10-K 1 ftfc20161231_10k.htm FORM 10-K ftfc20161231_10k.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

[ X ]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the fiscal year ended December 31, 2016

 

[    ]

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 small business issuer as specified in its charter)

 

Oklahoma

 

34-1991436

(State or other jurisdiction of incorporation or organization)  

(I.R.S. Employer number)

 

 

 

7633 East 63rd Place, Suite 230

Tulsa, Oklahoma

74133-1246

(Address of principal executive offices)

 

(918) 249-2438

(Issuer's telephone number)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each Class 

None

 

Securities registered pursuant to section 12(g) of the Exchange Act:

Title of Each Class 

Common Stock, $.01 Par Value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

  

 
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a 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.

 

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 aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

  

Because of the absence of an established trading market for the common stock, the registrant is unable to calculate the aggregate market value of the voting stock held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Common stock $.01 par value as of March 6, 2017: 7,802,593 shares

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement to be used in connection with its 2017 Annual Meeting of Shareholders, which is expected to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Form 10-K, are incorporated by reference into Part III of this report.

 

 
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FIRST TRINITY FINANCIAL CORPORATION

 

TABLE OF CONTENTS

 

Part I

   
     

Item 1.

Business

4

Item 2.

Properties

9

Item 3.

Legal Proceedings

10

Item 4.

Mine Safety Disclosures

11

   

 

Part II

 

 

   

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business

 

 

Issuer Purchases of Equity Securities

11

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

Item 8.

Financial Statements

41

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

86

Item 9A.

Controls and Procedures

86

Item 9B.

Other Information

87

   

 

Part III

 

 

   

 

Item 10.

Directors, Executive Officers and Corporate Governance

87

Item 11.

Executive Compensation

87

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

 

 

Matters

87

Item 13.

Certain Relationships and Related Transactions, and Director Independence

87

Item 14.

Principal Accounting Fees and Services.

87

Item 15.

Exhibits

87

Signatures

88

Exhibit Index

89

 

 

Exhibit 21.1

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

Exhibit 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

 

 
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PART I

 

Item 1. Business

 

Business Development

 

First Trinity Financial Corporation (the “Company” or “FTFC”) is the parent holding company of Trinity Life Insurance Company (“TLIC”), Family Benefit Life Insurance Company (“FBLIC”) and First Trinity Capital Corporation (“FTCC”). The Company was incorporated in Oklahoma on April 19, 2004, for the primary purpose of organizing a life insurance subsidiary.

 

The Company owns 100% of TLIC. TLIC owns 100% of FBLIC. TLIC and FBLIC are primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life insurance products and annuity contracts to individuals.

 

TLIC’s and FBLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment policies and annuity contracts. The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense is issued as either a simplified issue or as a graded benefit, determined by underwriting. The TLIC and FBLIC products are sold through independent agents.

 

TLIC is licensed in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas. FBLIC is licensed in the states of Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia.

 

The Company owns 100% of FTCC that was incorporated in 2006, and began operations in January 2007. FTCC provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC has made no premium financing loans since June 30, 2012.

 

Company Capitalization

 

Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through December 31, 2016, we have received $27,119,480 from the sale of our shares.

 

The Company raised $1,450,000 from two private placements during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012; and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings.

 

Our operations have been profitable and have generated $12,860,584 of net income from operations since we were incorporated in 2004. The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital.

 

The historic impact of these two stock dividend charges of $5,270,138 decreased during 2011 and 2012 the balance of accumulated earnings and resulted in a reported balance as of December 31, 2016 of $7,590,446, as shown in the accumulated earnings caption in the December 31, 2016 consolidated statement of financial position.

 

The Company has also purchased 247,580 shares of treasury stock at a cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’s Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.

 

 
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Acquisitions 

 

On December 23, 2008, FTFC acquired 100% of the outstanding common stock of First Life America Corporation (“FLAC”) from an unaffiliated company. The acquisition of FLAC was accounted for as a purchase. The aggregate purchase price for FLAC was $2,695,234 including direct cost associated with the acquisition of approximately $195,234. The acquisition of FLAC was financed with the working capital of FTFC.

 

On December 31, 2008, FTFC made FLAC a 15 year loan in the form of a surplus note in the amount of $250,000 with an interest rate of 6% payable monthly, that was approved by the Oklahoma Insurance Department (“OID”). This surplus note is eliminated in consolidation.

 

On August 31, 2009, two of the Company’s subsidiaries, Trinity Life Insurance Company (“Old TLIC”) and FLAC, were merged, with FLAC being the surviving company. Immediately following the merger, FLAC changed its name to TLIC.

 

On December 28, 2011, TLIC acquired 100% of the outstanding common stock of FBLIC from FBLIC’s shareholders. The acquisition of FBLIC was accounted for as a purchase. The aggregate purchase price for the acquisition of FBLIC was $13,855,129. The acquisition of FBLIC was financed with the working capital of TLIC.

 

On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement. The Company acquired assets of $3,644,839 (including cash), assumed liabilities of $3,055,916 and recorded a gain on reinsurance assumption of $588,923.

 

Financial Information about Segments

 

The Financial Accounting Standards Board (“FASB”) guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units. The discussion of segment operating results that follows is being provided based on segment data prepared in accordance with this methodology.

 

Our business segments are as follows:

 

 

Life insurance operations, consisting of the life insurance operations of TLIC and FBLIC;

 

Annuity operations, consisting of the annuity operations of TLIC and FBLIC and

 

Corporate operations, which includes the results of the parent company and FTCC after the elimination of intercompany amounts.

 

Please see below and Note 11 to the Consolidated Financial Statements for the years ended December 31, 2016 and 2015 and as of December 31, 2016 and 2015 for additional information regarding segment information.

 

Life Insurance and Annuity Operations

 

Our Life Insurance and Annuity Operations consists of issuing ordinary whole life insurance, modified premium whole life with an annuity rider, term, final expense and accidental death and dismemberment policies and annuity contracts. The policies can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense is issued as either a simplified issue or as a graded benefit, determined by underwriting.

  

TLIC renewed its administrative services agreement with Investors Heritage Life Insurance Company (“IHLIC”) on August 28, 2012. Under the terms of this agreement, the services provided by IHLIC include underwriting, actuarial, policy issue, accounting, claims processing and other services incidental to the operations of TLIC. The agreement is effective for a period of five (5) years from September 1, 2012 through August 31, 2017 and includes a provision that the agreement may be terminated at any time by either party with a 180 day prior notice.

 

FBLIC entered into an administrative services agreement with IHLIC on November 28, 2012. Under the terms of this agreement, the services provided by IHLIC include underwriting, actuarial, policy issue, accounting, claims processing and other services incidental to the operations of FBLIC. The agreement is effective for a period of five (5) years from November 1, 2012 through October 31, 2017 and includes a provision that the agreement may be terminated at any time by either party with a 180 day prior notice.

 

 
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FTFC entered into an administrative services agreement with IHLIC on January 7, 2011. Under the terms of this agreement, IHLIC provided services incidental to the operation of FTFC as a financial services holding company. The agreement would have been effective for a period of five (5) years from January 1, 2011 through December 31, 2015 and included a provision that the agreement could be terminated at any time by either party with a 180 day prior notice. This agreement was cancelled during 2015 and FTFC began administering its own operations on October 1, 2015.

 

TLIC continues to seek to serve middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas. TLIC markets its products through independent agents. With the acquisition of FBLIC in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico. FBLIC also had initial licenses in Kansas, Nebraska and Oklahoma where TLIC was also licensed. In late 2012, FBLIC was licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia. In 2013, FBLIC was licensed in Illinois and Pennsylvania. In 2014, FBLIC was licensed in Georgia, Louisiana, Michigan, Mississippi, North Carolina, Ohio, Tennessee and Virginia. In 2015, FBLIC was licensed in Alabama and Utah.

 

The following tables sets forth our direct collected life insurance premiums and annuity considerations by the policyholder’s state of residence at the time of premium collection and annuity consideration, for the most significant states in which we are licensed, for the years ended December 31, 2016 and 2015, in accordance with statutory accounting practices prescribed by the states of domicile of TLIC and FBLIC.

 

 

   

Year Ended December 31, 2016

 
   

Life

   

Annuity

 

State

 

Premiums

   

Percentage

   

Considerations

   

Percentage

 

Arizona

  $ 22,587       0.18 %   $ 301,465       0.56 %

Arkansas

    161,096       1.26 %     259,162       0.49 %

Colorado

    267,553       2.09 %     376,154       0.70 %

Georgia

    288,856       2.26 %     794,230       1.49 %

Illinois

    1,300,813       10.16 %     1,280,438       2.40 %

Indiana

    338,717       2.65 %     381,349       0.71 %

Kansas

    2,253,534       17.59 %     1,933,441       3.62 %

Kentucky

    439,721       3.43 %     244,864       0.46 %

Louisiana

    286,694       2.24 %     100,000       0.19 %

Michigan

    153,541       1.20 %     1,244,644       2.33 %

Missouri

    715,992       5.59 %     580,712       1.09 %

Nebraska

    216,880       1.69 %     827,130       1.55 %

North Carolina

    498,876       3.90 %     366,841       0.69 %

North Dakota

    119,710       0.94 %     17,972,674       33.64 %

Ohio

    1,514,308       11.83 %     382,893       0.72 %

Oklahoma

    1,613,573       12.60 %     1,641,576       3.07 %

Pennsylvania

    282,608       2.21 %     2,510,524       4.70 %

Tennessee

    141,227       1.10 %     1,103,240       2.07 %

Texas

    1,756,722       13.72 %     19,525,059       36.55 %

Virginia

    94,680       0.74 %     466,108       0.87 %

All other states

    335,044       2.62 %     1,121,001       2.10 %

Total direct collected premiums and considerations

  $ 12,802,732       100.00 %   $ 53,413,505       100.00 %

 

