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EX-31.2 - EXHIBIT 31.2 - First Trinity Financial CORPex31-2.htm
EX-21.1 - EXHIBIT 21.1 - First Trinity Financial CORPex21-1.htm
EX-32.2 - EXHIBIT 32.2 - First Trinity Financial CORPex32-2.htm
EX-31.1 - EXHIBIT 31.1 - First Trinity Financial CORPex31-1.htm
EX-32.1 - EXHIBIT 32.1 - First Trinity Financial CORPex32-1.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, 2015

 

[ ]

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

For the transition period From                               to                                  .

 

Commission file number 000-52613

 

FIRST TRINITY FINANCIAL CORPORATION

(Exact name of small business issuer as specified in its charter)

 

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

 

7633 East 63rd Place, Suite 230 Tulsa, Oklahoma 74133-1246
  (Address of principal executive offices)  

  

(918) 249-2438

(Issuer's telephone number)

 

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

Title of Each Class 

None

 

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

Title of Each Class 

Common Stock, $.01 Par Value

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒  No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

 

 
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer: ☐     Accelerated filer: ☐     Non accelerated filer: ☐     Smaller reporting company: ☒

 

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

Yes ☐       No ☒

 

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

  

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

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.    Common stock $.01 par value as of March 7, 2016: 7,802,593 shares

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement to be used in connection with its 2016 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     

8

Item 3.

Legal Proceedings     

10

Item 4. 

Mine Safety Disclosures     

12

 

 

 

Part II

 

 

 

 

 

Item 5. 

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

 12

Item 7.

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

 13

Item 8.   

Financial Statements     

 36

Item 9. 

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure     .

 83

Item 9A.   

Controls and Procedures    

 83

Item 9B.     

Other Information    

 84

 

 

 

Part III

 

 

 

 

 

Item 10.      

Directors, Executive Officers and Corporate Governance     

 84

Item 11.      

Executive Compensation   

 84

Item 12.      

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     

 84

Item 13.       

Certain Relationships and Related Transactions, and Director Independence    

 84

Item 14.      

Principal Accounting Fees and Services.    

 84

Item 15.       

Exhibits     

 84

Signatures  

 85

Exhibit Index  

 86

 

 

 

 

 

 

Exhibit 21.1  

 

Exhibit 31.1  
Exhibit 31.2  
Exhibit 32.1  
Exhibit 32.2  
Exhibit No. 101.INS  
Exhibit No. 101.SCH  
Exhibit No. 101.CAL  

Exhibit No. 101.DEF

 
Exhibit No. 101.LAB  
Exhibit No. 101.PRE  

 

 
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PART I

 

Item 1. Business

 

Business Development

 

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

 

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

 

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

 

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

 

The Company owns 100% of FTCC that was incorporated in 2006, and began operations in January 2007. FTCC provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC currently has no operations other than minor premium refunds and collections of past due accounts and accounts involved in litigation.

 

Company Capitalization

 

Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through December 31, 2015, we have received $27,119,480 from the sale of our shares.

 

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

 

Our operations have been profitable and have generated $10,269,845 of net income from operations since we were incorporated in 2004. The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital.

 

The historic impact of these two stock dividend charges of $5,270,138 decreased during 2011 and 2012 the balance of accumulated earnings and resulted in a reported balance as of December 31, 2015 of $4,999,707, as shown in the accumulated earnings caption in the December 31, 2015 consolidated statement of financial position.

 

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

 

 
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Acquisitions

 

On December 23, 2008, FTFC acquired 100% of the outstanding common stock of First Life America Corporation (“FLAC”) from an unaffiliated company. The acquisition of FLAC was accounted for as a purchase. The aggregate purchase price for FLAC was approximately $2,695,000 (including direct cost associated with the acquisition of approximately $195,000). The acquisition of FLAC was financed with the working capital of FTFC.

 

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

 

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

 

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

 

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

 

Financial Information about Segments

 

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

 

Our business segments are as follows:

 

 

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

 

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

 

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

 

Please see below and Note 13 to the Consolidated Financial Statements for the years ended December 31, 2015 and 2014 and as of December 31, 2015 and 2014 for additional information regarding segment information.

 

Life Insurance and Annuity Operations

 

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

  

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

 

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

 

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

 

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

 

The following tables sets forth our direct collected life insurance premiums and annuity considerations by the policyholder’s state of residence at the time of premium collection and annuity consideration, for the most significant states in which we are licensed, for the years ended December 31, 2015 and 2014, in accordance with statutory accounting practices prescribed by the states of domicile of TLIC and FBLIC.

 

   

Year Ended December 31, 2015

 
   

Life

   

Annuity

 

State

 

Premiums

   

Percentage

   

Considerations

   

Percentage

 

Arizona

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

Arkansas

    81,063       0.80 %     869,953       1.48 %

Colorado

    131,861       1.31 %     224,384       0.38 %

Georgia

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

Illinois

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

Indiana

    182,467       1.81 %     81,574       0.14 %

Kansas

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

Kentucky

    341,346       3.38 %     351,958       0.60 %

Louisiana

    136,478       1.35 %     525,000       0.89 %

Michigan

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

Missouri

    655,319       6.50 %     879,334       1.49 %

Nebraska

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

North Carolina

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

North Dakota

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

Ohio

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

Oklahoma

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

Pennsylvania

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

Tennessee

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

Texas

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

Virginia

    26,018       0.26 %     309,342       0.53 %

All other states

    159,534       1.58 %     673,051       1.14 %

Total direct collected premiums

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

 

 
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Year Ended December 31, 2014

 
   

Life

   

Annuity

 

State

 

Premiums

   

Percentage

   

Considerations

   

Percentage

 

Colorado

  $ 52,100       0.62 %   $ 45,982       0.15 %

Florida

    14,307       0.17 %     227,708       0.76 %

Illinois

    941,190       11.18 %     2,155,753       7.19 %

Indiana

    52,061       0.62 %     42,581       0.14 %

Kansas

    2,202,812       26.15 %     4,462,542       14.88 %

Kentucky

    191,817       2.28 %     50,000       0.17 %

Missouri

    602,282       7.15 %     464,826       1.55 %

Nebraska

    219,819       2.61 %     2,339,607       7.80 %

North Dakota

    135,738       1.61 %     3,267,067       10.89 %

Ohio

    978,350       11.62 %     241,178       0.80 %

Oklahoma

    1,595,805       18.95 %     2,575,335       8.59 %

Pennsylvania

    11,163       0.13 %     3,045,645       10.16 %

Texas

    1,233,995       14.65 %     10,784,374       35.96 %

All other states

    190,495       2.26 %     286,408       0.96 %
    $ 8,421,934       100.00 %     29,989,006       100.00 %

 

Reinsurance 

 

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

 

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

 

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

 

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

 

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

 

Competition 

 

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

 

 
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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 $2,266,305 in 2016 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $915,147 in 2016 without prior approval. FBLIC paid dividends of $1,000,000 and $1,500,000 to TLIC in 2015 and 2014, respectively. These dividends are eliminated in consolidation. TLIC has paid no dividends to FTFC.

 

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

 

Premium Finance Operations

 

FTCC was incorporated in 2006 and provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC currently has no operations other than minor premium refunds and collections of past due accounts and accounts involved in litigation.

 

Employees 

 

As of March 7, 2016, the Company had nine full-time employees and two part-time employees.

 

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 with increases of 2% each twelve month period from October 1, 2016 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 $67,961 and $69,886 for the years ended December 31, 2015 and 2014, respectively, under this lease.

