate preferred stock
    -       372,320       -       372,320  
Corporate common stock
    215,435       -       52,500       267,935  
                                 
Total equity securities
  $ 215,435     $ 575,562     $ 52,500     $ 843,497  

As of March 31, 2013, Level 3 financial instruments consisted of two private placement common stocks that have no active trading.  During 2012, one private placement common stock was sold and another was purchased.  These private placement 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 a 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
March 31, 2013
(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, state and political subdivisions, mortgage-backed securities, corporate bonds and foreign bonds.

The Company’s equity securities are included in Level 1 and Level 2 and the private placement common stocks included in Level 3.  Level 1 for those 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 as of March 31, 2013.

The Company’s fixed maturity and equity securities available-for-sale portfolio is highly liquid and allows for a high percentage of the portfolio to be priced through pricing services.

 
18

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2013
(Unaudited)

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 March 31, 2013 and December 31, 2012, 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:
 
   
March 31, 2013 (Unaudited)
 
   
Carrying
Amount
   
Fair
Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets
                             
Mortgage loans on real estate
                             
Commercial
  $ 2,216,846     $ 2,285,224     $ -     $ -     $ 2,285,224  
Residential
    10,505,879       10,550,414       -       -       10,550,414  
Policy loans
    1,498,415       1,498,415       -       -       1,498,415  
Other long-term investments
    22,715,572       26,706,033       -       -       26,706,033  
Cash and cash equivalents
    5,801,546       5,801,546       5,801,546       -       -  
Accrued investment income
    1,451,311       1,451,311       -       -       1,451,311  
Loans from premium financing
    135,643       135,643       -       -       135,643  
Total financial assets
  $ 44,325,212     $ 48,428,586     $ 5,801,546     $ -     $ 42,627,040  
Financial liabilities
                                       
Policyholders' account balances
  $ 99,855,190     $ 95,207,220     $ -     $ -     $ 95,207,220  
Policy claims
    612,023       612,023       -       -       612,023  
Total financial liabilities
  $ 100,467,213     $ 95,819,243     $ -     $ -     $ 95,819,243  
 
   
December 31, 2012
 
   
Carrying
Amount
   
Fair
Value
   
Level 1
   
Level 2
   
Level 3
 
Financial assets
                                       
Mortgage loans on real estate
                                       
Commercial
  $ 2,267,560     $ 2,330,004     $ -     $ -     $ 2,330,004  
Residential
    8,168,216       8,177,697       -       -       8,177,697  
Policy loans
    1,488,035       1,488,035       -       -       1,488,035  
Other long-term investments
    19,560,794       23,168,994       -       -       23,168,994  
Cash and cash equivalents
    10,947,474       10,947,474       10,947,474       -       -  
Accrued investment income
    1,417,218       1,417,218       -       -       1,417,218  
Loans from premium financing
    261,072       261,072       -       -       261,072  
Total financial assets
  $ 44,110,369     $ 47,790,494     $ 10,947,474     $ -     $ 36,843,020  
Financial liabilities
                                       
Policyholders' account balances
  $ 95,043,370     $ 91,013,971     $ -     $ -     $ 91,013,971  
Policy claims
    717,521       717,521       -       -       717,521  
Total financial liabilities
  $ 95,760,891     $ 91,731,492     $ -     $ -     $ 91,731,492  
 
 
19

 
 
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2013
(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:

Fixed Maturity and Equity Securities

The fair value of fixed maturity 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, using the actual spot rate yield curve in effect at the end of the period, as determined by recent new loan activity.

Cash and Cash Equivalents, Accrued Investment Income and Policy Loans
 
The carrying value of these financial instruments approximates their fair values.  Cash and cash equivalents 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 Citigroup Pension Liability Index in effect at the end of each period.

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.  Unearned interest was $1,389 as of both March 31, 2013 and December 31, 2012.  Estimated loan losses were $228,999 as of both March 31, 2013 and December 31, 2012.

