10-Q 1 ftfc20190331_10q.htm FORM 10-Q ftfc20190331_10q.htm
 

 United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

[ X ]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange act of 1934

   
  For the quarterly period ended March 31, 2019

 

[     ]

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

  For the transition period From                                 to                                   .

 

Commission file number: 000-52613

 

FIRST TRINITY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Oklahoma    34-1991436
(State or other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification Number)

           

7633 East 63rd Place, Suite 230

Tulsa, Oklahoma 74133-1246

(Address of principal executive offices)

 

(918) 249-2438

(Registrant's telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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 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 number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Common stock .01 par value as of May 8, 2019: 7,802,593 shares

 

Securities registered pursuant to Section 12(b) of the Act:  None.

 

 

 
 

 

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED MARCH 31, 2019

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

Page Number

     

Item 1. Consolidated Financial Statements

   
     

Consolidated Statements of Financial Position as of March 31, 2019 (Unaudited) and December 31, 2018

  3
     

Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

  4
     

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

  5
     

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

  6
     

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited)

  7
     

Notes to Consolidated Financial Statements (Unaudited)

  9
     

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

  32
     

Item 4. Controls and Procedures

  54
     

Part II. OTHER INFORMATION

   
     

Item 1.  Legal Proceedings

  54
     

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

  55
     

Item 3.  Defaults upon Senior Securities

  55
     

Item 4.  Mine Safety Disclosures

  55
     

Item 5.  Other Information

  55
     

Item 6.  Exhibits

  55
     

Signatures

  56

 

Exhibit No. 31.1                                                       

Exhibit No. 31.2                                                       

Exhibit No. 32.1                                                       

Exhibit No. 32.2

Exhibit No. 101.INS

Exhibit No. 101.SCH

Exhibit No. 101.CAL

Exhibit No. 101.DEF

Exhibit No. 101.LAB

Exhibit No. 101.PRE

 

2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Financial Position

 

   

(Unaudited)

         
   

March 31, 2019

   

December 31, 2018

 

Assets

               

Investments

               

Available-for-sale fixed maturity securities at fair value (amortized cost: $137,457,653 and $134,414,517 as of March 31, 2019 and December 31, 2018, respectively)

  $ 139,272,690     $ 131,152,199  

Available-for-sale preferred stock at fair value (cost: $99,945 as of March 31, 2019 and December 31, 2018)

    100,400       90,580  

Equity securities at fair value (cost: $191,082 and $187,122 as of March 31, 2019 and December 31, 2018, respectively)

    216,273       198,668  

Mortgage loans on real estate

    143,182,286       130,049,610  

Investment real estate

    2,454,877       2,392,031  

Policy loans

    1,834,806       1,809,339  

Short-term investments

    1,810,524       896,371  

Other long-term investments

    63,185,895       59,255,477  

Total investments

    352,057,751       325,844,275  

Cash and cash equivalents

    69,295,720       29,665,605  

Accrued investment income

    3,182,581       2,672,978  

Recoverable from reinsurers

    2,472,167       2,323,157  

Assets held in trust under coinsurance agreement

    45,209,891       25,494,700  

Agents' balances and due premiums

    1,521,746       1,418,916  

Deferred policy acquisition costs

    32,520,354       29,681,737  

Value of insurance business acquired

    5,104,423       5,185,870  

Other assets

    12,338,834       11,219,612  

Total assets

  $ 523,703,467     $ 433,506,850  

Liabilities and Shareholders' Equity

               

Policy liabilities

               

Policyholders' account balances

  $ 333,310,416     $ 297,168,411  

Future policy benefits

    58,376,526       56,261,507  

Policy claims

    1,449,529       1,102,257  

Other policy liabilities

    77,897       72,559  

Total policy liabilities

    393,214,368       354,604,734  

Funds withheld under coinsurance agreement

    57,673,090       29,285,119  

Deferred federal income taxes

    3,516,056       2,373,478  

Other liabilities

    24,743,512       8,118,268  

Total liabilities

    479,147,026       394,381,599  

Shareholders' equity

               

Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 issued as of March 31, 2019 and December 31, 2018 and 7,802,593 outstanding as of March 31, 2019 and December 31, 2018)

    80,502       80,502  

Additional paid-in capital

    28,684,598       28,684,598  

Treasury stock, at cost (247,580 shares as of March 31, 2019 and December 31, 2018)

    (893,947 )     (893,947 )

Accumulated other comprehensive income (loss)

    1,432,363       (2,576,631 )

Accumulated earnings

    15,252,925       13,830,729  

Total shareholders' equity

    44,556,441       39,125,251  

Total liabilities and shareholders' equity

  $ 523,703,467     $ 433,506,850  

 

See notes to consolidated financial statements (unaudited).

  

3

 
 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Revenues

               

Premiums

  $ 5,530,806     $ 4,486,735  

Net investment income

    5,573,456       4,684,242  

Net realized investment gains (losses)

    53,720       (24,784 )

Service fees

    427,734       3,400  

Other income

    38,984       17,827  

Total revenues

    11,624,700       9,167,420  

Benefits, Claims and Expenses

               

Benefits and claims

               

Increase in future policy benefits

    2,151,600       1,439,591  

Death benefits

    1,632,780       1,562,056  

Surrenders

    350,407       227,669  

Interest credited to policyholders

    2,550,672       2,307,331  

Dividend, endowment and supplementary life contract benefits

    68,669       67,685  

Total benefits and claims

    6,754,128       5,604,332  

Policy acquisition costs deferred

    (3,615,460 )     (2,308,033 )

Amortization of deferred policy acquisition costs

    764,346       823,548  

Amortization of value of insurance business acquired

    81,447       89,611  

Commissions

    3,572,572       2,103,122  

Other underwriting, insurance and acquisition expenses

    2,265,575       1,643,393  

Total expenses

    3,068,480       2,351,641  

Total benefits, claims and expenses

    9,822,608       7,955,973  

Income before total federal income tax expense

    1,802,092       1,211,447  

Current federal income tax expense

    303,002       -  

Deferred federal income tax expense

    76,894       271,066  

Total federal income tax expense

    379,896       271,066  

Net income

  $ 1,422,196     $ 940,381  

Net income per common share basic and diluted

  $ 0.18     $ 0.12  

 

See notes to consolidated financial statements (unaudited).