 
6

 

 
   

Year Ended December 31, 2015

 
   

Life

   

Annuity

 

State

 

Premiums

   

Percentage

   

Considerations

   

Percentage

 

Arizona

  $ 15,401       0.15 %   $ 376,712       0.64 %

Arkansas

    81,063       0.80 %     869,953       1.48 %

Colorado

    131,861       1.31 %     224,384       0.38 %

Georgia

    114,781       1.14 %     1,091,781       1.85 %

Illinois

    1,124,646       11.15 %     1,525,359       2.59 %

Indiana

    182,467       1.81 %     81,574       0.14 %

Kansas

    2,248,638       22.29 %     3,407,140       5.79 %

Kentucky

    341,346       3.38 %     351,958       0.60 %

Louisiana

    136,478       1.35 %     525,000       0.89 %

Michigan

    41,124       0.41 %     2,064,385       3.51 %

Missouri

    655,319       6.50 %     879,334       1.49 %

Nebraska

    219,382       2.18 %     1,654,405       2.81 %

North Carolina

    138,893       1.38 %     1,006,279       1.71 %

North Dakota

    124,044       1.23 %     6,820,804       11.59 %

Ohio

    1,181,502       11.71 %     1,916,371       3.26 %

Oklahoma

    1,576,249       15.63 %     2,136,831       3.63 %

Pennsylvania

    102,603       1.02 %     3,939,130       6.69 %

Tennessee

    53,683       0.53 %     1,663,465       2.83 %

Texas

    1,430,665       14.19 %     27,346,008       46.45 %

Virginia

    26,018       0.26 %     309,342       0.53 %

All other states

    159,534       1.58 %     673,051       1.14 %

Total direct collected premiums and considerations

  $ 10,085,697       100.00 %   $ 58,863,266       100.00 %

 

Reinsurance 

 

TLIC cedes reinsurance under various agreements allowing management to control exposure to potential losses arising from large risks and providing additional capacity for growth and risk diversification. TLIC reinsures all amounts of risk on any one life in excess of $75,000 for individual life insurance with IHLIC, Optimum Re Insurance Company (“Optimum Re”) and Wilton Reassurance Company (“Wilton Re”).

 

TLIC is a party to an Automatic Retrocession Pool Agreement (the “Reinsurance Pool”) with Optimum Re, Catholic Order of Foresters, American Home Life Insurance Company and Woodmen of the World. The agreement provides for automatic retrocession of coverage in excess of Optimum Re’s retention on business ceded to Optimum Re by the other parties to the Reinsurance Pool. TLIC’s maximum exposure on any one insured under the Reinsurance Pool is $75,000. As of January 1, 2008, the Reinsurance Pool stopped accepting new cessions.

 

Effective September 29, 2005, FLAC and Wilton Re executed a binding letter of intent whereby both parties agreed that FLAC would cede the simplified issue version of its Golden Eagle Whole Life (Final Expense) product to Wilton Re on a 50/50 quota share original term coinsurance basis. The letter of intent was executed on a retroactive basis to cover all applicable business issued by FLAC subsequent to January 1, 2005. Wilton Re agreed to provide various commission and expense allowances to FLAC in exchange for FLAC ceding 50% of the applicable premiums to Wilton Re as they were collected. As of June 24, 2006, Wilton Re terminated the reinsurance agreement for new business issued after the termination date.

 

FBLIC also participates in reinsurance in order to provide risk diversification, additional capacity for future growth and limit the maximum net loss potential arising from large amounts of risk. FBLIC reinsures initial amounts of risk on any one life in excess of $75,000 for individual life insurance with Optimum Re. TLIC and FBLIC also reinsure its accidental death benefit portion of their life policies under a bulk agreement with Optimum Re.

 

To the extent that the reinsurance companies are unable to meet their obligations under the reinsurance agreements, TLIC and FBLIC remain primarily liable for the entire amount at risk.

 

 
7

 

 

 Competition 

 

The U.S. life insurance industry is a mature industry that, in recent years, has experienced little to no growth. Competition is intense because the life insurance industry is consolidating, with larger, more efficient and more effective organizations emerging from consolidation. In addition, legislation became effective in the United States that permits commercial banks, insurance companies and investment banks to combine. These factors have increased competitive pressures in general.

 

Many domestic life insurance companies have significantly greater financial, marketing and other resources, longer business histories and more diversified lines of insurance products than we do. We also face competition from companies marketing in person as well as with direct mail and internet sales campaigns. Although we may be at a competitive disadvantage to these entities, we believe that our premium rates, policy features, marketing approaches and policyholder services are generally competitive with those of other life insurance companies selling similar types of products and provide us with niche marketing opportunities not actively pursued by other life insurance companies.

 

Governmental Regulation 

 

TLIC and FBLIC, respectively, are subject to regulation and supervision by the OID and the Missouri Department of Insurance (“MDOI”). The insurance laws of Oklahoma and Missouri give the OID and MDOI broad regulatory authority, including powers to: (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus and (x) regulate the type and amount of permitted investments.

 

TLIC and FBLIC can be required, under the solvency or guaranty laws of most states in which they do business, to pay assessments (up to prescribed limits) to fund policyholder losses or liabilities of other insurance companies that become insolvent. These assessments may be deferred or foregone under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes.

 

TLIC is subject to Oklahoma laws and FBLIC is subject to Missouri laws that limit the amount of dividends insurance companies can pay to stockholders without approval of the respective Departments of Insurance. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the greater of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is capacity for TLIC to pay a dividend up to $1,852,287 in 2017 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $914,179 in 2017 without prior approval. FBLIC paid dividends of $1,000,000 to TLIC in 2016 and 2015. Dividends paid by FBLIC are eliminated in consolidation. TLIC has paid no dividends to FTFC.

 

There are certain factors particular to the life insurance business which may have an adverse effect on the statutory operating results of TLIC and FBLIC. One such factor is that the costs associated with issuing a new policy in force is usually greater than the first year’s policy premium. Accordingly, in the early years of a new life insurance company, these initial costs and the required provisions for reserves often have an adverse effect on statutory operating results.

 

Premium Finance Operations

 

FTCC was incorporated in 2006 and provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC has made no premium financing loans since June 30, 2012.

 

Employees 

 

As of March 6, 2017, the Company had ten full-time employees and two part-time employees.

 

 
8

 

 

Item 2. Properties

 

The Company leases 6,769 square feet of office space pursuant to an original five-year lease that began October 1, 2010 and was amended on October 1, 2015 for another five-year term. Under the terms of the original home office lease, the monthly rent was $7,897 from October 1, 2010 through September 30, 2015. Under the terms of the amended home office lease, the monthly rent is $8,461 from October 1, 2015 through September 30, 2016 and $8,630 from October 1, 2016 through September 30, 2017 with increases of two percent each twelve month period from October 1, 2017 through September 30, 2020. The Company incurred rent expense (including charges for the lessor’s building operating expenses above those specified in the lease agreement less monthly amortization of the leasehold improvement allowance received from the lessor) of $93,415 and $67,961 for the years ended December 31, 2016 and 2015, respectively, under this lease.

 

On January 1, 2011, the Company received a $120,000 leasehold improvement allowance from the lessor related to the original lease that was fully amortized by September 30, 2015 and reduced rent expense by $18,947 for the nine months ended September 30, 2015. In accordance with the amended lease on October 1, 2015, the Company was provided an allowance of $54,152 for leasehold improvements. As of December 31, 2016, the Company received $39,509 from the lessor and in 2017 will receive the remaining $14,643 upon the completion and certification of additional leasehold improvements. The leasehold improvement allowance is amortized over the remaining amended non-cancellable lease term and reduced rent expense by $8,627 for the year ended December 31, 2016 and $1,250 for the three months ended December 31, 2015. The future minimum lease payments to be paid under the amended non-cancellable lease agreement are $104,090, $106,189, $108,304 and $82,446 for the years 2017 through 2020, respectively.

 

TLIC owns approximately six and one-half acres of land located in Topeka, Kansas. A 20,000 square foot office building has been constructed on approximately one-fourth of this land.

 

TLIC executed a two year lease agreement effective January 1, 2015, for 7,500 square feet of its building in Topeka, Kansas. Effective January 1, 2017, this lease was renewed for two years. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments are $8,696 for 2015, 2016, 2017 and 2018.

 

TLIC renewed a five year lease agreement effective June 1, 2011, for 10,000 square feet in the Topeka, Kansas office building. Beginning June 1, 2014, the lessee can terminate the lease with a 180 day written notice. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance with partial reimbursement from the lessee. The lease agreement calls for minimum monthly base lease payments of $17,750.

 

This 10,000 square feet lease was renewed for five years to be effective from June 1, 2016 through May 31, 2021, with an option for an additional five years from June 1, 2021 through May 31, 2026. Beginning June 1, 2021, the lessee can terminate the lease with a 120 day written notice. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance with partial reimbursement from the lessee. The lease agreement calls for a monthly lease payment of $16,598 from June 1, 2016 through June 30, 2016 quantified as follows: $12,275 for base rent and $4,323 for reimbursement of operating cost. Starting July 1, 2016, the lease agreement includes an $88,833 tenant improvement allowance that is amortized over 59 months with interest at 5.00%. The monthly lease payment is $18,299 from July 1, 2016 through May 31, 2021 quantified as follows: $12,275 for base rent, $4,323 for reimbursement of operating costs and $1,701 for tenant improvements. If the lease continues after the first five years, the lease agreement calls for monthly payments of $17,850 quantified as follows: $13,527 for base rent and $4,323 for reimbursement of operating costs.