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
March 31, 2013
(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 as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012 are summarized as follows:

   
Three Months Ended March 31, (Unaudited)
 
   
2013
   
2012
 
Revenues:
           
Life and annuity insurance operations
  $ 3,686,274     $ 3,583,603  
Premium finance operations
    1,094       47,056  
Corporate operations
    44,093       21,351  
Total
  $ 3,731,461     $ 3,652,010  
Income (loss) before income taxes:
               
Life and annuity insurance operations
  $ 562,854     $ 499,383  
Premium finance operations
    (108,807 )     (12,755 )
Corporate operations
    (103,919 )     (160,171 )
Total
  $ 350,128     $ 326,457  
Depreciation and amortization expense:
               
Life and annuity insurance operations
  $ 410,146     $ 397,478  
Premium finance operations
    927       927  
Corporate operations
    4,721       4,263  
Total
  $ 415,794     $ 402,668  
 
   
(Unaudited)
March 31, 2013
   
December 31, 2012
 
Assets:
               
Life and annuity insurance operations
  $ 164,172,691     $ 158,151,031  
Premium finance operations
    670,104       979,390  
Corporate operations
    6,290,024       6,319,896  
Total
  $ 171,132,819     $ 165,450,317  

 
21

 

First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2013
(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 months ended March 31, 2013 and 2012 is summarized as follows:
 
   
Three Months Ended March 31, (Unaudited)
 
   
2013
   
2012
 
Allowance at beginning of period
  $ 228,999     $ 229,004  
Additions credited to operations
    -       (7,484 )
Allowance at end of period
  $ 228,999     $ 221,520  


6.       Federal Income Taxes

The provision for federal income taxes is based on the asset and 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 2009 through 2012 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.
 
 
8.       Other Comprehensive Income and Accumulated Other Comprehensive Income

The changes in the components of the Company’s accumulated other comprehensive income for the three months ended March 31, 2013 and 2012 are summarized as follows:
 
    (Unaudited)  
   
Unrealized
Appreciation on
Available-For-Sale
Securities
   
Adjustment to
Deferred Acquisition
Costs
   
Accumulated
Other
Comprehensive
Income
 
Balance as of January 1, 2012
  $ 2,718,885     $ (22,661 )   $ 2,696,224  
Other comprehensive income
    470,026       (5,388 )     464,638  
Balance as of March 31, 2012
  $ 3,188,911     $ (28,049 )   $ 3,160,862  
                         
Balance as of January 1, 2013
  $ 5,811,309     $ (30,639 )   $ 5,780,670  
Other comprehensive income before reclassifications, net of tax
    273,129       (413 )     272,716  
Less amounts reclassified from accumulated other comprehensive income, net of tax
    119,415       -       119,415  
Other comprehensive income
    153,714       (413 )     153,301  
Balance as of March 31, 2013
  $ 5,965,023     $ (31,052 )   $ 5,933,971  
 
 
22

 
 
8.     Other Comprehensive Income and Accumulated Other Comprehensive Income (continued)

The pretax components of the Company’s other comprehensive income and the related income tax expense for each component for the three months ended March 31, 2013 and 2012 are summarized as follows:
 
   
Three Months Ended March 31, 2013
(Unaudited)
 
   
Pretax
   
Income Tax
Expense
(Benefit)
   
Net of Tax
 
Other comprehensive income:
                 
Change in net unrealized gains on available-for-sale securities:
             
Unrealized holding gains arising during the period
  $ 341,411     $ 68,282     $ 273,129  
Reclassification adjustment for gains included in income
    (149,269 )     (29,854 )     (119,415 )
Net unrealized gains on investments
    192,142       38,428       153,714  
Adjustment to deferred acquisition costs
    (516 )     (103 )     (413 )
Total other comprehensive income
  $ 191,626     $ 38,325     $ 153,301  
 
   
Three Months Ended March 31, 2012
(Unaudited)
 
   
Pretax
   
Income Tax
Expense
(Benefit)
   
Net of Tax
 
Other comprehensive income:
                 
Change in net unrealized gains on available-for-sale securities:
             
Unrealized holding gains arising during the period
  $ 677,033     $ 154,064     $ 522,969  
Reclassification adjustment for gains included in income
    (68,540 )     (15,597 )     (52,943 )
Net unrealized gains on investments
    608,493       138,467       470,026  
Adjustment to deferred acquisition costs
    (6,975 )     (1,587 )     (5,388 )
Total other comprehensive income
  $ 601,518     $ 136,880     $ 464,638  
 
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 statement of operations for the three months ended March 31, 2013 are summarized as follows:
 
Reclassification Adjustments
 
Three Months Ended
March 31, 2013
(Unaudited)
 
Unrealized gains on available-for-sale securities:
     
Realized gains on sales of securities (a)   $ 149,269  
Income tax expenses (b)     29,854  
Total reclassification adjustments     119,415  
(a) These items appear within net realized investment gains in the consolidated statement of operations.
(b) These items appear within federal income taxes in the consolidated statement of operations.
 
