10-Q 1 ftfc20130930_10q.htm FORM 10-Q ftfc20130930_10q.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 September 30, 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 ☑       No ☐

 

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 ☑ No ☐

 

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:  

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes ☐       No ☑

 

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 November 11, 2013: 7,851,984 shares

 

 
 

 

 

FIRST TRINITY FINANCIAL CORPORATION AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

Page Number

     

Item 1. Consolidated Financial Statements

   
     

Consolidated Statements of Financial Position as of September 30, 2013 (Unaudited) and December 31, 2012

3

 
     

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)

4

 
     

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)

5

 
     

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2013 and 2012 (Unaudited)

6

 
     

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (Unaudited)

7

 
     

Notes to Consolidated Financial Statements September 30, 2013 (Unaudited)

9

 
     

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

26

 
     

Item 4. Controls and Procedures

48

 
     

Part II. OTHER INFORMATION

   
     

Item 1. Legal Proceedings

49

 
     

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

49

 
     

Item 3. Defaults upon Senior Securities

49

 
     

Item 4. Mine Safety Disclosures

49

 
     

Item 5. Other Information

49

 
     

Item 6. Exhibits

49

 
     

Signatures

50

 
     

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

 

 

   

September 30, 2013

   

December 31, 2012

 

 

 

(Unaudited)

         

Assets

               

Investments

               

Available-for-sale fixed maturity securities at fair value (amortized cost: $97,805,325 and $91,543,308 as of September 30, 2013 and December 31, 2012, respectively)

  $ 101,683,656     $ 98,659,797  

Available-for-sale equity securities at fair value (cost: $607,931 and $695,846 as of September 30, 2013 and December 31, 2012, respectively)

    737,381       843,497  

Mortgage loans on real estate

    16,024,208       10,435,776  

Investment real estate

    2,697,071       2,858,765  

Policy loans

    1,519,371       1,488,035  

Other long-term investments

    22,294,629       19,560,794  

Total investments

    144,956,316       133,846,664  

Cash and cash equivalents

    12,254,639       10,947,474  

Accrued investment income

    1,448,238       1,417,218  

Recoverable from reinsurers

    1,319,565       1,188,371  

Agents' balances and due premiums

    310,758       358,729  

Loans from premium financing, net

    148,625       261,072  

Deferred policy acquisition costs

    8,018,223       7,028,820  

Value of insurance business acquired

    7,187,324       7,508,895  

Property and equipment, net

    142,678       124,558  

Other assets

    3,048,704       2,768,516  

Total assets

  $ 178,835,070     $ 165,450,317  
                 

Liabilities and Shareholders' Equity

               

Policy liabilities

               

Policyholders' account balances

  $ 108,794,797     $ 95,043,370  

Future policy benefits

    32,839,871       31,065,560  

Policy claims

    814,108       717,521  

Other policy liabilities

    93,302       139,722  

Total policy liabilities

    142,542,078       126,966,173  

Deferred federal income taxes

    2,847,213       3,301,524  

Other liabilities

    2,116,000       1,460,508  

Total liabilities

    147,505,291       131,728,205  

Shareholders' equity

               

Common stock, par value $.01 per share, 20,000,000 shares authorized, and 8,050,193 and 7,974,373 issued as of September 30, 2013 and December 31, 2012, respectively, and 7,851,984 and 7,789,060 outstanding as of September 30, 2013 and December 31, 2012, respectively, and 63,070 subscribed as of December 31, 2012

    80,502       80,374  

Additional paid-in capital

    28,666,748       28,707,648  

Treasury stock, at cost (198,209 and 185,313 shares as of September 30, 2013 and December 31, 2012, respectively)

    (693,731 )     (648,595 )

Accumulated other comprehensive income

    3,188,282       5,780,670  

Accumulated earnings (deficit)

    87,978       (197,985 )

Total shareholders' equity

    31,329,779       33,722,112  

Total liabilities and shareholders' equity

  $ 178,835,070     $ 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 September 30,

   

Nine Months Ended September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Revenues

                               

Premiums

  $ 1,930,541     $ 1,943,647     $ 5,779,585     $ 5,806,616  

Income from premium financing

    36,055       20,591       40,385       97,282  

Net investment income

    1,826,964       1,565,135       5,242,954       4,303,960  

Net realized investment gains

    89,799       378,378       366,000       471,189  

Other income

    7,318       3,544       10,746       15,354  

Total revenues

    3,890,677       3,911,295       11,439,670       10,694,401  

Benefits, Claims and Expenses

                               