 

A five year lease agreement effective September 1, 2010 automatically renewed on 2,500 square feet of the Topeka, Kansas office building with a 90 day notice by the lessee to terminate the lease. This lease was renewed on September 1, 2015 to run through August 31, 2017 with an option for an additional three years through August 31, 2020. Beginning September 1, 2017, the lessee can terminate the lease with a 120 day written notice. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance with partial reimbursement from the lessee. The lease agreement called for monthly lease payments of $3,100 from January 1, 2015 through August 31, 2015. The lease payments are $4,236 per month from September 1, 2015 through August 31, 2016 and $4,249 from September 1, 2016 through August 31, 2017.

 

The future minimum lease payments to be received under the non-cancellable lease agreement are $357,932, $323,938, $219,592, $219,592 and $91,497 for the years 2017 through 2021, respectively.

 

 
9

 

 

On March 11, 2015, TLIC sold its investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044. TLIC recorded a gross realized investment gain on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119. In addition, simultaneously with these sales, TLIC settled its two notes payable with an aggregate payment to Grand Bank (the creditor) of $4,076,473.

 

FBLIC owns approximately one-half acre of undeveloped land located in Jefferson City, Missouri with a carrying value of $131,000.

 

During 2016 the Company foreclosed on seven residential mortgage loans of real estate totaling $394,427 and transferred those properties to investment real estate that are now held for sale. The Company reduced the carrying value of this residential real estate obtained through foreclosure to the lower of acquisition cost or net realizable value. On November 30, 2016, the Company sold one investment real estate property with an aggregate carrying value of $63,931. The Company recorded a gross realized investment loss on sale of $20,662 based on an aggregate sales price of $43,269.

 

Item 3. Legal Proceedings

 

A lawsuit filed by the Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, against former Company Board of Directors member Wayne Pettigrew and Mr. Pettigrew's company, Group & Pension Planners, Inc. (the "Defendants"), concluded on February 17, 2017. The lawsuit was filed in the District Court of Tulsa County, Oklahoma (Case No. CJ-2013-03385). In the lawsuit, the Company alleged that Mr. Pettigrew had defamed the Company by making untrue statements to certain shareholders of the Company, to the press and to regulators of the state of Oklahoma and had breached his fiduciary duties.

 

The jury concluded that Mr. Pettigrew, while still a member of the Company’s Board of Directors, did, in fact, make untrue statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company and awarded it $800,000 of damages against Mr. Pettigrew. In addition, the jury found that Mr. Pettigrew had defamed Mr. Zahn and intentionally inflicted emotional distress on Mr. Zahn and awarded Mr. Zahn $3,500,000 of damages against Mr. Pettigrew.

 

Mr. Pettigrew has thirty days to appeal this decision by the jury that will require him to post a bond in the amount of the total judgment of $4,300,000. Should Mr. Pettigrew fail to post such a bond, the Company and Mr. Zahn will be permitted to execute on Mr. Pettigrew's assets.

 

In addition to the damages awarded by the jury, the Company and Mr. Zahn have initiated steps to aggressively communicate the correction of the untrue statements to outside parties.

 

Prior to its acquisition by TLIC, FBLIC developed, marketed, and sold life insurance products known as “Decreasing Term to 95” policies. On January 17, 2013, FBLIC’s Board of Directors voted that, effective March 1, 2013, it was not approving, and therefore was not providing, a dividend for the Decreasing Term to 95 policies. On November 22, 2013, three individuals who owned Decreasing Term to 95 policies filed a Petition in the Circuit Court of Greene County, Missouri asserting claims against FBLIC relating to FBLIC’s decision to not provide a dividend under the Decreasing Term to 95 policies.

 

On June 18, 2015, plaintiffs filed an amended petition. Like the original Petition, the amended Petition asserts claims for breach of contract and anticipatory breach of contract, and alleges that FBLIC breached, and will anticipatorily breach, the Decreasing Term to 95 policies of insurance by not providing a dividend sufficient to purchase a one year term life insurance policy which would keep the death benefit under the Decreasing Term to 95 policies the same as that provided during the first year of coverage under the policy. It also asserts claims for negligent misrepresentation, fraud, and violation of the Missouri Merchandising Practices Act (“MMPA”). It alleges that during its sale of the Decreasing Term to 95 policies, FBLIC represented that the owners of these policies would always be entitled to dividends to purchase a one-year term life insurance policy and that the owners would have a level death benefit without an increase in premium.

 

The main difference between the original Petition and the amended Petition is that the amended Petition also seeks equitable relief based on two new theories: that the Decreasing Term to 95 policies should be reformed so that they will provide a level death benefit for a level premium payment until the policyholder reaches 95 years of age; and alternatively, Count VIII of the amended Petition asks the Court to (1) find that the dividend provisions in the Decreasing Term to 95 policies violate Missouri law, specifically, § 376.360 RSMo.; (2) order that the policies are void ab initio; and (3) order that FBLIC return all premiums collected under these policies.

 

 
10

 

 

In addition, as part of the MMPA claim, plaintiffs are now alleging that FBLIC undertook a fraudulent scheme to sell the Decreasing Term to 95 policies as a level premium for level benefit even though FBLIC never intended to pay dividends for the life of the policies and that part of this alleged fraudulent scheme included having a dividend option which is not allowed under Missouri law. FBLIC denies the allegations in the amended Petition and will continue to defend against them.

 

On February 1, 2016, the plaintiffs asked that the Court certify the case as a class action. With their motion, Plaintiffs filed an affidavit from an actuary stating the opinion that FBLIC has collected at least $2,548,939 in premiums on the Decreasing Term to 95 policies. This presumably is the amount that Plaintiffs will seek to be refunded to policyholders if the policies are declared void. FBLIC opposed the request for class certification. On July 21, 2016, the Court certified three classes to maintain the claims for breach of contract, anticipatory breach of contract, violation of the MMPA, reformation, and to void the Decreasing Term to 95 policies. On August 1, 2016, FBLIC filed a Petition for Leave to Appeal with the Missouri Court of Appeals, Southern District asking for permission to appeal the Court’s class certification. The Petition for Leave to Appeal was denied.

 

FBLIC intends to defend vigorously against the class and individual allegations. The Company is unable to determine the potential magnitude of the claims in the event of a final certification and the plaintiffs prevailing on this substantive action.

 

On May 13, 2015, FBLIC filed a Counterclaim against Doyle Nimmo seeking indemnity and seeking damages for breach of fiduciary duty in the event FBLIC is liable under Plaintiffs’ underlying claims. In addition, on April 29, 2015, TLIC filed a lawsuit against Doyle Nimmo and Michael Teel alleging that they were liable for violations of federal and state securities laws for failing to disclose information relating to the Decreasing Term to 95 policies. This lawsuit is currently pending in the District Court for the Western District of Missouri (hereinafter the “Federal Lawsuit”). No claims have been made against TLIC in the Federal Lawsuit. The Federal Lawsuit has been stayed pending resolution of the lawsuit against FBLIC in the Circuit Court of Greene County, Missouri.

 

On September 28, 2015, Doyle Nimmo filed a Third-Party Petition for Declaratory Judgment (and Other Relief) against FBLIC. In this Third-Party Petition, Doyle Nimmo, a former director for FBLIC, seeks a declaratory judgment that the corporate by-laws of FBLIC require FBLIC to indemnify him for attorney’s fees, judgments, costs, fines, and amounts paid in defense of both the Counterclaim and the Federal Lawsuit and seeks a monetary judgment for the amounts expended by Doyle Nimmo in such defense. Prior to Doyle Nimmo’s filing of the Third-Party Petition, FBLIC’s Board of Directors executed a Unanimous Written Consent in Lieu of a Special Meeting in which it denied Doyle Nimmo’s tender of defense and request for indemnification finding Mr. Nimmo did not meet the applicable standard of conduct for indemnification under Missouri law. FBLIC intends to vigorously defend the Third-Party Petition on these grounds. The Company is unable to determine the potential magnitude of the claims in the event Doyle Nimmo prevails on his Third-Party Petition.

 

As stated above, FBLIC filed a Counterclaim and TLIC filed the Federal Lawsuit against Doyle Nimmo. Doyle Nimmo submitted a claim and tendered the defense of these claims to Utica Mutual Insurance Company under a policy providing Insurance Agents and Brokers Errors and Omissions Liability coverage. On November 4, 2015, Utica Mutual Insurance Company filed a lawsuit against Doyle Nimmo and other interested parties, including FBLIC and TLIC. The lawsuit is pending in the District Court for the Western District of Missouri and asks the Court to determine whether the Errors and Omissions policy provides coverage for the lawsuits filed against Doyle Nimmo. Utica Mutual Insurance Company does not seek a monetary judgment against FBLIC or TLIC. All parties to the lawsuit pending in the Circuit Court of Greene County, Missouri agreed to waive their right to a trial by jury and have all claims submitted to the Judge for decision. The trial in that case is scheduled to begin on November 27, 2017.

 

Item 4. Mine Safety Disclosures

 

None

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

 

(a)

Market Information

 

Trading of the Company’s common stock is limited and an established public market does not exist.

 

 
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(i)

Holders

 

As of March 6, 2017, there were approximately 4,500 shareholders of the Company’s outstanding common stock.

 

(ii)

Dividends

 

The Company has not paid any cash dividends since inception (April 19, 2004). The Board of Directors of the Company has not adopted a dividend payment policy; however, dividends must necessarily depend upon the Company's earnings and financial condition, applicable legal restrictions, and other factors relevant at the time the Board of Directors considers a dividend policy. Cash available for dividends to shareholders of the Company must initially come from income and capital gains earned on its investment portfolio and dividends paid by the Company’s subsidiaries.

