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EX-31.1 - EXHIBIT 31.1 - First Trinity Financial CORPex_120608.htm
 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

[ X ]

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

 

For the quarterly period ended June 30, 2018

 

[   ]

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

For the transition period From                                 to                                   .

 

Commission file number: 000-52613

 

FIRST TRINITY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

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

 

7633 East 63rd Place, Suite 230

Tulsa, Oklahoma 74133-1246

(Address of principal executive offices)

 

(918) 249-2438

(Registrant's telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑        No ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” "accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer:  ☐ 

Accelerated filer:  ☐

Non-accelerated filer:  ☐

Smaller reporting company:  ☑

Emerging growth company: ☐

  

   

 

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

 

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

Yes ☐       No ☑

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Common stock .01 par value as of August 6, 2018: 7,802,593 shares

 

 

 
 

 

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED JUNE 30, 2018

 

 

 

TABLE OF CONTENTS

 

 

 

PART I.  FINANCIAL INFORMATION

Page Number

 

 

 

Item 1.  Consolidated Financial Statements

 

 

 

 

 

Consolidated Statements of Financial Position as of June 30, 2018 (Unaudited) and December 31, 2017

3

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)

5

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2018 and 2017 (Unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (Unaudited)

7

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

9

 

 

 

 

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

34

 

 

 

 

Item 4.  Controls and Procedures

66

 

 

 

 

Part II.  OTHER INFORMATION

 

 

 

 

 

Item 1.  Legal Proceedings

66

 

 

 

 

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

67

 

 

 

 

Item 3.  Defaults upon Senior Securities

67

 

 

 

 

Item 4.  Mine Safety Disclosures

67

 

 

 

 

Item 5. Other Information

67

 

 

 

 

Item 6. Exhibits

67

 

 

 

 

Signatures

68

 

 

 

 

Exhibit No. 31.1

 

 

Exhibit No. 31.2

 

 

Exhibit No. 32.1

 

 

Exhibit No. 32.2

 

 

Exhibit No. 101.INS

 

 

Exhibit No. 101.SCH

 

 

Exhibit No. 101.CAL

 

 

Exhibit No. 101.DEF

 

 

Exhibit No. 101.LAB

 

 

Exhibit No. 101.PRE

 

 

 

2

 
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Financial Position

 

   

(Unaudited)

         
   

June 30, 2018

   

December 31, 2017

 

Assets

               

Investments

               

Available-for-sale fixed maturity securities at fair value (amortized cost: $145,519,627 and $143,621,947 as of June 30, 2018 and December 31, 2017, respectively)

  $ 144,729,230     $ 149,683,139  

Available-for-sale preferred stock at fair value (cost: $99,945 as of June 30, 2018 and December 31, 2017)

    99,020       100,720  

Equity securities (available-for-sale in 2017) at fair value (cost: $513,490 and $502,919 as of June 30, 2018 and December 31, 2017, respectively)

    568,208       571,427  

Mortgage loans on real estate

    120,023,916       102,496,451  

Investment real estate

    2,632,458       2,382,966  

Policy loans

    1,683,744       1,660,175  

Short-term investments

    685,898       547,969  

Other long-term investments

    58,904,792       55,814,583  

Total investments

    329,327,266       313,257,430  

Cash and cash equivalents

    16,585,991       31,496,159  

Accrued investment income

    2,707,701       2,544,963  

Recoverable from reinsurers

    1,659,698       1,340,700  

Assets held in trust under coinsurance agreement

    7,464,922       -  

Agents' balances and due premiums

    1,500,290       1,485,305  

Deferred policy acquisition costs

    27,166,743       24,555,902  

Value of insurance business acquired

    5,355,156       5,526,645  

Other assets

    11,532,357       10,920,570  

Total assets

  $ 403,300,124     $ 391,127,674  

Liabilities and Shareholders' Equity

               

Policy liabilities

               

Policyholders' account balances

  $ 294,488,224     $ 292,909,762  

Future policy benefits

    52,601,174       49,663,099  

Policy claims

    1,187,074       1,148,513  

Other policy liabilities

    66,445       68,490  

Total policy liabilities

    348,342,917       343,789,864  

Funds withheld under coinsurance agreement

    11,335,660       -  

Deferred federal income taxes

    2,179,425       2,961,929  

Other liabilities

    3,156,673       3,123,702  

Total liabilities

    365,014,675       349,875,495  

Shareholders' equity

               

Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 issued as of June 30, 2018 and December 31, 2017 and 7,802,593 outstanding as of June 30, 2018 and December 31, 2017)

    80,502       80,502  

Additional paid-in capital

    28,684,598       28,684,598  

Treasury stock, at cost (247,580 shares as of June 30, 2018 and December 31, 2017)

    (893,947 )     (893,947 )

Accumulated other comprehensive income (loss)

    (614,045 )     4,760,951  

Accumulated earnings

    11,028,341       8,620,075  

Total shareholders' equity

    38,285,449       41,252,179  

Total liabilities and shareholders' equity

  $ 403,300,124     $ 391,127,674  

 

 

See notes to consolidated financial statements (unaudited).

 

3

 
 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Revenues

                               

Premiums

  $ 4,572,872     $ 3,880,345     $ 9,059,607     $ 7,502,035  

Net investment income

    5,038,141       3,995,064       9,722,383       7,664,935  

Net realized investment gains

    49,256       91,088       24,472       257,594  

Loss on other-than-temporary impairments

    -       (224,250 )     -       (224,250 )

Service fees

    230,161       3,614       233,561       7,289  

Other income

    28,345       13,621       46,172       59,838  

Total revenues

    9,918,775       7,759,482       19,086,195       15,267,441  

Benefits, Claims and Expenses

                               

Benefits and claims

                               

Increase in future policy benefits

    1,526,060       1,482,159       2,965,651       2,441,964  

Death benefits

    1,525,130       887,745       3,087,186       2,433,581  

Surrenders

    235,172       248,212       462,841       531,588  

Interest credited to policyholders

    2,304,102       2,201,930       4,611,433       4,236,984  

Dividend, endowment and supplementary life contract benefits

    65,010       64,795       132,695       131,768  

Total benefits and claims

    5,655,474       4,884,841       11,259,806       9,775,885  

Policy acquisition costs deferred

    (2,180,425 )     (2,586,318 )     (4,488,458 )     (5,001,037 )

Amortization of deferred policy acquisition costs

    1,172,075       747,306       1,995,623       1,428,142  

Amortization of value of insurance business acquired

    81,878       107,296       171,489       209,464  

Commissions

    1,926,536       2,345,063       4,029,658       4,589,973  

Other underwriting, insurance and acquisition expenses

    1,488,635       1,572,220       3,132,028       3,226,423  

Total expenses

    2,488,699       2,185,567       4,840,340       4,452,965  

Total benefits, claims and expenses

    8,144,173       7,070,408       16,100,146       14,228,850  

Income before total federal income tax expense

    1,774,602       689,074       2,986,049       1,038,591  

Current federal income tax expense

    -       19,909       -       19,909  

Deferred federal income tax expense

    375,225       119,121       646,291       207,160  

Total federal income tax expense

    375,225       139,030       646,291       227,069  

Net income

  $ 1,399,377     $ 550,044     $ 2,339,758     $ 811,522  

Net income per common share basic and diluted

  $ 0.18     $ 0.07     $ 0.30     $ 0.10  

 

 

See notes to consolidated financial statements (unaudited).

 

4

 
 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Net income

  $ 1,399,377     $ 550,044     $ 2,339,758     $ 811,522  

Other comprehensive income (loss)

                               

Total net unrealized investment gains (losses) arising during the period

    (2,433,022 )     2,477,183       (6,813,812 )     3,720,267  

Cumulative effect, adoption of accounting guidance for equity securities

    -       -       (68,508 )     -  

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

    40,647       (197,332 )     39,477       (33,313 )

Net unrealized investment gains (losses)

    (2,473,669 )     2,674,515       (6,921,797 )     3,753,580  

Less adjustment to deferred acquisition costs

    (42,316 )     49,778       (118,006 )     69,278  

Other comprehensive income (loss) before federal income tax expense

    (2,431,353 )     2,624,737       (6,803,791 )     3,684,302  

Federal income tax expense (benefit)

    (510,583 )     524,948       (1,428,795 )     736,861  

Total other comprehensive income (loss)

    (1,920,770 )     2,099,789       (5,374,996 )     2,947,441  

Total comprehensive income (loss)

  $ (521,393 )   $ 2,649,833     $ (3,035,238 )   $ 3,758,963  

 

 

See notes to consolidated financial statements (unaudited).