 

 
8

 

 

The Company received a $120,000 leasehold improvement allowance from the lessor related to the original lease on January 1, 2011 that was fully amortized by September 30, 2015 and reduced incurred rent expense by $25,263 for the year ended December 31, 2014 and by $18,947 for the nine months ended September 30, 2015. The Company also received a $25,000 leasehold improvement allowance from the lessor related to the amended lease on October 1, 2015 that will be amortized over the remaining, amended non-cancellable lease term and reduced incurred rent expense by $1,250 for the three months ended December 31, 2015. The Company also has the right to receive an additional $29,152 leasehold improvement allowance during the term of the amended lease that if and when received will be amortized over the remaining non-cancellable lease term. The future minimum lease payments to be paid under the amended non-cancellable lease agreement are $102,043, $104,090, $106,189, $108,304 and $82,446 for the years 2016 through 2020, respectively.

 

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

 

On December 24, 2009, TLIC entered into a five year lease of approximately 7,500 square feet of its building in Topeka, Kansas with an option for the lessee to renew the lease for five additional years. On September 28, 2014, TLIC entered into a two year lease effective January 1, 2015 with the same lessee for the same office space. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments are as follows: $9,130 in 2012, $9,371 in 2013 and 2014 and $8,696 for 2015 and 2016.

 

TLIC has also leased 10,000 square feet in the Topeka, Kansas office building under a lease that was renewed during 2006 to run through June 30, 2011 with a 90 day notice to terminate the lease by the lessee. This lease was renewed on June 1, 2011 to run through May 31, 2016. 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 on December 21, 2015 to be effective from June 1, 2016 through May 31, 2021 with the lessee’s 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 includes a $100,044 tenant improvement allowance that is amortized over the first five years of the renewed lease including interest at 5.00%. The lease agreement calls for monthly lease payments of $18,486 quantified as follows: $12,275 for base rent, $4,323 for reimbursement of operating costs and $1,888 for tenant improvements. If the lease continues after the first five years, the monthly lease payments are $17,850 quantified as follows: $13,527 for base rent and $4,323 for reimbursement of operating costs.

 

Effective August 29, 2005, TLIC executed a lease agreement for 2,500 square feet of the Topeka, Kansas office building. The base lease period commenced on September 1, 2005 and ended on August 31, 2010. The lease automatically renewed on September 1, 2010, for another five years with a 90 day notice by the lessee to terminate the lease. This lease was renewed on September 1, 2015 to run through August 31, 2017 with an option for an additional three years through August 31, 2020. Beginning September 1, 2017, the lessee can terminate the lease with a 120 day written notice. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance with partial reimbursement from the lessee. The lease agreement called for minimum monthly base lease payments of $4,332 through August 31, 2010. The lease payments decreased to $3,100 per month for the period September 1, 2010 through August 31, 2015. The lease payments are $4,236 per month for the period September 1, 2015 through August 31, 2017.

 

The future minimum lease payments to be paid under the non-cancellable lease agreement are $373,324, $255,716, $221,832, $221,832 and $221,832 for the years 2016 through 2020, respectively.

 

On March 11, 2015, TLIC sold its investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044 as of both December 31, 2014 and March 11, 2015. TLIC recorded a gross realized investment gain on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119.

 

 
9

 

 

In addition, simultaneously with these sales, TLIC settled its two notes payable, collateralized by the held-for-sale buildings and land (including assignment of the tenant leases), with an aggregate payment to Grand Bank (the creditor) of $4,076,473. TLIC’s $3,009,265 promissory note was collateralized (including assignment of the tenant leases) by three properties, located in Indiana, Oklahoma and Texas, purchased for $4,940,647 in December 2013 and February 2014.

 

In December 2013, TLIC purchased one acre of land in Greensburg, Indiana that included a 3,975 square foot building constructed on approximately 8% of this land at a cost of $2,444,203 (including closing costs of $50,516). The building was leased through October 31, 2027 plus four future five year extensions effective on November 1, 2027, November 1, 2032, November 1, 2037 and November 1, 2042. The terms of the lease had the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were as follows: $14,661 in 2014; $14,881 in 2015; $15,104 in 2016; $15,331 in 2017; $15,561 in 2018 and $15,794 in 2019.

 

In December 2013, TLIC also purchased one acre of land in Norman, Oklahoma that included a 9,100 square foot building constructed on approximately 18% of this land at a cost of $1,519,431 (including closing costs of $37,931). The building was leased through August 31, 2028 plus three future five year extensions on September 1, 2028, September 1, 2033 and September 1, 2038. The terms of the lease had the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were $8,004 through August 31, 2028.

 

In February 2014, TLIC purchased one acre of land in Houston, Texas that included a 9,195 square foot building constructed on approximately 25% of this land at a cost of $977,013 (including closing costs of $31,063). The building was leased through December 31, 2023 plus four future five year extensions effective on January 1, 2024, January 1, 2029, January 1, 2034 and January 1, 2039. The terms of the lease had the lessee responsible for paying real estate taxes and building insurance. TLIC was responsible for building and ground maintenance. The monthly lease payments were $5,833 through December 31, 2019.

 

The $1,067,208 promissory note was collateralized (including assignment of the tenant leases) by the February 2014 TLIC purchase of three-fourths of an acre of land in Harrisonville, Missouri that included a 6,895 square foot building constructed on approximately 20% of this land at a cost of $1,752,397 (including closing costs of $44,864). The building was leased through October 31, 2028 plus three future five year extensions on November 1, 2028, November 1, 2033 and November 1, 2038. The terms of the lease had the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were $9,463 through October 31, 2028.

 

When TLIC originated the two promissory notes on March 26, 2014, $106,889 of loan origination fees were capitalized with amortization of the capitalized loan origination fees during the expected 36 month term of the loan. For the year ended December 31, 2014, $26,722 of the loan origination fees has been amortized and the unamortized loan origination fees as of December 31, 2014 were $80,167. TLIC incurred $137,581 of interest expense during 2014 on these two notes payable. In connection with the repayments of the two notes payable on March 11, 2015, TLIC expensed the loan origination fees remaining as of March 11, 2015 of $72,744. During the period from January 1, 2015 to March 11, 2015, TLIC incurred interest expense of $35,181 on the two notes payable and amortized $7,423 of loan origination fees.

 

FBLIC owns approximately one-half acre of undeveloped land located in Jefferson City, Missouri with a carrying value of $135,892.

 

Item 3. Legal Proceedings

 

The Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, filed an action in the District Court of Tulsa County, Oklahoma in 2013, Case No. CJ-2013-03385, against former Company Board of Directors member, Wayne Pettigrew and Mr. Pettigrew’s company, Group & Pension Planners, Inc. (the “Defendants”).  The petition filed in the case alleges that Mr. Pettigrew, during and after the time he was a member of the Company’s Board of Directors, made defamatory statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company.  The defendants are alleged to have made defamatory statements to certain shareholders of the Company, to the press and to the OID and the Oklahoma Department of Securities.  Mr. Pettigrew has denied the allegations.

 

The Board of Directors, represented by independent counsel, concluded that there was no action to be taken against Mr. Zahn and that the allegations by Mr. Pettigrew were without substance.  The Company has been informed by the OID that it would take no action and also informed that the Oklahoma Department of Securities, after its investigation of the allegations, concluded that no proceedings were needed with respect to the alleged matters.

 

 
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It is the Company’s intention to vigorously prosecute this action against the Defendants for damages and for the correction of the defamatory statements.  In the opinion of the Company’s management, the ultimate resolution of any contingencies that may arise from this litigation is not considered material in relation to the financial position or results of operations of the Company.

 

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

 

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

 

The main difference between the original Petition and the amended Petition is that the amended Petition also seeks equitable relief based on two new theories: that the Decreasing Term to 95 policies should be reformed so that they will provide a level death benefit for a level premium payment until the policyholder reaches 95 years of age; and alternatively, Count VIII of the amended Petition asks the Court to (1) find that the dividend provisions in the Decreasing Term to 95 policies violate Missouri law, specifically, § 376.360 RSMo.; (2) order that the policies are void ab initio; and (3) order that FBLIC return all premiums collected under these policies. FBLIC has moved to dismiss Count VIII of the amended Petition. No hearing has been held or ruling made on this Motion.