 

Provisions of the Oklahoma Insurance Code relating to insurance holding companies subject transactions between the Company and TLIC and the Company and FBLIC, including dividend payments, to certain standards generally intended to prevent such transactions from adversely affecting the adequacy of life insurance subsidiaries' capital and surplus available to support policyholder obligations. In addition, under the Oklahoma General Corporation Act, the Company may not pay dividends if, after giving effect to a dividend, it would not be able to pay its debts as they become due in the usual course of business or if its total liabilities would exceed its total assets.

 

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

 

On January 11, 2012, the Company’s Board of Directors approved another 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold. The dividend was payable to the holders of shares of the Corporation as of March 10, 2012. Fractional  shares were rounded to the nearest whole number of shares. The Company issued 378,908 shares in connection with the stock dividend that resulted in accumulated deficit being charged $2,841,810 with an offsetting credit of $2,841,810 to common stock and additional paid-in capital.

 

(iii)

Securities Authorized for Issuance Under Equity Compensation Plans

 

There are no plans under which equity securities are authorized for issuance.

 

(b)

None

 

(c)

Purchases of Equity Securities by Issuer

 

The Company repurchased 185,313 shares of its common stock at a cost of $648,595 during 2012 from former members of the Board of Directors; repurchased 12,896 shares of its common stock at a cost of $45,136 from a former member of the Board of Directors and a charitable organization for which that former Director had donated 10,250 shares of the Company’s common stock during 2013, repurchased 39,946 shares of its common stock at a cost of $161,573 from a former agent, the former spouse of the Company’s Chairman, Chief Executive Officer and the former Chairman of the Board of Directors during 2014 and repurchased 9,425 shares of its common stock at a cost of $38,643 from the former Chairman of the Board of Directors during 2015.

 

 
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview 

 

First Trinity Financial Corporation (“we” “us”, “our”, “FTFC” or the “Company”) conducts operations as an insurance holding company emphasizing ordinary life insurance products and annuity contracts in niche markets. We are no longer operating a premium finance company, financing casualty insurance premiums. As an insurance provider, we collect premiums and annuity considerations 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 and term products and annuity contracts 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 FBLIC in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico. FBLIC also had initial licenses in Kansas, Nebraska and Oklahoma where TLIC was also licensed. In late 2012, FBLIC was licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia. In 2013, FBLIC was licensed in Illinois and Pennsylvania. In 2014, FBLIC was licensed in Georgia, Louisiana, Michigan, Mississippi, North Carolina, Ohio, Tennessee and Virginia. In 2015, FBLIC was licensed in Alabama and Utah.

 

We also realize revenues from our investment portfolio, which is a key component of our operations. The revenues and funds we collect as premiums and annuity considerations 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 and annuity considerations paid to the insurer between the time of receipt and the time benefits are paid out under our policies and contracts. 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.

 

Prior to June 30, 2012, we provided financing for casualty insurance premiums for individuals and companies through independent property and casualty insurance agents through our wholly owned subsidiary FTCC. FTCC was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC has made no premium financing loans since June 30, 2012. 

 

Acquisitions 

 

The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance and annuity business. In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of First Life America Corporation for $2,500,000 and had additional acquisition related expenses of $195,234.

 

In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of FBLIC for $13,855,129.

 

In late April 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement. The Company acquired assets of $3,644,839 (including cash), assumed liabilities of $3,055,916 and recorded a gain on reinsurance assumption of $588,923.

 

Critical Accounting Policies and Estimates 

 

The discussion and analysis of our financial condition, results of operations and liquidity and capital resources is based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We evaluate our estimates and assumptions continually, including those related to investments, deferred acquisition costs, value of insurance business acquired and policy liabilities. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following accounting policies, judgments and estimates are the most critical to the preparation of our consolidated financial statements.

 

 
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Investments in Fixed Maturities and Equity Securities

 

We hold fixed maturities and equity interests in a variety of companies. We continuously evaluate all of our investments based on current economic conditions, credit loss experience and other developments. We evaluate the difference between the cost/amortized cost and estimated fair value of our investments to determine whether any decline in fair value is other-than-temporary in nature. This determination involves a degree of uncertainty. If a decline in the fair value of a security is determined to be temporary, the decline is recognized in other comprehensive income (loss) within shareholders’ equity. If a decline in a security’s fair value is considered to be other-than-temporary, we then determine the proper treatment for the other-than-temporary impairment.

 

For fixed maturities, the amount of any other-than-temporary impairment related to a credit loss is recognized in earnings and reflected as a reduction in the cost basis of the security. The amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security. For equity securities, the amount of any other-than-temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security.

 

The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security. It is not possible to accurately predict when it may be determined that a specific security will become impaired. Future adverse changes in market conditions, poor operating results of underlying investments and defaults on interest and principal payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future.

 

In addition, if a change occurs in our intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that we will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result. If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, we amortize the reduced book value back to the security’s expected recovery value over the remaining term of the bond. We continue to review the security for further impairment that would prompt another write-down in the book value.

 

Mortgage Loans on Real Estate

 

We carry mortgage loans on real estate at unpaid balances, net of unamortized premium or discounts. Interest income and the amortization of premiums or discounts are included in net investment income. Mortgage loan fees, certain direct loan origination costs and purchase premiums and discounts on loans are recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. In certain circumstances, prepayments may be anticipated. We have established a valuation allowance for mortgage loans on real estate that are not supported by funds held in escrow.

 

This allowance for possible loan losses from investments in mortgage loans on real estate is a reserve established through a provision for possible loan losses charged to expense which represents, in our judgment, the known and inherent credit losses existing in the residential and commercial mortgage loan portfolio. This allowance, in our judgment, is necessary to reserve for estimated loan losses inherent in the residential and commercial mortgage loan portfolio and reduces the carrying value of investments in mortgage loans on real estate to the estimated net realizable value on the consolidated statement of financial position.

 

While we utilize our best judgment and information available, the ultimate adequacy of this allowance is dependent upon a variety of factors beyond our control, including the performance of the residential and commercial mortgage loan portfolio, the economy and changes in interest rates. Our allowance for possible mortgage loan losses consists of specific valuation allowances established for probable losses on specific loans and a portfolio reserve for probable incurred but not specifically identified loans.

 

We consider mortgage loans on real estate impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the mortgage loan agreement. Factors that we consider in determining impairment include payment status, collateral value of the real estate subject to the mortgage loan and the probability of collecting scheduled principal and interest payments when due. Mortgage loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

 

 
14

 

 

We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the mortgage loan on real estate and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis.

 

Deferred Policy Acquisition Costs

 

Commissions and other acquisition costs which vary with and are primarily related to the successful production of new and renewal insurance contracts are deferred and amortized in a systematic manner based on the related contract revenues or gross profits as appropriate. The recovery of deferred acquisition costs is dependent on the future profitability of the underlying business for which acquisition costs were incurred. Each reporting period, we evaluate the recoverability of the unamortized balance of deferred acquisition costs. We consider estimated future gross profits or future premiums; expected mortality or morbidity; interest earned and credited rates; persistency and expenses in determining whether the balance is recoverable.

 

If we determine a portion of the unamortized balance is not recoverable, it is immediately charged to amortization expense. The assumptions we use to amortize and evaluate the recoverability of the deferred acquisition costs involve significant judgment. A revision to these assumptions may impact future financial results. Deferred acquisition costs related to the successful production of new and renewal insurance business for traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities.

 

Deferred acquisition costs related to the successful production of new and renewal insurance and annuity products that subject us to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed (i.e., limited-payment long-duration annuity contracts) are deferred to the extent deemed recoverable and amortized in relation to the present value of actual and expected gross profits on the policies. To the extent that realized gains and losses on securities result in adjustments to deferred acquisition costs related to insurance and annuity products, such adjustments are reflected as a component of the amortization of deferred acquisition costs.

 

Deferred acquisition costs related to limited-payment long-duration insurance and annuity contracts are also adjusted, net of tax, for the change in amortization that would have been recorded if the unrealized gains (losses) from securities had actually been realized. This adjustment is included in the change in net unrealized appreciation (depreciation) on available-for-sale securities, a component of “Accumulated Other Comprehensive Income (Loss)” in the shareholders’ equity section of the statement of financial position.

 

Value of Insurance Business Acquired

 

As a result of our purchases of FLAC and FBLIC, an asset was recorded in the application of purchase accounting to recognize the value of acquired insurance in force.  The Company’s value of acquired insurance in force is an intangible asset with a definite life and is amortized under FASB guidance.

 

The value of acquired insurance in force is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. The recovery of the value of insurance business acquired is dependent on the future profitability of the underlying business that was initially recorded in the purchases of FLAC and FBLIC. Each reporting period, we evaluate the recoverability of the unamortized balance of the value of insurance business acquired.

 

For the amortization of the value of acquired insurance in force, the Company reviews its estimates of gross profits each reporting period. The most significant assumptions involved in the estimation of gross profits include interest rate spreads; future financial market performance; business surrender and lapse rates; mortality and morbidity; expenses and the impact of realized investment gains and losses. In the event actual experience differs significantly from assumptions or assumptions are significantly revised, the Company is required to record a charge or credit to amortization expense for the period in which an adjustment is made.

 

 
15

 

 

As of December 31, 2016 and 2015, there was $2,831,043 and $2,451,678, respectively, of accumulated amortization of the value of insurance business acquired due to the purchases of FLAC and FBLIC. The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years:  $339,942 in 2017, $331,886 in 2018, $308,179 in 2019, $283,088 in 2020 and $262,097 in 2021.