 

5

 
 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

Six Months Ended June 30, 2018 and 2017

(Unaudited)

 

 

                           

Accumulated

                 
   

Common

   

Additional

           

Other

           

Total

 
   

Stock

   

Paid-in

   

Treasury

   

Comprehensive

   

Accumulated

   

Shareholders'

 
   

$.01 Par Value

   

Capital

   

Stock

   

Income (Loss)

   

Earnings

   

Equity

 

Balance as of January 1, 2017

  $ 80,502     $ 28,684,598     $ (893,947 )   $ 818,676     $ 7,590,446     $ 36,280,275  

Comprehensive income:

                                               

Net income

    -       -       -       -       811,522       811,522  

Other comprehensive income

    -       -       -       2,947,441       -       2,947,441  

Balance as of June 30, 2017

  $ 80,502     $ 28,684,598     $ (893,947 )   $ 3,766,117     $ 8,401,968     $ 40,039,238  
                                                 

Balance as of January 1, 2018

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

Comprehensive loss:

                                               

Net income

    -       -       -       -       2,339,758       2,339,758  

Cumulative effect, adoption of accounting guidance for equity securities

    -       -       -       -       68,508       68,508  

Other comprehensive loss

    -       -       -       (5,374,996 )     -       (5,374,996 )

Balance as of June 30, 2018

  $ 80,502     $ 28,684,598     $ (893,947 )   $ (614,045 )   $ 11,028,341     $ 38,285,449  

 

 

See notes to consolidated financial statements (unaudited).

 

6

 
 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

   

Six Months Ended June 30,

 
   

2018

   

2017

 

Operating activities

               

Net income

  $ 2,339,758     $ 811,522  

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

               

Provision for depreciation

    72,744       73,063  

Accretion of discount on investments

    (1,877,352 )     (1,386,429 )

Net realized investment gains

    (24,472 )     (257,594 )

Loss on other-than-temporary impairment

    -       224,250  

Amortization of policy acquisition cost

    1,995,623       1,428,142  

Policy acquisition cost deferred

    (4,488,458 )     (5,001,037 )

Amortization of loan origination fees

    20,955       23,408  

Amortization of value of insurance business acquired

    171,489       209,464  

Allowance for mortgage loan losses

    67,481       101,031  

Provision for deferred federal income tax expense

    646,291       207,160  

Interest credited to policyholders

    4,611,433       4,236,984  

Change in assets and liabilities:

               

Policy loans

    (23,569 )     (6,144 )

Short-term investments

    (137,929 )     -  

Accrued investment income

    (162,738 )     (341,160 )

Recoverable from reinsurers

    (318,998 )     28,028  

Assets held in trust under coinsurance agreement

    (7,464,922 )     -  

Agents' balances and due premiums

    (14,985 )     (224,440 )

Other assets (excludes depreciation of $320 in 2017 and change in receivable for securities sold of $674,416 and $609,014 in 2018 and 2017, respectively)

    62,629       620,743  

Future policy benefits

    2,938,075       2,441,965  

Policy claims

    38,561       (82,644 )

Other policy liabilities

    (2,045 )     7,904  

Other liabilities (excludes change in payable for securities purchased of ($99,611) and ($80,176) in 2018 and 2017, respectively)

    (66,640 )     (1,878,923 )

Net cash provided (used) by operating activities

    (1,617,069 )     1,235,293  
                 

Investing activities

               

Purchases of fixed maturity securities

    (10,665,969 )     (32,301,685 )

Maturities of fixed maturity securities

    4,500,000       4,868,000  

Sales of fixed maturity securities

    3,988,932       7,735,249  

Purchases of equity securities

    (25,876 )     (1,807 )

Sales of equity securities

    15,412       -  

Purchases of mortgage loans

    (34,435,782 )     (36,741,329 )

Payments on mortgage loans

    16,655,627       10,724,113  

Purchases of other long-term investments

    (5,877,273 )     (13,362,692 )

Payments on other long-term investments

    4,769,093       3,999,678  

Sale on other long-term investments

    -       792,012  

Sale of real estate

    54,853       190,084  

Net change in receivable and payable for securities sold and purchased

    (574,805 )     528,838  

Net cash used in investing activities

    (21,595,788 )     (53,569,539 )
                 

Financing activities

               

Policyholders' account deposits

    21,557,499       45,682,170  

Policyholders' account withdrawals

    (13,254,810 )     (10,030,091 )

Net cash provided by financing activities

    8,302,689       35,652,079  
                 

Decrease in cash

    (14,910,168 )     (16,682,167 )

Cash and cash equivalents, beginning of period

    31,496,159       34,223,945  

Cash and cash equivalents, end of period

  $ 16,585,991     $ 17,541,778  

 

 

See notes to consolidated financial statements (unaudited).

 

7

 
 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows (continued)

Supplemental Disclosure – Cash and Non-Cash Impact on Investing Activities

(Unaudited)

 

 

During 2017 the Company reclassified an available-for-sale fixed maturity security totaling $729,737 to other long-term investments as recent third party information indicated the security does not qualify for available-for-sale treatment.

 

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

 

   

Six Months Ended

 
   

June 30, 2017

 

Reduction in available-for-securities fixed maturity securities

  $ 729,737  

Other long-term invesments

    (729,737 )

Net cash provided (used) in investing activities

  $ -  

 

 

During 2018 the Company foreclosed on residential mortgage loans of real estate totaling $378,411 and transferred those properties to investment real estate that are now held for sale.

 

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

 

   

Six Months Ended

 
   

June 30, 2018

 

Reductions in mortgage loans due to foreclosure

  $ 378,411  

Investment real estate held-for-sale acquired through foreclosure

    (378,411 )

Net cash provided (used) in investing activities

  $ -  

 

 

See notes to consolidated financial statements (unaudited).

 

8

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

 

1. Organization and Significant Accounting Policies

 

Nature of Operations

 

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

 

The Company owns 100% of TLIC. TLIC owns 100% of FBLIC. TLIC and FBLIC are primarily engaged in the business of marketing, underwriting and distributing a broad range of individual life insurance and annuity products to individuals. TLIC’s and FBLIC’s current product portfolio consists of a modified premium whole life insurance policy with a flexible premium deferred annuity rider, whole life, term, final expense, accidental death and dismemberment and annuity products. The term products are both renewable and convertible and issued for 10, 15, 20 and 30 years. They can be issued with premiums fully guaranteed for the entire term period or with a limited premium guarantee. The final expense is issued as either a simplified issue or as a graded benefit, determined by underwriting. The TLIC and FBLIC products are sold through independent agents. TLIC is licensed in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas. FBLIC is licensed in the states of Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia.

 

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

 

Company Capitalization

 

The Company raised $1,450,000 from two private placement stock offerings during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012 and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings. The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital.

 

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

 

Acquisitions

 

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

 

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

 

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

 

9

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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

 

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

 

Basis of Presentation

 

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

 

The results of operations for the six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the year ended December 31, 2018 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to consolidated financial statements prepared in accordance with U.S. GAAP, but which is not required for interim reporting purposes, has been condensed or omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 2017.

 

Principles of Consolidation

 

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

 

Reclassifications

 

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

 

Use of Estimates

 

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

 

Common Stock

 

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

 

Treasury Stock

 

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

 

10

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Subsequent Events

 

Management has evaluated all events subsequent to June 30, 2018 through the date that these financial statements have been issued.

 

Recent Accounting Pronouncements

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing services will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognition by one year to the quarter ending March 31, 2018.  The adoption of this guidance did not have a material effect on the Company’s result of operations, financial position or liquidity.

