10-K 1 ftfc20181231_10k.htm FORM 10-K ftfc20181231_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, 2018

 

[    ]

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 every Interactive Data File required to be submitted 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 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, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” "accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer:  ☐ 

Accelerated filer:  ☐

Non-accelerated filer:  ☐

Smaller reporting company:  ☑

Emerging growth company:  ☐

 

   

 

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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 11, 2019: 7,802,593 shares

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement to be used in connection with its 2019 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  10
     
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 12
Item 8. Financial Statements 38
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 82
Item 9A. Controls and Procedures 82
Item 9B. Other Information 83
     
Part III    
     
Item 10. Directors, Executive Officers and Corporate Governance 83
Item 11. Executive Compensation 83
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 83
Item 13. Certain Relationships and Related Transactions, and Director Independence 83
Item 14. Principal Accounting Fees and Services 83
Item 15. Exhibits 83
Signatures  84
Exhibit Index  85
     
     
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, Montana, 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, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia.

 

The Company owns 100% of 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, 2018, we have received $27,119,480 from the sale of our shares. The Company raised $1,450,000 from two private placements during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012 and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings. The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012.

 

During 2012, 2013, 2014 and 2015, the Company repurchased 247,580 shares of its common stock at a total cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’s current Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.

 

Acquisitions

 

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

 

On December 31, 2008, FTFC made FLAC a 15 year loan in the form of a surplus note in the amount of $250,000 with an interest rate of 6% payable monthly, that was approved by 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.

 

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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 as of and for the years ended December 31, 2018 and 2017 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 September 1, 2017. Under the terms of this agreement, the services provided by IHLIC include underwriting, actuarial, policy issue, accounting, claims processing and other services incidental to the operations of TLIC. The agreement is effective for a period of five (5) years from September 1, 2017 through August 31, 2022 and includes a provision that the agreement may be terminated at any time by either party with a 180 day prior notice.

 

FBLIC renewed its administrative services agreement with IHLIC on November 1, 2017. Under the terms of this agreement, the services provided by IHLIC include underwriting, actuarial, policy issue, accounting, claims processing and other services incidental to the operations of FBLIC. The agreement is effective for a period of five (5) years from November 1, 2017 through October 31, 2022 and includes a provision that the agreement may be terminated at any time by either party with a 180 day prior notice.

 

TLIC continues to seek to serve middle income households 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. In 2018, FBLIC and TLIC were licensed in Montana.

 

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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, 2018 and 2017, in accordance with statutory accounting practices prescribed by the states of domicile of TLIC and FBLIC.

 

   

Year Ended December 31, 2018

 
   

Life

   

Annuity

 

State

 

Premiums

   

Percentage

   

Considerations

   

Percentage

 

Alabama

  $ 359,367       1.91 %   $ 50,800       0.09 %

Arizona

    100,989       0.54 %     177,560       0.33 %

Arkansas

    256,591       1.36 %     205,795       0.38 %

Colorado

    582,423       3.09 %     343,234       0.63 %

Georgia

    630,534       3.35 %     695,687       1.28 %

Illinois

    1,623,150       8.62 %     1,644,945       3.01 %

Indiana

    768,182       4.08 %     496,481       0.91 %

Kansas

    2,253,023       11.96 %     1,976,325       3.62 %

Kentucky

    603,186       3.20 %     231,112       0.42 %

Louisiana

    573,141       3.04 %     160,132       0.29 %

Michigan

    364,120       1.93 %     1,201,305       2.20 %

Mississippi

    154,593       0.82 %     227,978       0.42 %

Missouri

    750,749       3.98 %     673,760       1.23 %

Nebraska

    212,891       1.13 %     1,564,585       2.87 %

New Mexico

    14,394       0.08 %     368,394       0.68 %

North Carolina

    1,407,279       7.47 %     422,725       0.77 %

North Dakota

    98,125       0.52 %     13,311,590       24.40 %

Ohio

    2,360,144       12.53 %     699,796       1.28 %

Oklahoma

    1,285,488       6.82 %     1,179,828       2.16 %

Pennsylvania

    629,500       3.34 %     2,618,266       4.80 %

Tennessee

    339,087       1.80 %     414,392       0.76 %

Texas

    2,952,455       15.67 %     24,492,681       44.90 %

Virginia

    310,985       1.65 %     50,000       0.09 %

All other states

    209,252       1.11 %     1,352,730       2.48 %

Total direct collected premiums and considerations

  $ 18,839,648       100.00 %   $ 54,560,101       100.00 %

 

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Year Ended December 31, 2017

 
   

Life

   

Annuity

 

State

 

Premiums

   

Percentage

   

Considerations

   

Percentage

 

Alabama

  $ 219,135       1.36 %   $ 141,926       0.25 %

Arizona

    61,364       0.38 %     401,702       0.72 %

Arkansas

    238,372       1.48 %     406,520       0.72 %

Colorado

    459,708       2.85 %     38,387       0.07 %

Georgia

    474,792       2.94 %     534,626       0.95 %

Illinois

    1,441,519       8.94 %     719,662       1.28 %

Indiana

    534,599       3.32 %     59,299       0.11 %

Kansas

    2,236,609       13.87 %     1,796,931       3.20 %

Kentucky

    530,972       3.29 %     82,408       0.15 %

Louisiana

    433,371       2.69 %     -       0.00 %

Michigan

    263,984       1.64 %     2,381,477       4.24 %

Mississippi

    143,635       0.89 %     76,032       0.14 %

Missouri

    820,326       5.09 %     195,035       0.35 %

Nebraska

    217,740       1.35 %     802,251       1.43 %

New Mexico

    11,882       0.07 %     520       0.01 %

North Carolina

    966,643       5.99 %     149,092       0.27 %

North Dakota

    108,810       0.67 %     18,239,925       32.49 %

Ohio

    2,003,162       12.42 %     1,431,925       2.55 %

Oklahoma

    1,484,722       9.21 %     1,922,469       3.42 %

Pennsylvania

    422,290       2.62 %     1,762,619       3.14 %

Tennessee

    269,038       1.67 %     2,290,127       4.08 %

Texas

    2,406,525       14.93 %     21,532,935       38.35 %

Virginia

    195,474       1.21 %     40,017       0.07 %

All other states

    181,239       1.12 %     1,126,501       2.01 %

Total direct collected premiums and considerations

  $ 16,125,911       100.00 %   $ 56,132,386       100.00 %

 

Reinsurance

 

TLIC cedes reinsurance under various agreements allowing management to control exposure to potential losses arising from large risks and providing additional capacity for growth and risk diversification. TLIC reinsures all amounts of risk on any one life in excess of $100,000 for individual life insurance with IHLIC, Optimum Re Insurance Company (“Optimum Re”) and Wilton Reassurance Company (“Wilton Re”).

 

The Company also assumes reinsurance under various agreements allowing management to increase growth in assets and profitability. TLIC is a party to an Automatic Retrocession Pool Agreement (the “Reinsurance Pool”) with Optimum Re, Catholic Order of Foresters, American Home Life Insurance Company and Woodmen of the World. The agreement provides for automatic retrocession of coverage in excess of Optimum Re’s retention on business ceded to Optimum Re by the other parties to the Reinsurance Pool. TLIC’s maximum exposure on any one insured under the Reinsurance Pool is $100,000. As of January 1, 2008, the Reinsurance Pool stopped accepting new cessions.

 

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

 

FBLIC also participates in reinsurance in order to provide risk diversification, additional capacity for future growth and limit the maximum net loss potential arising from large amounts of risk. FBLIC reinsures initial amounts of risk on any one life in excess of $100,000 for individual life insurance with Optimum Re. TLIC and FBLIC also reinsure its accidental death benefit portion of their life policies under a bulk agreement with Optimum Re.

 

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

 

Coinsurance

 

Effective January 1, 2018, TLIC entered into an annuity coinsurance agreement with an offshore annuity and life insurance company whereby 90% of TLIC’s annuity considerations originated after December 31, 2017 were ceded to the assuming company. The assuming company contractually reimburses TLIC for the related commissions, withdrawals, settlements, interest credited, submission costs, maintenance costs, marketing costs, excise taxes and other costs plus a placement fee.