 

Future Policy Benefits

 

Our liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. For life insurance and annuity products, expected mortality and morbidity is generally based on the Company’s historical experience or standard industry tables including a provision for the risk of adverse deviation.

 

Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality and morbidity and interest rate assumptions are “locked-in” upon the issuance of new insurance with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to provide for expected future losses on a product by establishing premium deficiency reserves.

 

Estimating liabilities for our long-duration insurance contracts requires management to make various assumptions, including policyholder persistency; mortality rates; investment yields; discretionary benefit increases; new business pricing and operating expense levels. We evaluate historical experience for these factors when assessing the need for changing current assumptions.

 

Since many of these factors are interdependent and subject to short-term volatility during the long-duration contract period, however, substantial judgment is required. Actual experience may emerge differently from that originally estimated. Any such difference would be recognized in the current year’s consolidated statement of operations.

 

Recent Accounting Pronouncements

 

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

        

In April 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group was eligible for discontinued operations presentation.

 

The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity) and that have a major effect on a reporting entity's operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance was effective for the quarter ending March 31, 2015. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing services will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services.

 

The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, the entity satisfies a performance obligation.

 

 
16

 

 

In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognition by one year to the quarter ending March 31, 2018.  The adoption of this guidance is not expected to have a material effect on the Company’s result of operations, financial position or liquidity.

 

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

 

In June 2014, the FASB issued updated guidance to resolve diversity in practice concerning employee share-based payments that contain performance targets that could be achieved after the requisite service period. Many reporting entities account for performance targets that could be achieved after the requisite service period as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance targets in the estimate of the grant-date fair value of the award. Other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award.

 

The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. As such, the performance target that affects vesting should not be reflected in estimating that fair value of the award at the grant date. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest.

 

The updated guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

 

Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern

 

In August 2014, the FASB issued guidance to address the diversity in practice in determining when there is substantial doubt about an entity's ability to continue as a going concern and when an entity must disclose certain relevant conditions and events. The new guidance requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The new guidance allows the entity to consider the mitigating effects of management's plans that will alleviate the substantial doubt and requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans.

 

If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations and management's plans that are intended to mitigate those conditions. The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter. The adoption of this guidance will not have a material effect on the Company's results of operations, financial position or liquidity since there are no uncertainties about the Company’s ability to continue as a going concern.

 

Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity

        

In November 2014, the FASB issued updated guidance to clarify when the separation of certain embedded derivative features in a hybrid financial instrument that is issued in the form of a share is required. That is, an entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract.

 

 
17

 

  

Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument.

 

The updated guidance is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

 

Receivables – Troubled Debt Restructurings by Creditors

 

In January 2015, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015. This guidance can be elected for prospective adoption or by using a retrospective transition method. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

 

Amendments to the Consolidation Analysis

 

In February 2015, the FASB issued updated guidance that makes targeted amendments to the current consolidation accounting guidance. The update is in response to accounting complexity concerns, particularly from the asset management industry. The guidance simplifies consolidation accounting by reducing the number of approaches to consolidation, provides a scope exception to registered money market funds and similar unregistered money market funds and ends the indefinite deferral granted to investment companies from applying the variable interest entity guidance. The updated guidance is effective for annual and interim periods beginning after December 15, 2015. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Simplifying the Presentation of Debt Issuance Costs

 

In April 2015, the FASB issued updated guidance to clarify the required presentation of debt issuance costs.  The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts.  Amortization of debt issuance costs is to be reported as interest expense.  The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance.  The updated guidance is effective for reporting periods beginning after December 15, 2015.  Early adoption is permitted.  The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Simplifying the Accounting for Measurement-Period Adjustments

 

In September 2015, the FASB issued updated guidance regarding business combinations that requires an acquirer to recognize post-close measurement adjustments for provisional amounts in the period the adjustment amounts are determined rather than retrospectively.  The acquirer is also required to recognize, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the provisional amount, calculated as if the accounting had been completed at the acquisition date.  The updated guidance is to be applied prospectively effective for annual and interim periods beginning after December 15, 2015.  In connection with business combinations which have already been completed, the adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Recognition and Measurement of Financial Assets and Financial Liabilities

 

In January 2016, the FASB issued updated guidance regarding financial instruments. This guidance intends to enhance reporting for financial instruments and addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The significant amendments in this update generally require equity investments to be measured at fair value with changes in fair value recognized in net income, require the use of an exit price notion when measuring the fair value of financial instruments for disclosure purposes and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. This guidance also intends to enhance the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments.

 

 
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This guidance is effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance will be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and early adoption is not permitted. The Company is evaluating this guidance but expects the primary impact will be the recognition of unrealized gains and losses on available-for-sale equity securities in net income. Currently, all unrealized gains and losses on available-for-sale equity securities are recognized in other comprehensive income (loss).

 

The effect of the adoption of this guidance on the Company’s results of operations, financial position and liquidity is primarily dependent on the fair value of the available-for-sale equity securities in future periods and the existence of a deferred tax asset related to available-for-sale securities in future periods that have not yet been fully assessed.

 

Leases

 

In February 2016, the FASB issued updated guidance regarding leases that generally requires the lessee and lessor to recognize lease assets and lease liabilities on the statement of financial position. A lessee should recognize on the statement of financial position a liability to make lease payments and an asset representing its right-to-use the underlying assets for the lease term. Optional payments to extend the lease or purchase the underlying leased asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise the option(s). If the lease has a term of 12 months or less, a lessee can make an election to recognize lease expenses for such leases on a straight-line basis over the lease term. There is a differentiation between finance leases and operating leases for the lessee in the statements of operations and cash flows. Finance leases recognize interest on the lease liability separately from the right-to-use the asset whereas an operating lease recognizes a single lease cost allocated over the lease term on a generally straight-line basis. All cash payments are within operating activities in the statement of cash flows except finance leases classify repayments of the principal portion of the lease liability within financing activities.

 

The accounting applied by the lessor is largely unchanged from that applied under previous U.S. GAAP. Key aspects of the lessor accounting model, however, were aligned with the revenue recognition guidance of Codification Topic 606. The previous accounting model for leverage leases continues to apply only to those leveraged leases that commenced before the effective date of Codification Update 2016-02 Leases (Topic 842).

 

Entities will generally continue to account for leases that commenced before the effective date of this update in accordance with previous U.S. GAAP unless the lease is modified. Lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimal rental payments that were tracked and disclosed under previous U.S. GAAP. The updated guidance is to be applied using a modified retrospective approach effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Investments — Equity Method and Joint Ventures:  Simplifying the Transition to the Equity Method of Accounting

 

In March 2016, the FASB issued updated guidance that eliminates the requirement to retroactively apply the equity method of accounting when an investment that was previously accounted for using another method of accounting becomes qualified to apply the equity method due to an increase in the level of ownership interest or degree of influence.  If the investment was previously accounted for as an available-for-sale security, any related unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for the equity method is recognized through earnings.  The updated guidance is effective for reporting periods beginning after December 15, 2016, and is to be applied prospectively. Early adoption is permitted.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Derivatives and Hedging:  Contingent Put and Call Options in Debt Instruments

 

In March 2016, the FASB issued updated guidance clarifying that when a call (put) option in a debt instrument is contingently exercisable, the event that triggers the ability to exercise the option is considered to be clearly and closely related to the debt instrument (i.e., the economic characteristics and risks of the option are related to interest rates or credit risks) and the entity does not have to assess whether the option should be accounted for separately. The updated guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

 
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Financial Instruments — Credit Losses:  Measurement of Credit Losses on Financial Instruments

 

In June 2016, the FASB issued updated guidance for the accounting for credit losses for financial instruments. The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.

 

The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.

 

The updated guidance is effective for reporting periods beginning after December 15, 2019. Early adoption is permitted for reporting periods beginning after December 15, 2018. Based on the financial instruments currently held by the Company, there would not be a material effect on the Company’s results of operations, financial position or liquidity if the new guidance were able to be adopted in the current accounting period. The impact on the Company’s results of operations, financial position or liquidity at the date of adoption of the updated guidance will be determined by the financial instruments held by the Company and the economic conditions at that time.

 

Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments

 

In August 2016, the FASB issued specific guidance to reduce the existing diversity in practice in how eight specific cash flow issues of certain cash receipts and cash payments are presented and classified in the statement of cash flows. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Consolidation – Interests Held through Related Parties that Are Under Common Control

 

In October 2016, the FASB issued further guidance that makes targeted amendments to consolidation accounting. This update changes how a reporting entity that is the primary beneficiary of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The updated guidance is effective for annual and interim periods beginning after December 15, 2016, and is to be applied retrospectively. Early adoption is permitted.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments

 

In November 2016, the FASB issued specific guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents when there are transfers between cash, cash equivalents and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Business Combinations – Clarifying the Definition of a Business

 

In January 2017, the FASB issued guidance to clarify the definition of a business to assist reporting entities in evaluating whether transactions should be accounted for as an acquisition or disposal of assets or businesses. This update provides a screen to determine when an integrated set of assets or activities is not a business and the requirements to be met to be considered a business.

 

 
20

 

 

The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted in certain situations.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Intangibles – Goodwill and Other - Simplifying the Test for Goodwill Impairment

 

In January 2017, the FASB issued guidance to modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Reporting entities will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Business Segments

 

The FASB guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units. The discussion of segment operating results that follows is being provided based on segment data prepared in accordance with this methodology.

 

Our business segments are as follows:

 

 

Life insurance operations, consisting of the life insurance operations of TLIC and FBLIC;

 

Annuity operations, consisting of the annuity operations of TLIC and FBLIC and

 

Corporate operations, which includes the results of the parent company and FTCC after the elimination of intercompany amounts.