 

Recognition and Measurement of Financial Assets and Financial Liabilities

 

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

 

This guidance is effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance was applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and early adoption is not permitted. The adoption of this guidance did not have a material effect on the Company’s result of operations, financial position or liquidity.

 

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.

 

11

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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 may be applied using a modified retrospective approach effective for annual and interim periods beginning after December 15, 2018.  In July 2018, the FASB issued updated guidance (Accounting Standards Update 2018-11) that provides entities with an additional (and optional) transition method to adopt the new standard on leases. Under this new transition method, an entity initially applies the new standard on leases at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new standard on leases will continue to be in accordance with current GAAP (Topic 840, Leases).  An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. 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.

 

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

 

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

 

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

 

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

 

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

 

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

 

12

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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

 

In November 2016, the FASB issued specific guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents when there are transfers between cash, cash equivalents and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents.

 

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

 

Business Combinations – Clarifying the Definition of a Business

 

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

 

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

 

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

 

In January 2017, the FASB issued guidance to modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Reporting entities will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The updated guidance is effective for annual and interim periods beginning after December 15, 2019, and is to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

Compensation — Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

 

In March 2017, the FASB issued updated guidance to improve the presentation of net periodic pension cost and net periodic post retirement cost (net benefit costs). Net benefit costs comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees.  The update requires that the employer service cost component be reported in the same lines as other employee compensation cost and that the other components (non-service costs) be presented separately from the service cost and outside of a subtotal of income from operations if one is presented.  The update also allows only the service cost component to be eligible for capitalization in assets when applicable.

 

The updated guidance is effective for reporting periods beginning after December 15, 2017. The update is to be applied retrospectively with respect to the presentation of service cost and non-service cost and prospectively with respect to applying the service cost only eligible for capitalization in assets guidance. Early adoption is permitted as of the first interim period of an annual period if an entity issues interim financial statements. This pronouncement did not impact the Company since it does not have any pension or postretirement benefit plans and has no intention to adopt such plans.

 

13

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Compensation — Stock Compensation: Scope of Modification Accounting

 

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

 

The updated guidance is effective for the quarter ending March 31, 2018.  The update is to be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted in any interim periods for which financial statements have not yet been made available for issuance. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Target Improvement to Accounting for Hedging Activities

 

In August 2017, the FASB issued updated authoritative guidance for the application of hedge accounting. The updated guidance updates certain recognition and measurement requirements for hedge accounting. The objective of the guidance is to more closely align the economics of a company’s risk management activities in its financial results and reduce the complexity of applying hedge accounting. The updates include the expansion of hedging strategies that are eligible for hedge accounting, elimination of the separate measurement and reporting of hedge ineffectiveness, presentation of the changes in the fair value of the hedging instrument in the same consolidated statement of operations line as the earnings effect of the hedged item and simplification of hedge effectiveness assessments. This guidance also includes new disclosures and will be applied using a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.

 

The updated guidance is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted for reporting periods beginning before December 15, 2018. The Company does not currently and does not intend to participate in hedging activities and there is therefore no impact on the Company’s results of operations, financial position or liquidity. This pronouncement would be adopted if the Company begins to participate in hedging activities in the future.

 

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 

On February 14, 2018, the FASB issued updated guidance that allows a reclassification of the stranded tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017. Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to accumulated other comprehensive income. The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Cuts and Jobs Act of 2017 related to items in accumulated other comprehensive income. The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which the effect of the Tax Cuts and Jobs Act of 2017 related to items remaining in accumulated other comprehensive income are recognized or at the beginning of the period of adoption. Early adoption is permitted.

 

The Company adopted the updated guidance effective December 31, 2017. The adoption of this guidance did not have a material effect on the Company’s result of operations, financial position or liquidity.

 

14

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

 

2. Investments

 

Investments in fixed maturity and preferred stock available-for-sale and equity securities as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

           

Gross

   

Gross

         
   

Amortized Cost

   

Unrealized

   

Unrealized

   

Fair

 
   

or Cost

   

Gains

   

Losses

   

Value

 
   

June 30, 2018 (Unaudited)

 

Fixed maturity securities

                               

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

  $ 2,966,177     $ 24,243     $ 102,727     $ 2,887,693  

States and political subdivisions

    9,332,714       200,146       41,142       9,491,718  

Residential mortgage-backed securities

    25,849       33,585       -       59,434  

Corporate bonds

    110,610,723       1,239,478       1,822,844       110,027,357  

Asset-backed

    253,753       37       -       253,790  

Foreign bonds

    22,330,411       220,185       541,358       22,009,238  

Total fixed maturity securities

    145,519,627       1,717,674       2,508,071       144,729,230  
                                 

Preferred stock

    99,945       1,275       2,200       99,020  
                                 

Equity securities

                               

Mutual funds

    350,191       -       11,892       338,299  

Corporate common stock

    163,299       66,610       -       229,909  

Total equity securities

    513,490       66,610       11,892       568,208  

Total fixed maturity, preferred stock and equity securities

  $ 146,133,062     $ 1,785,559     $ 2,522,163     $ 145,396,458  

 

   

December 31, 2017

 

Fixed maturity securities

                               

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

  $ 2,989,688     $ 48,720     $ 65,341     $ 2,973,067  

States and political subdivisions

    9,368,393       337,442       20,148       9,685,687  

Residential mortgage-backed securities

    29,573       41,736       -       71,309  

Corporate bonds

    109,340,273       5,248,291       491,556       114,097,008  

Foreign bonds

    21,894,020       1,134,999       172,951       22,856,068  

Total fixed maturity securities

    143,621,947       6,811,188       749,996       149,683,139  
                                 

Preferred stock

    99,945       775       -       100,720  
                                 

Equity securities

                               

Mutual funds

    347,942       1,124       -       349,066  

Corporate common stock

    154,977       67,384       -       222,361  

Total equity securities

    502,919       68,508       -       571,427  

Total fixed maturity, preferred stock and equity securities

  $ 144,224,811     $ 6,880,471     $ 749,996     $ 150,355,286  

 

15

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

  

2. Investments (continued)

 

All securities in an unrealized loss position as of the financial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

           

Unrealized

   

Number of

 
   

Fair Value

   

Loss

   

Securities

 
   

June 30, 2018 (Unaudited)

 

Fixed maturity securities

                       

Less than 12 months

                       

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

  $ 120,618     $ 4,435       1  

States and political subdivisions

    1,001,108       9,835       6  

Corporate bonds

    52,118,833       1,413,515       192  

Foreign bonds

    14,660,347       480,116       50  

Total less than 12 months

    67,900,906       1,907,901       249  

More than 12 months

                       

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

    1,456,702       98,292       5  

States and political subdivisions

    515,250       31,307       4  

Corporate bonds

    3,827,555       409,329       18  

Foreign bonds

    507,826       61,242       3  

Total more than 12 months

    6,307,333       600,170       30  

Total fixed maturity securities in an unrealized loss position

    74,208,239       2,508,071       279  
                         

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

    47,800       2,200       1  
                         

Equity securities

                       

Less than 12 months

                       

Mutual funds

    80,090       11,892       1  

Total less than 12 months

    80,090       11,892       1  

Total equity securities in an unrealized loss position

    80,090       11,892       1  

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

  $ 74,336,129     $ 2,522,163       281  

 

   

December 31, 2017

 

Fixed maturity securities

                       

Less than 12 months

                       

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

  $ 326,163     $ 3,897       2  

States and political subdivisions

    608,342       6,889       3  

Corporate bonds

    5,995,898       130,337       23  

Foreign bonds

    2,061,178       98,520       7  

Total less than 12 months

    8,991,581       239,643       35  

More than 12 months

                       

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

    1,338,617       61,444       5  

States and political subdivisions

    579,008       13,259       4  

Corporate bonds

    5,139,898       361,219       20  

Foreign bonds

    501,875       74,431       3  

Total more than 12 months

    7,559,398       510,353       32  

Total fixed maturity securities in an unrealized loss position

  $ 16,550,979     $ 749,996       67  

 

16

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

2. Investments (continued)

 

As of June 30, 2018, the Company held 279 available-for-sale fixed maturity securities with an unrealized loss of $2,508,071, fair value of $74,208,239 and amortized cost of $76,716,310. These unrealized losses were primarily due to market interest rate movements in the bond market as of June 30, 2018. The ratio of the fair value to the amortized cost of these 279 securities is 97%.