 

In accordance with this annuity coinsurance agreement, TLIC holds assets and recognizes a funds withheld liability for the benefit of the assuming company in an amount at least equal to the annuity reserves in accordance with U.S. statutory accounting principles generated by this ceded business with a corresponding funds withheld liability recorded. In addition, the assuming company maintains a trust related to this ceded business amounting to at least an additional 4% of assets above the required annuity reserve required under U.S. statutory accounting principles. This coinsurance agreement may be terminated for new business by either party at any time upon 30 days prior written notice to the other party.

  

 Competition 

 

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

 

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

 

Governmental Regulation 

 

TLIC and FBLIC, respectively, are subject to regulation and supervision by the OID and the 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 $2,073,443 in 2019 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $988,218 in 2019 without prior approval. FBLIC paid a dividend of $760,347 to TLIC in 2018 but none in 2017. 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.

 

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Employees 

 

As of March 11, 2019, the Company had twelve full-time employees and one part-time employee.

 

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, $8,630 from October 1, 2016 through September 30, 2017, $8,805 from October 1, 2017 through September 30, 2018 and $8,920 from October 1, 2018 through September 30, 2019 with an increase of two percent for the period from October 1, 2019 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 $97,063 and $92,041 for the years ended December 31, 2018 and 2017, 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. In accordance with the amended lease on October 1, 2015, the Company was provided an allowance of $54,152 for leasehold improvements. The leasehold improvement allowance is amortized over the remaining amended non-cancellable lease term and reduced rent expense by $10,830 and $14,491 for the years ended December 31, 2018 and 2017, respectively. The future minimum lease payments to be paid under the amended non-cancellable lease agreement are $108,304 and $82,446 for the years 2019 and 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 were $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. Starting July 1, 2016, the lease agreement includes an $88,833 tenant improvement allowance that is amortized over 59 months with interest at 5.00%. The monthly lease payments were $18,299 from July 1, 2016 through May 31, 2017, $18,376 from June 1, 2017 through May 31, 2018 and are $18,508 from June 1, 2018 through May 31, 2021.

 

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 payments are $4,236 per month from September 1, 2015 through August 31, 2016, $4,242 from September 1, 2016 through August 31, 2017, $4,263 from September 1, 2017 through August 31, 2018 and $4,293 from September 1, 2018 through December 31, 2018.

 

The future minimum lease payments to be received under the non-cancellable lease agreements are $222,100, $222,100 and $92,542 for the years 2019 through 2021, respectively.

 

9

 

 

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

 

During 2018 and 2017 the Company foreclosed on residential mortgage loans of real estate totaling $467,593 and $207,482, respectively, and transferred those properties to investment real estate held for sale. The Company’s policy is to reduce the carrying value of this residential real estate obtained through foreclosure to the lower of acquisition cost or net realizable value.

 

During 2018, the Company sold investment real estate property with an aggregate carrying value of $313,040. The Company recorded a gross realized investment gain on sale of $51,649 based on an aggregate sales price of $364,689. During 2017, the Company sold investment real estate property with an aggregate carrying value of $185,701. The Company recorded a gross realized investment gain on sale of $4,382 based on an aggregate sales price of $190,083.

 

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 the jury awarded the Company $800,000 of damages against Mr. Pettigrew. In addition, the jury found that Mr. Pettigrew had defamed Mr. Zahn and intentionally inflicted emotional distress on Mr. Zahn and awarded Mr. Zahn $3,500,000 of damages against Mr. Pettigrew. In addition to the 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.

 

Mr. Pettigrew has appealed this decision but has failed to post an appeal bond. As a consequence, the Company and Mr. Zahn are in the process of executing on the judgments against Mr. Pettigrew’s assets. The Company and Mr. Zahn have so far collected some property and money in the execution process and will continue to execute on the judgments. Any money or property collected to date during the execution of the judgments are held in an escrow by a third party, have not been reflected in the December 31, 2018 consolidated financial statements and would have to be returned to Mr. Pettigrew in the event the judgments are reversed by the appellate courts.

 

Prior to being acquired 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 non-guaranteed dividend for the Decreasing Term to 95 policies since that group of policies was not producing a positive divisible surplus to allow the payment of a non-guaranteed dividend.

 

On November 22, 2013, a lawsuit was filed in the Circuit Court of Greene County, Missouri asserting claims by two individuals and a class of Missouri residents against FBLIC relating to this decision to not pay a non-guaranteed dividend. A trial was held November 27, 2017 through December 1, 2017 regarding those class and individual claims. During 2018, a settlement was reached by the parties and the Court approved the settlement agreement on June 11, 2018. FBLIC paid $1.85 million to resolve all class and individual claims and all active Decreasing Term to 95 policies for individuals in the class were cancelled.

 

Item 4. Mine Safety Disclosures

 

None

 

10

 

 

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.

 

(b)

Holders

 

 

As of March 11, 2019, there were approximately 4,500 shareholders of the Company’s outstanding common stock.

 

(c)

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.

 

 

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.

 

(d)

Securities Authorized for Issuance Under Equity Compensation Plans

 

 

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

 

(e)

Performance Graph – Not Required

 

(f)

Purchases of Equity Securities by Issuer

 

 

During 2012, 2013, 2014 and 2015, the Company repurchased 247,580 shares of its common stock at a total cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’s current Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.

 

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Item 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 that financed 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. In 2018, TLIC was licensed in Montana.

 

With the acquisition of FBLIC in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico. FBLIC also had initial licenses in Kansas, Nebraska and Oklahoma where TLIC was also licensed. In late 2012, FBLIC was licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia. In 2013, FBLIC was licensed in Illinois and Pennsylvania. In 2014, FBLIC was licensed in Georgia, Louisiana, Michigan, Mississippi, North Carolina, Ohio, Tennessee and Virginia. In 2015, FBLIC was licensed in Alabama and Utah. In 2018, FBLIC was licensed in Montana.

 

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.

 

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, 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.

 

12

 

 

Investments in Fixed Maturity Securities

 

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

 

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

 

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

 

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

 

Mortgage Loans on Real Estate

 

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

 

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

 

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

 

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

 

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

 

13

 

 

Deferred Policy Acquisition Costs

 

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

 

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

 

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

 

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

 

Value of Insurance Business Acquired

 

As a result of our purchases of FLAC and FBLIC, an asset was recorded in the application of purchase accounting to recognize the value of acquired insurance in force.  The Company’s value of acquired insurance in force is an intangible asset with a definite life and is amortized under FASB guidance. The value of acquired insurance in force is amortized primarily over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. The recovery of the value of insurance business acquired is dependent on the future profitability of the underlying business that was initially recorded in the purchases of FLAC and FBLIC. Each reporting period, we evaluate the recoverability of the unamortized balance of the value of insurance business acquired.

 

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

 

As of December 31, 2018 and 2017, there was $3,554,008 and $3,213,233, 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: $281,649 in 2019, $259,735 in 2020, $239,257 in 2021, $221,542 in 2022 and $212,645 in 2023.

 

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.

 

14

 

 

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

 

Estimating liabilities for our long-duration insurance contracts requires management to make various assumptions, including policyholder persistency, mortality rates, investment yields, discretionary benefit increases, new business pricing and operating expense levels.

 

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

 

Recent Accounting Pronouncements

 

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. 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 in 2018 did not have a material effect on the Company’s result 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.

 

This guidance was effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance were 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 adoption of this guidance in 2018 did not have a material effect on the Company’s result of operations, financial position or liquidity.

 

15

 

 

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.

 

In July 2018, the FASB issued updated guidance (Accounting Standards Update 2018-11) that provides entities with an additional (and optional) transition method to adopt the new standard on leases. Under this new transition method, an entity initially applies the new standard on leases at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new standard on leases will continue to be in accordance with current GAAP (Topic 840, Leases).  An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840.

 

In December 2018, the FASB issued additional guidance (Accounting Standards Update 2018-20) that permits an accounting policy election for lessors to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. A lessor making this election will exclude from the consideration in the contract and from variable payments not included in the consideration of the contract all collections from lessees of certain sales taxes and other similar taxes and to provide certain disclosures.