 

FBLIC denies the allegations in the amended Petition and will continue to defend against them.

 

On February 1, 2016, the plaintiffs asked that the Court certify the case as a class action. With their motion, Plaintiffs filed an affidavit from an actuary stating the opinion that FBLIC has collected at least $2,548,939 in premiums on the Decreasing Term to 95 policies. This presumably is the amount that Plaintiffs will seek to be refunded to policyholders if the policies are declared void. FBLIC intends to oppose the request for class certification, as well as to defend vigorously against the individual allegations. The Company is unable to determine the potential magnitude of the claims in the event of a final certification and the plaintiffs prevailing on this substantive action.

 

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

 

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

 

 
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As stated above, FBLIC filed a Counterclaim and TLIC filed the Federal Lawsuit against Doyle Nimmo. Doyle Nimmo submitted a claim and tendered the defense of these claims to Utica Mutual Insurance Company under a policy providing Insurance Agents and Brokers Errors and Omissions Liability coverage. On November 4, 2015, Utica Mutual Insurance Company filed a lawsuit against Doyle Nimmo and other interested parties, including FBLIC and TLIC. The lawsuit is pending in the District Court for the Western District of Missouri and asks the Court to determine whether the Errors and Omissions policy provides coverage for the lawsuits filed against Doyle Nimmo. Utica Mutual Insurance Company does not seek a monetary judgment against FBLIC or TLIC.

 

Item 4. Mine Safety Disclosures

 

None

 

PART II

 

Item 5.

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

 

(a)     Market Information

 

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

 

(i)     Holders

 

As of March 7, 2016, there were approximately 4,500 shareholders of the Company’s outstanding common stock.

 

(ii)     Dividends

 

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

 

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

 

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

 

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

 

(iii)

Securities Authorized for Issuance Under Equity Compensation Plans

 

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

 

 
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(b)        None

 

(c)        Purchases of Equity Securities by Issuer

 

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

  

 

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

 

Overview 

 

First Trinity Financial Corporation (“we” “us”, “our”, “FTFC” or the “Company”) conducts operations as an insurance holding company emphasizing ordinary life insurance products and annuity contracts in niche markets. We are no longer operating a premium finance company, financing casualty insurance premiums.

 

As an insurance provider, we collect premiums and annuity considerations in the current period to pay future benefits to our policy and contract holders. Our core TLIC operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense and term products and annuity contracts to predominately middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas through independent agents.

 

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

 

We also realize revenues from our investment portfolio, which is a key component of our operations. The revenues and funds we collect as premiums and annuity considerations from policyholders are invested to ensure future benefit payments under the policy contracts. Life insurance companies earn profits on the investment spread, which reflects the investment income earned on the premiums and annuity considerations paid to the insurer between the time of receipt and the time benefits are paid out under our policies and contracts. Changes in interest rates, changes in economic conditions and volatility in the capital markets can all impact the amount of earnings that we realize from our investment portfolio.

 

Prior to June 30, 2013, we provided financing for casualty insurance premiums for individuals and companies through independent property and casualty insurance agents through our wholly owned subsidiary FTCC. FTCC was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC currently has no operations other than minor premium refunds and collections of past due accounts and accounts involved in litigation.

 

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 approximately $195,000. 

 

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

 

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

 

Critical Accounting Policies and Estimates 

 

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

 

Investments in Fixed Maturities and Equity Securities

 

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

 

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

 

The assessment of whether a decline in fair value is considered temporary or other-than-temporary includes management’s judgment as to the financial position and future prospects of the entity issuing the security. It is not possible to accurately predict when it may be determined that a specific security will become impaired. Future adverse changes in market conditions, poor operating results of underlying investments and defaults on interest and principal payments could result in losses or an inability to recover the current carrying value of the investments, thereby possibly requiring an impairment charge in the future. In addition, if a change occurs in our intent to sell temporarily impaired securities prior to maturity or recovery in value, or if it becomes more likely than not that we will be required to sell such securities prior to recovery in value or maturity, a future impairment charge could result. If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, we amortize the reduced book value back to the security’s expected recovery value over the remaining term of the bond. We continue to review the security for further impairment that would prompt another write-down in the book value.

 

Mortgage Loans on Real Estate

 

We carry mortgage loans on real estate at unpaid balances, net of unamortized premium or discounts. Interest income and the amortization of premiums or discounts are included in net investment income. Mortgage loan fees, certain direct loan origination costs and purchase premiums and discounts on loans are recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. In certain circumstances, prepayments may be anticipated. We have established a valuation allowance for mortgage loans on real estate that are not supported by funds held in escrow. This allowance for possible loan losses from investments in mortgage loans on real estate is a reserve established through a provision for possible loan losses charged to expense which represents, in our judgment, the known and inherent credit losses existing in the residential and commercial mortgage loan portfolio. This allowance, in our judgment, is necessary to reserve for estimated loan losses inherent in the residential and commercial mortgage loan portfolio and reduces the carrying value of investments in mortgage loans on real estate to the estimated net realizable value on the consolidated statement of financial position.

 

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

 

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

 

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

 

Deferred Policy Acquisition Costs

 

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

 

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

 

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

 

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

 

Value of Insurance Business Acquired

 

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

 

 
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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, 2015 and 2014, there was $2,451,678 and $2,065,464, 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:  $341,453 in 2016, $330,587 in 2017, $310,821 in 2018, $281,462 in 2019 and $255,833 in 2020.

 

Future Policy Benefits

 

Our liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. For life insurance and annuity products, expected mortality and morbidity is generally based on the Company’s historical experience or standard industry tables including a provision for the risk of adverse deviation. Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality and morbidity and interest rate assumptions are “locked-in” upon the issuance of new insurance with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to provide for expected future losses on a product by establishing premium deficiency reserves.

 

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

 

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

        

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

 

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

 

The updated guidance was effective for the quarter ending March 31, 2015. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

 

 
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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 is not expected to have a material effect on the Company’s result of operations, financial position or liquidity.

 

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

 

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

 

The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. As such, the performance target that affects vesting should not be reflected in estimating that fair value of the award at the grant date. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The updated guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

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

 

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

 

If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations and management's plans that are intended to mitigate those conditions. The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter.

 

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

        

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

 

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

 

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

 

Receivables – Troubled Debt Restructurings by Creditors

 

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

 

Amendments to the Consolidation Analysis

 

In February 2015, the FASB issued updated guidance that makes targeted amendments to the current consolidation accounting guidance. The update is in response to accounting complexity concerns, particularly from the asset management industry. The guidance simplifies consolidation accounting by reducing the number of approaches to consolidation, provides a scope exception to registered money market funds and similar unregistered money market funds and ends the indefinite deferral granted to investment companies from applying the variable interest entity guidance.

 

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

 

Simplifying the Presentation of Debt Issuance Costs

 

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

 

Simplifying the Accounting for Measurement-Period Adjustments

 

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

 

 
18

 

 

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

 

As of December 31, 2015, the fair value of the Company’s available-for-sale equity securities was $892,800 reflecting a cost of $790,215, gross unrealized gains of $123,231 and gross unrealized losses of $20,646. The gross unrealized loss of $20,646 as of December 31, 2015 consists of three available-for-sale equity securities that have a fair value of $225,630 and a cost of $246,276. As of December 31, 2015, the Company has a deferred tax asset related to available-for-sale securities of $663,953 for which the Company has analyzed and determined that there was no need for a valuation allowance. The effect of the adoption of this guidance on the Company’s results of operations, financial position and liquidity is primarily dependent on the fair value of the available-for-sale equity securities in future periods and the existence of a deferred tax asset related to available-for-sale securities in future periods that have not yet been fully assessed.

 

Leases

 

In February 2016, the FASB issued updated guidance regarding leases that generally requires the lessee and lessor to recognize lease assets and lease liabilities on the statement of financial position.