 

As of December 31, 2017, the Company held 67 available-for-sale fixed maturity securities with an unrealized loss of $749,996, fair value of $16,550,979 and amortized cost of $17,300,975. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2017. The ratio of the fair value to the amortized cost of these 67 securities is 96%.

 

As of June 30, 2018, the Company held one preferred stock with an unrealized loss of $2,200, fair value of $47,800 and cost of $50,000. The ratio of fair value to cost of this preferred stock is 96%.

 

As of June 30, 2018, the Company held one equity security with an unrealized loss of $11,892, fair value of $80,090 and cost of $91,982. The ratio of fair value to cost of this security is 87%.

 

As of December 31, 2017, the Company had no equity securities and preferred stock with unrealized losses.

 

Fixed maturity securities were 94% and 93% investment grade as rated by Standard & Poor’s as of June 30, 2018 and December 31, 2017, respectively.

 

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

 

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

 

The Company has recorded other-than-temporary impairments on its fixed maturity available-for-sale investment in an energy corporation with a total par value of $650,000 as a result of continuing unrealized losses. During fourth quarter 2016 this security was initially impaired by a $207,450 charge to the statement of operations. During second quarter 2017 this security was further impaired by a $224,250 charge to the statement of operations. These impairments were considered fully credit-related and represent the difference between the amortized cost basis of the security and its fair value. The Company experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securities for the three and six months ended June 30, 2018 and the year ended December 31, 2017.

 

Management believes that the Company will fully recover its cost basis in the securities held as of June 30, 2018, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature.  The remaining temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment. 

 

17

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

  

2. Investments (continued)

 

Net unrealized gains included in other comprehensive income for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized as of June 30, 2018 and December 31, 2017, are summarized as follows:

 

   

(Unaudited)

         
   

June 30, 2018

   

December 31, 2017

 

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

  $ (791,322 )   $ 6,130,475  

Adjustment to deferred acquisition costs

    14,051       (103,955 )

Deferred income taxes

    163,226       (1,265,569 )

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

  $ (614,045 )   $ 4,760,951  

 

The Company’s investment in lottery prize cash flows categorized as other long-term investments in the statement of financial position was $58,904,792 and $55,814,583 as of June 30, 2018 and December 31, 2017, respectively. The lottery prize cash flows are assignments of the future rights from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries.

 

The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of June 30, 2018, by contractual maturity, are summarized as follows:

 

   

June 30, 2018 (Unaudited)

 
   

Fixed Maturity Available-For-Sale Securities

   

Other Long-Term Investments

 
   

Amortized Cost

   

Fair Value

   

Amortized Cost

   

Fair Value

 

Due in one year or less

  $ 5,989,076     $ 6,029,453     $ 8,353,077     $ 8,466,758  

Due after one year through five years

    31,631,572       31,892,998       24,494,875       26,511,324  

Due after five years through ten years

    42,904,163       42,264,931       16,992,187       20,528,993  

Due after ten years

    64,968,967       64,482,414       9,064,653       13,927,201  

Due at multiple maturity dates

    25,849       59,434       -       -  
    $ 145,519,627     $ 144,729,230     $ 58,904,792     $ 69,434,276  

 

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

 

18

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

2. Investments (continued)

 

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity securities available-for-sale, equity securities, investment real estate and other long-term investments for the three and six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

Three Months Ended June 30, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

   

Investment Real Estate

 
   

2018

   

2017

   

2018

   

2017

   

2018

   

2017

 

Proceeds

  $ 5,909,141     $ 8,154,018     $ 15,000     $ -     $ 54,853     $ 82,917  

Gross realized gains

    74,419       356,147       1       -       -       3,563  

Gross realized losses

    (33,772 )     (329,229 )     -       -       (1,322 )     (1,668 )

Loss on other-than- temporary impairment

    -       (224,250 )     -       -       -       -  

 

   

Three Months Ended June 30, (Unaudited)

 
   

Other Long-Term Investments

 
   

2018

   

2017

 

Proceeds

  $ -     $ 792,012  

Gross realized gains

    -       62,275  

Gross realized losses

    -       -  

Loss on other-than- temporary impairment

    -       -  

 
 

   

Six Months Ended June 30, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

   

Investment Real Estate

 
   

2018

   

2017

   

2018

   

2017

   

2018

   

2017

 

Proceeds

  $ 8,488,932     $ 12,603,249     $ 15,412     $ -     $ 54,853     $ 190,084  

Gross realized gains

    80,520       527,252       107       -       -       6,050  

Gross realized losses

    (41,043 )     (336,315 )     -       -       (1,322 )     (1,668 )

Loss on other-than- temporary impairment

    -       (224,250 )     -       -       -       -  

 

   

Six Months Ended June 30, (Unaudited)

 
   

Other Long-Term Investments

 
   

2018

   

2017

 

Proceeds

  $ -     $ 792,012  

Gross realized gains

    -       62,275  

Gross realized losses

    -       -  

Loss on other-than- temporary impairment

    -       -  

 

19

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

2. Investments (continued)

 

The accumulated change in unrealized investment gains (losses) for fixed maturity and preferred stock available-for-sale and equity securities for the three and six months ended June 30, 2018 and 2017 and the amount of net realized investment gains (losses) on fixed maturity securities available-for-sale, equity securities, investment real estate and other long-term investments for the three and six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

Three Months Ended June 30, (Unaudited)

   

Six Months Ended June 30, (Unaudited)

 
   

2018

   

2017

   

2018

   

2017

 

Change in unrealized investment gains (losses):

                               

Available-for-sale securities:

                               

Fixed maturity securities

  $ (2,475,749 )   $ 2,673,801     $ (6,851,589 )   $ 3,734,842  

Preferred stock

    2,080       -       (1,700 )     5,578  

Equity securities

    -       714       -       13,160  

Net realized investment gains (losses):

                               

Available-for-sale securities:

                               

Fixed maturity securities

    40,647       26,918       39,477       190,937  

Equity securities, sale of securities

    1       -       107       -  

Equity securities, changes in fair value

    9,930       -       (13,790 )     -  

Investment real estate

    (1,322 )     1,895       (1,322 )     4,382  

Other long-term investments

    -       62,275       -       62,275  

 

Major categories of net investment income for the three and six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

Three Months Ended June 30, (Unaudited)

   

Six Months Ended June 30, (Unaudited)

 
   

2018

   

2017

   

2018

   

2017

 

Fixed maturity securities

  $ 1,669,950     $ 1,665,525     $ 3,300,424     $ 3,155,895  

Preferred stock and equity securities

    28,034       5,086       33,117       10,158  

Other long-term investments

    1,009,007       882,009       1,979,063       1,739,479  

Mortgage loans

    2,887,505       2,002,184       5,375,918       3,669,578  

Policy loans

    30,342       28,453       59,425       56,017  

Real estate

    94,003       93,712       188,006       187,423  

Short-term and other investments

    25,939       (12,749 )     67,681       97,537  

Gross investment income

    5,744,780       4,664,220       11,003,634       8,916,087  

Investment expenses

    (706,639 )     (669,156 )     (1,281,251 )     (1,251,152 )

Net investment income

  $ 5,038,141     $ 3,995,064     $ 9,722,383     $ 7,664,935  

 

 

TLIC and FBLIC are required to hold assets on deposit with various state insurance departments for the benefit of policyholders and other special deposits in accordance with statutory rules and regulations. As of June 30, 2018 and December 31, 2017, these required deposits, included in investment assets, had amortized costs that totaled $4,338,465 and $4,308,853, respectively. As of June 30, 2018 and December 31, 2017, these required deposits had fair values that totaled $4,265,608 and $4,307,439, respectively.