 

4

 
 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Net income

  $ 1,422,196     $ 940,381  

Other comprehensive income (loss)

               

Total net unrealized gains (losses) arising during the period

    5,127,250       (4,380,790 )

Cumulative effect, adoption of accounting guidance for equity securities

    -       (68,508 )

Less net realized investment gains (losses) having no credit losses

    40,075       (1,170 )

Net unrealized gains (losses)

    5,087,175       (4,448,128 )

Less adjustment to deferred acquisition costs

    12,497       (75,690 )

Other comprehensive income (loss) before income tax expense (benefit)

    5,074,678       (4,372,438 )

Income tax expense (benefit)

    1,065,684       (918,212 )

Total other comprehensive income (loss)

    4,008,994       (3,454,226 )

Total comprehensive income (loss)

  $ 5,431,190     $ (2,513,845 )

 

See notes to consolidated financial statements (unaudited).

 

5

 
 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended March 31, 2019 and 2018

(Unaudited)

 

                           

Accumulated

                 
   

Common

   

Additional

           

Other

           

Total

 
   

Stock

   

Paid-in

   

Treasury

   

Comprehensive

   

Accumulated

   

Shareholders'

 
   

$.01 Par Value

   

Capital

   

Stock

   

Income

   

Earnings

   

Equity

 

Balance as of January 1, 2018

  $ 80,502     $ 28,684,598     $ (893,947 )   $ 4,760,951     $ 8,620,075     $ 41,252,179  

Comprehensive loss:

                                               

Net income

    -       -       -       -       940,381       940,381  

Cumulative effect, adoption of accounting guidance for equity securities

    -       -       -       -       68,508       68,508  

Other comprehensive loss

    -       -       -       (3,454,226 )     -       (3,454,226 )

Balance as of March 31, 2018

  $ 80,502     $ 28,684,598     $ (893,947 )   $ 1,306,725     $ 9,628,964     $ 38,806,842  
                                                 

Balance as of January 1, 2019

  $ 80,502     $ 28,684,598     $ (893,947 )   $ (2,576,631 )   $ 13,830,729     $ 39,125,251  

Comprehensive income:

                                               

Net income

    -       -       -       -       1,422,196       1,422,196  

Other comprehensive income

    -       -       -       4,008,994       -       4,008,994  

Balance as of March 31, 2019

  $ 80,502     $ 28,684,598     $ (893,947 )   $ 1,432,363     $ 15,252,925     $ 44,556,441  

 

See notes to consolidated financial statements (unaudited).

 

6

 
 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2019

   

2018

 

Operating activities

               

Net income

  $ 1,422,196     $ 940,381  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Provision for depreciation

    36,372       36,372  

Accretion of discount on investments

    (1,167,169 )     (837,220 )

Net realized investment losses (gains)

    (53,720 )     24,784  

Amortization of policy acquisition cost

    764,346       823,548  

Policy acquisition cost deferred

    (3,615,460 )     (2,308,033 )

Amortization of loan origination fees

    7,460       13,365  

Amortization of value of insurance business acquired

    81,447       89,611  

Allowance for mortgage loan losses

    33,217       41,203  

Provision for deferred federal income tax expense

    76,894       271,066  

Interest credited to policyholders

    2,550,672       2,307,331  

Change in assets and liabilities:

               

Policy loans

    (25,467 )     12,855  

Short-term investments

    (914,153 )     (1,995,943 )

Accrued investment income

    (509,603 )     (79,480 )

Recoverable from reinsurers

    (149,010 )     167,449  

Assets held in trust under coinsurance agreement

    (19,715,191 )     -  

Agents' balances and due premiums

    (102,830 )     70,148  

Other assets (excludes change in receivable for securities sold of $33,600 and ($303,014) in 2019 and 2018, respectively)

    (1,152,822 )     (228,358 )

Future policy benefits

    2,115,019       1,433,136  

Policy claims

    347,272       65,022  

Other policy liabilities

    5,338       2,139  

Other liabilities (exclude change in payable for securities purchased of ($124,160) and ($132,961) in 2019 and 2018, respectively)

    16,749,404       1,392,743  

Net cash provided by (used in) operating activities

    (3,215,788 )     2,242,119  
                 

Investing activities

               

Purchases of fixed maturity securities

    (6,536,434 )     (6,885,843 )

Maturities of fixed maturity securities

    2,600,000       1,950,000  

Sales of fixed maturity securities

    799,846       629,791  

Purchases of equity securities

    (27,784 )     (968 )

Sales of equity securities

    -       412  

Joint venture distribution

    23,824       -  

Purchases of mortgage loans

    (21,818,443 )     (16,247,647 )

Payments on mortgage loans

    8,694,982       6,810,769  

Purchases of other long-term investments

    (5,629,292 )     (4,737,503 )

Payments on other long-term investments

    2,850,460       2,711,668  

Net change in receivable and payable for securities sold and purchased

    (90,560 )     (435,975 )

Net cash used in investing activities

    (19,133,401 )     (16,205,296 )
                 

Financing activities

               

Policyholders' account deposits

    70,719,584       7,433,520  

Policyholders' account withdrawals

    (8,740,280 )     (7,160,631 )

Net cash provided by financing activities

    61,979,304       272,889  
                 

Increase (decrease) in cash and cash equivalents

    39,630,115       (13,690,288 )

Cash and cash equivalents, beginning of period

    29,665,605       31,496,159  

Cash and cash equivalents, end of period

  $ 69,295,720     $ 17,805,871  

 

See notes to consolidated financial statements (unaudited).