Benefits and claims

                               

Increase in future policy benefits

    576,056       472,508       1,741,803       1,645,523  

Death benefits

    847,526       606,062       1,943,220       1,891,630  

Surrenders

    129,880       156,212       438,856       430,212  

Interest credited to policyholders

    942,075       873,679       2,737,378       2,505,815  

Dividend, endowment and supplementary life contract benefits

    69,225       93,576       191,163       274,674  

Total benefits and claims

    2,564,762       2,202,037       7,052,420       6,747,854  

Policy acquisition costs deferred

    (274,016 )     (459,085 )     (1,426,610 )     (1,885,010 )

Amortization of deferred policy acquisition costs

    69,372       52,998       453,081       437,537  

Amortization of value of insurance business acquired

    105,771       92,211       321,571       307,877  

Commissions

    505,998       545,148       1,558,435       1,835,323  

Other underwriting, insurance and acquisition expenses

    901,754       940,584       3,021,792       2,754,979  

Total expenses

    1,308,879       1,171,856       3,928,269       3,450,706  

Total benefits, claims and expenses

    3,873,641       3,373,893       10,980,689       10,198,560  

Income before total federal income tax expense

    17,036       537,402       458,981       495,841  

Current federal income tax expense (benefit)

    (124,016 )     53,365       (20,768 )     120,145  

Deferred federal income tax expense (benefit)

    308,631       11,960       193,786       (44,054 )

Total federal income tax expense

    184,615       65,325       173,018       76,091  

Net income (loss)

  $ (167,579 )   $ 472,077     $ 285,963     $ 419,750  

Net income (loss) per common share basic and diluted

  $ (0.02 )   $ 0.06     $ 0.04     $ 0.05  

 

See notes to consolidated financial statements (unaudited).

 

 
4

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Net income (loss)

  $ (167,579 )   $ 472,077     $ 285,963     $ 419,750  

Other comprehensive income (loss)

                               

Total net unrealized gains (losses) arising during the period

    (881,882 )     2,868,334       (2,890,359 )     4,766,190  

Less net realized investment gains

    89,799       378,378       366,000       471,189  

Net unrealized gains (losses)

    (971,681 )     2,489,956       (3,256,359 )     4,295,001  

Adjustment to deferred acquisition costs

    4,193       (5,547 )     15,874       (13,398 )

Other comprehensive income before income tax expense (benefit)

    (967,488 )     2,484,409       (3,240,485 )     4,281,603  

Income tax expense (benefit)

    (193,495 )     511,973       (648,097 )     903,088  

Total other comprehensive income (loss)

    (773,993 )     1,972,436       (2,592,388 )     3,378,515  

Total comprehensive income (loss)

  $ (941,572 )   $ 2,444,513     $ (2,306,425 )   $ 3,798,265  

 

See notes to consolidated financial statements (unaudited).

 

 
5

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

Nine Months Ended September 30, 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

    3,789       2,838,171       -       -       (2,841,960 )     -  

Subscriptions of common stock

    2,671       1,744,569       -       -       -       1,747,240  

Repurchase of common stock

    -       -       (485,058 )     -       -       (485,058 )

Comprehensive income:

                                               

Net income

    -       -       -       -       419,750       419,750  

Other comprehensive income

    -       -       -       3,378,515       -       3,378,515  

Balance as of September 30, 2012

  $ 80,109     $ 28,668,886     $ (485,058 )   $ 6,074,739     $ (880,116 )   $ 33,458,560  
                                                 

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       (40,900 )     -       -       -       (40,772 )

Repurchase of common stock

    -       -       (45,136 )     -       -       (45,136 )

Comprehensive income (loss):

                                               

Net income

    -       -       -       -       285,963       285,963  

Other comprehensive loss

    -       -       -       (2,592,388 )     -       (2,592,388 )

Balance as of September 30, 2013

  $ 80,502     $ 28,666,748     $ (693,731 )   $ 3,188,282     $ 87,978     $ 31,329,779  

 

See notes to consolidated financial statements (unaudited).