 

20

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

2. Investments (continued)

 

The Company’s mortgage loans by property type as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

   

(Unaudited)

         
   

June 30, 2018

   

December 31, 2017

 

Commercial, industrial and hotel mortgage loans

               
                 

Retail stores

  $ 4,114,758     $ 1,227,894  

Office buildings

    1,782,430       137,703  

Industrial

    1,540,193       430,613  

Hotel

    113,480       -  
                 

Total commercial, industrial and hotel mortgage loans

    7,550,861       1,796,210  
                 

Residential mortgage loans

    112,473,055       100,700,241  
                 

Total mortgage loans

  $ 120,023,916     $ 102,496,451  

 

There were 10 loans with a remaining principal balance of $811,631 that were more than 90 days past due as of June 30, 2018. There were 23 loans with a remaining principal balance of $3,094,155 that were more than 90 days past due as of December 31, 2017.

 

There were no mortgage loans in default and in the foreclosure process as of June 30, 2018 and December 31, 2017.

 

The Company’s investment real estate as of June 30, 2018 and December 31, 2017 is summarized as follows:

 

   

(Unaudited)

         
   

June 30, 2018

   

December 31, 2017

 

Land - held for the production of income

  $ 213,160     $ 213,160  

Land - held for investment

    745,155       745,155  

Total land

    958,315       958,315  

Building - held for the production of income

    2,267,557       2,267,557  

Less - accumulated depreciation

    (1,267,927 )     (1,195,183 )

Buildings net of accumulated depreciation

    999,630       1,072,374  

Residential real estate - held for sale

    674,513       352,277  

Total residential real estate

    674,513       352,277  

Investment real estate, net of accumulated depreciation

  $ 2,632,458     $ 2,382,966  

 

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

 

During 2018 the Company foreclosed on residential mortgage loans of real estate totaling $378,411 and transferred those properties to investment real estate held for sale. During 2018, the Company sold investment real estate property with an aggregate carrying value of $56,175. The Company recorded a gross realized investment loss on sale of $1,322 based on an aggregate sales price of $54,853.

 

21

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

2. Investments (continued)

 

During 2017, the Company sold investment real estate property with an aggregate carrying value of $185,702. The Company recorded a gross realized investment gain on sale of $4,382 based on an aggregate sales price of $190,084. 

 

 

 

3. Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

22

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

3. Fair Value Measurements (continued)

 

The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 is summarized as follows:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

June 30, 2018 (Unaudited)

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 2,887,693     $ -     $ 2,887,693  

States and political subdivisions

    -       9,491,718       -       9,491,718  

Residential mortgage-backed securities

    -       59,434       -       59,434  

Corporate bonds

    -       110,027,357       -       110,027,357  

Asset-backed

    -       253,790       -       253,790  

Foreign bonds

    -       22,009,238       -       22,009,238  

Total fixed maturity securities

  $ -     $ 144,729,230     $ -     $ 144,729,230  
                                 

Preferred stock, available-for-sale

  $ 99,020     $ -     $ -     $ 99,020  
                                 

Equity securities

                               

Mutual funds

  $ -     $ 338,299     $ -     $ 338,299  

Corporate common stock

    159,782       -       70,127       229,909  

Total equity securities

  $ 159,782     $ 338,299     $ 70,127     $ 568,208  

 

   

December 31, 2017

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 2,973,067     $ -     $ 2,973,067  

States and political subdivisions

    -       9,685,687       -       9,685,687  

Residential mortgage-backed securities

    -       71,309       -       71,309  

Corporate bonds

    -       114,097,008       -       114,097,008  

Foreign bonds

    -       22,856,068       -       22,856,068  

Total fixed maturity securities

  $ -     $ 149,683,139     $ -     $ 149,683,139  
                                 

Preferred stock, available-for-sale

  $ 100,720     $ -     $ -     $ 100,720  
                                 

Equity securities

                               

Mutual funds

  $ -     $ 349,066     $ -     $ 349,066  

Corporate common stock

    160,861       -       61,500       222,361  

Total equity securities

  $ 160,861     $ 349,066     $ 61,500     $ 571,427  

 

As of June 30, 2018 and December 31, 2017, Level 3 financial instruments consisted of two private placement common stocks that have no active trading and a joint venture investment with a mortgage loan originator.

 

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

 

23

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

3. Fair Value Measurements (continued)

 

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

 

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

 

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

 

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

 

24

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

3. Fair Value Measurements (continued)

 

The carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of June 30, 2018 and December 31, 2017, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:

 

Financial Instruments Disclosed, But Not Carried, at Fair Value:

 

   

Carrying

   

Fair

                         
   

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 
   

June 30, 2018 (Unaudited)

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial and Industrial

  $ 7,550,861     $ 7,890,347     $ -     $ -     $ 7,890,347  

Residential

    112,473,055       108,783,119       -       -       108,783,119  

Policy loans

    1,683,744       1,683,744       -       -       1,683,744  

Short-term investments

    685,898       685,898       685,898       -       -  

Other long-term investments

    58,904,792       69,434,276       -       -       69,434,276  

Cash and cash equivalents

    16,585,991       16,585,991       16,585,991       -       -  

Accrued investment income

    2,707,701       2,707,701       -       -       2,707,701  

Total financial assets

  $ 200,592,042     $ 207,771,076     $ 17,271,889     $ -     $ 190,499,187  

Financial liabilities

                                       

Policyholders' account balances

  $ 294,488,224     $ 242,615,184     $ -     $ -     $ 242,615,184  

Policy claims

    1,187,074       1,187,074       -       -       1,187,074  

Total financial liabilities

  $ 295,675,298     $ 243,802,258     $ -     $ -     $ 243,802,258  

 

   

December 31, 2017

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial and Industrial

  $ 1,796,210     $ 1,783,385     $ -     $ -     $ 1,783,385  

Residential

    100,700,241       102,192,001       -       -       102,192,001  

Policy loans

    1,660,175       1,660,175       -       -       1,660,175  

Short-term investments

    547,969       547,969       547,969       -       -  

Other long-term investments

    55,814,583       68,298,585       -       -       68,298,585  

Cash and cash equivalents

    31,496,159       31,496,159       31,496,159       -       -  

Accrued investment income

    2,544,963       2,544,963       -       -       2,544,963  

Total financial assets

  $ 194,560,300     $ 208,523,237     $ 32,044,128     $ -     $ 176,479,109  

Financial liabilities

                                       

Policyholders' account balances

  $ 292,909,762     $ 243,234,637     $ -     $ -     $ 243,234,637  

Policy claims

    1,148,513       1,148,513       -       -       1,148,513  

Total financial liabilities

  $ 294,058,275     $ 244,383,150     $ -     $ -     $ 244,383,150  

 

25

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

3. Fair Value Measurements (continued)

 

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

 

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

 

Mortgage Loans on Real Estate

 

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

 

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

 

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

 

Other Long-Term Investments

 

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

 

Investment Contracts – Policyholders’ Account Balances

 

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

 

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

 

Policy Claims

 

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

 

26

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

 

4. Segment Data

 

The Company has a life insurance segment, consisting of the life insurance operations of TLIC and FBLIC, an annuity segment, consisting of the annuity operations of TLIC and FBLIC and a corporate segment. Results for the parent company and the operations of FTCC, after elimination of intercompany amounts, are allocated to the corporate segment. These segments as of June 30, 2018 and December 31, 2017 and for the three and six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

Three Months Ended June 30, (Unaudited)

   

Six Months Ended June 30, (Unaudited)

 
   

2018

   

2017

   

2018

   

2017

 

Revenues:

                               

Life insurance operations

  $ 5,362,692     $ 4,413,296     $ 10,538,864     $ 8,597,949  

Annuity operations

    4,423,642       3,285,595       8,301,779       6,474,566  

Corporate operations

    132,441       60,591       245,552       194,926  
                                 

Total

  $ 9,918,775     $ 7,759,482     $ 19,086,195     $ 15,267,441  
                                 

Income before income taxes:

                               

Life insurance operations

  $ 128,003     $ 436,176     $ 299,522     $ 554,026  

Annuity operations

    1,533,032       186,941       2,490,421       347,356  

Corporate operations

    113,567       65,957       196,106       137,209  
                                 

Total

  $ 1,774,602     $ 689,074     $ 2,986,049     $ 1,038,591  
                                 

Depreciation and amortization expense:

                               

Life insurance operations

  $ 1,522,057     $ 556,637     $ 2,214,447     $ 970,921  

Annuity operations

    (224,142 )     343,108       46,364       763,156  
Total   $ 1,297,915     $ 899,745     $ 2,260,811     $ 1,734,077  

 

   

(Unaudited)

         

Assets:

 

June 30, 2018

   

December 31, 2017

 

Life insurance operations

  $ 61,480,891     $ 56,780,793  

Annuity operations

    336,134,175       328,727,443  

Corporate operations

    5,685,058       5,619,438  

Total

  $ 403,300,124     $ 391,127,674  

 

 

5. Federal Income Taxes

 

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

 

The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, has not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions.  The 2014 through 2017 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.