 
23

 
 
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 TLIC 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 expanded into Arizona, Colorado, Missouri and New Mexico.  Family Benefit Life has recently been licensed in Arkansas, Illinois, Indiana, Kentucky, North Dakota, Pennsylvania, South Dakota, Texas and West Virginia.  Sales activity will soon begin in these new states.

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.

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 would not accept new premium financing contracts after June 30, 2012.  FTCC continued to process payments and service all existing premium financing contracts after June 30, 2012 and will 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.

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, 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.  However, as introduced above, the Company has discontinued its premium financing operations and will completely exit that segment of the business on approximately July 1, 2013.

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 loan 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.

 
24

 
 
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 and Results of Operations - Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  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, 2012.

Recent Accounting Pronouncements

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
 
In February 2013, the Financial Accounting Standards Board (“FASB”) issued updated guidance to improve the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to present, either on the face of the statement of income or in the notes, separately for each component of comprehensive income, the current period reclassifications out of accumulated other comprehensive income by the respective line items of net income affected by the reclassification.
 
The updated guidance is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted the updated guidance effective March 31, 2013, and such adoption did not have any effect on the Company’s results of operations, financial position or liquidity.
 
Testing Indefinite-Lived Intangible Assets for Impairment
 
In July 2012, the FASB issued updated guidance regarding the impairment test applicable to indefinite-lived intangible assets that is similar to the impairment guidance applicable to goodwill.  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 the fair value of the indefinite-lived intangible asset and lead to the determination that it is more likely than not that the fair value of the asset is less than its carrying value.  If an entity determines that it is more likely than not that the fair value of the intangible asset is less than its carrying value, an impairment test must be performed.  The impairment test requires an entity to calculate the estimated fair value of the indefinite-lived intangible asset.  If the carrying value of the indefinite-lived intangible asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to the excess.
 
The updated guidance was effective for the quarter ended March 31, 2013, but early adoption was permitted.  The Company adopted the updated guidance effective December 31, 2012, and such adoption 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 months ended March 31, 2013 and 2012 and as of March 31, 2013 and December 31, 2012 for additional information regarding segment information.

 
25

 
 
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 Three Months Ended March 31, 2013 and 2012
 
   
(Unaudited)
             
   
Three Months Ended March 31,
   
Increase (Decrease)
   
Percentage Change
 
   
2013
   
2012
   
2013 less 2012
   
2013 to 2012
 
Premiums
  $ 1,927,550     $ 2,056,139     $ (128,589 )     -6.3 %
Net investment income
    1,651,623       1,472,495       179,128       12.2 %
Net realized investment gains
    149,269       68,540       80,729       117.8 %
Other revenues
    3,019       54,836       (51,817 )     -94.5 %
Total revenues
    3,731,461       3,652,010       79,451       2.2 %
Benefits and claims
    2,169,463       2,281,629       (112,166 )     -4.9 %
Expenses
    1,211,870       1,043,924       167,946       16.1 %
Total benefits, claims and expenses
    3,381,333       3,325,553       55,780       1.7 %
Income before federal income tax expense (benefit)
    350,128       326,457       23,671       7.3 %
Federal income tax expense (benefit)
    (30,864 )     9,205       (40,069 )     -435.3 %
Net income
  $ 380,992     $ 317,252     $ 63,740       20.1 %
Net income per common share basic and diluted
  $ 0.05     $ 0.04     $ 0.01          

Consolidated Condensed Financial Position as of March 31, 2013 and December 31, 2012

   
(Unaudited)
         
Increase (Decrease)
   
Percentage Change
 
   
March 31, 2013
   
December 31, 2012
   
2013 to 2012
   
2013 to 2012