 

The Company will adopt this guidance in first quarter 2019. The adoption of this guidance in 2019 is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

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. mortgage loans and reinsurance amounts recoverable) 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.

 

In November 2018, the FASB issued updated guidance (Accounting Standards Update 2018-19) to emphasize improvements related to the measurement of credit losses on financial statements to increase awareness of the amendments to scope and transition and effective date requirements.

 

16

 

 

The original and 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, the Company expects there would not be a material effect on the Company’s results of operations, financial position or liquidity if the new guidance were to be adopted in the current accounting period. The Company will adopt this guidance in 2020. 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 was effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption was permitted.  The adoption of this guidance in 2018 did not have a material effect on the Company’s cash flows statement.

 

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 was permitted.  The adoption of this guidance in 2018 did not 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. The updated guidance is effective for annual and interim periods beginning after December 15, 2017, and is to be applied retrospectively. Early adoption was permitted in certain situations.  The adoption of this guidance in 2018 did not 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, 2019, 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 in 2020 is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

Compensation — Stock Compensation: Scope of Modification Accounting

 

In May 2017, the FASB issued updated guidance related to a change to the terms or conditions (modification) of a share-based payment award.  The updated guidance provides that an entity should account for the effects of a modification unless the fair value and vesting conditions of the modified award and the classification of the modified award (equity or liability instrument) are the same as the original award immediately before the modification. The updated guidance is effective for the quarter ending March 31, 2018.

 

The update is to be applied prospectively to an award modified on or after the adoption date. Early adoption was permitted. The adoption of this guidance in 2018 did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

17

 

 

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 

On February 14, 2018, the FASB issued updated guidance that allows a reclassification of the stranded tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017. Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to accumulated other comprehensive income. The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Cuts and Jobs Act of 2017 related to items in accumulated other comprehensive income.

 

The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which the effect of the Tax Cuts and Jobs Act of 2017 related to items remaining in accumulated other comprehensive income are recognized or at the beginning of the period of adoption. Early adoption was permitted and the Company adopted the updated guidance effective December 31, 2017. The adoption of this guidance in 2017 did not have a material effect on the Company’s result of operations, financial position or liquidity.

 

Targeted Improvements to the Accounting for Long-Duration Contracts

 

In August 2018, the FASB issued updated guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. This update improves the timeliness of recognizing changes in the liability for future policy benefits, modifies the rate used to discount future cash flows, simplifies and improves accounting for certain market-based options or guarantees associated with deposit (i.e., account balance) contracts, simplifies the amortization of deferred acquisitions costs and expands required disclosures. The expanded disclosure requires an insurance entity to provide disaggregated roll forwards of beginning to ending balances of the following: liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities and deferred acquisition costs including disclosure about, changes to and effect of changes for significant inputs, judgments, assumptions and methods used in measurements.

 

The updated guidance is effective for reporting periods beginning after December 15, 2020. Early adoption is permitted. With respect to the liability for future policyholder benefits for traditional and limited-payment contracts and deferred acquisition costs, an insurance entity may elect to apply the amendments retrospectively as of the beginning of the earliest period presented. With respect to the market risk benefits, an insurance entity should apply the amendments retrospectively as of the beginning of the earliest period presented. The Company expects that the impact on the Company’s results of operations, financial position and liquidity at the date of adoption of the updated guidance in 2021 will be determined by the long-duration contracts then held by the Company and the economic conditions at that time.

 

Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

 

In August 2018, the FASB issued amendments to modify the disclosure requirements related to fair value measurements including the consideration of costs and benefits of producing the modified disclosures. The updated guidance is effective for reporting periods beginning after December 15, 2019. Early adoption is permitted and an entity is permitted to early adopt any removed or modified disclosures upon issuance and delay adoption of the additional disclosures until their effective date. The adoption of this guidance in 2020 is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

  

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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 as of and for the years ended December 31, 2018 and 2017 for additional information regarding segment information.

 

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

 

FINANCIAL HIGHLIGHTS

 

Consolidated Condensed Results of Operations for the Years Ended December 31, 2018 and 2017

 

   

Years Ended December 31,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Premiums

  $ 18,822,517     $ 15,855,686     $ 2,966,831  

Net investment income

    19,609,386       16,710,408       2,898,978  

Net realized investment gains

    266,498       271,470       (4,972 )

Loss on other-than-temporary impairments

    -       (224,250 )     224,250  

Service fees

    465,528       14,347       451,181  

Other income

    77,166       102,176       (25,010 )

Total revenues

    39,241,095       32,729,837       6,511,258  

Benefits and claims

    22,455,883       19,868,790       2,587,093  

Expenses

    10,180,945       10,518,164       (337,219 )

Total benefits, claims and expenses

    32,636,828       30,386,954       2,249,874  

Income before federal income tax expense

    6,604,267       2,342,883       4,261,384  

Federal income tax expense

    1,462,121       1,373,519       88,602  

Net income

  $ 5,142,146     $ 969,364     $ 4,172,782  

Net income per common share basic and diluted

  $ 0.66     $ 0.12     $ 0.54  

 

19

 

 

Consolidated Condensed Financial Position as of December 31, 2018 and 2017

 

                   

Amount Change

 
   

December 31, 2018

   

December 31, 2017

   

2018 less 2017

 
                         
                         

Investment assets

  $ 325,844,275     $ 313,257,430     $ 12,586,845  

Other assets

    107,662,575       77,870,244       29,792,331  

Total assets

  $ 433,506,850     $ 391,127,674     $ 42,379,176  
                         

Policy liabilities

  $ 354,604,734     $ 343,789,864     $ 10,814,870  

Funds withheld under coinsurance agreement

    29,285,119       -       29,285,119  

Deferred federal income taxes

    2,373,478       2,961,929       (588,451 )

Other liabilities

    8,118,268       3,123,702       4,994,566  

Total liabilities

    394,381,599       349,875,495       44,506,104  

Shareholders' equity

    39,125,251       41,252,179       (2,126,928 )

Total liabilities and shareholders' equity

  $ 433,506,850     $ 391,127,674     $ 42,379,176  
                         

Shareholders' equity per common share

  $ 5.01     $ 5.29     $ (0.28 )

 

 

Results of Operations – Years Ended December 31, 2018 and 2017

 

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, 2018 and 2017 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Premiums

  $ 18,822,517     $ 15,855,686     $ 2,966,831  

Net investment income

    19,609,386       16,710,408       2,898,978  

Net realized investment gains

    266,498       271,470       (4,972 )

Loss on other-than-temporary impairments

    -       (224,250 )     224,250  

Service fees

    465,528       14,347       451,181  

Other income

    77,166       102,176       (25,010 )

Total revenues

  $ 39,241,095     $ 32,729,837     $ 6,511,258  

 

The $6,511,258 increase in total revenues for the year ended December 31, 2018 is discussed below.

 

20

 

 

Premiums

 

Our premiums for the years ended December 31, 2018 and 2017 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Ordinary life first year

  $ 406,793     $ 171,220     $ 235,573  

Ordinary life renewal

    2,094,982       2,292,825       (197,843 )

Final expense first year

    4,498,389       4,694,380       (195,991 )

Final expense renewal

    11,736,143       8,658,393       3,077,750  

Supplementary contracts with life contingencies

    86,210       38,868       47,342  

Total premiums

  $ 18,822,517     $ 15,855,686     $ 2,966,831  

 

The $2,966,831 increase in premiums for the year ended December 31, 2018 is primarily due to a $3,077,750 increase in final expense renewal premiums and a $235,573 increase in ordinary life first year premiums that exceeded a $197,843 decrease in ordinary life renewal premiums and a $195,991 decrease in final expense first year premiums.

 

The increase in final expense renewal premiums reflects the persistency of prior years’ final expense production. The decrease in final expense first year premium reflects increased competition. Our marketing efforts are focused on final expense and annuity production. The increase in ordinary life first year premiums reflects ordinary life insurance sold in the international market that the Company started assuming in fourth quarter 2018.