 

27

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

  

 

6. Legal Matters and Contingent Liabilities

 

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

 

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

 

Mr. Pettigrew has appealed this decision but has failed to post an appeal bond. As a consequence, the Company and Mr. Zahn are in the process of executing on the judgments against Mr. Pettigrew’s assets. The Company and Mr. Zahn have so far collected some property and money in the execution process and will continue to execute on the judgments. Any money or property collected to date during the execution of the judgments are held in an escrow by a third party, have not been reflected in the June 30, 2018 consolidated financial statements and would have to be returned to Mr. Pettigrew in the event the judgments are reversed by the appellate courts.

 

Prior to being acquired by TLIC, FBLIC developed, marketed, and sold life insurance products known as “Decreasing Term to 95” policies. On January 17, 2013, FBLIC’s Board of Directors voted that, effective March 1, 2013, it was not approving, and therefore was not providing, a dividend for the Decreasing Term to 95 policies. On November 22, 2013, a lawsuit was filed in the Circuit Court of Greene County, Missouri asserting claims against FBLIC relating to this decision. A trial was held November 27, 2017 through December 1, 2017 on the individual claims of two policyholders asserting fraud and negligent misrepresentation and on claims of a class of Missouri residents asking 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, plus interest and attorneys’ fees.

 

During 2018, a settlement was reached by the parties and the Court approved the settlement agreement on June 11, 2018. FBLIC paid $1.85 million to resolve all class and individual claims and all active Decreasing Term to 95 policies for individuals in the class will be cancelled.

 

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

 

 

 

7. Line of Credit

 

Through June 30, 2018, the Company had a $1.0 million line of credit with a bank to provide working capital and funds for expansion.  The terms of the line of credit allowed for advances, repayments and re-borrowings through the maturity date of July 1, 2018.  Any outstanding advances would have incurred interest at a variable interest rate of the prime rate set forth in the Wall Street Journal plus 1% per annum adjusting monthly based on a 360 day year.  The Company did not utilize this line of credit during 2018 or 2017.    

 

28

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

 

8. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (loss)

 

The changes in the components of the Company’s accumulated other comprehensive income (loss) for the three and six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

Three Months Ended June 30, 2018 and 2017 (Unaudited)

 
   

Unrealized

                 
   

Appreciation

           

Accumulated

 
   

(Depreciation) on

   

Adjustment to

   

Other

 
   

Available-For-Sale

   

Deferred Acquisition

   

Comprehensive

 
   

Securities

   

Costs

   

Income (loss)

 

Balance as of April 1, 2018

  $ 1,329,041     $ (22,316 )   $ 1,306,725  

Other comprehensive loss before reclassifications, net of tax

    (1,922,089 )     33,430       (1,888,659 )

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

    32,111       -       32,111  

Other comprehensive loss

    (1,954,200 )     33,430       (1,920,770 )

Balance as of June 30, 2018

  $ (625,159 )   $ 11,114     $ (614,045 )
                         

Balance as of April 1, 2017

  $ 1,695,169     $ (28,841 )   $ 1,666,328  

Other comprehensive income before reclassifications, net of tax

    1,981,747       (39,823 )     1,941,924  

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

    (157,865 )     -       (157,865 )

Other comprehensive income

    2,139,612       (39,823 )     2,099,789  

Balance as of June 30, 2017

  $ 3,834,781     $ (68,664 )   $ 3,766,117  

 

 

   

Six Months Ended June 30, 2018 and 2017 (Unaudited)

 
   

Unrealized

                 
   

Appreciation

           

Accumulated

 
   

(Depreciation) on

   

Adjustment to

   

Other

 
   

Available-For-Sale

   

Deferred Acquisition

   

Comprehensive

 
   

Securities

   

Costs

   

Income (Loss)

 

Balance as of January 1, 2018

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

Other comprehensive loss before reclassifications, net of tax

    (5,437,033 )     93,224       (5,343,809 )

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

    31,187       -       31,187  

Other comprehensive loss

    (5,468,220 )     93,224       (5,374,996 )

Balance as of June 30, 2018

  $ (625,159 )   $ 11,114     $ (614,045 )
                         

Balance as of January 1, 2017

  $ 831,917     $ (13,241 )   $ 818,676  

Other comprehensive income before reclassifications, net of tax

    2,976,214       (55,423 )     2,920,791  

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

    (26,650 )     -       (26,650 )

Other comprehensive income

    3,002,864       (55,423 )     2,947,441  

Balance as of June 30, 2017

  $ 3,834,781     $ (68,664 )   $ 3,766,117  

 

29

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

8. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (loss) (continued)

 

The pretax components of the Company’s other comprehensive income (loss) and the related income tax expense (benefit) for each component for the three and six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

Three Months Ended June 30, 2018 (Unaudited)

 
           

Income Tax

         
   

Pretax

   

Expense (Benefit)

   

Net of Tax

 

Other comprehensive loss:

                       

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

                       

Unrealized holding losses arising during the period

  $ (2,433,022 )   $ (510,933 )   $ (1,922,089 )

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

    40,647       8,536       32,111  

Net unrealized losses on investments

    (2,473,669 )     (519,469 )     (1,954,200 )

Adjustment to deferred acquisition costs

    42,316       8,886       33,430  

Total other comprehensive loss

  $ (2,431,353 )   $ (510,583 )   $ (1,920,770 )

 

   

Three Months Ended June 30, 2017 (Unaudited)

 
           

Income Tax

         
   

Pretax

   

Expense (Benefit)

   

Net of Tax

 

Other comprehensive income:

                       

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

                       

Unrealized holding gains arising during the period

  $ 2,477,183     $ 495,436     $ 1,981,747  

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

    (197,332 )     (39,467 )     (157,865 )

Net unrealized gains on investments

    2,674,515       534,903       2,139,612  

Adjustment to deferred acquisition costs

    (49,778 )     (9,955 )     (39,823 )

Total other comprehensive income

  $ 2,624,737     $ 524,948     $ 2,099,789  

 

 

   

Six Months Ended June 30, 2018 (Unaudited)

 
           

Income Tax

         
   

Pretax

   

Expense (Benefit)

   

Net of Tax

 

Other comprehensive loss:

                       

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

                       

Unrealized holding losses arising during the period

  $ (6,882,320 )   $ (1,445,287 )   $ (5,437,033 )

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

    39,477       8,290       31,187  

Net unrealized losses on investments

    (6,921,797 )     (1,453,577 )     (5,468,220 )

Adjustment to deferred acquisition costs

    118,006       24,782       93,224  

Total other comprehensive loss

  $ (6,803,791 )   $ (1,428,795 )   $ (5,374,996 )

 

   

Six Months Ended June 30, 2017 (Unaudited)

 
           

Income Tax

         
   

Pretax

   

Expense (Benefit)

   

Net of Tax

 

Other comprehensive income:

                       

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

                       

Unrealized holding gains arising during the period

  $ 3,720,267     $ 744,053     $ 2,976,214  

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

    (33,313 )     (6,663 )     (26,650 )

Net unrealized gains on investments

    3,753,580       750,716       3,002,864  

Adjustment to deferred acquisition costs

    (69,278 )     (13,855 )     (55,423 )

Total other comprehensive income

  $ 3,684,302     $ 736,861     $ 2,947,441  

 

30

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

8. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (loss) (continued)

 

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

 

The pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income (loss) to the Company’s consolidated statement of operations for the three and six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

Three Months Ended June 30, (Unaudited)

   

Six Months Ended June 30, (Unaudited)

 

Reclassification Adjustments

 

2018

   

2017

   

2018

   

2017

 

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

                               

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

  $ 40,647     $ (197,332 )   $ 39,477     $ (33,313 )

Income tax expense (benefit) (b)

    8,536       (39,467 )     8,290       (6,663 )

Total reclassification adjustments

  $ 32,111     $ (157,865 )   $ 31,187     $ (26,650 )

 

(a) These items appear within net realized investment gains (losses) and other-than-temporary impairments in the consolidated statements of operations.