 

7

 

 

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

Supplemental Disclosure – Cash and Non-Cash Impact on Operating, Investing and Financing Activities

 

 

During 2019, the Company foreclosed on one residential mortgage loan of real estate totaling $99,218 and transferred that property to investment real estate that is now held for sale.

 

In conjunction with this foreclosure, the non-cash impact on investing activities is summarized as follows:

 

   

Three Months Ended

 
   

March 31, 2019

 

Reductions in mortgage loans due to foreclosure

  $ 99,218  

Investment real estate held-for-sale acquired through foreclosure

    (99,218 )

Net cash used in investing activities

  $ -  

 

See notes to consolidated financial statements (unaudited).

 

8

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

 

1. Organization and Significant Accounting Policies

 

Nature of Operations

 

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 and annuity products 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 and annuity products. The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense product 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

 

The Company raised $1,450,000 from two private placement stock offerings 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.

 

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

 

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.

 

9

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included.

 

The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ended December 31, 2019 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to consolidated financial statements prepared in accordance with U.S. GAAP, but which is not required for interim reporting purposes, has been condensed or omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 2018.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts and operations of the Company and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.

 

Reclassifications

 

Certain reclassifications have been made in the prior year and prior quarter financial statements to conform to current year and current quarter classifications. These reclassifications had no effect on previously reported net income or shareholders' equity.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.

 

Common Stock

 

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

 

Treasury Stock

 

Treasury stock, representing shares of the Company’s common stock that have been reacquired after having been issued and fully paid, is recorded at the reacquisition cost and the shares are no longer outstanding.

 

10

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Subsequent Events

 

Management has evaluated all events subsequent to March 31, 2019 through the date that these financial statements have been issued.

 

Recent Accounting Pronouncements

 

Leases

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued updated guidance (Accounting Standards Update 2018-11) to require lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months. The updated guidance retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease). Both lease classifications require the lessee to record the right-of-use asset and the lease liability based upon the present value of cash flows. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The accounting by lessors is not significantly changed by the updated guidance. The updated guidance requires expanded qualitative and quantitative disclosures, including additional information about the amounts recorded in the financial statements.

 

In July 2018, the FASB amended the updated guidance on leases that was issued in February 2016 (Accounting Standards Update 2018-11) and provided an additional transition method with which to adopt the updated guidance. Under the additional transition method, entities may elect to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. Consequently, if this transition method is elected, an entity’s reporting for the comparative periods prior to adoption presented in the financial statements would continue to be in accordance with current lease guidance. The amendments also provide lessors with a practical expedient to combine non-lease components (e.g., a fee for common area maintenance when leasing office space) with the associated lease component rather than accounting for those components separately if certain criteria are met. The updated guidance requires entities to recognize a right-of-use asset and lease liability equal to the present value of lease payments for all leases other than those that are less than one year. The updated guidance, as amended, is effective for reporting periods beginning after December 15, 2018.

 

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 adopted this guidance in first quarter 2019. The adoption of this guidance in 2019 did not 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 (Accounting Standards Update 2016-13) for the accounting for credit losses for financial instruments. The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance recoverables, including structured settlements that are recorded as part of reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.

 

11

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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

 

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

 

Intangibles - Goodwill and Other

 

In January 2017, the FASB issued updated guidance (Accounting Standards Update 2017-04) that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge by comparing a reporting unit’s fair value with its carrying amount and recognizing an impairment charge for the excess of the carrying amount over estimated fair value (i.e., Step 1 of current guidance). The implied fair value of goodwill is currently determined in Step 2 by deducting the fair value of all assets and liabilities of the reporting unit (determined in the same manner as a business combination) from the reporting unit’s fair value as determined in Step 1 (including any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unit in Step 1). The updated guidance requires an entity to perform its annual, or interim, impairment test by either: (1) an initial qualitative assessment of factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact a reporting unit’s fair value and lead to the determination that it is more likely than not that the reporting unit’s fair value is less than its carrying value, including goodwill (consistent with current guidance), or (2) applying Step 1.

 

The updated guidance is effective for reporting 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 is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Targeted Improvements to the Accounting for Long-Duration Contracts

 

In August 2018, the FASB issued updated guidance (Accounting Standards Update 2018-12) 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.

 

12

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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

 

In August 2018, the FASB issued amendments (Accounting Standards Update 2018-13) 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.

 

13

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

 

2. Investments

 

Investments in fixed maturity and preferred stock available-for-sale and equity securities as of March 31, 2019 and December 31, 2018 are summarized as follows:

 

           

Gross

   

Gross

         
   

Amortized Cost

   

Unrealized

   

Unrealized

   

Fair

 
   

or Cost

   

Gains

   

Losses

   

Value

 
   

March 31, 2019 (Unaudited)

 

Fixed maturity securities

                               

U.S. government and U.S. government agencies

  $ 1,801,279     $ 2,054     $ 58,250     $ 1,745,083  

States and political subdivisions

    9,277,644       364,811       6,915       9,635,540  

Residential mortgage-backed securities

    22,252       26,041       -       48,293  

Corporate bonds

    103,183,030       2,633,218       1,107,842       104,708,406  

Asset-backed

    253,519       8,091       -       261,610  

Foreign bonds

    22,919,929       415,931       462,102       22,873,758  

Total fixed maturity securities

    137,457,653       3,450,146       1,635,109       139,272,690  
                                 

Preferred stock

    99,945       855       400       100,400  
                                 

Equity securities

                               

Mutual funds

    91,982       -       11,731       80,251  

Corporate common stock

    99,100       36,922       -       136,022  

Total equity securities

    191,082       36,922       11,731       216,273  

Total fixed maturity, preferred stock and equity securities

  $ 137,748,680     $ 3,487,923     $ 1,647,240     $ 139,589,363  

 

   

December 31, 2018

 

Fixed maturity securities

                               