 

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

 

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

 

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

 

 
19

 

 

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 13 to the Consolidated Financial Statements for the years ended December 31, 2015 and 2014 and as of December 31, 2015 and 2014 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, 2015 and 2014

 

   

Years Ended December 31,

   

Increase (Decrease)

   

Percentage Change

 
   

2015

   

2014

   

2015 less 2014

    2015 to 2014  

Premiums

  $ 9,822,009     $ 8,095,199     $ 1,726,810       21.3 %

Net investment income

    11,235,342       8,683,007       2,552,335       29.4 %

Net realized investment gains

    684,668       1,017,545       (332,877 )     -32.7 %

Loss on other-than-temporary impairments

    (525,750 )     -       (525,750 )     100.0 %

Gain on reinsurance assumption

    588,923       -       588,923       100.0 %

Other income

    95,462       82,432       13,030       15.8 %

Total revenues

    21,900,654       17,878,183       4,022,471       22.5 %

Benefits and claims

    13,427,029       10,766,491       2,660,538       24.7 %

Expenses

    6,516,075       5,668,619       847,456       14.9 %

Total benefits, claims and expenses

    19,943,104       16,435,110       3,507,994       21.3 %

Income before federal income tax benefit

    1,957,550       1,443,073       514,477       35.7 %

Federal income tax benefit

    (425,158 )     (482,438 )     57,280       -11.9 %

Net income

  $ 2,382,708     $ 1,925,511     $ 457,197       23.7 %

Net income per common share basic and diluted

  $ 0.31     $ 0.25     $ 0.06       24.2 %

 

 
20

 

 

Consolidated Condensed Financial Position as of December 31, 2015 and 2014

 

   

December 31, 2015

   

December 31, 2014

   

Increase (Decrease)

2015 to 2014

   

Percentage Change

2015 to 2014

 
                                 
                                 

Investment assets

  $ 230,203,402     $ 183,581,353     $ 46,622,049       25.4 %

Other assets

    38,926,440       35,419,815       3,506,625       9.9 %

Total assets

  $ 269,129,842     $ 219,001,168     $ 50,128,674       22.9 %
                                 

Policy liabilities

  $ 237,944,222     $ 177,158,120     $ 60,786,102       34.3 %

Notes payable

    -       4,076,473       (4,076,473 )     -100.0 %

Deferred federal income taxes

    33,210       2,198,753       (2,165,543 )     -98.5 %

Other liabilities

    937,367       2,357,484       (1,420,117 )     -60.2 %

Total liabilities

    238,914,799       185,790,830       53,123,969       28.6 %

Shareholders' equity

    30,215,043       33,210,338       (2,995,295 )     -9.0 %

Total liabilities and shareholders' equity

  $ 269,129,842     $ 219,001,168     $ 50,128,674       22.9 %
                                 

Shareholders' equity per common share

  $ 3.87     $ 4.25     $ (0.38 )     -8.9 %

 

 

Results of Operations – Years Ended December 31, 2015 and 2014

 

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, 2015 and 2014 are summarized as follows:

 

   

Years Ended December 31,

   

Increase

(Decrease)

   

Percentage Change

 
   

2015

   

2014

   

2015 less 2014

    2015 to 2014  

Premiums

  $ 9,822,009     $ 8,095,199     $ 1,726,810       21.3 %

Net investment income

    11,235,342       8,683,007       2,552,335       29.4 %

Net realized investment gains

    684,668       1,017,545       (332,877 )     -32.7 %

Loss on other-than-temporary impairments

    (525,750 )     -       (525,750 )     -100.0 %

Gain on reinsurance assumption

    588,923       -       588,923       100.0 %

Other income

    95,462       82,432       13,030       15.8 %

Total revenues

  $ 21,900,654     $ 17,878,183     $ 4,022,471       22.5 %

 

The $4,022,471 increase in total revenues for the year ended December 31, 2015 is discussed below.

 

 
21

 

 

Premiums

 

Our premiums for the years ended December 31, 2015 and 2014 are summarized as follows:

 

   

Years Ended December 31,

   

Increase (Decrease)

   

Percentage Change

 
   

2015

   

2014

   

2015 less 2014

    2015 to 2014  

Whole life and term first year

  $ 98,287     $ 67,654     $ 30,633       45.3 %

Whole life and term renewal

    2,589,056       2,637,361       (48,305 )     -1.8 %

Final expense first year

    2,291,696       948,892       1,342,804       141.5 %

Final expense renewal

    4,842,970       4,441,292       401,678       9.0 %

Total premiums

  $ 9,822,009     $ 8,095,199     $ 1,726,810       21.3 %

 

The $1,726,810 increase in premiums for the year ended December 31, 2015 is primarily due to a $1,342,804 increase in in final expense first year premiums and a $401,678 increase in final expense renewal premiums.

 

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

 

Net Investment Income

 

The major components of our net investment income for the years ended December 31, 2015 and 2014 are summarized as follows:

 

   

Years Ended December 31,

   

Increase (Decrease)

   

Percentage Change

 
   

2015

   

2014

   

2015 less 2014

    2015 to 2014  

Fixed maturity securities

  $ 5,542,312     $ 4,585,375     $ 956,937       20.9 %

Equity securities

    39,329       41,127       (1,798 )     -4.4 %

Other long-term investments

    1,877,725       1,605,470       272,255       17.0 %

Mortgage loans

    4,492,150       2,479,552       2,012,598       81.2 %

Real estate

    449,034       788,087       (339,053 )     -43.0 %

Policy loans

    101,344       102,675       (1,331 )     -1.3 %

Short-term and other investments

    12,278       166,298       (154,020 )     -92.6 %

Gross investment income

    12,514,172       9,768,584       2,745,588       28.1 %

Investment expenses

    (1,278,830 )     (1,085,577 )     193,253       17.8 %

Net investment income

  $ 11,235,342     $ 8,683,007     $ 2,552,335       29.4 %

 

The $2,745,588 increase in gross investment income for the year ended December 31, 2015 is primarily due to the 2015 increases in investment in mortgage loans, fixed maturity securities and other long-term investments. During 2015, our investments in mortgage loans have increased approximately $20.1 million. In addition, during 2015, our investments in fixed maturity securities have increased approximately $23.9 million. Finally, during 2015, our investments in other long-term investments (lottery receivables) have increased approximately $9.8 million.

 

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

 

 
22

 

 

The $193,253 increase in investment expenses for the year ended December 31, 2015 is primarily related to fees and expenses associated with the increased investments in mortgage loans, the expenses incurred during the second half of 2015 in engaging an investment advisor and expenses incurred with the sale of investment real estate on March 11, 2015. The investment real estate sale included expensing the remaining loan origination fees, interest on the note payable and closing costs.

 

Net Realized Investment Gains and Gain on Reinsurance Assumption

 

There was a $332,877 decrease in net realized investment gains for the year ended December 31, 2015.

 

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $183,831 for the year ended December 31, 2015 resulted from proceeds of $8,799,624 for these securities that had carrying values of $8,615,793 at the 2015 disposal dates.

 

We have recorded an other-than-temporary impairment during 2015.  During 2015, we impaired our fixed maturity security in a mining corporation with a total par value of $600,000 as a result of continuing unrealized losses. This impairment was considered fully credit-related, resulting in a charge to the statement of operations before tax of $502,013 for the year ended December 31, 2015. This charge represents the credit-related portion of the difference between the amortized cost basis of the security and its fair value. We have experienced no additional other-than-temporary impairments of available-for-sale fixed maturity securities during 2015.

 

The net realized investment gains from the sales and maturities of fixed maturity securities available-for-sale of $796,141 for the year ended December 31, 2014 resulted from proceeds of $14,462,534 for these securities that had carrying values of $13,666,393 at the 2014 disposal dates.

 

The net realized investment losses from the sales of equity securities available-for-sale of $1,902 for the year ended December 31, 2015 resulted from proceeds of $533,817 for these securities that had carrying values of $535,719 at the 2015 disposal dates.