 

Net Investment Income

 

The major components of our net investment income for the years ended December 31, 2018 and 2017 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Fixed maturity securities

  $ 6,278,105     $ 6,504,233     $ (226,128 )

Preferred stock and equity securities

    83,263       20,167       63,096  

Other long-term investments

    3,992,882       3,645,043       347,839  

Mortgage loans

    11,079,802       8,364,448       2,715,354  

Policy loans

    122,587       114,246       8,341  

Real estate

    376,599       375,369       1,230  

Short-term and other investments

    233,366       141,259       92,107  

Gross investment income

    22,166,604       19,164,765       3,001,839  

Investment expenses

    (2,557,218 )     (2,454,357 )     102,861  

Net investment income

  $ 19,609,386     $ 16,710,408     $ 2,898,978  

 

The $3,001,839 increase in gross investment income for the year ended December 31, 2018 is primarily due to increases in investments in mortgage loans and other long-term investments that exceeded decreases in fixed maturity securities. In the twelve months since December 31, 2017, we have increased investments in mortgage loans on real estate by $27.6 million and other long-term investments by $3.4 million while fixed maturity securities have decreased by $18.5 million.

 

The $102,861 increase in investment expense is primarily related to increased production of investments in mortgage loans on real estate.

 

21

 

 

Net Realized Investment Gains

 

Our net realized investment gains result from sales of fixed maturity securities, equity securities, investment real estate, other long-term investments and changes in the fair value of equity securities.

 

Our net realized investment gains for the years ended December 31, 2018 and 2017 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Fixed maturity securities available-for-sale:

                       

Sale proceeds

  $ 22,037,796     $ 20,230,756     $ 1,807,040  

Amortized cost at sale date

    21,791,718       20,025,943       1,765,775  

Net realized gains

  $ 246,078     $ 204,813     $ 41,265  

Equity securities at fair value:

                       

Sale proceeds

  $ 361,947     $ -     $ 361,947  

Cost at sale date

    336,214       -       336,214  

Net realized gains

  $ 25,733     $ -     $ 25,733  

Investment real estate:

                       

Sale proceeds

  $ 364,689     $ 190,083     $ 174,606  

Carrying value at sale date

    313,040       185,701       127,339  

Net realized gains

  $ 51,649     $ 4,382     $ 47,267  

Other long-term investments

                       

Sale proceeds

  $ -     $ 792,012     $ (792,012 )

Carrying value at sale date

    -       729,737       (729,737 )

Net realized gains

  $ -     $ 62,275     $ (62,275 )
                         

Equity securities, changes in fair value

  $ (56,962 )   $ -     $ (56,962 )
                         

Net realized investment gains

  $ 266,498     $ 271,470     $ (4,972 )

 

Loss on Other-Than-Temporary Impairments

 

The Company has recorded other-than-temporary impairments on its available-for-sale fixed maturity investment in an energy corporation with a total par value of $650,000 as a result of continuing unrealized losses. During fourth quarter 2016 this security was initially impaired by a $207,450 charge to the statement of operations. During second quarter 2017 this security was further impaired by a $224,250 charge to the statement of operations. These impairments were considered fully credit-related and represent 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 2018.

 

22

 

 

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, 2018 and 2017 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Benefits and claims

                       

Increase in future policy benefits

  $ 6,634,114     $ 5,402,902     $ 1,231,212  

Death benefits

    5,345,707       4,463,854       881,853  

Surrenders

    913,977       878,361       35,616  

Interest credited to policyholders

    9,282,425       8,840,019       442,406  

Dividend, endowment and supplementary life contract benefits

    279,660       283,654       (3,994 )

Total benefits and claims

    22,455,883       19,868,790       2,587,093  
                         

Expenses

                       

Policy acquisition costs deferred

    (8,527,380 )     (9,321,726 )     794,346  

Amortization of deferred policy acquisition costs

    3,515,624       2,870,412       645,212  

Amortization of value of insurance business acquired

    340,775       382,190       (41,415 )

Commissions

    8,228,279       8,585,278       (356,999 )

Other underwriting, insurance and acquisition expenses

    6,623,647       8,002,010       (1,378,363 )

Total expenses

    10,180,945       10,518,164       (337,219 )

Total benefits, claims and expenses

  $ 32,636,828     $ 30,386,954     $ 2,249,874  

 

The $2,249,874 increase in total benefits, claims and expenses for the year ended December 31, 2018 is discussed below.

 

Benefits and Claims

 

The $2,587,093 increase in total benefits and claims for the year ended December 31, 2018 is primarily due to the following:

 

 

$1,231,212 increase in future policy benefits is primarily due to the increased number of life policies in force and the aging of existing life policies.

 

 

$881,853 increase in death benefits is primarily due to approximately $937,000 of increased final expense settlements and $268,000 of decreased ceded claims that exceeded $346,000 of decreased ordinary life settlements. The increase in final expense incurred claims is expected by the Company due to the continued growth in the number and amount of final expense policies in force.

 

 

$442,406 increase in interest credited to policyholders is primarily due to an increase of approximately $4.3 million in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits and interest credited in excess of withdrawals) since December 31, 2017.

 

23

 

 

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, 2018 and 2017, capitalized costs were $8,527,380 and $9,321,726, respectively. During 2018, $7,505,616 of commissions (91.2% of total 2018 commissions of $8,228,279) and $1,021,764 of expenses (15.4% of total 2018 other underwriting, insurance and acquisition expenses of $6,623,647) were eligible for deferral and were capitalized. During 2017, $8,009,758 of commissions (93.3% of total 2017 commissions of $8,585,278) and $1,311,968 of expenses (16.4% of total 2017 other underwriting, insurance and acquisition expenses of $8,002,010) were eligible for deferral and were capitalized. The $794,346 decrease in the 2018 acquisition costs deferred primarily relates to decreased final expense and annuity production and deferral and capitalization of the decreased eligible commissions and expenses.

 

Amortization of deferred policy acquisition costs for the years ended December 31, 2018 and 2017 were $3,515,624 and $2,870,412, respectively. The $645,212 increase in the 2018 amortization of deferred acquisition costs is primarily due to an increased number and amount of final expense policies and annuity contracts in force and lapsation of ordinary life policies reflected by increased death benefits, surrenders and annuity withdrawals.

 

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 $340,775 and $382,190 for the years ended December 31, 2018 and 2017, respectively.

 

Commissions

 

Our commissions for the years ended December 31, 2018 and 2017 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Annuity

  $ 1,221,517     $ 1,912,429     $ (690,912 )

Ordinary life first year

    406,707       151,739       254,968  

Ordinary life renewal

    61,268       81,295       (20,027 )

Final expense first year

    5,385,178       5,612,755       (227,577 )

Final expense renewal

    1,153,609       827,060       326,549  

Total commissions

  $ 8,228,279     $ 8,585,278     $ (356,999 )

 

The $356,999 decrease in commissions for the year ended December 31, 2018 is primarily due to a $690,912 decrease in annuity commissions (due to a $31.9 million decline in annuity considerations net of coinsurance) and a $227,577 decrease in final expense first year commissions (due to $195,991 decline in final expense first year premiums) that exceeded a $326,549 increase in final expense renewal commissions (due to $3,077,750 increase in final expense renewal premiums) and a $254,968 increase in ordinary life first year commissions (due to $235,573 increase in ordinary life first year premiums).

 

24

 

 

Other Underwriting, Insurance and Acquisition Expenses

 

The $1,378,363 decrease in other underwriting, insurance and acquisition expenses for the year ended December 31, 2018 was primarily related to the $1.85 million settlement of the Decreasing Term to 95 lawsuit in 2017 that exceeded an increase in 2018 expenses for the use of consultants for the international business initiative and an increase in third party administration fees primarily related to the increased number of policies in force and increased service requests less decreased 2018 legal fees.

 

Federal Income Taxes

 

FTFC filed its 2017 consolidated federal income tax return with TLIC, FBLIC and FTCC since by 2017 all companies had been members of a consolidated group for five years. Prior to 2017, FTFC filed consolidated federal income tax returns with FTCC and from 2012 to 2016 TLIC and FBLIC filed separate consolidated federal income tax returns as a life insurance company.

 

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, 2018 and 2017, current income tax expense was $100,075 and $105,696, respectively. Deferred federal income tax expense was $1,362,046 and $1,267,823 for the years ended December 31, 2018 and 2017, respectively.