 

 
6

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2013

   

2012

 

Operating activities

               

Net income

  $ 285,963     $ 419,750  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for depreciation

    156,736       165,182  

Accretion of discount on investments

    (648,823 )     (116,930 )

Net realized investment gains

    (366,000 )     (471,189 )

Gain on sale of fixed asset

    -       (2,934 )

Gain on sale of real estate

    (3,047 )     -  

Amortization of policy acquisition cost

    453,081       437,537  

Policy acquisition cost deferred

    (1,426,610 )     (1,885,010 )

Mortgage loan origination fees deferred

    (112,458 )     (149,588 )

Amortization of loan origination fees

    34,575       -  

Amortization of value of insurance business acquired

    321,571       307,877  

Provision for deferred federal income tax benefit

    193,786       (44,054 )

Interest credited to policyholders

    2,737,378       2,505,815  

Change in assets and liabilities:

               

Accrued investment income

    (31,020 )     (316,062 )

Policy loans

    (31,336 )     (1,707 )

Allowance for mortgage and premium finance loan losses

    42,114       5,997  

Recoverable from reinsurers

    (131,194 )     (38,269 )

Agents' balances and due premiums

    47,971       7,048  

Other assets

    (405,651 )     (427,576 )

Future policy benefits

    1,774,311       1,683,161  

Policy claims

    96,587       32,407  

Other policy liabilities

    (46,420 )     5,224  

Other liabilities

    655,492       (302,149 )

Net cash provided by operating activities

    3,597,006       1,814,530  
                 

Investing activities

               

Purchases of fixed maturity securities

    (12,111,396 )     (18,476,679 )

Maturities of fixed maturity securities

    2,441,000       1,378,000  

Sales of fixed maturity securities

    2,882,457       4,971,785  

Purchases of equity securities

    (14,504 )     (504,568 )

Sales of equity securities

    97,965       891,480  

Purchases of mortgage loans

    (7,371,253 )     (7,341,848 )

Payments on mortgage loans

    2,137,408       833,373  

Purchases of other long-term investments

    (4,337,915 )     (9,573,807 )

Payments on other long-term investments

    2,824,536       1,545,128  

Loans made for premiums financed

    -       (924,868 )

Loans repaid for premiums financed

    118,371       1,455,667  

Sales of real estate

    180,000       -  

Purchases of real estate

    (10,656 )     -  

Sales of furniture and equipment

    -       5,000  

Purchases of furniture and equipment

    (53,995 )     (1,294 )

Net cash used in investing activities

    (13,217,982 )     (25,742,631 )
                 

Financing activities

               

Policyholders' account deposits

    16,094,089       11,386,515  

Policyholders' account withdrawals

    (5,080,040 )     (3,545,191 )

Purchases of treasury stock

    (45,136 )     (485,058 )

Proceeds from (used in) public and private stock offerings

    (40,772 )     1,747,240  

Net cash provided by financing activities

    10,928,141       9,103,506  
                 

Increase (decrease) in cash

    1,307,165       (14,824,595 )

Cash and cash equivalents, beginning of period

    10,947,474       27,705,711  

Cash and cash equivalents, end of period

  $ 12,254,639     $ 12,881,116  

 

See notes to consolidated financial statements (unaudited).

 

 
7

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

(Unaudited)

Supplemental Disclosures

 

 

In 2013, the Company foreclosed on a delinquent note receivable and recovered the former home office building of Southern Insurance Services, LLC that was subsequently sold during third quarter 2013. In conjunction with this 2013 transaction, the non-cash impact on investing and finance activities is summarized as follows:

 

 

   

Nine Months Ended

September 30, 2013

 

Reduction in notes receivable for recovery of investment real estate

  $ 125,464  
         

Recognition of investment real estate from foreclosure

  $ 125,464  

 

 

In 2012, the Company issued 378,928 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:

 

 

   

Nine Months Ended

September 30, 2012

 

Fair value of shares issued in connection with the stock dividend (378,928 shares issued in 2012)

  $ 2,841,960  

Reduction in accumulated earnings (deficit) due to the stock dividend

    (2,841,960 )

Increase in common stock, par value $.01 due to the stock dividend

    3,789  

Increase in additional paid-in-capital due to the stock dividend

    2,838,171  

Change in shareholders' equity due to the stock dividend

  $ -  

 

 
8

 

 

 First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 $382,069 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 sixteen 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 continued to process payments and service all existing premium financing contracts after June 30, 2012 through the duration that the property and casualty premium financing contracts were in force. The Company virtually completed processing and servicing its premium finance operations on June 30, 2013 subject to minor refunds, minor collections of past due accounts and legal matters. The Company incurred minimal costs related to exiting its premium financing operations since resources were redeployed into its growing life and annuity insurance operations.