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

 

 

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

 

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

 

While the Company utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the mortgage loan portfolio, the economy and changes in interest rates. The Company’s allowance for possible mortgage loan consists of specific valuation allowances established for probable losses on specific loans and a portfolio reserve for probable incurred but not specifically identified loans.

 

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

 

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

 

31

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

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

 

As of June 30, 2018, $599,645 of independent residential mortgage loans on real estate are held in escrow by a third party for the benefit of the Company.   As of June 30, 2018, $409,546 of that escrow amount is available to the Company as additional collateral on $4,863,235 of advances to the loan originator. The remaining June 30, 2018 escrow amount of $190,099 is available to the Company as additional collateral on its investment of $38,019,842 in residential mortgage loans on real estate. In addition, the Company has an additional $410,296 allowance for possible loan losses in the remaining $82,004,074 of investments in mortgage loans on real estate as of June 30, 2018.

 

As of December 31, 2017, $564,479 of independent residential mortgage loans on real estate are held in escrow by a third party for the benefit of the Company.   As of December 31, 2017, $394,978 of that escrow amount is available to the Company as additional collateral on $4,925,259 of advances to the loan originator. The remaining December 31, 2017 escrow amount of $169,501 is available to the Company as additional collateral on its investment of $33,900,260 in residential mortgage loans on real estate. In addition, the Company has an additional $342,815 allowance for possible loan losses in the remaining $68,596,191 of investments in mortgage loans on real estate as of December 31, 2017.

 

The balances of and changes in the Company’s credit losses related to mortgage loans on real estate as of and for the three and six months ended June 30, 2018 and 2017 are summarized as follows (excluding $38,019,842 and $31,407,826 of mortgage loans on real estate as of June 30, 2018 and 2017, respectively, with one loan originator where independent mortgage loan balances are held in escrow by a third party for the benefit of the Company):

 

   

Unaudited

 
   

Three Months Ended June 30,

 
   

Residential Mortgage Loans

   

Commercial, Industrial and Hotel Mortgage Loans

   

Total

 
   

2018

   

2017

   

2018

   

2017

   

2018

   

2017

 

Allowance, beginning

  $ 370,771     $ 280,284     $ 13,247     $ 6,197     $ 384,018     $ 286,481  

Charge offs

    -       -       -       -       -       -  

Recoveries

    -       -       -       -       -       -  

Provision

    1,581       55,896       24,697       3,081       26,278       58,977  

Allowance, ending

  $ 372,352     $ 336,180     $ 37,944     $ 9,278     $ 410,296     $ 345,458  
                                                 

Allowance, ending:

                                               

Individually evaluated for impairment

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

Collectively evaluated for impairment

  $ 372,352     $ 336,180     $ 37,944     $ 9,278     $ 410,296     $ 345,458  
                                                 

Carrying Values:

                                               

Individually evaluated for impairment

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

Collectively evaluated for impairment

  $ 74,453,213     $ 67,082,982     $ 7,550,861     $ 1,846,251     $ 82,004,074     $ 68,929,233  

 

32

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

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

 

   

(Unaudited)

 
   

Six Months Ended June 30,

 
   

Residential Mortgage Loans

   

Commercial, Industrial and Hotel Mortgage Loans

   

Total

 
   

2018

   

2017

   

2018

   

2017

   

2018

   

2017

 

Allowance, beginning

  $ 333,789     $ 238,121     $ 9,026     $ 6,306     $ 342,815     $ 244,427  

Charge offs

    -       -       -       -       -       -  

Recoveries

    -       -       -       -       -       -  

Provision

    38,563       98,059       28,918       2,972       67,481       101,031  

Allowance, ending

  $ 372,352     $ 336,180     $ 37,944     $ 9,278     $ 410,296     $ 345,458  
                                                 

Allowance, ending:

                                               

Individually evaluated for impairment

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

Collectively evaluated for impairment

  $ 372,352     $ 336,180     $ 37,944     $ 9,278     $ 410,296     $ 345,458  
                                                 

Carrying Values:

                                               

Individually evaluated for impairment

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

Collectively evaluated for impairment

  $ 74,453,213     $ 67,082,982     $ 7,550,861     $ 1,846,251     $ 82,004,074     $ 68,929,233  

 

 

The Company utilizes the ratio of the carrying value of individual mortgage loans compared to the individual appraisal value to evaluate the credit quality of its mortgage loans on real estate (commonly referred to as the loan-to-value ratio). The Company’s residential and commercial and industrial mortgage loans on real estate by credit quality using this ratio as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

   

Residential Mortgage Loans

   

Commercial, Industrial and Hotel Mortgage Loans

   

Total Mortgage Loans

 
   

(Unaudited)

           

(Unaudited)

           

(Unaudited)

         

Loan-To-Value Ratio

 

June 30, 2018

   

December 31, 2017

   

June 30, 2018

   

December 31, 2017

   

June 30, 2018

   

December 31, 2017

 

Over 70% to 80%

  $ 22,581,510     $ 19,515,632     $ 592,309     $ -     $ 23,173,819     $ 19,515,632  

Over 60% to 70%

    39,405,118       36,192,035       1,415,373       -       40,820,491       36,192,035  

Over 50% to 60%

    25,704,386       25,121,248       1,157,295       835,093       26,861,681       25,956,341  

Over 40% to 50%

    14,335,326       12,923,381       1,468,081       -       15,803,407       12,923,381  

Over 30% to 40%

    5,028,788       4,303,273       2,068,546       658,296       7,097,334       4,961,569  

Over 20% to 30%

    2,894,209       1,867,670       708,133       159,671       3,602,342       2,027,341  

Over 10% to 20%

    2,079,040       727,245       141,124       143,150       2,220,164       870,395  

10% or less

    444,678       49,757       -       -       444,678       49,757  

Total

  $ 112,473,055     $ 100,700,241     $ 7,550,861     $ 1,796,210     $ 120,023,916     $ 102,496,451  

 

33

 
 

 

Item 2: 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.

 

As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core TLIC and FBLIC operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense, term and annuity products to predominately middle income households 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 through independent agents.

 

We also realize revenues from our investment portfolio, which is a key component of our operations. The revenues we collect as premiums 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 paid to the insurer between the time of receipt and the time benefits are paid out under policies. Changes in interest rates, changes in economic conditions and volatility in the capital markets can all impact the amount of earnings that we realize from our investment portfolio.

 

Acquisitions 

 

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

 

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

 

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 and assumed liabilities of $3,055,916.

 

Our profitability in the life insurance and annuity segments is a function of our ability to accurately price the policies that we write, adequately value life insurance business acquired, administer life insurance company acquisitions at an expense level that validates the acquisition cost and invest the premiums and annuity considerations in assets that earn investment income with a positive spread.

 

Coinsurance

 

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

 

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

 

34

 

 

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 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, allowance for loan losses from mortgages, value of insurance business acquired, policy liabilities, regulatory requirements, contingencies and litigation. 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.

 

For a description of the Company’s critical accounting policies and estimates, please refer to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  The Company considers its most critical accounting estimates to be those applied to investments in fixed maturities, mortgage loans on real estate, deferred policy acquisition costs, value of insurance business acquired and future policy benefits. There have been no material changes to the Company’s critical accounting policies and estimates since December 31, 2017.