U.S. government and U.S. government agencies

  $ 2,793,681     $ 2,769     $ 91,739     $ 2,704,711  

States and political subdivisions

    9,295,973       215,000       32,941       9,478,032  

Residential mortgage-backed securities

    23,694       27,461       -       51,155  

Corporate bonds

    100,360,468       823,991       3,220,268       97,964,191  

Asset-backed

    253,598       7,820       -       261,418  

Foreign bonds

    21,687,103       75,525       1,069,936       20,692,692  

Total fixed maturity securities

    134,414,517       1,152,566       4,414,884       131,152,199  
                                 

Preferred stock

    99,945       -       9,365       90,580  
                                 

Equity securities

                               

Mutual funds

    91,981       -       17,082       74,899  

Corporate common stock

    95,141       28,628       -       123,769  

Total equity securities

    187,122       28,628       17,082       198,668  

Total fixed maturity, preferred stock and equity securities

  $ 134,701,584     $ 1,181,194     $ 4,441,331     $ 131,441,447  

 

14

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

  

2. Investments (continued)

 

All securities in an unrealized loss position as of the financial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position as of March 31, 2019 and December 31, 2018 are summarized as follows:

 

           

Unrealized

   

Number of

 
   

Fair Value

   

Loss

   

Securities

 
   

March 31, 2019 (Unaudited)

 

Fixed maturity securities

                       

Less than 12 months in an unrealized loss position

                       

States and political subdivisions

  $ 486,296     $ 6,915       3  

Corporate bonds

    15,199,095       290,145       50  

Foreign bonds

    4,516,082       158,214       17  

Total less than 12 months in an unrealized loss position

    20,201,473       455,274       70  

More than 12 months in an unrealized loss position

                       

U.S. government and U.S. government agencies

    1,621,687       58,250       6  

Corporate bonds

    14,750,863       817,697       58  

Foreign bonds

    5,226,329       303,888       15  

Total more than 12 months in an unrealized loss position

    21,598,879       1,179,835       79  

Total fixed maturity securities in an unrealized loss position

    41,800,352       1,635,109       149  

Preferred stock, less than 12 months in an unrealized loss position

    49,600       400       1  

Equity securities (mutual funds), less than 12 months in an unrealized loss position

    80,249       11,731       1  

Total fixed maturity, preferred stock and equity securities in an unrealized loss position

  $ 41,930,201     $ 1,647,240     $ 151  

 

   

December 31, 2018

 

Fixed maturity securities

                       

Less than 12 months in an unrealized loss position

                       

U.S. government and U.S. government agencies

  $ 991,660     $ 2,419       1  

States and political subdivisions

    1,066,743       7,948       6  

Corporate bonds

    58,506,980       2,154,898       215  

Foreign bonds

    14,554,291       852,120       50  

Total less than 12 months in an unrealized loss position

    75,119,674       3,017,385       272  

More than 12 months in an unrealized loss position

                       

U.S. government and U.S. government agencies

    1,590,655       89,320       6  

States and political subdivisions

    518,969       24,993       4  

Corporate bonds

    7,107,831       1,065,370       30  

Foreign bonds

    1,376,680       217,816       5  

Total more than 12 months in an unrealized loss position

    10,594,135       1,397,499       45  

Total fixed maturity securities in an unrealized loss position

    85,713,809       4,414,884       317  

Preferred stock, less than 12 months in an unrealized loss position

    90,580       9,365       2  

Equity securities (mutual funds), less than 12 months in an unrealized loss position

    74,899       17,082       1  

Total fixed maturity, preferred stock and equity securities in an unrealized loss position

  $ 85,879,288     $ 4,441,331     $ 320  

 

15

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

  

2. Investments (continued)

 

As of March 31, 2019, the Company held 149 available-for-sale fixed maturity securities with an unrealized loss of $1,635,109, fair value of $41,800,352 and amortized cost of $43,435,461. These unrealized losses were primarily due to market interest rate movements in the bond market as of March 31, 2019. The ratio of the fair value to the amortized cost of these 149 securities is 96%.

 

As of December 31, 2018, the Company held 317 available-for-sale fixed maturity securities with an unrealized loss of $4,414,884, fair value of $85,713,809 and amortized cost of $90,128,693. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2018. The ratio of the fair value to the amortized cost of these 317 securities is 95%.

 

As of March 31, 2019, the Company held one equity security with an unrealized loss of $11,731, fair value of $80,249 and cost of $91,980. The ratio of fair value to cost of this security is 87%.

 

As of December 31, 2018, the Company held one equity security with an unrealized loss of $17,082, fair value of $74,899 and cost of $91,981. The ratio of fair value to cost of this security is 81%.

 

As of March 31, 2019, the Company held one preferred stock with an unrealized loss of $400, fair value of $49,600 and cost of $50,000. The ratio of fair value to cost of this preferred stock is 99%.

 

As of December 31, 2018, the Company held two preferred stocks with an unrealized loss of $9,365, fair value of $90,580 and cost of $99,945. The ratio of fair value to cost of these two preferred stocks is 91%.

 

Fixed maturity securities were 96% investment grade as rated by Standard & Poor’s as of March 31, 2019 and December 31, 2018.

 

The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value based on all of the factors considered. Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value.

 

For any fixed maturity securities that are other-than-temporarily impaired, the Company determines the portion of the other-than-temporary impairment that is credit-related and the portion that is related to other factors. The credit-related portion is the difference between the expected future cash flows and the amortized cost basis of the fixed maturity security, and that difference is charged to earnings. The non-credit-related portion representing the remaining difference to fair value is recognized in other comprehensive income (loss). Only in the case of a credit-related impairment where management has the intent to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its cost basis, is a fixed maturity security adjusted to fair value and the resulting losses recognized in realized gains (losses) in the consolidated statements of operations. Any other-than-temporary impairments on equity securities are recorded in the consolidated statements of operations in the periods incurred as the difference between fair value and cost.