 

 
9

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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 and nine months ended September 30, 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 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. This stock dividend was a non-cash investing and financing activity.

 

Subsequent Events

 

Management has evaluated all events subsequent to September 30, 2013 through the date that these financial statements have been issued.

 

 

 
10

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 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

September 30, 2013

(Unaudited)

 

2.     Investments

 

Investments in fixed maturity and equity securities available-for-sale as of September 30, 2013 and December 31, 2012 are summarized as follows:

 

September 30, 2013 (unaudited)

 

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 

Fixed maturity securities

                               

U.S. government

  $ 3,154,137     $ 206,885     $ 194,358     $ 3,166,664  

States and political subdivisions

    260,647       755       8,329       253,073  

Residential mortgage-backed securities

    87,567       71,100       -       158,667  

Corporate bonds

    89,787,225       4,471,843       898,431       93,360,637  

Foreign bonds

    4,515,749       239,297       10,431       4,744,615  

Total fixed maturity securities

    97,805,325       4,989,880       1,111,549       101,683,656  

 

Equity securities

 

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 

Mutual funds

    66,532       20,787       2,100       85,219  

Corporate preferred stock

    347,905       21,693       28,845       340,753  

Corporate common stock

    193,494       117,915       -       311,409  

Total equity securities

    607,931       160,395       30,945       737,381  

Total fixed maturity and equity securities

  $ 98,413,256     $ 5,150,275     $ 1,142,494     $ 102,421,037  

 

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

September 30, 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 September 30, 2013 and December 31, 2012 are summarized as follows:

 

September 30, 2013 (unaudited)

 

Fair Value

   

Unrealized

Loss

   

Number of

Securities

 

Fixed maturity securities

                       

Less than 12 months

                       

U.S. government

  $ 1,235,642     $ 194,358       3  

States and political subdivisions

    99,599       8,329       1  

Corporate bonds

    22,112,633       898,431       134  

Foreign bonds

    474,429       10,431       3  

Total fixed maturity securities

    23,922,303       1,111,549       141  

Equity securities

                       

Less than 12 months

                       

Mutual funds

    10,956       2,100       1  

Corporate preferred stock

    189,600       28,845       3  

Total equity securities

    200,556       30,945       4  

Total fixed maturity and equity securities

  $ 24,122,859     $ 1,142,494       145  

 

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 September 30, 2013, all of the above fixed maturity securities had a fair value to cost ratio equal to or greater than 79%. 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 September 30, 2013 and December 31, 2012, respectively.

 

As of September 30, 2013, all of the above equity securities had a fair value to cost ratio equal to or greater than 79%.

 

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

September 30, 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 and nine months ended September 30, 2013 and the year ended December 31, 2012. Management believes that the Company will fully recover its cost basis in the securities held as of September 30, 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 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 September 30, 2013 and December 31, 2012, are summarized as follows:

 

   

(Unaudited)

September 30, 2013

   

December 31, 2012

 

Unrealized appreciation on available-for-sale securities

  $ 4,007,781     $ 7,264,140  

Adjustment to deferred acquisition costs

    (22,425 )     (38,299 )

Deferred income taxes

    (797,074 )     (1,445,171 )

Net unrealized appreciation on available-for-sale securities

  $ 3,188,282     $ 5,780,670  

 

The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of September 30, 2013, by contractual maturity, are summarized as follows:

 

   

September 30, 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

  $ 5,699,048     $ 5,811,187     $ 3,732,183     $ 3,759,565  

Due in one year through five years

    38,355,712       41,158,032       9,710,802       10,400,168  

Due after five years through ten years

    41,997,752       43,180,334       6,179,655       7,396,613  

Due after ten years

    11,665,246       11,375,436       2,671,989       3,749,825  

Due at multiple maturity dates

    87,567       158,667       -       -  
    $ 97,805,325     $ 101,683,656     $ 22,294,629     $ 25,306,171  

 

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

September 30, 2013

(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 and mortgage loans on real estate for the three and nine months ended September 30, 2013 and 2012 are summarized as follows:

 

   

Three Months Ended September 30, (Unaudited)

   

Nine Months Ended September 30, (Unaudited)

 
   

Fixed Maturity

and Equity Securities

   