 

The net realized investment gains from the sales of equity securities available-for-sale of $2,900 for the year ended December 31, 2014 resulted from proceeds of $205,080 for these securities that had carrying values of $202,180 at the 2014 disposal dates.

 

The net realized investment gains from mortgage loans on real estate of $112,537 for the year ended December 31, 2015 resulted from the early payoff of mortgage loans that the Company had acquired at a discounted price. During 2015, we impaired a mortgage loan in foreclosure by $23,737 to reduce its principal balance of $100,237 to its estimated net realizable value of $76,500. We have experienced no additional other-than-temporary impairments of mortgage loans during 2015.

 

The net realized investment gains from mortgage loans on real estate of $218,504 for the year ended December 31, 2014 resulted from the early payoff of mortgage loans that the Company had acquired at a discounted price.

 

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

 

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.

 

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.

 

 
23

 

 

Our benefits, claims and expenses for the years ended December 31, 2015 and 2014 are summarized as follows:

 

   

Years Ended December 31,

   

Increase (Decrease)

   

Percentage Change

 
   

2015

   

2014

   

2015 less 2014

    2015 to 2014  

Benefits and claims

                               

Increase in future policy benefits

  $ 3,429,019     $ 2,539,468     $ 889,551       35.0 %

Death benefits

    3,424,098       2,893,415       530,683       18.3 %

Surrenders

    574,739       614,510       (39,771 )     -6.5 %

Interest credited to policyholders

    5,675,873       4,433,762       1,242,111       28.0 %

Dividend, endowment and supplementary life contract benefits

    323,300       285,336       37,964       13.3 %

Total benefits and claims

    13,427,029       10,766,491       2,660,538       24.7 %

Expenses

                               

Policy acquisition costs deferred

    (5,204,940 )     (2,351,163 )     (2,853,777 )     121.4 %

Amortization of deferred policy acquisition costs

    1,563,625       1,212,426       351,199       29.0 %

Amortization of value of insurance business acquired

    386,214       412,376       (26,162 )     -6.3 %

Commissions

    4,774,196       2,296,112       2,478,084       107.9 %

Other underwriting, insurance and acquisition expenses

    4,996,980       4,098,868       898,112       21.9 %

Total expenses

    6,516,075       5,668,619       847,456       14.9 %

Total benefits, claims and expenses

  $ 19,943,104     $ 16,435,110     $ 3,507,994       21.3 %

 

The $3,507,994 increase in total benefits, claims and expenses for the year ended December 31, 2015 is discussed below.

 

Benefits and Claims

 

The $2,660,538 increase in benefits and claims for the year ended December 31, 2015 is primarily due to the following:

 

 

$1,242,111 increase in interest credited to policyholders is primarily due to an approximate $57.1 million increase in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits and interest credited in excess of withdrawals) during 2015.

 

 

$889,551 increase in future policy benefits primarily related to the existing policies in force aging one additional year combined with an increase in the number of policies in force.

 

 

$530,683 increase in death benefits is primarily due to 59 additional final expense claims at an average of approximately $9,500 per claim. Final expense mortality is above actuarial estimates when the products were introduced but management and actuarial analysis continues to conclude that its final expense products are profitable despite the unfavorable mortality.

 

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 policies and contracts, which vary with, and are primarily related to, the successful production of new and renewal life insurance policies and annuity contracts.

 

 
24

 

 

For the years ended December 31, 2015 and 2014, capitalized costs were $5,204,940 and $2,351,163, respectively. Amortization of deferred policy acquisition costs for the years ended December 31, 2015 and 2014 were $1,563,625 and $1,212,426, respectively.

 

The $2,853,777 increase in the acquisition costs deferred primarily relates to increased production of annuity and final expense products by appointed agents based upon expansion into additional states and recruiting of additional agents. The $351,199 increase in the 2015 amortization of deferred acquisition costs is primarily due to increased mortality associated with final expense policies and a decrease in the persistency of issued policies.

 

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 $386,214 and $412,376 for the years ended December 31, 2015 and 2014, respectively. The $26,162 decrease in the 2015 amortization of value of insurance business acquired is due to the positive persistency of the FLAC and FBLIC business acquired in 2008 and 2011, respectively.

 

Commissions

 

Our commissions for the years ended December 31, 2015 and 2014 are summarized as follows:

 

   

Years Ended December 31,

   

Increase (Decrease)

   

Percentage Change

 
   

2015

   

2014

   

2015 less 2014

    2015 to 2014  

Annuity

  $ 1,455,566     $ 666,748     $ 788,818       118.3 %

Whole life and term first year

    89,761       51,514       38,247       74.2 %

Whole life and term renewal

    101,553       104,559       (3,006 )     -2.9 %

Final expense first year

    2,714,342       1,087,263       1,627,079       149.6 %

Final expense renewal

    412,974       386,028       26,946       7.0 %

Total commissions

  $ 4,774,196     $ 2,296,112     $ 2,478,084       107.9 %

 

The $2,478,084 increase in commissions for the year ended December 31, 2015 is primarily due to:

 

 

$1,627,079 increase in final expense first year commissions that correspond to the $1,342,804 increase in final expense first year premiums.

 

 

$788,818 increase in annuity first year, single and renewal commissions that corresponds to $59,274,275 of increased annuity considerations and deposit-type liabilities deposited.

 

Other Underwriting, Insurance and Acquisition Expenses

 

The $898,112 increase in other underwriting, insurance and acquisition expenses for the year ended December 31, 2015 was primarily related to increased acquisition and maintenance costs associated with increased final expense and annuity production, increased third party administration fees primarily related to the increased number of policies in force, increased services and the conversion of the assumption reinsurance to the existing legacy system, increased legal fees associated with the two cases being contested, increased salaries and benefits due to increased staffing levels and the asset growth bonus paid to our Chairman, President and Chief Executive Officer related to the Company exceeding $250 million in U.S. GAAP assets during 2015.

 

Federal Income Taxes

 

FTFC files a consolidated federal income tax return with FTCC but does not file a consolidated tax return with TLIC or FBLIC. TLIC and FBLIC are taxed as life insurance companies under the provisions of the Internal Revenue Code. Life insurance companies must file separate tax returns until they have been a member of the consolidated filing group for five years. However, we filed consolidated life insurance company federal tax returns for TLIC and FBLIC for 2012, 2013 and 2014 and intend to also file a consolidated life insurance company federal tax return for TLIC and FBLIC for 2015.

 

 
25

 

 

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 year ended December 31, 2015 and 2014, current income tax expense was $405,546 and $63,983, respectively. Deferred federal income tax benefit was $830,704 and $546,421 for the years ended December 31, 2015 and 2014, respectively. The change in deferred taxes between 2015 and 2014 is primarily due to the utilization of net operating loss carryforwards and the reduction in valuation allowances on deferred tax assets as it is probable that a portion of the net operating loss carryforwards on the consolidated federal income tax returns of FTFC and FTCC will be utilized due to projected taxable income in future years demonstrated by the taxable income generated in 2015 and 2014.

 

Net Income Per Common Share Basic and Diluted

 

Net income was $2,382,708 ($0.31 per common share basic and diluted) and $1,925,511 ($0.25 per common share basic and diluted) for the years ended December 31, 2015 and 2014, 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 for the years ended December 31, 2015 and 2014 were 7,804,566 and 7,831,108, respectively.