 

Net Income Per Common Share Basic and Diluted

 

Net income was $5,142,146 ($0.66 per common share basic and diluted) and $969,364 ($0.12 per common share basic and diluted) for the years ended December 31, 2018 and 2017, respectively.

 

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 were 7,802,593 for both of the years ended December 31, 2018 and 2017.

 

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 (loss) before federal income taxes from our business segments for the years ended December 31, 2018 and 2017 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Revenues:

                       

Life insurance operations

  $ 21,985,441     $ 18,308,660     $ 3,676,781  

Annuity operations

    16,739,274       14,061,953       2,677,321  

Corporate operations

    516,380       359,224       157,156  

Total

  $ 39,241,095     $ 32,729,837     $ 6,511,258  

Income before federal income taxes:

                       

Life insurance operations

  $ 780,362     $ (207,655 )   $ 988,017  

Annuity operations

    5,369,900       2,280,615       3,089,285  

Corporate operations

    454,005       269,923       184,082  

Total

  $ 6,604,267     $ 2,342,883     $ 4,261,384  

 

25

 

 

Life Insurance Operations

 

The $3,676,781 increase in revenues from Life Insurance Operations for the year ended December 31, 2018 is primarily due to the following:

 

 

$2,966,831 increase in premiums

 

 

$678,154 increase in net investment income

 

 

$36,160 increase in net realized investment gains (that also includes a loss on other-than-temporary impairment)

 

 

$4,364 decrease in other income

 

 

The $988,017 increased profitability from Life Insurance Operations for the year ended December 31, 2018 is primarily due to the following:

 

 

$2,966,831 increase in premiums

 

 

$678,154 increase in net investment income

 

 

$520,486 decrease in other underwriting, insurance and acquisition expenses

 

 

$36,160 increase in net realized investment gains (that also includes a loss on other-than-temporary impairment)

 

 

$20,707 decrease in amortization of value of insurance business acquired

 

 

$3,994 decrease in dividend, endowment and supplementary life contract benefits

 

 

$4,364 decrease in other income

 

 

$35,616 increase in surrenders

 

 

$333,913 increase in commissions

 

 

$751,357 decrease in policy acquisition costs deferred net of amortization

 

 

$881,853 increase in death benefits

 

 

$1,231,212 increase in future policy benefits

 

 

Annuity Operations

 

The $2,677,321 increase in revenues from Annuity Operations for the year ended December 31, 2018 is due to the following:

 

 

$2,028,675 increase in net investment income

 

 

$465,528 increase in service fees and other income

 

 

$183,118 increase in net realized investment gains (that also includes a loss on other-than-temporary impairment)

 

26

 

 

The $3,089,285 increased profitability from Annuity Operations for the year ended December 31, 2018 is due to the following:

 

 

$2,028,675 increase in net investment income

 

 

$830,951 decrease in other underwriting, insurance and acquisition expenses

 

 

$690,912 decrease in commissions

 

 

$465,528 increase in service fees and other income

 

 

$183,118 increase in net realized investment gains (that also includes a loss on other-than-temporary impairment)

 

 

$20,708 decrease in amortization of value of insurance business acquired

 

 

$442,406 increase in interest credited to policyholders

 

 

$688,201 decrease in policy acquisition costs deferred net of amortization

 

Corporate Operations

 

The $157,156 increase in revenues from Corporate Operations for the year ended December 31, 2018 is primarily due to $192,149 of increased net investment income that exceeded $34,993 of decreased other income.

 

The $184,082 increase in Corporate Operations profitability for the year ended December 31, 2018 is primarily due to $192,149 of increased net investment income and $26,926 of decreased operating expenses that exceeded $34,993 of decreased other income.

 

Consolidated Financial Condition

 

Our invested assets as of December 31, 2018 and 2017 are summarized as follows:

 

                   

Amount Change

 
   

December 31, 2018

   

December 31, 2017

   

2018 less 2017

 

Assets

                       

Investments

                       

Available-for-sale fixed maturity securities at fair value (amortized cost: $134,414,517 and $143,621,947 as of December 31, 2018 and 2017, respectively)

  $ 131,152,199     $ 149,683,139     $ (18,530,940 )

Available-for-sale preferred stock at fair value (cost: $99,945 as of December 31, 2018 and 2017)

    90,580       100,720       (10,140 )

Equity securities (available-for-sale in 2017) at fair value (cost: $187,122 and $502,919 as of December 31, 2018 and 2017, respectively)

    198,668       571,427       (372,759 )

Mortgage loans on real estate

    130,049,610       102,496,451       27,553,159  

Investment real estate

    2,392,031       2,382,966       9,065  

Policy loans

    1,809,339       1,660,175       149,164  

Short-term investments

    896,371       547,969       348,402  

Other long-term investments

    59,255,477       55,814,583       3,440,894  

Total investments

  $ 325,844,275     $ 313,257,430     $ 12,586,845  

 

27

 

 

The $18,530,940 decrease and $20,371,984 increase in fixed maturity available-for-sale securities for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2018

   

2017

 

Fixed maturity securities, available-for-sale, beginning

  $ 149,683,139     $ 129,311,155  

Purchases

    13,191,134       37,095,248  

Unrealized appreciation (depreciation)

    (9,323,510 )     5,060,303  

Net realized investment gains (losses)

    246,078       (19,437 )

Sales proceeds

    (16,961,796 )     (12,389,756 )

Maturities

    (5,076,000 )     (7,841,000 )

Transfer to other long-term investments

    -       (729,737 )

Premium amortization

    (606,846 )     (803,637 )

Increase (decrease)

    (18,530,940 )     20,371,984  

Fixed maturity securities, available-for-sale, ending

  $ 131,152,199     $ 149,683,139  

 

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, asset-backed securities and foreign securities.

 

The $10,140 decrease and $4,360 increase in preferred stock available-for-sale for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2018

   

2017

 

Preferred stock, available-for-sale, beginning

  $ 100,720     $ 96,360  

Unrealized appreciation (depreciation)

    (10,140 )     4,360  

Increase (decrease)

    (10,140 )     4,360  

Preferred stock, available-for-sale, ending

  $ 90,580     $ 100,720  

 

Preferred stock available-for-sale is 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 $372,759 decrease and $29,380 increase in equity securities available-for-sale for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2018

   

2017

 

Equity securities, available-for-sale, beginning

  $ 571,427     $ 542,047  

Purchases

    76,127       3,465  

Sales proceeds

    (361,947 )     -  

Joint venture distribution

    (55,710 )     -  

Unrealized appreciation

    -       25,915  

Net realized investment gains, sale of securities

    25,733       -  

Net realized investment losses, changes in fair value

    (56,962 )     -  

Increase (decrease)

    (372,759 )     29,380  

Equity securities, available-for-sale, ending

  $ 198,668     $ 571,427  

 

Equity securities in 2018 are reported at fair value with the change in fair value reflected in net realized investment gains (losses) within the consolidated statements of operations. Equity securities in 2017 were 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).”

 

28

 

 

The $27,553,159 and $28,125,165 increases in mortgage loans on real estate for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2018

   

2017

 

Mortgage loans on real estate, beginning

  $ 102,496,451     $ 74,371,286  

Purchases

    63,066,644       53,913,277  

Capitalization of loan origination fees

    -       -  

Discount accretion

    536,331       252,903  

Payments

    (35,461,456 )     (25,670,590 )

Foreclosed - transferred to real estate

    (467,593 )     (207,482 )

Increase in allowance for bad debts

    (81,351 )     (98,388 )

Amortization of loan origination fees

    (39,416 )     (64,555 )

Increase

    27,553,159       28,125,165  

Mortgage loans on real estate, ending

  $ 130,049,610     $ 102,496,451  

 

The $9,065 increase and $123,707 decrease in investment real estate for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2018

   

2017

 

Investment real estate, beginning

  $ 2,382,966     $ 2,506,673  

Real estate acquired through mortgage loan foreclosure

    467,593       207,482  

Sales proceeds

    (364,689 )     (190,083 )

Depreciation of building

    (145,488 )     (145,488 )

Net realized investment gains

    51,649       4,382  

Increase (decrease)

    9,065       (123,707 )

Investment real estate, ending

  $ 2,392,031     $ 2,382,966  

 