 

There were no impairments during the three months ended March 31, 2019 and 2018.

 

Management believes that the Company will fully recover its cost basis in the securities held as of March 31, 2019, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature.  The remaining temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment. 

 

16

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

2. Investments (continued)

 

Net unrealized gains included in other comprehensive income (loss) for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized as of March 31, 2019 and December 31, 2018, are summarized as follows:

 

   

(Unaudited)

         
   

March 31, 2019

   

December 31, 2018

 

Unrealized appreciation (depreciation) on available-for-sale securities

  $ 1,815,492     $ (3,271,683 )

Adjustment to deferred acquisition costs

    (2,373 )     10,124  

Deferred income taxes

    (380,756 )     684,928  

Net unrealized appreciation (depreciation) on available-for-sale securities

  $ 1,432,363     $ (2,576,631 )

 

The Company’s investment in lottery prize cash flows categorized as other long-term investments in the statement of financial position was $63,185,895 and $59,255,477 as of March 31, 2019 and December 31, 2018, respectively. The lottery prize cash flows are assignments of the future rights from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries.

 

The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of March 31, 2019, by contractual maturity, are summarized as follows:

 

   

March 31, 2019 (Unaudited)

 
   

Fixed Maturity Available-For-Sale Securities

   

Other Long-Term Investments

 
   

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 

Due in one year or less

  $ 3,038,344     $ 3,062,717     $ 8,952,216     $ 9,099,748  

Due after one year through five years

    28,377,978       28,984,355       27,610,745       30,380,461  

Due after five years through ten years

    43,330,357       43,678,550       18,314,803       23,039,451  

Due after ten years

    62,688,722       63,498,775       8,308,131       13,517,451  

Due at multiple maturity dates

    22,252       48,293       -       -  
    $ 137,457,653     $ 139,272,690     $ 63,185,895     $ 76,037,111  

 

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

17

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

2. Investments (continued)

 

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity securities available-for-sale and equity securities for the three months ended March 31, 2019 and 2018 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

 
   

2019

   

2018

   

2019

   

2018

 

Proceeds

  $ 3,399,846     $ 2,579,791     $ -     $ 412  

Gross realized gains

    44,555       6,101       -       106  

Gross realized losses

    (4,480 )     (7,271 )     -       -  

 

The accumulated change in unrealized investment gains (losses) for fixed maturity and preferred stock available-for-sale for the three months ended March 31, 2019 and 2018 and the amount of net realized investment gains (losses) on fixed maturity securities available-for-sale and equity securities for the three months ended March 31, 2019 and 2018 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2019

   

2018

 

Change in unrealized investment gains (losses):

               

Available-for-sale securities:

               

Fixed maturity securities

  $ 5,077,355     $ (4,375,840 )

Preferred stock

    9,820       (3,780 )

Net realized investment gains (losses):

               

Available-for-sale securities:

               

Fixed maturity securities

    40,075       (1,170 )

Equity securities, sale of securities

    -       106  

Equity securities, changes in fair value

    13,645       (23,720 )

 

18

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

2. Investments (continued)

 

Major categories of net investment income for the three months ended March 31, 2019 and 2018 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2019

   

2018

 

Fixed maturity securities

  $ 1,529,476     $ 1,630,474  

Preferred stock and equity securities

    34,218       5,083  

Other long-term investments

    1,150,757       970,056  

Mortgage loans

    3,182,848       2,488,413  

Policy loans

    32,273       29,083  

Real estate

    64,296       94,003  

Short-term and other investments

    244,840       41,742  

Gross investment income

    6,238,708       5,258,854  

Investment expenses

    (665,252 )     (574,612 )

Net investment income

  $ 5,573,456     $ 4,684,242  

 

TLIC and FBLIC are required to hold assets on deposit with various state insurance departments for the benefit of policyholders and other special deposits in accordance with statutory rules and regulations. As of March 31, 2019 and December 31, 2018, these required deposits, included in investment assets, had amortized costs that totaled $4,382,763 and $4,376,463, respectively. As of March 31, 2019 and December 31, 2018, these required deposits had fair values that totaled $4,352,112 and $4,292,657, respectively.

 

The Company’s mortgage loans by property type as of March 31, 2019 and December 31, 2018 are summarized as follows:

 

   

(Unaudited)

         
   

March 31, 2019

   

December 31, 2018

 

Residential mortgage loans

  $ 132,867,267     $ 120,108,297  

Commercial mortgage loans by property type

               

Apartment

    2,304,803       1,816,870  

Industrial

    1,146,212       1,156,157  

Lodging

    111,985       112,494  

Office building

    3,047,332       2,348,639  

Retail

    3,704,687       4,507,153  

Total commercial mortgage loans by property type

    10,315,019       9,941,313  

Total mortgage loans

  $ 143,182,286     $ 130,049,610  

 

There were 15 loans with a remaining principal balance of $3,339,379 that were more than 90 days past due as of March 31, 2019. There were 11 loans with a remaining principal balance of $2,233,575 that were more than 90 days past due as of December 31, 2018.

 

There were no mortgage loans in default and in the foreclosure process as of March 31, 2019 and December 31, 2018.

 

19

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

2. Investments (continued)

 

The Company’s investment real estate as of March 31, 2019 and December 31, 2018 is summarized as follows:

 

   

(Unaudited)

         
   

March 31, 2019

   

December 31, 2018

 

Land - held for the production of income

  $ 213,160     $ 213,160  

Land - held for investment

    745,155       745,155  

Total land

    958,315       958,315  

Building - held for the production of income

    2,267,557       2,267,557  

Less - accumulated depreciation

    (1,377,043 )     (1,340,671 )

Buildings net of accumulated depreciation

    890,514       926,886  

Residential real estate - held for sale

    606,048       506,830  

Total residential real estate

    606,048       506,830  

Investment real estate, net of accumulated depreciation

  $ 2,454,877     $ 2,392,031  

 

TLIC owns approximately six and one-half acres of land located in Topeka, Kansas that includes a 20,000 square foot office building on approximately one-fourth of this land. This building and land on one of the four lots is held for the production of income. The other three lots of land owned in Topeka, Kansas are held for investment. In addition, FBLIC owns one-half acre of undeveloped land located in Jefferson City, Missouri.