Mortgage Loans

on Real Estate

   

Fixed Maturity

and Equity Securities

   

Mortgage Loans

on Real Estate

 
   

2013

   

2012

   

2013

   

2012

   

2013

   

2012

   

2013

   

2012

 

Proceeds

  $ 2,377,678     $ 3,205,210     $ 694,203     $ -     $ 5,421,422     $ 7,241,265     $ 2,134,439     $ -  

Gross realized gains

    55,425       380,992       40,954       -       115,020       476,614       264,223       -  

Gross realized losses

    (6,580 )     (2,614 )     -       -       (13,243 )     (5,425 )     -       -  

 

The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the three and nine months ended September 30, 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 and nine months ended September 30, 2013 and 2012 are summarized as follows:

 

 

   

Three Months Ended

September 30, (Unaudited)

   

Nine Months Ended

September 30, (Unaudited)

 
   

2013

   

2012

   

2013

   

2012

 

Change in unrealized investment gains:

                               

Available-for-sale securities:

                               

Fixed maturity securities

  $ (934,277 )   $ 2,465,576     $ (3,238,158 )   $ 4,221,883  

Equity securities

    (37,404 )     24,380       (18,201 )     73,118  

Net realized investment gains (losses):

                               

Available-for-sale securities:

                               

Fixed maturity securities

    53,300       20,230       106,232       109,725  

Equity securities

    (4,455 )     358,148       (4,455 )     361,464  

Mortgage loans on real estate

    40,954       -       264,223       -  

 

Major categories of net investment income for the three and nine months ended September 30, 2013 and 2012 are summarized as follows:

 

   

Three Months Ended

September 30, (Unaudited)

   

Nine Months Ended

September 30, (Unaudited)

 
   

2013

   

2012

   

2013

   

2012

 

Fixed maturity securities

  $ 1,101,529     $ 1,065,560     $ 3,294,448     $ 3,130,035  

Equity securities

    10,330       11,077       25,016       39,243  

Other long-term investments

    404,978       275,496       1,220,456       770,076  

Mortgage loans

    305,106       213,949       781,273       365,975  

Policy loans

    25,804       27,785       74,869       76,615  

Real estate

    90,870       93,684       272,290       280,635  

Short-term and other investments

    42,700       2,843       70,664       17,471  

Gross investment income

    1,981,317       1,690,394       5,739,016       4,680,050  

Investment expenses

    (154,353 )     (125,259 )     (496,062 )     (376,090 )

Net investment income

  $ 1,826,964     $ 1,565,135     $ 5,242,954     $ 4,303,960  

 

 
15

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

2.     Investments (continued)

 

Included in invested assets are securities and other assets having amortized cost values of $3,223,464 and $3,981,060 and fair values of $3,210,405 and $4,219,334 as of September 30, 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 the fair value hierarchy are reported as transfers in and out of the 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

September 30, 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 September 30, 2013 and December 31, 2012 is summarized as follows:

 

September 30, 2013 (Unaudited)

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Fixed maturity securities, available-for-sale

                               

U.S. government

  $ -     $ 3,166,664     $ -     $ 3,166,664  

States and political subdivisions

    -       253,073       -       253,073  

Residential mortgage-backed securities

    -       158,667       -       158,667  

Corporate bonds

    -       93,360,637       -       93,360,637  

Foreign bonds

    -       4,744,615       -       4,744,615  

Total fixed maturity securities

  $ -     $ 101,683,656     $ -     $ 101,683,656  
                                 

Equity securities, available-for-sale

                               

Mutual funds

  $ -     $ 85,219     $ -     $ 85,219  

Corporate preferred stock

    83,800       256,953       -       340,753  

Corporate common stock

    250,909       -       60,500       311,409  

Total equity securities

  $ 334,709     $ 342,172     $ 60,500     $ 737,381  

 

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 September 30, 2013, Level 3 financial instruments consisted of three private placement common stocks that have no active trading. During 2013, one private placement common stock was purchased. 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

September 30, 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 September 30, 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.

 

The change in the fair value of the Company’s Level 3 equity securities, available-for-sale for the three and nine months ended September 30, 2013 and 2012 is summarized as follows:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Beginning balance

  $ 52,500     $ 77,500     $ 52,500     $ 77,500  
Purchases     8,000       -       8,000       -  

Sales

    -       (35,000 )     -       (35,000 )

Ending balance

  $ 60,500