 

Business Segments

 

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

 

The revenues and income before federal income taxes from our business segments for the years ended December 31, 2015 and 2014 are summarized as follows:

 

   

Years Ended December 31,

   

Increase (Decrease)

   

Percentage Change

 
   

2015

   

2014

    2015 to 2014     2015 to 2014  

Revenues:

                               

Life insurance operations

  $ 11,847,640     $ 10,074,767     $ 1,772,873       17.6 %

Annuity operations

    9,647,120       7,372,871       2,274,249       30.8 %

Corporate operations

    405,894       430,545       (24,651 )     -5.7 %

Total

  $ 21,900,654     $ 17,878,183     $ 4,022,471       22.5 %

Income before federal income taxes:

                               

Life insurance operations

  $ 852,489     $ 507,717     $ 344,772       67.9 %

Annuity operations

    935,945       606,317       329,628       54.4 %

Corporate operations

    169,116       329,039       (159,923 )     -48.6 %

Total

  $ 1,957,550     $ 1,443,073     $ 514,477       35.7 %

 

Life Insurance Operations

 

The $1,772,873 increase in revenues from Life Insurance Operations for the year ended December 31, 2015 is primarily due to the following:

 

 

$1,726,810 increase in premiums

 

 

$107,409 increase in net investment income

 

 

$20,240 increase in other income

 

 

$81,586 decrease in net realized investment gains

 

 
26

 

 

The $344,772 increased profitability from Life Insurance Operations for the year ended December 31, 2015 is primarily due to the following:

 

 

$1,726,810 increase in premiums

 

 

$1,650,065 increase in policy acquisition costs deferred net of amortization

 

 

$107,409 increase in net investment income

 

 

$39,771 decrease in surrenders

 

 

$20,240 increase in other income

 

 

$16,446 decrease in other underwriting, insurance and acquisition expenses

 

 

$13,081 decrease in amortization of value of insurance business acquired

 

 

$37,964 increase in dividend, endowment and supplementary life contract benefits

 

 

$81,586 decrease in net realized investment gains

 

 

$530,683 increase in death benefits

 

 

$889,551 increase in future policy benefits

 

 

$1,689,266 increase in commissions

 

Annuity Operations

 

The $2,274,249 increase in revenues from Annuity Operations for the year ended December 31, 2015 is due to the following:

 

 

$2,445,410 increase in net investment income

 

 

$171,161 decrease in net realized investment gains

 

The $329,628 increased profitability from Annuity Operations for the year ended December 31, 2015 is due to the following:

 

 

$2,445,410 increase in net investment income

 

 

$852,513 increase in policy acquisition costs deferred net of amortization

 

 

$13,081 decrease in amortization of value of insurance business acquired

 

 

$171,161 decrease in net realized investment gains

 

 

$779,286 increase in other underwriting, insurance and acquisition expenses

 

 

$788,818 increase in commissions

 

 

$1,242,111 increase in interest credited to policyholders

 

 
27

 

 

Corporate Operations

 

The $24,651 decrease in revenues from Corporate Operations for the year ended December 31, 2015 is primarily due to $16,957 of decreased realized gains, $7,210 of decreased other income and $484 of decreased net investment income.

 

The $159,923 decrease in Corporate Operations profitability for the year ended December 31, 2015 is primarily due to $135,272 of increased operating expenses, $16,957 of decreased realized gains, $7,210 of decreased other income and $484 of decreased net investment income.

 

Consolidated Financial Condition

 

Our invested assets as of December 31, 2015 and 2014 are summarized as follows:

 

   

December 31, 2015

   

December 31, 2014

   

Increase (Decrease)

2015 to 2014

   

Percentage Change

2015 to 2014

 

Assets

                               

Investments

                               

Available-for-sale fixed maturity securities at fair value (amortized cost: $138,028,455 and $107,412,322 as of December 31, 2015 and 2014, respectively)

  $ 134,556,027     $ 110,651,429     $ 23,904,598       21.6 %

Available-for-sale equity securities at fair value (cost: $790,215 and $519,595 as of December 31, 2015 and 2014, respectively)

    892,800       671,357       221,443       33.0 %

Mortgage loans on real estate

    58,774,918       38,649,733       20,125,185       52.1 %

Investment real estate

    2,326,558       9,165,090       (6,838,532 )     -74.6 %

Policy loans

    1,486,317       1,520,620       (34,303 )     -2.3 %

Short-term investments

    599,855       1,141,199       (541,344 )     -47.4 %

Other long-term investments

    31,566,927       21,781,925       9,785,002       44.9 %

Total investments

  $ 230,203,402     $ 183,581,353     $ 46,622,049       25.4 %

 

The $23,904,598 increase in available-for-sale fixed maturity securities for the year ended December 31, 2015 is primarily due to purchases of $37,123,963, available-for-sale fixed maturity securities acquired by reinsurance assumption of $3,534,093 and net realized investment gains of $183,831 in excess of sales and maturities of $8,799,624, decrease in unrealized appreciation of $6,711,535, premium amortization of $924,117 and loss on other-than-temporary impairment of $502,013. This portfolio is reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income (Loss).” The available-for-sale fixed maturity securities portfolio is invested primarily in a variety of companies, U. S. government and government agencies, states and political subdivisions and foreign securities.

 

As of December 31, 2015, we held 290 available-for-sale fixed maturity securities with an unrealized loss of $5,720,175, fair value of $69,044,947 and amortized cost of $74,765,122. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2015 coupled with a downturn in the Chinese economy, decreases in the value of commodities and a drop in oil prices. The ratio of the fair value to the amortized cost of these 290 securities is 92%. Management has analyzed these unrealized losses in available-for-sale fixed maturity securities and determined that these losses are not other-than-temporary.

 

As of December 31, 2014, we held 81 available-for-sale fixed maturity securities with an unrealized loss of $1,149,612, fair value of $19,933,429 and amortized cost of $21,083,041. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2014. The ratio of the fair value to the amortized cost of these 81 securities is 95%.

 

The $221,443 increase in available-for-sale equity securities for the year ended December 31, 2015 is primarily due to purchases of $806,537 in excess of sales of $533,817, decreases of unrealized appreciation in available-for-sale equity securities of $49,177, net realized investment losses of $1,902 and amortization of premium of $198. This portfolio 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 available-for-sale equity securities portfolio is invested in a variety of companies.

 

As of December 31, 2015, we held three available-for-sale equity securities with an unrealized loss of $20,646, fair value of $225,630 and cost of $246,276. The ratio of fair value to cost of these securities is approximately 92%.

 

 
28

 

 

As of December 31, 2014, we held one available-for-sale equity security with an unrealized loss of $1,700, fair value of $48,300 and cost of $50,000. The ratio of fair value to cost of this security is 97%.

 

The $20,125,185 increase in mortgage loans for the year ended December 31, 2015 is primarily due to the purchase of mortgage loans of $29,780,501, discount accretion of $167,772, realized gains on the early pay off of loans purchased at a discount of $112,537 and capitalization of loan origination fees of $90,000 in excess of principal payments of $9,882,604, amortization of loan origination fees of $62,402, charges to the allowance for bad debts of $56,882 and an impairment of a mortgage loan in foreclosure of $23,737.

 

The $6,838,532 decrease in investment real estate is primarily due to our March 11, 2015 sale of investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044 as of both December 31, 2014 and March 11, 2015. The Company recorded a gross realized investment gain on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119. The remaining $145,488 difference is the depreciation of the Topeka building that is held for the production of income.

 

The $541,344 decrease in short-term investments is due to management’s decision to decrease our investment in funds that have a maturity of more than 90 days but less than one year at the date of purchase.

 

The $9,785,002 increase in other long-term investments (comprised of lottery receivables) for the year ended December 31, 2015 is primarily due to purchases of $12,476,814 and accretion of discount of $1,878,019 less principal payments of $4,569,831.

 

Our assets other than invested assets as of December 31, 2015 and 2014 are summarized as follows:

 

   

December 31, 2015

   

December 31, 2014

   

Increase (Decrease)

2015 to 2014

   

Percentage Change

2015 to 2014

 
                                 

Cash and cash equivalents

  $ 9,047,586     $ 10,158,386     $ (1,110,800 )     -10.9 %

Accrued investment income

    2,205,469       1,682,906       522,563       31.1 %

Recoverable from reinsurers

    1,243,618       1,222,245       21,373       1.7 %

Agents' balances and due premiums

    1,070,050       562,146       507,904       90.4 %

Deferred policy acquisition costs

    13,015,679       9,287,851       3,727,828       40.1 %

Value of insurance business acquired

    6,288,200       6,674,414       (386,214 )     -5.8 %

Property and equipment, net

    949       84,001       (83,052 )     -98.9 %

Other assets

    6,054,889       5,747,866       307,023       5.3 %

Assets other than investment assets

  $ 38,926,440     $ 35,419,815     $ 3,506,625       9.9 %

 

The $522,563 increase in accrued investment income is due to the $46,622,049 increase in invested assets during 2015.