 

During 2019, the Company foreclosed on one residential mortgage loans of real estate totaling $99,218 and transferred that property to investment real estate that is now held for sale.

 

 

 

3. Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) on the measurement date.  The Company also considers the impact on fair value of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity.

 

The Company holds fixed maturity, preferred stock and equity securities that are measured and reported at fair market value on the statement of financial position. The Company determines the fair market values of its financial instruments based on the fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value, as follows:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets include preferred stock and equity securities that are traded in an active exchange market.

 

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

 

20

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

3. Fair Value Measurements (continued)

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company’s Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments where independent pricing information was not able to be obtained for a significant portion of the underlying assets.

 

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in and out of the Level 3 category as of the beginning of the period in which the reclassifications occur.

 

21

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

3. Fair Value Measurements (continued)

 

The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 is summarized as follows:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

March 31, 2019 (Unaudited)

 

Fixed maturity securities, available-for-sale

                               

U.S. government and U.S. government agencies

  $ -     $ 1,745,083     $ -     $ 1,745,083  

States and political subdivisions

    -       9,635,540       -       9,635,540  

Residential mortgage-backed securities

    -       48,293       -       48,293  

Corporate bonds

    -       104,708,406       -       104,708,406  

Asset-backed

            261,610               261,610  

Foreign bonds

    -       22,873,758       -       22,873,758  

Total fixed maturity securities

  $ -     $ 139,272,690     $ -     $ 139,272,690  
                                 

Preferred stock, available-for-sale

  $ 100,400     $ -     $ -     $ 100,400  
                                 

Equity securities

                               

Mutual funds

  $ -     $ 80,251     $ -     $ 80,251  

Corporate common stock

    68,026       -       67,996       136,022  

Total equity securities

  $ 68,026     $ 80,251     $ 67,996     $ 216,273  

 

   

December 31, 2018

 

Fixed maturity securities, available-for-sale

                               

U.S. government and U.S. government agencies

  $ -     $ 2,704,711     $ -     $ 2,704,711  

States and political subdivisions

    -       9,478,032       -       9,478,032  

Residential mortgage-backed securities

    -       51,155       -       51,155  

Corporate bonds

    -       97,964,191       -       97,964,191  

Asset-backed

    -       261,418       -       261,418  

Foreign bonds

    -       20,692,692       -       20,692,692  

Total fixed maturity securities

  $ -     $ 131,152,199     $ -     $ 131,152,199  
                                 

Preferred stock, available-for-sale

  $ 90,580     $ -     $ -     $ 90,580  
                                 

Equity securities

                               

Mutual funds

  $ -     $ 74,899     $ -     $ 74,899  

Corporate common stock

    59,733       -       64,036       123,769  

Total equity securities

  $ 59,733     $ 74,899     $ 64,036     $ 198,668  

 

As of March 31, 2019 and December 31, 2018, Level 3 financial instruments consisted of two private placement common stocks that have no active trading and a joint venture investment with a mortgage loan originator.

 

These private placement common stocks represent investments in small insurance holding companies. The fair value for these securities was determined through the use of unobservable assumptions about market participants. The Company has assumed a willing market participant would purchase the securities for the same price as the Company paid until such time as these small insurance holding companies commence significant operations. The joint venture investment with a mortgage loan originator is accounted for under the equity method of accounting.

 

22

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

3. Fair Value Measurements (continued)

 

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

 

The Company analyzes market valuations received to verify reasonableness and to understand the key assumptions used and the sources. Since the fixed maturity securities owned by the Company do not trade on a daily basis, the third party investment service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing. As the fair value estimates of the Company’s fixed maturity securities are based on observable market information rather than market quotes, the estimates of fair value on these fixed maturity securities are included in Level 2 of the hierarchy. The Company’s Level 2 investments include obligations of U.S. government, U.S. government agencies, state and political subdivisions, mortgage-backed securities, corporate bonds, asset-backed and foreign bonds.

 

The Company’s preferred stock is included in Level 1 and equity securities are included in Level 1 and Level 2 and the private placement common stocks and joint venture investment are included in Level 3. Level 1 for the preferred stock and those equity securities classified as such is appropriate since they trade on a daily basis, are based on quoted market prices in active markets and are based upon unadjusted prices. Level 2 for those equity securities classified as such is appropriate since they are not actively traded.

 

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

 

The change in the fair value of the Company’s Level 3 equity securities available-for-sale for the three months ended March 31, 2019 and March 31, 2018 is summarized as follows:

 

   

Unaudited

 
   

Three Months Ended March 31,

 
   

2019

   

2018

 
                 

Beginning balance

  $ 64,036     $ 61,500  

Joint venture net income

    27,784       -  

Joint venture distribution

    (23,824 )     -  

Ending balance

  $ 67,996     $ 61,500  

 

23

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

3. Fair Value Measurements (continued)

 

The carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of March 31, 2019 and December 31, 2018, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:

 

Financial instruments disclosed, but not carried, at fair value:

 

   

Carrying

   

Fair

                         
   

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 
   

March 31, 2019 (Unaudited)

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial

  $ 10,315,019     $ 10,043,300     $ -     $ -     $ 10,043,300  

Residential

    132,867,267       129,813,959       -       -       129,813,959  

Policy loans

    1,834,806       1,834,806       -       -       1,834,806  

Short-term investments

    1,810,524       1,810,524       1,810,524       -       -  

Other long-term investments

    63,185,895       76,037,111       -       -       76,037,111  

Cash and cash equivalents

    69,295,720       69,295,720       69,295,720       -       -  

Accrued investment income

    3,182,581       3,182,581       -       -       3,182,581  

Total financial assets

  $ 282,491,812     $ 292,018,001     $ 71,106,244     $ -     $ 220,911,757  

Financial liabilities

                                       