 

Please see below and Note 11 to the Consolidated Financial Statements for the years ended December 31, 2016 and 2015 and as of December 31, 2016 and 2015 for additional information regarding segment information.

 

 
21

 

 

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

 

FINANCIAL HIGHLIGHTS

 

Consolidated Condensed Results of Operations for the Years Ended December 31, 2016 and 2015

 

   

Years Ended December 31,

   

Amount Change

   

Percentage Change

 
   

2016

   

2015

   

2016 less 2015

    2016 to 2015  

Premiums

  $ 12,870,483     $ 9,822,009     $ 3,048,474       31.0 %

Net investment income

    13,190,643       11,235,342       1,955,301       17.4 %

Net realized investment gains

    729,739       684,668       45,071       6.6 %

Loss on other-than-temporary impairments

    (212,342 )     (525,750 )     313,408       -59.6 %

Gain on reinsurance assumption

    -       588,923       (588,923 )     -100.0 %

Other income

    139,967       95,462       44,505       46.6 %

Total revenues

    26,718,490       21,900,654       4,817,836       22.0 %

Benefits and claims

    16,602,839       13,427,029       3,175,810       23.7 %

Expenses

    7,695,869       6,516,075       1,179,794       18.1 %

Total benefits, claims and expenses

    24,298,708       19,943,104       4,355,604       21.8 %

Income before federal income tax benefit

    2,419,782       1,957,550       462,232       23.6 %

Federal income tax benefit

    (170,957 )     (425,158 )     254,201       -59.8 %

Net income

  $ 2,590,739     $ 2,382,708     $ 208,031       8.7 %

Net income per common share basic and diluted

  $ 0.33     $ 0.31     $ 0.02       5.5 %

 

 

Consolidated Condensed Financial Position as of December 31, 2016 and 2015

 

                   

Amount Change

   

Percentage Change

 
   

December 31, 2016

   

December 31, 2015

   

2016 less 2015

    2016 to 2015  
                                 
                                 

Investment assets

  $ 255,214,510     $ 230,203,402     $ 25,011,108       10.9 %

Other assets

    78,038,103       38,926,440       39,111,663       100.5 %

Total assets

  $ 333,252,613     $ 269,129,842     $ 64,122,771       23.8 %
                                 

Policy liabilities

  $ 290,680,384     $ 237,944,222     $ 52,736,162       22.2 %

Deferred federal income taxes

    693,470       33,210       660,260       1988.1 %

Other liabilities

    5,598,484       937,367       4,661,117       497.3 %

Total liabilities

    296,972,338       238,914,799       58,057,539       24.3 %

Shareholders' equity

    36,280,275       30,215,043       6,065,232       20.1 %

Total liabilities and shareholders' equity

  $ 333,252,613     $ 269,129,842     $ 64,122,771       23.8 %
                                 

Shareholders' equity per common share

  $ 4.65     $ 3.87     $ 0.78       20.1 %

  

 
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Results of Operations – Years Ended December 31, 2016 and 2015

 

Revenues

 

Our primary sources of revenue are life insurance premium income and investment income. Premium payments are classified as first-year, renewal and single. In addition, realized gains and losses on investment holdings can significantly impact revenues from period to period.

 

Our revenues for the years ended December 31, 2016 and 2015 are summarized as follows:

 

 

   

Years Ended December 31,

   

Amount Change

   

Percentage Change

 
   

2016

   

2015

   

2016 less 2015

    2016 to 2015  

Premiums

  $ 12,870,483     $ 9,822,009     $ 3,048,474       31.0 %

Net investment income

    13,190,643       11,235,342       1,955,301       17.4 %

Net realized investment gains

    729,739       684,668       45,071       6.6 %

Loss on other-than-temporary impairments

    (212,342 )     (525,750 )     313,408       -59.6 %

Gain on reinsurance assumption

    -       588,923       (588,923 )     -100.0 %

Other income

    139,967       95,462       44,505       46.6 %

Total revenues

  $ 26,718,490     $ 21,900,654     $ 4,817,836       22.0 %

 

The $4,817,836 increase in total revenues for the year ended December 31, 2016 is discussed below.

 

Premiums

 

Our premiums for the years ended December 31, 2016 and 2015 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

   

Percentage Change

 
   

2016

   

2015

   

2016 less 2015

    2016 to 2015  

Whole life and term first year

  $ 224,607     $ 98,287     $ 126,320       128.5 %

Whole life and term renewal

    2,478,252       2,528,372       (50,120 )     -2.0 %

Final expense first year

    3,521,136       2,291,696       1,229,440       53.6 %

Final expense renewal

    6,267,914       4,842,970       1,424,944       29.4 %

Supplementary contracts with life contingencies

    378,574       60,684       317,890       523.8 %

Total premiums

  $ 12,870,483     $ 9,822,009     $ 3,048,474       31.0 %

 

The $3,048,474 increase in premiums for the year ended December 31, 2016 is primarily due to the following: $1,229,440 increase in final expense first year premiums, $1,424,944 increase in final expense renewal premiums and $317,890 increase in consideration received for supplementary contracts with life contingencies.

 

The increase in final expense first year premiums represents management’s focus on expanding final expense production by contracting new, independent agents in expanded locations. The increase in final expense renewal premiums reflects the persistency of prior years’ final expense production. Our marketing efforts are focused on final expense and annuity production and we have not been focused on whole life and term production for the past few years.

 

The increase in consideration received for supplementary contracts with life contingencies reflects policyholder decisions to receive future payment streams during their remaining life instead of a lump sum payment.

 

 
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Net Investment Income

 

The major components of our net investment income for the years ended December 31, 2016 and 2015 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

   

Percentage Change

 
   

2016

   

2015

   

2016 less 2015

    2016 to 2015  

Fixed maturity securities

  $ 5,970,940     $ 5,542,312     $ 428,628       7.7 %

Equity securities

    27,364       39,329       (11,965 )     -30.4 %

Other long-term investments

    2,685,639       1,877,725       807,914       43.0 %

Mortgage loans

    5,774,229       4,492,150       1,282,079       28.5 %

Policy loans

    107,541       101,344       6,197       6.1 %

Real estate

    340,032       449,034       (109,002 )     -24.3 %

Short-term and other investments

    44,013       12,278       31,735       258.5 %

Gross investment income

    14,949,758       12,514,172       2,435,586       19.5 %

Investment expenses

    (1,759,115 )     (1,278,830 )     480,285       37.6 %

Net investment income

  $ 13,190,643     $ 11,235,342     $ 1,955,301       17.4 %

 

The $2,435,586 increase in gross investment income for the year ended December 31, 2016 is primarily due to increases in investment holdings in mortgage loans and other long-term investments.

 

In the twelve months since December 31, 2015, our investments in mortgage loans have increased approximately $15.6 million and other long term investments have increased approximately $15.2 million.

 

Although investments in fixed maturity securities decreased by $5.2 million for the twelve months ended December 31, 2016, we benefited from the late 2015 purchase of fixed maturity securities and held those securities throughout 2016 resulting in increased investment income from fixed maturity securities.

 

The $109,002 decrease in real estate investment income is related to the loss of rental income from the sale of $6,693,044 of investment real estate held in March 2015.

 

The $480,285 increase in investment expenses for the year ended December 31, 2016 is primarily related to increased fees and expenses associated with the 2016 acquisition of mortgage loan investments including the 2016 establishment of an internal mortgage loan department.

 

 
24

 

 

Net Realized Investment Gains and Gain on Reinsurance Assumption

 

Our net realized investment gains result from sales of fixed maturity and equity securities available-for-sale, sale and early payoff gain (loss) of mortgage loans on real estate that the Company previously acquired and sales of investment real estate.

 

Our net realized investment gains (losses) for the years ended December 31, 2016 and 2015 and the $45,071 increase in net realized investment gains for the year ended December 31, 2016 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

   

Percentage Change

 
   

2016

   

2015

   

2016 less 2015

    2016 to 2015  

Fixed maturity securities available-for-sale:

                               

Sale proceeds

  $ 20,532,968     $ 8,799,624     $ 11,733,344       133.3 %

Amortized cost at sale date

    19,954,481       8,615,793       11,338,688       131.6 %

Net realized gains

  $ 578,487     $ 183,831     $ 394,656       214.7 %

Equity securities available-for-sale:

                               

Sale proceeds

  $ 324,556     $ 533,817     $ (209,261 )     -39.2 %

Cost at sale date

    225,155       535,719       (310,564 )     -58.0 %

Net realized gains (losses)

  $ 99,401     $ (1,902 )   $ 101,303       -5326.1 %

Mortgage loans on real estate:

                               

Payments and sale proceeds on mortgage loans

  $ 17,550,870     $ 9,882,604     $ 7,668,266       77.6 %

Principal collections

    17,478,357       9,770,067       7,708,290       78.9 %

Net realized gains

  $ 72,513     $ 112,537     $ (40,024 )     -35.6 %

Investment real estate:

                               

Sale proceeds

  $ 43,269     $ 7,083,246     $ (7,039,977 )     -99.4 %

Carrying value at sale date

    63,931       6,693,044       (6,629,113 )     -99.0 %

Net realized gains (losses)

  $ (20,662 )   $ 390,202     $ (410,864 )     -105.3 %

Net realized investment gains

  $ 729,739     $ 684,668     $ 45,071       6.6 %

 

On March 11, 2015, the Company sold its investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044 as of March 11, 2015. The Company recorded a gross profit on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119.

 

During 2016 the Company foreclosed on seven residential mortgage loans of real estate totaling $394,427 and transferred those properties to investment real estate that are now held for sale. The Company reduced the carrying value of this residential real estate obtained through foreclosure to the lower of acquisition cost or net realizable value. On November 30, 2016, the Company sold one investment real estate property with an aggregate carrying value of $63,931. The Company recorded a gross realized investment loss on this sale of $20,662 based on an aggregate sales price of $43,269.