 

The $507,904 increase in 2015 agents’ balances and due premiums is primarily due to a $494,328 increase in agents’ balances. This increase is due to increased production of annuity contracts and final expense policies.

 

The decrease in property, plant and equipment is due to 2015 depreciation.

 

Other assets consist primarily of recoverable federal and state income taxes, receivables from mortgage loans and other long-term assets (lottery receivables), guaranty funds, notes receivable, customer account balances receivable, prepaid expenses, other receivables and loans from premium financing .

 

The $307,023 increase in other assets is primarily due to a $652,531 increase in receivables from mortgage loans and other long-term assets (lottery receivables) and a $196,250 increase in the renewal of the note receivable from its former Chairman in excess of decreased recoverable federal and state income taxes of $491,941, decreased prepaid expenses of $30,206 and a decrease in guaranty funds of $16,211.

 

 
29

 

 

Our liabilities as of December 30, 2015 and 2014 are summarized as follows:

 

   

December 31, 2015

   

December 31, 2014

   

Increase (Decrease)

2015 to 2014

     

Percentage Change

2015 to 2014

 
                                 

Policy liabilities

                               

Policyholders' account balances

  $ 197,688,616     $ 140,554,973     $ 57,133,643       40.6 %

Future policy benefits

    39,464,124       35,913,730       3,550,394       9.9 %

Policy claims

    714,928       602,269       112,659       18.7 %

Other policy liabilities

    76,554       87,148       (10,594 )     -12.2 %

Total policy liabilities

    237,944,222       177,158,120       60,786,102       34.3 %

Notes payable

    -       4,076,473       (4,076,473 )     -100.0 %

Deferred federal income taxes

    33,210       2,198,753       (2,165,543 )     -98.5 %

Other liabilities

    937,367       2,357,484       (1,420,117 )     -60.2 %

Total liabilities

  $ 238,914,799     $ 185,790,830     $ 53,123,969       28.6 %

 

The $57,133,643 increase in policy liabilities is due to $59,274,275 of deposits on annuity and deposit-type contracts, $2,966,827 acquired in the reinsurance assumption and interest credited to policyholders’ account balances of $5,675,873 that exceeded withdrawals of $10,783,332.

 

The $3,550,394 increase in future policy benefits is primarily related to the production of new policies, initial sales of policies to older age bands resulting in increased mortality reserve charges and the aging of existing policies.

 

On March 11, 2015, TLIC sold its investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044 as of both December 31, 2014 and March 11, 2015. TLIC recorded a gross realized investment gain on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119. In addition, simultaneously with these sales, TLIC settled its two notes payable, collateralized by the held for sale buildings and land (including assignment of the tenant leases), with an aggregate payment to Grand Bank (the creditor) of $4,076,473.

 

On March 26, 2014, TLIC issued two notes payable totaling $4,076,473. The first note payable totaling $3,009,265 was collateralized (including assignment of the tenant leases) by three properties, located in Indiana, Oklahoma and Texas, purchased for a total of $4,940,647 in December 2013 and February 2014.

 

In December 2013, TLIC purchased one acre of land in Greensburg, Indiana that included a 3,975 square foot building constructed on approximately 8% of this land at a cost of $2,444,203 (including closing costs of $50,516). The building was leased through October 31, 2027 plus four future five year extensions effective on November 1, 2027, November 1, 2032, November 1, 2037 and November 1, 2042. The terms of the lease had the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were as follows: $14,661 in 2014; $14,881 in 2015; $15,104 in 2016; $15,531 in 2017; $15,561 in 2018 and $15,794 in 2019.

 

In December 2013, TLIC also purchased one acre of land in Norman, Oklahoma that included a 9,100 square foot building constructed on approximately 18% of this land at a cost of $1,519,431 (including closing costs of $37,931). The building was leased through August 31, 2028 plus three future five year extensions on September 1, 2028, September 1, 2033 and September 1, 2038. The terms of the lease had the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were $8,004 through August 31, 2028.

 

In February 2014, TLIC purchased one acre of land in Houston, Texas that included a 9,195 square foot building constructed on approximately 25% of this land at a cost of $977,013 (including closing costs of $31,063). The building was leased through December 31, 2023 plus four future five year extensions effective on January 1, 2024, January 1, 2029, January 1, 2034 and January 1, 2039. The terms of the lease had the lessee responsible for paying real estate taxes and building insurance. TLIC was responsible for building and ground maintenance. The monthly lease payments were $5,833 through December 31, 2019.

 

TLIC’s second promissory note totaling $1,067,208 was collateralized (including assignment of the tenant leases) by the February 2014 TLIC purchase of three-fourths of an acre of land in Harrisonville, Missouri that included a 6,895 square foot building constructed on approximately 20% of this land at a cost of $1,752,397 (including closing costs of $44,864).

 

 
30

 

 

The building was leased through October 31, 2028 plus three future five year extensions on November 1, 2028, November 1, 2033 and November 1, 2038. The terms of the lease had the lessee responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were $9,463 through October 31, 2028.

 

When TLIC originated the two promissory notes on March 26, 2014, $106,889 of loan origination fees were capitalized with amortization of the capitalized loan origination fees during the expected 36 month term of the loan. For the year ended December 31, 2014, $26,722 of the loan origination fees has been amortized and the unamortized loan origination fees as of December 31, 2014 were $80,167. TLIC incurred $137,581 of interest expense during 2014 on these two notes payable. In connection with the repayments of the two notes payable on March 11, 2015, TLIC expensed the loan origination fees remaining as of March 11, 2015 of $72,744. During the period from January 1, 2015 to March 11, 2015, TLIC incurred interest expense of $35,181 on the two notes payable and amortized $7,423 of loan origination fees.

 

The $2,165,543 decrease in deferred federal income taxes during the year ended December 31, 2015 was due to $830,704 of operating deferred tax benefits and $1,334,839 of increased deferred federal income benefits on the unrealized depreciation of available-for-sale fixed maturity and equity securities. The $830,704 deferred tax benefit is primarily due to a reduction in the valuation allowances on deferred tax assets as it is probable that a portion of the net operating loss carryforwards on the consolidated federal income tax returns of FTFC and FTCC will be utilized due to projected taxable income in future years demonstrated by the taxable income generated in 2015.

 

Other liabilities consist primarily of accrued expenses, accounts payable, deposits on pending policy applications and unearned investment income. The $1,420,117 decrease in other liabilities is primarily due to a $1,674,397 decrease in deposits on pending applications in excess of an increase in accrued general expenses and taxes, licenses and fees of $177,726.

 

 

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, 2015, we have received $27,119,480 from the sale of our shares.

 

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

 

Our operations have been profitable and have generated $10,269,845 of net income from operations since we were incorporated in 2004. The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital.

 

The historic impact of these two stock dividend charges of $5,270,138 decreased during 2011 and 2012 the balance of accumulated earnings and resulted in a reported balance as of December 31, 2015 of $4,999,707, as shown in the accumulated earnings caption in the December 31, 2015 consolidated statement of financial position.

 

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

 

As of December 31, 2015, we had cash and cash equivalents totaling $9,047,586. As of December 31, 2015, cash and cash equivalents of $4,094,054 and $2,970,846, respectively, of the total $9,047,586 were held by FBLIC and TLIC and may not be available for use by FTFC due to the required pre-approval by the OID and MDOI 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.