Policyholders' account balances

  $ 333,310,416     $ 302,901,926     $ -     $ -     $ 302,901,926  

Policy claims

    1,449,529       1,449,529       -       -       1,449,529  

Total financial liabilities

  $ 334,759,945     $ 304,351,455     $ -     $ -     $ 305,351,455  

 

   

December 31, 2018

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial

  $ 9,941,313     $ 9,698,226     $ -     $ -     $ 9,698,226  

Residential

    120,108,297       115,788,967       -       -       115,788,967  

Policy loans

    1,809,339       1,809,339       -       -       1,809,339  

Short-term investments

    896,371       896,371       896,371       -       -  

Other long-term investments

    59,255,477       69,641,358       -       -       69,641,358  

Cash and cash equivalents

    29,665,605       29,665,605       29,665,605       -       -  

Accrued investment income

    2,672,978       2,672,978       -       -       2,672,978  

Total financial assets

  $ 224,349,380     $ 230,172,844     $ 30,561,976     $ -     $ 199,610,868  

Financial liabilities

                                       

Policyholders' account balances

  $ 297,168,411     $ 259,247,412     $ -     $ -     $ 259,247,412  

Policy claims

    1,102,257       1,102,257       -       -       1,102,257  

Total financial liabilities

  $ 298,270,668     $ 260,349,669     $ -     $ -     $ 260,349,669  

 

24

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

3. Fair Value Measurements (continued)

 

The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment was required to interpret market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.

 

The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying financial statements and notes thereto:

 

Fixed Maturity Securities, Preferred Stock and Equity Securities

 

The fair value of fixed maturity securities and equity securities are based on the principles previously discussed as Level 1, Level 2 and Level 3.

 

Mortgage Loans on Real Estate

 

The fair values for mortgage loans are estimated using discounted cash flow analyses. For residential mortgage loans, the discount rate used was indexed to the LIBOR yield curve adjusted for an appropriate credit spread. For commercial (includes apartment, industrial, lodging, office building and retail) mortgage loans, the discount rate used was assumed to be the interest rate on the last commercial mortgage acquired by the Company.

 

Cash and Cash Equivalents, Short-Term Investments, Accrued Investment Income and Policy Loans

 

The carrying value of these financial instruments approximates their fair values. Cash and cash equivalents and short-term investments are included in Level 1 of the fair value hierarchy due to their highly liquid nature.

 

Other Long-Term Investments

 

Other long-term investments are comprised of lottery prize receivables and fair value is derived by using a discounted cash flow approach. Projected cash flows are discounted using the average FTSE Pension Liability Index in effect at the end of each period.

 

Investment Contracts – Policyholders’ Account Balances

 

The fair value for liabilities under investment-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach.  Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and the nonperformance risk of the liabilities.

 

The fair values for insurance contracts other than investment-type contracts are not required to be disclosed.

 

Policy Claims

 

The carrying amounts reported for these liabilities approximate their fair value.

 

25

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

  

 

4. Segment Data

 

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. These segments as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2019

   

2018

 

Revenues:

               

Life insurance operations

  $ 6,471,048     $ 5,176,172  

Annuity operations

    4,970,032       3,878,137  

Corporate operations

    183,620       113,111  

Total

  $ 11,624,700     $ 9,167,420  

Income before income taxes:

               

Life insurance operations

  $ 197,559     $ 171,519  

Annuity operations

    1,502,612       957,389  

Corporate operations

    101,921       82,539  

Total

  $ 1,802,092     $ 1,211,447  

Depreciation and amortization expense:

               

Life insurance operations

  $ 830,461     $ 692,390  

Annuity operations

    59,164       270,506  

Total

  $ 889,625     $ 962,896  

 

   

(Unaudited)

         
   

March 31, 2019

   

December 31, 2018

 

Assets:

               

Life insurance operations

  $ 74,435,037     $ 69,756,013  

Annuity operations

    443,558,892       357,797,728  

Corporate operations

    5,709,538       5,953,109  

Total

  $ 523,703,467     $ 433,506,850  

 

 

 

5. Federal Income Taxes

 

The provision for federal income taxes is based on the asset and liability method of accounting for income taxes. Deferred income taxes are provided for the cumulative temporary differences between balances of assets and liabilities determined under GAAP and the balances using tax bases.

 

The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, has not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions.  The 2015 through 2018 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.

 

26

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

 

6. Legal Matters and Contingent Liabilities

 

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 March 31, 2019 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.

 

Guaranty fund assessments, brought about by the insolvency of life and health insurers, are levied at the discretion of the various state guaranty fund associations to cover association obligations. In most states, guaranty fund assessments may be taken as a credit against premium taxes, typically over a five-year period.

 

27

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

 

7. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)

 

The changes in the components of the Company’s accumulated other comprehensive income (loss) for the three months ended March 31, 2019 and 2018 are summarized as follows:

 

   

Three Months Ended March 31, 2019 and 2018 (Unaudited)

 
   

Unrealized

                 
   

Appreciation

           

Accumulated

 
   

(Depreciation) on

   

Adjustment to

   

Other

 
   

Available-For-Sale

   

Deferred Acquisition

   

Comprehensive

 
   

Securities

   

Costs

   

Income (Loss)

 

Balance as of January 1, 2019

  $ (2,584,643 )   $ 8,012     $ (2,576,631 )

Other comprehensive income before reclassifications, net of tax

    4,050,528       (9,874 )     4,040,654  

Less amounts reclassified from accumulated other comprehensive income having no credit losses, net of tax