29

 

 

The $3,440,894 and $9,025,710 increases in other long-term investments (comprised primarily of lottery receivables) for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2018

   

2017

 

Other long-term investments, beginning

  $ 55,814,583     $ 46,788,873  

Purchases

    9,143,277       14,036,082  

Transfer from fixed maturity available for-sale securities

    -       729,737  

Accretion of discount

    3,998,117       3,652,776  

Net realized investment gains

    -       62,275  

Sales proceeds

    -       (792,012 )

Payments

    (9,700,500 )     (8,663,148 )

Increase

    3,440,894       9,025,710  

Other long-term investments, ending

  $ 59,255,477     $ 55,814,583  

 

The $348,402 increase in short-term investments is due to management’s decision to increase 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, 2018 and 2017 are summarized as follows:

 

                   

Amount Change

 
   

December 31, 2018

   

December 31, 2017

     2018 to 2017  
                         

Cash and cash equivalents

  $ 29,665,605     $ 31,496,159     $ (1,830,554 )

Accrued investment income

    2,672,978       2,544,963       128,015  

Recoverable from reinsurers

    2,323,157       1,340,700       982,457  

Assets held in trust under coinsurance agreement

    25,494,700       -       25,494,700  

Agents' balances and due premiums

    1,418,916       1,485,305       (66,389 )

Deferred policy acquisition costs

    29,681,737       24,555,902       5,125,835  

Value of insurance business acquired

    5,185,870       5,526,645       (340,775 )

Other assets

    11,219,612       10,920,570       299,042  

Assets other than investment assets

  $ 107,662,575     $ 77,870,244     $ 29,792,331  

 

The $1,830,554 decrease in cash and cash equivalents for the year ended December 31, 2018 and the corresponding amount for the year ended December 31, 2017 are summarized in the Company’s consolidated statements of cash flows.

 

The increase in deferred policy acquisition costs for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2018

   

2017

 

Balance, beginning of year

  $ 24,555,902     $ 18,191,990  

Capitalization of commissions, sales and issue expenses

    8,527,380       9,321,726  

Amortization

    (3,515,624 )     (2,870,412 )

Deferred acquisition costs allocated to investments

    114,079       (87,402 )

Balance, end of year

  $ 29,681,737     $ 24,555,902  

 

30

 

 

Our other assets as of December 31, 2018 and December 31, 2017 are summarized as follows:

 

                   

Amount Change

 
   

December 31, 2018

   

December 31, 2017

   

2018 less 2017

 

Advances to mortgage loan originator

  $ 4,942,870     $ 4,925,259     $ 17,611  

Federal and state income taxes recoverable

    4,492,793       2,504,494       1,988,299  

Notes receivable

    446,978       448,006       (1,028 )

Accrual of mortgage loan and long-term investment payments due

    1,045,634       2,516,490       (1,470,856 )

Receivable for securities sold

    33,600       364,611       (331,011 )

Guaranty funds

    69,740       73,151       (3,411 )

Other receivables, prepaid assets and deposits

    187,997       88,559       99,438  

Total other assets

  $ 11,219,612     $ 10,920,570     $ 299,042  

 

There was a $1,988,299 increase in federal and state income taxes recoverable primarily due to federal and state tax withholdings on lottery receivables.

 

As of December 31, 2018, the Company had $33,600 of security sales where the trade date and settlement date were in different financial reporting periods compared to $364,611 of security sales overlapping financial reporting periods as of December 31, 2017.

 

There was a $1,470,856 decrease in the accrual of mortgage loans and long-term investment payments due based upon the scheduled timing of investment payments remitted by third party servicers. Those cash payments were received in January 2019.

 

The increase in other receivables, prepaid assets and deposits of $99,438 was primarily due to a $125,000 deposit to acquire a Barbados, West Indies domiciled life insurance company that will soon be approved by local country regulators.

 

On April 15, 2018, the Company renewed its previous one-year loan of $400,000 to its former Chairman. The renewed loan also has a term of one year and a contractual interest rate of 5.00%. The loan is collateralized by 100,000 shares of the Company’s Class A Common stock owned by the former Chairman.

 

Our liabilities as of December 31, 2018 and 2017 are summarized as follows:

 

                   

Amount Change

 
   

December 31, 2018

   

December 31, 2017

   

2018 less 2017

 
                         

Policy liabilities

                       

Policyholders' account balances

  $ 297,168,411     $ 292,909,762     $ 4,258,649  

Future policy benefits

    56,261,507       49,663,099       6,598,408  

Policy claims

    1,102,257       1,148,513       (46,256 )

Other policy liabilities

    72,559       68,490       4,069  

Total policy liabilities

    354,604,734       343,789,864       10,814,870  

Funds withheld under coinsurance agreement

    29,285,119       -       29,285,119  

Deferred federal income taxes

    2,373,478       2,961,929       (588,451 )

Other liabilities

    8,118,268       3,123,702       4,994,566  

Total liabilities

  $ 394,381,599     $ 349,875,495     $ 44,506,104  

 

31

 

 

The $4,258,649 and $47,563,273 increases in policyholders’ account balances for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2018

   

2017

 

Policyholders' account balances, beginning

  $ 292,909,762     $ 245,346,489  

Deposits

    54,957,500       56,666,113  

Withdrawals

    (30,696,157 )     (17,942,859 )

Funds withheld under coinsurance agreement

    (29,285,119 )     -  

Interest credited

    9,282,425       8,840,019  

Increase

    4,258,649       47,563,273  

Policyholders' account balances, ending

  $ 297,168,411     $ 292,909,762  

 

The $6,598,408 increase in future policy benefits during the year ended December 31, 2018 is primarily related to the production of new life insurance policies, initial sales of policies to older age bands (resulting in increased mortality reserve charges) and the aging of existing policies.

 

The $588,451 decrease in deferred federal income taxes during the year ended December 31, 2018 was due to $1,950,497 of decreased deferred federal income taxes on the unrealized appreciation (depreciation) of fixed maturity and preferred stock available-for-sale and $1,362,046 of operating deferred federal tax expense.

 

Our other liabilities as of December 31, 2018 and December 31, 2017 are summarized as follows:

 

                   

Amount Change

 
   

December 31, 2018

   

December 31, 2017

   

2018 less 2017

 

Suspense accounts payable

  $ 7,379,975     $ 42,901     $ 7,337,074  

Accounts payable

    47,309       1,898,817       (1,851,508 )

Accrued expenses payable

    668,000       776,000       (108,000 )

Payable for securities purchased

    393,762       462,598       (68,836 )

Guaranty fund assessments

    35,000       43,000       (8,000 )

Unearned investment income

    71,234       62,326       8,908  

Deferred revenue

    18,953       29,784       (10,831 )

Unclaimed funds

    39,325       23,622       15,703  

Other payables, withholdings and escrows

    (535,290 )     (215,346 )     (319,944 )

Total other liabilities

  $ 8,118,268     $ 3,123,702     $ 4,994,566  

 

The $7,337,074 increase in suspense accounts payable is due to increased deposits on policy applications that had not been issued as of the financial reporting date.

 

The $1,851,508 decrease in accounts payable is primarily due to a payment of $1,850,000 to settle the FBLIC Decreasing Term to 95 lawsuit.

 

As of December 31, 2018, the Company had $393,762 of security purchases where the trade date and settlement date were in different financial reporting periods compared to $462,598 of security purchases overlapping financial reporting periods as of December 31, 2017.

 

The $319,944 decline in other payables, withholdings and escrows is primarily due to an increase in escrow amounts on purchased mortgage loans due from previous servicers.

 

The $108,000 decrease in accrued expenses is primarily due to a decrease in the FBLIC Term to 95 lawsuit legal fees accrued in 2017.

 

32

 

 

Liquidity and Capital Resources

 

Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through December 31, 2018, we have received $27,119,480 from the sale of our shares.

 

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

 

The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital.

 

During 2012, 2013, 2014 and 2015, the Company repurchased 247,580 shares of its common stock at a total cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’s current Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.