 

 
31

 

 

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 $2,266,305 in 2016 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $915,147 in 2016 without prior approval. FBLIC paid dividends of $1,000,000 and $1,500,000 to TLIC in 2015 and 2014, respectively. These dividends 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 $5,957,248 as of December 31, 2015. Uninsured balances aggregated $6,494,515 as of December 31, 2014. 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.

 

Our cash flows for the years ended December 31, 2015 and 2014 are summarized as follows:

 

   

Years Ended December 31,

   

Increase (Decrease)

   

Percentage Change

 
   

2015

   

2014

    2015 to 2014     2015 to 2014  

Net cash provided by operating activities

  $ 3,767,070     $ 2,892,309     $ 874,761       30.2 %

Net cash used in investing activities

    (49,253,697 )     (29,627,791 )     (19,625,906 )     66.2 %

Net cash provided by financing activities

    44,375,827       26,285,430       18,090,397       68.8 %

Decrease in cash and cash equivalents

    (1,110,800 )     (450,052 )     (660,748 )     146.8 %

Cash and cash equivalents, beginning of period

    10,158,386       10,608,438       (450,052 )     -4.2 %

Cash and cash equivalents, end of period

  $ 9,047,586     $ 10,158,386     $ (1,110,800 )     -10.9 %

 

The $874,761 increase in cash provided by operating activities during the year ended December 31, 2015 is primarily due to increases in net investment income of $2,737,695, premiums of $1,727,743, short-term investments of $1,682,543, taxes of $318,631 and policy loans of $72,071 that exceeded increase in commissions of $2,712,499, other underwriting, insurance and acquisition expenses of $2,567,264 and benefits of $408,811.

 

The $19,625,906 decrease in cash used for investing activities during the year ended December 31, 2015 was primarily related to $13,383,839 of increased 2015 purchases of fixed maturity securities, $10,255,086 of increased purchases of other long-term investments (lottery receivables), $5,662,910 of decreased 2015 sales and maturity of fixed maturity securities, $2,875,276 of increased 2015 purchases of mortgage loans and $652,459 increased purchases of equity securities that exceeded $7,047,246 of increased proceeds from the 2015 sale of investment real estate held for sale, $2,817,857 of decreased purchases of real estate held for sale, $2,214,761 of increased 2015 payments of mortgage loans, $743,487 of increased payments of long-term investments and $328,737 of increased 2015 sales of equity securities.

 

The $18,090,397 increase in cash provided by financing activities for the year ended December 31, 2015 resulted from $28,507,213 of increased 2015 policyholder account deposits in excess of increased withdrawals of $2,386,800 and $122,930 of 2015 decreased purchases of treasury shares and $8,152,946 less funds available in 2015 due to both the settlement of and issuance of note payable proceeds of $4,076,473 in 2015 and 2014.

 

Our shareholders’ equity as of December 31, 2015 and 2014 is summarized as follows:

 

   

December 31, 2015

   

December 31, 2014

   

Increase (Decrease) 

2015 to 2014

   

 Percentage Change

2015 to 2014

 
                                 

Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 and 8,050,193 issued as of December 31, 2015 and 2014, respectively, and 7,802,593 and 7,812,038 outstanding as of December 31, 2015 and 2014, respectively)

  $ 80,502     $ 80,502     $ -       0.0 %

Additional paid-in capital

    28,684,598       28,684,748       (150 )     0.0 %

Treasury stock, at cost (247,580 and 238,155 shares as of December 31, 2015 and 2014, respectively)

    (893,947 )     (855,304 )     (38,643 )     4.5 %

Accumulated other comprehensive income (loss)

    (2,655,817 )     2,683,543       (5,339,360 )     -199.0 %

Accumulated earnings

    4,999,707       2,616,849       2,382,858       91.1 %

Total shareholders' equity

  $ 30,215,043     $ 33,210,338     $ (2,995,295 )     -9.0 %

 

 
32

 

 

The decrease in shareholders’ equity of $2,995,295 for the year ended December 31, 2015 is due to $5,339,360 of other comprehensive loss and $38,643 for the purchase of 9,425 shares of treasury stock from the former chairman of FTFC that exceeded net income of $2,382,708.

 

Equity per common share outstanding decreased 8.9% from $4.25 per share as of December 31, 2014 to $3.87 per share as of December 31, 2015, based upon 7,802,593 and 7,812,038 common shares outstanding as of December 31, 2015 and 2014, respectively.

 

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 2015 or 2014. Our investments consist primarily of 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 (depreciation) appreciation on available-for-sale securities of ($3,369,843) and $3,390,869 as of December 31, 2015 and 2014, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. An increase of $7,080,796 in unrealized losses arising for the year ended December 31, 2015 has been offset by the 2015 net realized investment losses of $320,084 originating from the sale and call activity for fixed maturity and equity securities and a loss on an other-than-temporary impairment resulting in net unrealized losses on investment of $6,760,712.

 

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, 2015, 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 8.4% 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 2015, 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.

 

 
33

 

 

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.

 

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, 2015 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;

 

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;

 

 
34

 

 

 

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.

 

 
35

 

  

FIRST TRINITY FINANCIAL CORPORATION AND SUBSIDIARIES

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

 

 

Consolidated Financial Statements 

Page

Numbers

 

 

Report of Independent Registered Public Accounting Firm                     

37

 

 

Consolidated Statements of Financial Position                          

 38

 

 

Consolidated Statements of Operations                                

 39

 

 

Consolidated Statements of Comprehensive Income (Loss) 

 40

 

 

Consolidated Statements of Changes in Shareholders’ Equity                     

41

 

 

Consolidated Statements of Cash Flows                               

42

 

 

Notes to Consolidated Financial Statements                               

44

 

 
36

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

To the Board of Directors and
Shareholders of First Trinity Financial Corporation

 

 

 

We have audited the accompanying consolidated statements of financial position of First Trinity Financial Corporation and Subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the years then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Trinity Financial Corporation and Subsidiaries as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

 

 

/s/ Kerber, Eck & Braeckel LLP

 

 

Springfield, Illinois

March 9, 2016

 

 
37

 

  

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Financial Position

 

   

December 31, 2015

   

December 31, 2014

 

Assets

               

Investments

               

Available-for-sale fixed maturity securities at fair value (amortized cost: $138,028,455 and $107,412,322 as of December 31, 2015 and 2014, respectively)

  $ 134,556,027     $ 110,651,429  

Available-for-sale equity securities at fair value (cost: $790,215 and $519,595 as of December 31, 2015 and 2014, respectively)

    892,800       671,357  

Mortgage loans on real estate

    58,774,918       38,649,733  

Investment real estate

    2,326,558       9,165,090  

Policy loans

    1,486,317       1,520,620  

Short-term investments

    599,855       1,141,199  

Other long-term investments

    31,566,927       21,781,925  

Total investments

    230,203,402       183,581,353  

Cash and cash equivalents

    9,047,586       10,158,386  

Accrued investment income

    2,205,469       1,682,906  

Recoverable from reinsurers

    1,243,618       1,222,245  

Agents' balances and due premiums

    1,070,050       562,146  

Deferred policy acquisition costs

    13,015,679       9,287,851  

Value of insurance business acquired

    6,288,200       6,674,414  

Property and equipment, net

    949       84,001  

Other assets

    6,054,889       5,747,866  

Total assets

  $ 269,129,842     $ 219,001,168  
                 

Liabilities and Shareholders' Equity

               

Policy liabilities

               

Policyholders' account balances

  $ 197,688,616     $ 140,554,973  

Future policy benefits

    39,464,124       35,913,730  

Policy claims

    714,928       602,269  

Other policy liabilities

    76,554       87,148  

Total policy liabilities

    237,944,222       177,158,120  

Notes payable

    -       4,076,473  

Deferred federal income taxes

    33,210       2,198,753  

Other liabilities

    937,367       2,357,484  

Total liabilities

    238,914,799