    31,660       -       31,660  

Other comprehensive income

    4,018,868       (9,874 )     4,008,994  

Balance as of March 31, 2019

  $ 1,434,225     $ (1,862 )   $ 1,432,363  
                         

Balance as of January 1, 2018

  $ 4,843,061     $ (82,110 )   $ 4,760,951  

Other comprehensive loss before reclassifications, net of tax

    (3,514,945 )     59,795       (3,455,150 )

Less amounts reclassified from accumulated other comprehensive loss having no credit losses, net of tax

    (924 )     -       (924 )

Other comprehensive loss

    (3,514,021 )     59,795       (3,454,226 )

Balance as of March 31, 2018

  $ 1,329,040     $ (22,315 )   $ 1,306,725  

 

The pretax components of the Company’s other comprehensive income (loss) and the related income tax expense for each component for the three months ended March 31, 2019 and 2018 are summarized as follows:

 

           

Income Tax

         
   

Pretax

   

Expense

   

Net of Tax

 
   

Three Months Ended March 31, 2019 (Unaudited)

 

Other comprehensive income:

                       

Change in net unrealized gains on available-for-sale securities:

                       

Unrealized holding gains arising during the period

  $ 5,127,250     $ 1,076,722     $ 4,050,528  

Reclassification adjustment for net losses included in operations having no credit losses

    40,075       8,415       31,660  

Net unrealized gains on investments

    5,087,175       1,068,307       4,018,868  

Adjustment to deferred acquisition costs

    (12,497 )     (2,623 )     (9,874 )

Total other comprehensive income

  $ 5,074,678     $ 1,065,684     $ 4,008,994  

 

   

Three Months Ended March 31, 2018 (Unaudited)

 

Other comprehensive loss:

                       

Change in net unrealized losses on available-for-sale securities:

                       

Unrealized holding losses arising during the period

  $ (4,449,298 )   $ (934,353 )   $ (3,514,945 )

Reclassification adjustment for net losses included in operations having no credit losses

    (1,170 )     (246 )     (924 )

Net unrealized losses on investments

    (4,448,128 )     (934,107 )     (3,514,021 )

Adjustment to deferred acquisition costs

    75,690       15,895       59,795  

Total other comprehensive loss

  $ (4,372,438 )   $ (918,212 )   $ (3,454,226 )

 

28

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

7. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss) (continued)

 

Realized gains and losses on the sales of investments are determined based upon the specific identification method and include provisions for other-than-temporary impairments where appropriate.

 

The pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income (loss) to the Company’s consolidated statement of operations for the three months ended March 31, 2019 and 2018 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 

Reclassification Adjustments

 

2019

   

2018

 

Unrealized gains (losses) on available-for-sale securities having no credit losses:

               

Realized gains (losses) on sales of securities (a)

  $ 40,075     $ (1,170 )

Income tax expense (benefit) (b)

    8,415       (246 )

Total reclassification adjustments

  $ 31,660     $ (924 )

 

(a) These items appear within net realized investment gains (losses) in the consolidated statements of operations.

(b) These items appear within federal income taxes in the consolidated statements of operations.

 

 

 

8. Allowance for Loan Losses from Mortgage Loans on Real Estate

 

The 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 the Company’s judgment, the known and inherent credit losses existing in the mortgage loan portfolio. The allowance, in the judgment of the Company, is necessary to reserve for estimated loan losses inherent in the 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 the Company utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the mortgage loan portfolio, the economy and changes in interest rates. The Company’s 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.

 

Mortgage loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the mortgage loan agreement. Factors considered by the Company 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.

 

The Company determines 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 and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis.

 

29

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

  

8. Allowance for Loan Losses from Mortgage Loans on Real Estate (continued)

 

As of March 31, 2019, $825,244 of independent residential mortgage loans on real estate are held in escrow by a third party for the benefit of the Company.   As of March 31, 2019, $569,604 of that escrow amount is available to the Company as additional collateral on $5,713,102 of advances to the loan originator. The remaining March 31, 2019 escrow amount of $255,640 is available to the Company as additional collateral on its investment of $51,127,965 in residential mortgage loans on real estate. In addition, the Company has an additional $457,383 allowance for possible loan losses in the remaining $92,054,321 of investments in mortgage loans on real estate as of March 31, 2019.

 

As of December 31, 2018, $823,645 of independent residential mortgage loans on real estate are held in escrow by a third party for the benefit of the Company.   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. In addition, the Company has an additional $424,166 allowance for possible loan losses in the remaining $85,081,139 of investments in mortgage loans on real estate as of December 31, 2018.

 

The balances of and changes in the Company’s credit losses related to mortgage loans on real estate as of and for the three months ended March 31, 2019 and 2018 are summarized as follows (excluding $51,127,965 and $35,129,998 of mortgage loans on real estate as of March 31, 2019 and 2018, respectively, with one loan originator where independent mortgage loan balances are held in escrow by a third party for the benefit of the Company):

 

   

As of and for the Three Months Ended March 31, (Unaudited)

 
   

Residential Mortgage Loans

   

Commercial Mortgage Loans

   

Total

 
   

2019

   

2018

   

2019

   

2018

   

2019

   

2018

 

Allowance, beginning

  $ 374,209     $ 333,789     $ 49,957     $ 9,026     $ 424,166     $ 342,815  

Charge offs

    -       -       -       -       -       -  

Recoveries

    -       -       -       -       -       -  

Provision

    31,339       36,982       1,878       4,221       33,217       41,203  

Allowance, ending

  $ 405,548     $ 370,771     $ 51,835     $ 13,247     $ 457,383     $ 384,018  
                                                 

Allowance, ending:

                                               

Individually evaluated for impairment

  $ -     $ -     $ -     $ -     $ -     $ -  

Collectively evaluated for impairment

  $ 405,548     $ 370,771     $ 51,835     $ 13,247     $ 457,383     $ 384,018  
                                                 

Carrying Values:

                                               

Individually evaluated for impairment

  $ -     $ -     $ -     $ -     $ -     $ -  

Collectively evaluated for impairment

  $ 81,739,302     $