 

As of December 31, 2018, we had cash and cash equivalents totaling $29,665,605. As of December 31, 2018, cash and cash equivalents of $13,669,115 and $13,744,984, respectively, totaling $27,414,099 were held by TLIC and FBLIC and may not be available for use by FTFC due to the required pre-approval by the OID and Missouri Department of Insurance of any dividend or intercompany transaction to transfer funds to FTFC. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the greater of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year.

 

Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is capacity for TLIC to pay a dividend up to $2,073,443 in 2019 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $988,218 in 2019 without prior approval. FBLIC paid dividends of $760,347 to TLIC in 2018 but none in 2017. Dividends paid by FBLIC are eliminated in consolidation. TLIC has paid no dividends to FTFC.

 

The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures interest and non-interest bearing accounts up to $250,000. Uninsured balances aggregate $14,663,402 and $21,835,216 as of December 31, 2018 and December 31, 2017, respectively. Other funds are invested in mutual funds that invest in U.S. government securities. We monitor the solvency of all financial institutions in which we have funds to minimize the exposure for loss. The Company has not experienced any losses in such accounts.

 

On November 8, 2018, the company executed a $1.5 million line of credit with a bank to provide working capital and funds for expansion.  The terms of the line of credit allowed for advances, repayments and re-borrowings through a maturity date of November 8, 2019.  Any outstanding advances will incur interest at a variable interest rate of the prime rate set forth in the Wall Street Journal plus 1% per annum adjusting monthly based on a 360 day year with a minimum interest rate floor of 5%. 

 

33

 

 

Our cash flows for the years ended December 31, 2018 and 2017 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Net cash provided by (used in) operating activities

  $ (8,858,987 )   $ 1,898,407     $ (10,757,394 )

Net cash used in investing activities

    (17,232,910 )     (43,349,447 )     26,116,537  

Net cash provided by financing activities

    24,261,343       38,723,254       (14,461,911 )

Decrease in cash

    (1,830,554 )     (2,727,786 )     897,232  

Cash and cash equivalents, beginning of period

    31,496,159       34,223,945       (2,727,786 )

Cash and cash equivalents, end of period

  $ 29,665,605     $ 31,496,159     $ (1,830,554 )

 

The $8,858,987 cash used in operating activities and $1,898,407 cash provided by operating activities for the years ended December 31, 2018 and 2017, respectively, are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Premiums collected

  $ 18,843,535     $ 15,861,633     $ 2,981,902  

Net investment income collected

    17,033,536       11,249,130       5,784,406  

Service fees and other income collected

    542,694       116,523       426,171  

Death benefits paid

    (6,374,420 )     (4,394,917 )     (1,979,503 )

Surrenders paid

    (913,977 )     (878,361 )     (35,616 )

Dividends and endowments paid

    (282,029 )     (285,378 )     3,349  

Commissions paid

    (8,176,470 )     (8,656,921 )     480,451  

Other underwriting, insurance and acquisition expenses paid

    (8,609,969 )     (5,747,916 )     (2,862,053 )

Taxes paid

    (2,088,374 )     (389,622 )     (1,698,752 )

Increased (decreased) advances to mortgage loan originator

    (17,611 )     282,121       (299,732 )

Increased (decreased) deposits of pending policy applications

    7,337,074       (4,641,825 )     11,978,899  

Increased assets held in trust under coinsurance agreement

    (25,494,700 )     -       (25,494,700 )

Increased short-term investments

    (348,402 )     (547,969 )     199,567  

Increased policy loans

    (149,164 )     (62,059 )     (87,105 )

Increased deposits

    (125,000 )     -       (125,000 )

Other

    (35,710 )     (6,032 )     (29,678 )

Increase in cash provided by (used in) operating activities

  $ (8,858,987 )   $ 1,898,407     $ (10,757,394 )

 

Please see the statements of cash flows for the years ended December 31, 2018 and 2017 for a summary of the components of net cash used in investing activities and net cash provided by financing activities.

 

Our shareholders’ equity as of December 31, 2018 and 2017 is summarized as follows:

 

                   

Amount Change

 
   

December 31, 2018

   

December 31, 2017

   

2018 less 2017

 
                         

Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 issued as of December 31, 2018 and 2017 and 7,802,593 outstanding as of December 31, 2018 and 2017)

  $ 80,502     $ 80,502     $ -  

Additional paid-in capital

    28,684,598       28,684,598       -  

Treasury stock, at cost (247,580 shares as of December 31, 2018 and 2017)

    (893,947 )     (893,947 )     -  

Accumulated other comprehensive income (loss)

    (2,576,631 )     4,760,951       (7,337,582 )

Accumulated earnings

    13,830,729       8,620,075       5,210,654  

Total shareholders' equity

  $ 39,125,251     $ 41,252,179     $ (2,126,928 )

 

The decrease in shareholders’ equity of $2,126,928 for the year ended December 31, 2018 is due to $7,337,582 in other comprehensive loss that exceeded $5,142,146 in net income and a $68,508 cumulative-effect of adoption of accounting guidance for reporting changes in fair value of equity securities in net realized gains and losses instead of accumulated other comprehensive income.

 

Shareholders’ equity per common share outstanding decreased 5.29% from $5.29 per share as of December 31, 2017 to $5.01 per share as of December 31, 2018, based upon 7,802,593 common shares outstanding as of both December 31, 2018 and 2017.

 

34

 

 

The liquidity requirements of our life insurance companies are met primarily by funds provided from operations. Premium and annuity consideration deposits, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. There were no liquidity issues in 2018 or 2017. Our investments include marketable debt securities that could be readily converted to cash for liquidity needs. We are subject to various market risks. The quality of our investment portfolio and the current level of shareholders’ equity continue to provide a sound financial base as we strive to expand our marketing to offer competitive products.

 

Our investment portfolio had unrealized appreciation (depreciation) on available-for-sale securities of ($3,271,683) and $6,130,475 as of December 31, 2018 and 2017, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. An increase of $9,087,572 in unrealized losses arising for year ended December 31, 2018 has been offset by the cumulative effect adjustment for the adoption of accounting guidance for equity securities of $68,508 and 2018 net realized investment gains of $246,078 originating from the sale and call activity for fixed maturity securities available-for-sale resulting in net unrealized losses on investments of $9,402,158.

 

A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy. We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds.

 

One of our significant risks relates to the fluctuations in interest rates. Regarding interest rates, the value of our available-for-sale fixed maturity securities investment portfolio will increase or decrease in an inverse relationship with fluctuations in interest rates, while net investment income earned on newly acquired available-for-sale fixed maturity securities increases or decreases in direct relationship with interest rate changes.

 

From an income perspective, we are exposed to rising interest rates which could be a significant risk, as TLIC's and FBLIC’s annuity business is impacted by changes in interest rates. Life insurance company policy liabilities bear fixed rates. From a liquidity perspective, our fixed rate policy liabilities are relatively insensitive to interest rate fluctuations. We believe gradual increases in interest rates do not present a significant liquidity exposure for the life insurance policies and annuity contracts. We maintain conservative durations in our fixed maturity portfolio.

 

As of December 31, 2018, cash and cash equivalents, short-term investments, the fair value of fixed maturity available-for-sale securities with maturities of less than one year and the fair value of lottery receivables with maturities of less than one year equaled 12.3% of total policy liabilities. If interest rates rise significantly in a short time frame, there can be no assurance that the life insurance industry, including the Company, would not experience increased levels of surrenders and reduced sales, and thereby be materially adversely affected.

 

In addition to the measures described above, TLIC and FBLIC must comply with the National Association of Insurance Commissioners promulgated Standard Valuation Law ("SVL") which specifies minimum reserve levels and prescribes methods for determining them, with the intent of enhancing solvency. Upon meeting certain tests, which TLIC and FBLIC met during 2018, the SVL also requires the Company to perform annual cash flow testing for TLIC and FBLIC. This testing is designed to ensure that statutory reserve levels will maintain adequate protection in a variety of potential interest rate scenarios. The Actuarial Standards Board of the American Academy of Actuaries also requires cash flow testing as a basis for the actuarial opinion on the adequacy of the reserves which is a required part of the annual statutory reporting process.

 

Our marketing plan could be modified to emphasize certain product types and reduce others. New business levels could be varied in order to find the optimum level. We believe that our current liquidity, current bond portfolio maturity distribution and cash position give us substantial resources to administer our existing business and fund growth generated by direct sales.