 

Loss on Other-Than-Temporary Impairments and Gain on Reinsurance

 

During 2016, the Company impaired its bonds in an energy corporation with a total par value of $650,000 as a result of continuing unrealized losses. This impairment was considered fully credit-related, resulting in a charge to the statement of operations before tax of $207,450 for the year ended December 31, 2016. This charge represents the credit-related portion of the difference between the amortized cost basis of the security and its fair value. The Company has experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securities during 2016.

 

During 2016 management also impaired FBLIC’s one-half acre of undeveloped land located in Jefferson City, Missouri by $4,892 from its carrying value to its net realizable value expected at the time of ultimate resale.

 

 
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During 2015, the Company impaired its bonds in a mining corporation with a total par value of $600,000 as a result of continuing unrealized losses. This impairment was considered fully credit-related, resulting in a charge to the statement of operations before tax of $502,013 for the year ended December 31, 2015. This charge represents the credit-related portion of the difference between the amortized cost basis of the security and its fair value.

 

In 2015, management also impaired one mortgage loan on real estate investment that was in foreclosure and reduced that investment by $23,737 from its carrying value to its net realizable value expected at the time of ultimate resale. 

 

On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement. The Company acquired assets of $3,644,839 (including cash), assumed liabilities of $3,055,916 and recorded a gain on reinsurance assumption of $588,923. During third quarter 2015, the Company completed its evaluation of assets, liabilities and gain associated with the reinsurance assumption and adjusted the assets, liabilities and gain on reinsurance assumption initially estimated and recorded in second quarter 2015.

 

Total Benefits, Claims and Expenses

 

Our benefits, claims and expenses are primarily generated from benefit payments, surrenders, interest credited to policyholders, change in reserves, commissions and other underwriting, insurance and acquisition expenses. Benefit payments can significantly impact expenses from period to period. Our benefits, claims and expenses for the years ended December 31, 2016 and 2015 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

   

Percentage Change

 
   

2016

   

2015

   

2016 less 2015

    2016 to 2015  

Benefits and claims

                               

Increase in future policy benefits

  $ 4,786,377     $ 3,429,019     $ 1,357,358       39.6 %

Death benefits

    3,814,049       3,424,098       389,951       11.4 %

Surrenders

    728,122       574,739       153,383       26.7 %

Interest credited to policyholders

    6,977,306       5,675,873       1,301,433       22.9 %

Dividend, endowment and supplementary life contract benefits

    296,985       323,300       (26,315 )     -8.1 %

Total benefits and claims

    16,602,839       13,427,029       3,175,810       23.7 %
                                 

Expenses

                               

Policy acquisition costs deferred

    (7,445,304 )     (5,204,940 )     (2,240,364 )     43.0 %

Amortization of deferred policy acquisition costs

    2,202,367       1,563,625       638,742       40.9 %

Amortization of value of insurance business acquired

    379,365       386,214       (6,849 )     -1.8 %

Commissions

    6,882,311       4,774,196       2,108,115       44.2 %

Other underwriting, insurance and acquisition expenses

    5,677,130       4,996,980       680,150       13.6 %

Total expenses

    7,695,869       6,516,075       1,179,794       18.1 %

Total benefits, claims and expenses

  $ 24,298,708     $ 19,943,104     $ 4,355,604       21.8 %

 

The $4,355,604 increase in total benefits, claims and expenses for the year ended December 31, 2016 is discussed below.

 

Benefits and Claims

 

The $3,175,810 increase in total benefits and claims for the year ended December 31, 2016 is primarily due to the following:

 

 

$1,357,358 increase in future policy benefits is primarily related to the production of new policies, initial sales of policies to older age bands resulting in increased mortality reserve charges and the aging of existing policies.

  

 
26

 

 

 

$1,301,433 increase in interest credited to policyholders is primarily due to an increase of approximately $47.7 million in the amount of policyholders’ account balances in the consolidated statement of financial position (deposits and interest credited in excess of withdrawals) since December 31, 2015.

 

 

$389,951 increase in death benefits is primarily due to 24 additional final expense claims in 2016 compared to 2015, at an average claim amount of $15,000. We expect final expense incurred claims to increase in the future as the volume of final expense policies grows. The protective measures surrounding our underwriting of final expense products, however, should keep our mortality exposure at or below current levels.

 

 

$153,383 increase in surrenders is as we expected and corresponds to growth in our number of policies in force and amount of insurance in force that is annually growing at 15% to 22%.

 

Deferral and Amortization of Deferred Acquisition Costs

 

Certain costs related to the successful acquisition of traditional life insurance policies are capitalized and amortized over the premium-paying period of the policies. Certain costs related to the successful acquisition of insurance and annuity policies that subject us to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed (i.e., limited-payment long-duration annuity contracts) are capitalized and amortized in relation to the present value of actual and expected gross profits on the policies. These acquisition costs, which are referred to as deferred policy acquisition costs, include commissions and other successful costs of acquiring life insurance, which vary with, and are primarily related to, the successful production of new and renewal insurance and annuity contracts.

 

For the years ended December 31, 2016 and 2015, capitalized costs were $7,445,304 and $5,204,940, respectively. Amortization of deferred policy acquisition costs for the years ended December 31, 2016 and 2015 were $2,202,367 and $1,563,625, respectively.

 

The $2,240,364 increase in the 2016 acquisition costs deferred primarily relates to increased final expense and annuity production. During 2016, more annuity contracts were issued but at a lower average amount. During third quarter 2016, we conducted an actuarial study that resulted in approximately a $100,000 decrease in the 2016 acquisition expenses to be capitalized and deferred.

 

The $638,742 increase in the 2016 amortization of deferred acquisition costs is primarily due to the growth in the volume of final expense policies and annuity contracts. With these increases in final expense policies and annuity contracts, we experienced increased mortality, annuity withdrawals and life insurance policy surrenders causing an immediate amortization of the remaining acquisition costs deferred associated with a specific policy or contract. We expect this trend to continue as we grow.

 

Amortization of Value of Insurance Business Acquired

 

The cost of acquiring insurance business is amortized over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was $379,365 and $386,214 for the years ended December 31, 2016 and 2015, respectively.

 

 
27

 

 

Commissions

 

Our commissions for the years ended December 31, 2016 and 2015 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

   

Percentage Change

 
   

2016

   

2015

   

2016 less 2015

   

2016 to 2015

 

Annuity

  $ 1,896,150     $ 1,455,566     $ 440,584       30.3 %

Whole life and term first year

    125,467       89,761       35,706       39.8 %

Whole life and term renewal

    100,247       101,553       (1,306 )     -1.3 %

Final expense first year

    4,195,896       2,714,342       1,481,554       54.6 %

Final expense renewal

    564,551       412,974       151,577       36.7 %

Total commissions

  $ 6,882,311     $ 4,774,196     $ 2,108,115       44.2 %

 

The $2,108,115 increase in commissions for the year ended December 31, 2016 is primarily due to:

 

 

$1,481,554 increase in final expense first year commissions that correspond to the $1,229,440 increase in final expense first year premiums.

 

 

$440,584 increase in annuity first year, single and renewal commissions is due to the Company now paying renewal commission on two annuity products amounting to $383,072. These renewal commissions are half of the first year commissions and are paid if the annuity contract is still in force in the second year.

 

 

$151,577 increase in final expense renewal commissions that correspond to the $1,424,944 increase in final expense renewal premiums.

 

Other Underwriting, Insurance and Acquisition Expenses

 

The $680,150 increase in other underwriting, insurance and acquisition expenses for the year ended December 31, 2016 was primarily related to increased acquisition and maintenance costs associated with increased final expense production, increased salaries and benefits due to increased staffing levels and increased salary and bonus levels, increased legal fees from contested litigation, write-off and recording of bad debt expense on uncollectible receivables of the premium finance business and tenant improvements on the Topeka, Kansas office building.

 

Federal Income Taxes

 

FTFC files a consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC or FBLIC. TLIC and FBLIC are taxed as life insurance companies under the provisions of the Internal Revenue Code. Life insurance companies must file separate tax returns until they have been a member of the consolidated filing group for five years. However, we filed consolidated life insurance company federal tax returns for TLIC and FBLIC for 2013, 2014 and 2015 and intend to also file a consolidated life insurance company federal tax return for TLIC and FBLIC for 2016 during 2017.

 

Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes.

 

For the years ended December 31, 2016 and 2015, current income tax expense was $37,404 and $405,546, respectively. Deferred federal income tax benefit was $208,361 and $830,704 for the years ended December 31, 2016 and 2015, respectively.

 

Net Income Per Common Share Basic and Diluted

 

Net income was $2,590,739 ($0.33 per common share basic and diluted) and $2,382,708 ($0.31 per common share basic and diluted) for the years ended December 31, 2016 and 2015, respectively.

 

 
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Net income per common share basic and diluted is calculated using the weighted average number of common shares outstanding and subscribed during the year. The weighted average outstanding and subscribed common shares basic and diluted for the years ended December 31, 2016 and 2015 were 7,802,593 and 7,804,566, respectively.

 

Business Segments

 

The Company has a life insurance segment, consisting of the life insurance operations of TLIC and FBLIC, an annuity segment, consisting of the annuity operations of TLIC and FBLIC and a corporate segment. Results for the parent company and the operations of FTCC, after elimination of intercompany amounts, are allocated to the corporate segment.