 

The operations of TLIC and FBLIC may require additional capital contributions to meet statutory capital and surplus requirements mandated by state insurance departments. Life insurance contract liabilities are generally long term in nature and are generally paid from future cash flows or existing assets and reserves. We will service other expenses and commitments by: (1) using available cash, (2) dividends from TLIC and FBLIC that are limited by law to the greater of prior year net operating income or 10% of prior year-end surplus unless specifically approved by the controlling insurance department, (3) public and private offerings of our common stock and (4) corporate borrowings, if necessary.

 

35

 

 

Effective January 1, 2017, the Company entered into a revised advance agreement with one loan originator. As of December 31, 2018, the Company has outstanding advances to this loan originator totaling $4,942,870. The advances are secured by $6,092,039 of residential mortgage loans on real estate that are assigned to the Company. The Company has committed to fund up to an additional $557,130 to the loan originator that would result in additional security in the form of residential mortgage loans on real estate to be assigned to the Company.

 

Effective January 1, 2017, the Company also entered into a revised escrow agreement with the same loan originator. According to the revised terms of the escrow agreement, as of December 31, 2018, $823,645 of additional and secured residential mortgage loan balances on real estate are held in escrow by the loan originator.  As of December 31, 2018, $598,803 of that escrow amount is available to the Company as additional collateral on $4,942,870 of advances to the loan originator. The remaining December 31, 2018 escrow amount of $224,842 is available to the Company as additional collateral on its investment of $44,968,471 in residential mortgage loans on real estate.

 

We are not aware of any commitments or unusual events that could materially affect our capital resources. We are not aware of any current recommendations by any regulatory authority which, if implemented, would have a material adverse effect on our liquidity, capital resources or operations. We believe that our existing cash and cash equivalents as of December 31, 2018 will be sufficient to fund our anticipated operating expenses.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements.

 

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

Certain statements contained herein are forward-looking statements. The forward-looking statements are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning; and include, but are not limited to, statements regarding the outlook of our business and financial performance. These forward-looking statements are subject to change and uncertainty, which are, in many instances, beyond our control and have been made based upon our expectations and beliefs concerning future developments and their potential effect upon us. There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be as anticipated. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. These factors include among others:

 

 

general economic conditions and financial factors, including the performance and fluctuations of fixed income, equity, real estate, credit capital and other financial markets;

 

differences between actual experience regarding mortality, morbidity, persistency, surrenders, investment returns, and our pricing assumptions establishing liabilities and reserves or for other purposes;

 

the effect of increased claims activity from natural or man-made catastrophes, pandemic disease, or other events resulting in catastrophic loss of life;

 

adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including and in connection with our divestiture or winding down of businesses such as FTCC;

 

inherent uncertainties in the determination of investment allowances and impairments and in the determination of the valuation allowance on the deferred income tax asset;

 

investment losses and defaults;

 

competition in our product lines;

 

attraction and retention of qualified employees and agents;

 

ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks;

 

the availability, affordability and adequacy of reinsurance protection;

 

the effects of emerging claim and coverage issues;

 

36

 

 

 

the cyclical nature of the insurance business;

 

interest rate fluctuations;

 

changes in our experiences related to deferred policy acquisition costs;

 

the ability and willingness of counterparties to our reinsurance arrangements and derivative instruments to pay balances due to us;

 

impact of medical epidemics and viruses;

 

domestic or international military actions;

 

the effects of extensive government regulation of the insurance industry;

 

changes in tax and securities law;

 

changes in statutory or U.S. generally accepted accounting principles (“GAAP”), practices or policies;

 

regulatory or legislative changes or developments;

 

the effects of unanticipated events on our disaster recovery and business continuity planning;

 

failures or limitations of our computer, data security and administration systems;

 

risks of employee error or misconduct;

 

the assimilation of life insurance businesses we acquire and the sound management of these businesses; and

 

the availability of capital to expand our business.

 

It is not our corporate policy to make specific projections relating to future earnings, and we do not endorse any projections regarding future performance made by others. In addition, we do not publicly update or revise forward-looking statements based on the outcome of various foreseeable or unforeseeable developments.

 

37

 

 

FIRST TRINITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

  

 

Consolidated Financial Statements

Page

Numbers

   
   

Report of Independent Registered Public Accounting Firm

39   
   
Consolidated Statements of Financial Position 40   
   
Consolidated Statements of Operations  41   
   
Consolidated Statements of Comprehensive Income (Loss) 42   
   
Consolidated Statements of Changes in Shareholders’ Equity  43   
   
Consolidated Statements of Cash Flows  44   
   
Notes to Consolidated Financial Statements  46   

                               

38

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Board of Directors and

Shareholders of First Trinity Financial Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated statements of financial position of First Trinity Financial Corporation and Subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Kerber, Eck & Braeckel LLP

 

We have served as the Company’s auditor since 2004.

 

Springfield, Illinois

March 8, 2019

 

39

 

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Financial Position

 

   

December 31, 2018

   

December 31, 2017

 

Assets

               

Investments

               

Available-for-sale fixed maturity securities at fair value (amortized cost: $134,414,517 and $143,621,947 as of December 31, 2018 and 2017, respectively)

  $ 131,152,199     $ 149,683,139  

Available-for-sale preferred stock at fair value (cost: $99,945 as of December 31, 2018 and 2017)

    90,580       100,720  

Equity securities (available-for-sale in 2017) at fair value (cost: $187,122 and $502,919 as of December 31, 2018 and 2017, respectively)

    198,668       571,427  

Mortgage loans on real estate

    130,049,610       102,496,451  

Investment real estate

    2,392,031       2,382,966  

Policy loans

    1,809,339       1,660,175  

Short-term investments

    896,371       547,969  

Other long-term investments

    59,255,477       55,814,583  

Total investments

    325,844,275       313,257,430  

Cash and cash equivalents

    29,665,605       31,496,159  

Accrued investment income

    2,672,978       2,544,963  

Recoverable from reinsurers

    2,323,157       1,340,700  

Assets held in trust under coinsurance agreement

    25,494,700       -  

Agents' balances and due premiums

    1,418,916       1,485,305  

Deferred policy acquisition costs

    29,681,737       24,555,902  

Value of insurance business acquired

    5,185,870       5,526,645  

Other assets

    11,219,612       10,920,570  

Total assets

  $ 433,506,850     $ 391,127,674  

Liabilities and Shareholders' Equity

               

Policy liabilities

               

Policyholders' account balances

  $ 297,168,411     $ 292,909,762  

Future policy benefits

    56,261,507       49,663,099  

Policy claims

    1,102,257       1,148,513  

Other policy liabilities

    72,559       68,490  

Total policy liabilities

    354,604,734       343,789,864  

Funds withheld under coinsurance agreement

    29,285,119       -  

Deferred federal income taxes

    2,373,478       2,961,929  

Other liabilities

    8,118,268       3,123,702  

Total liabilities

    394,381,599       349,875,495  

Shareholders' equity

               

Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 issued as of December 31, 2018 and 2017 and 7,802,593 outstanding as of December 31, 2018 and 2017)

    80,502       80,502  

Additional paid-in capital

    28,684,598       28,684,598  

Treasury stock, at cost (247,580 shares as of December 31, 2018 and 2017)

    (893,947 )     (893,947 )

Accumulated other comprehensive income (loss)

    (2,576,631 )     4,760,951  

Accumulated earnings

    13,830,729       8,620,075  

Total shareholders' equity

    39,125,251       41,252,179  

Total liabilities and shareholders' equity

  $ 433,506,850     $ 391,127,674  

 

 

See notes to consolidated financial statements.

 

40

 

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

 

   

Years Ended December 31,

 
   

2018

   

2017

 

Revenues

               

Premiums

  $ 18,822,517     $ 15,855,686  

Net investment income

    19,609,386       16,710,408  

Net realized investment gains

    266,498       271,470  

Loss on other-than-temporary impairments

    -       (224,250 )

Service fees

    465,528       14,347  

Other income

    77,166       102,176  

Total revenues

    39,241,095       32,729,837  

Benefits, Claims and Expenses

               

Benefits and claims