 

The revenues and income before federal income taxes from our business segments for the years ended December 31, 2016 and 2015 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

   

Percentage Change

 
   

2016

   

2015

   

2016 less 2015

   

2016 to 2015

 

Revenues:

                               

Life insurance operations

  $ 14,996,543     $ 11,847,640     $ 3,148,903       26.6 %

Annuity operations

    11,135,950       9,647,120       1,488,830       15.4 %

Corporate operations

    585,997       405,894       180,103       44.4 %

Total

  $ 26,718,490     $ 21,900,654     $ 4,817,836       22.0 %
                                 

Income before federal income taxes:

                               

Life insurance operations

  $ 866,648     $ 852,489     $ 14,159       1.7 %

Annuity operations

    1,271,600       935,945       335,655       35.9 %

Corporate operations

    281,534       169,116       112,418       66.5 %

Total

  $ 2,419,782     $ 1,957,550     $ 462,232       23.6 %

 

Life Insurance Operations

 

The $3,148,903 increase in revenues from Life Insurance Operations for the year ended December 31, 2016 is primarily due to the following:

 

 

$3,048,474 increase in premiums

 

 

$162,901 increase in net investment income

 

 

$11,940 decrease in other income

 

 

$50,532 decrease in net realized investment gains

 

The $14,159 increased profitability from Life Insurance Operations for the year ended December 31, 2016 is primarily due to the following:

 

 

$1,357,358 increase in future policy benefits

 

 

$1,667,531 increase in commissions

 

 

$897,653 increase in other underwriting, insurance and acquisition expenses

 

 

$389,951 increase in death benefits

 

 

$153,383 increase in surrenders

 

 

$50,532 decrease in net realized investment gains

  

 
29

 

 

 

$11,940 decrease in other income

 

 

$3,425 decrease in amortization of value of insurance business acquired

 

 

$26,315 decrease in dividend, endowment and supplementary life contract benefits

 

 

$162,901 increase in net investment income

 

 

$1,301,392 increase in policy acquisition costs deferred net of amortization

 

 

$3,048,474 increase in premiums

 

Annuity Operations

 

The $1,488,830 increase in revenues from Annuity Operations for the year ended December 31, 2016 is due to the following:

 

 

$1,685,700 increase in net investment income

 

 

$196,870 decrease in net realized investment gains

 

The $335,655 increased profitability from Annuity Operations for the year ended December 31, 2016 is due to the following:

 

 

$1,685,700 increase in net investment income

 

 

$300,230 increase in policy acquisition costs deferred net of amortization

 

 

$285,188 decrease in other underwriting, insurance and acquisition expenses

 

 

$3,424 decrease in amortization of value of insurance business acquired

 

 

$196,870 decrease in net realized investment gains

 

 

$440,584 increase in commissions

 

 

$1,301,433 increase in interest credited to policyholders

 

Corporate Operations

 

The $180,103 increase in revenues from Corporate Operations for the year ended December 31, 2016 is primarily due to $106,700 of increased net investment income, $56,445 of increased other income and $16,958 of decreased realized losses.

 

The $112,418 increase in Corporate Operations profitability for the year ended December 31, 2016 is primarily due to $106,700 of increased net investment income, $56,445 of increased other income, $16,958 of decreased realized losses and $67,685 of increased operating expenses.

 

 
30

 

 

Consolidated Financial Condition

 

Our invested assets as of December 31, 2016 and 2015 are summarized as follows:

 

 

                   

Amount Change

   

Percentage Change

 
   

December 31, 2016

   

December 31, 2015

   

2016 less 2015

    2016 to 2015  

Assets

                               

Investments

                               

Available-for-sale fixed maturity securities at fair value (amortized cost: $128,310,625 and $138,028,455 as of December 31, 2016 and 2015, respectively)

  $ 129,311,155     $ 134,556,027     $ (5,244,872 )     -3.9 %

Available-for-sale equity securities at fair value (cost: $599,400 and $790,215 as of December 31, 2016 and 2015, respectively)

    638,407       892,800       (254,393 )     -28.5 %

Mortgage loans on real estate

    74,371,286       58,774,918       15,596,368       26.5 %

Investment real estate

    2,506,673       2,326,558       180,115       7.7 %

Policy loans

    1,598,116       1,486,317       111,799       7.5 %

Short-term investments

    -       599,855       (599,855 )     -100.0 %

Other long-term investments

    46,788,873       31,566,927       15,221,946       48.2 %

Total investments

  $ 255,214,510     $ 230,203,402     $ 25,011,108       10.9 %

 

The $5,244,872 decrease and $23,904,598 increase in fixed maturity available-for-sale securities for the years ended December 31, 2016 and 2015, respectively, are summarized as follows: 

 

   

Years Ended December 31,

 
   

2016

   

2015

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Fixed maturity securities, available-for-sale, beginning

  $ 134,556,027       104.06 %   $ 110,651,429       82.23 %

Purchases

    11,338,377       8.77 %     37,123,963       27.60 %

Assumption reinsurance

    -       0.00 %     3,534,093       2.63 %

Unrealized appreciation (depreciation)

    4,473,318       3.46 %     (6,711,535 )     -4.99 %

Net realized investment gains (losses)

    371,037       0.29 %     (318,182 )     -0.24 %

Sales proceeds

    (14,933,968 )     -11.56 %     (6,685,624 )     -4.97 %

Maturities

    (5,599,000 )     -4.33 %     (2,114,000 )     -1.57 %

Premium amortization

    (894,636 )     -0.69 %     (924,117 )     -0.69 %

Increase (decrease)

    (5,244,872 )     -4.06 %     23,904,598       17.77 %

Fixed maturity securities, available-for-sale, ending

  $ 129,311,155       100.00 %   $ 134,556,027       100.00 %

 

Fixed maturity securities available-for-sale are reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income (Loss).” The available-for-sale fixed maturity securities portfolio is invested primarily in a variety of companies, U. S. government and government agencies, states and political subdivisions and foreign securities.

 

 
31

 

  

The $254,393 decrease and $221,443 increase in equity securities available-for-sale for the years ended December 31, 2016 and 2015, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2016

   

2015

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Equity securities, available-for-sale, beginning

  $ 892,800       139.85 %   $ 671,357       75.20 %

Purchases

    34,340       5.38 %     806,537       90.33 %

Sales proceeds

    (324,556 )     -50.84 %     (533,817 )     -59.79 %

Unrealized depreciation

    (63,578 )     -9.96 %     (49,177 )     -5.51 %

Net realized investment gains (losses)

    99,401       15.57 %     (1,902 )     -0.21 %

Premium amortization

    -       0.00 %     (198 )     -0.02 %

Increase (decrease)

    (254,393 )     -39.85 %     221,443       24.80 %

Equity securities, available-for-sale, ending

  $ 638,407       100.00 %   $ 892,800       100.00 %

 

Equity securities available-for-sale are also reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income (Loss).” The available-for-sale equity securities portfolio is invested in a small number of companies.

 

The $15,596,368 and $20,125,185 increase in mortgage loans on real estate for the years ended December 31, 2016 and 2015, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2016

   

2015

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Mortgage loans on real estate, beginning

  $ 58,774,918       79.03 %   $ 38,649,733       65.76 %

Purchases

    33,480,579       45.01 %     29,780,501       50.67 %

Capitalization of loan origination fees

    4,531       0.01 %     90,000       0.15 %

Discount accretion

    157,424       0.21 %     167,772       0.29 %

Net realized investment gains

    72,513       0.10 %     88,800       0.15 %

Payments

    (17,550,870 )     -23.60 %     (9,882,604 )     -16.81 %

Foreclosed - transferred to real estate

    (394,427 )     -0.53 %     -       0.00 %

Increase in allowance for bad debts

    (61,079 )     -0.08 %     (56,882 )     -0.10 %

Amortization of loan origination fees

    (112,303 )     -0.15 %     (62,402 )     -0.11 %

Increase

    15,596,368       20.97 %     20,125,185       34.24 %

Mortgage loans on real estate, ending

  $ 74,371,286       100.00 %   $ 58,774,918       100.00 %

 

 
32

 

 

The $180,115 increase and $6,838,532 decrease in investment real estate for the years ended December 31, 2016 and 2015, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2016

   

2015

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Investment real estate, beginning

  $ 2,326,558       92.81 %   $ 9,165,090       393.93 %

Real estate acquired through mortgage loan foreclosure

    394,427       15.74 %     -       0.00 %

Sales proceeds

    (43,269 )     -1.73 %     (7,083,246 )     -304.45 %

Depreciation of building

    (145,489 )     -5.80 %     (145,488 )     -6.25 %

Net realized investment gains (losses)

    (25,554 )     -1.02 %     390,202       16.77 %

Increase (decrease)

    180,115       7.19 %     (6,838,532 )     -293.93 %

Investment real estate, ending

  $ 2,506,673       100.00 %   $ 2,326,558       100.00 %

 

The $15,221,946 and $9,785,002 increases in other long-term investments (comprised of lottery receivables) for the years ended December 31, 2016 and 2015, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2016

   

2015

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Other long-term investments, beginning

  $ 31,566,927       67.47 %   $ 21,781,925       69.00 %

Purchases

    17,973,300       38.41 %     12,476,814       39.53 %

Accretion of discount

    2,685,635       5.74 %     1,878,019       5.95 %

Payments

    (5,436,989 )     -11.62 %     (4,569,831 )     -14.48 %

Increase

    15,221,946       32.53 %     9,785,002       31.00 %

Other long-term investments, ending

  $ 46,788,873       100.00 %   $ 31,566,927       100.00 %

 

The $599,855 decrease in short-term investments is due to management’s decision to decrease our investment in funds that have a maturity of more than 90 days but less than one year at the date of purchase.

 

Our assets other than invested assets as of December 31, 2016 and 2015 are summarized as follows:

 

                   

Amount Change

   

Percentage Change