 

Recent Accounting Pronouncements

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing services will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In July 2015, the FASB deferred the effective date of the updated guidance on revenue recognition by one year to the quarter ending March 31, 2018.  The adoption of this guidance did not have a material effect on the Company’s result of operations, financial position or liquidity.

 

Recognition and Measurement of Financial Assets and Financial Liabilities

 

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

 

This guidance is effective for fiscal years beginning after December 15, 2017. The recognition and measurement provisions of this guidance was applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption and early adoption is not permitted. The adoption of this guidance did not have a material effect on the Company’s result of operations, financial position or liquidity.

 

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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 may be applied using a modified retrospective approach effective for annual and interim periods beginning after December 15, 2018.  In July 2018, the FASB issued updated guidance (Accounting Standards Update 2018-11) that provides entities with an additional (and optional) transition method to adopt the new standard on leases. Under this new transition method, an entity initially applies the new standard on leases at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new standard on leases will continue to be in accordance with current GAAP (Topic 840, Leases).  An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. 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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

In November 2016, the FASB issued specific guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents when there are transfers between cash, cash equivalents and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents.

 

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

 

Business Combinations – Clarifying the Definition of a Business

 

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

 

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

 

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

 

In January 2017, the FASB issued guidance to modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Reporting entities will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The updated guidance is effective for annual and interim periods beginning after December 15, 2019, and is to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

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Compensation — Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

 

In March 2017, the FASB issued updated guidance to improve the presentation of net periodic pension cost and net periodic post retirement cost (net benefit costs). Net benefit costs comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees.  The update requires that the employer service cost component be reported in the same lines as other employee compensation cost and that the other components (non-service costs) be presented separately from the service cost and outside of a subtotal of income from operations if one is presented.  The update also allows only the service cost component to be eligible for capitalization in assets when applicable.

 

The updated guidance is effective for reporting periods beginning after December 15, 2017. The update is to be applied retrospectively with respect to the presentation of service cost and non-service cost and prospectively with respect to applying the service cost only eligible for capitalization in assets guidance. Early adoption is permitted as of the first interim period of an annual period if an entity issues interim financial statements. This pronouncement did not impact the Company since it does not have any pension or postretirement benefit plans and has no intention to adopt such plans.

 

Compensation — Stock Compensation: Scope of Modification Accounting

 

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

 

The updated guidance is effective for the quarter ending March 31, 2018.  The update is to be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted in any interim periods for which financial statements have not yet been made available for issuance. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

Target Improvement to Accounting for Hedging Activities

 

In August 2017, the FASB issued updated authoritative guidance for the application of hedge accounting. The updated guidance updates certain recognition and measurement requirements for hedge accounting. The objective of the guidance is to more closely align the economics of a company’s risk management activities in its financial results and reduce the complexity of applying hedge accounting. The updates include the expansion of hedging strategies that are eligible for hedge accounting, elimination of the separate measurement and reporting of hedge ineffectiveness, presentation of the changes in the fair value of the hedging instrument in the same consolidated statement of operations line as the earnings effect of the hedged item and simplification of hedge effectiveness assessments. This guidance also includes new disclosures and will be applied using a modified retrospective approach by recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.

 

The updated guidance is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted for reporting periods beginning before December 15, 2018. The Company does not currently and does not intend to participate in hedging activities and there is therefore no impact on the Company’s results of operations, financial position or liquidity. This pronouncement would be adopted if the Company begins to participate in hedging activities in the future.

 

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Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 

On February 14, 2018, the FASB issued updated guidance that allows a reclassification of the stranded tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017. Current guidance requires the effect of a change in tax laws or rates on deferred tax balances to be reported in income from continuing operations in the accounting period that includes the period of enactment, even if the related income tax effects were originally charged or credited directly to accumulated other comprehensive income. The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Cuts and Jobs Act of 2017 related to items in accumulated other comprehensive income. The updated guidance is effective for reporting periods beginning after December 15, 2018 and is to be applied retrospectively to each period in which the effect of the Tax Cuts and Jobs Act of 2017 related to items remaining in accumulated other comprehensive income are recognized or at the beginning of the period of adoption. Early adoption is permitted.

 

The Company adopted the updated guidance effective December 31, 2017. The adoption of this guidance did not have a material effect on the Company’s result of operations, financial position or liquidity.

 

Business Segments

 

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 4 to the Consolidated Financial Statements for the three and six months ended June 30, 2018 and 2017 and as of June 30, 2018 and December 31, 2017 for additional information regarding segment information.

 

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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 Three Months Ended June 30, 2018 and 2017

 

   

(Unaudited)

         
   

Three Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Premiums

  $ 4,572,872     $ 3,880,345     $ 692,527  

Net investment income

    5,038,141       3,995,064       1,043,077  

Net realized investment gains

    49,256       91,088       (41,832 )

Loss on other-than-temporary impairment

    -       (224,250 )     224,250  

Service fees

    230,161       3,614       226,547  

Other income

    28,345       13,621       14,724  

Total revenues

    9,918,775       7,759,482       2,159,293  

Benefits and claims

    5,655,474       4,884,841       770,633  

Expenses

    2,488,699       2,185,567       303,132  

Total benefits, claims and expenses

    8,144,173       7,070,408       1,073,765  

Income before federal income tax expense

    1,774,602       689,074       1,085,528  

Federal income tax expense

    375,225       139,030       236,195  

Net income

  $ 1,399,377     $ 550,044     $ 849,333  

Net income per common share basic and diluted

  $ 0.18     $ 0.07     $ 0.11  

 

 

Consolidated Condensed Results of Operations for the Six Months Ended June 30, 2018 and 2017

 

   

(Unaudited)

         
   

Six Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Premiums

  $ 9,059,607     $ 7,502,035     $ 1,557,572  

Net investment income

    9,722,383       7,664,935       2,057,448  

Net realized investment gains

    24,472       257,594       (233,122 )

Loss on other-than-temporary impairment

    -       (224,250 )     224,250  

Service fees

    233,561       7,289       226,272  

Other income

    46,172       59,838       (13,666 )

Total revenues

    19,086,195       15,267,441       3,818,754  

Benefits and claims

    11,259,806       9,775,885       1,483,921  

Expenses

    4,840,340       4,452,965       387,375  

Total benefits, claims and expenses

    16,100,146       14,228,850       1,871,296  

Income before federal income tax expense

    2,986,049       1,038,591       1,947,458  

Federal income tax expense

    646,291       227,069       419,222  

Net income

  $ 2,339,758     $ 811,522     $ 1,528,236  

Net income per common share basic and diluted

  $ 0.30     $ 0.10     $ 0.20  

 

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Consolidated Condensed Financial Position as of June 30, 2018 and December 31, 2017

 

   

(Unaudited)

           

Amount Change

 
   

June 30, 2018

   

December 31, 2017

      2018 to 2017  
                         
                         

Investment assets

  $ 329,327,266     $ 313,257,430     $ 16,069,836  

Other assets

    73,972,858       77,870,244       (3,897,386 )

Total assets

  $ 403,300,124     $ 391,127,674     $ 12,172,450  
                         

Policy liabilities

  $ 348,342,917     $ 343,789,864     $ 4,553,053  

Funds withheld under coinsurance agreement

    11,335,660       -       11,335,660  

Deferred federal income taxes

    2,179,425       2,961,929       (782,504 )

Other liabilities

    3,156,673       3,123,702       32,971  

Total liabilities

    365,014,675       349,875,495       15,139,180  

Shareholders' equity

    38,285,449       41,252,179       (2,966,730 )

Total liabilities and shareholders' equity

  $ 403,300,124     $ 391,127,674     $ 12,172,450  
                         

Shareholders' equity per common share

  $ 4.91     $ 5.29     $ (0.38 )

 

Results of Operations – Three Months Ended June 30, 2018 and 2017

 

Revenues

 

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

 

Our revenues for the three months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Three Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Premiums

  $ 4,572,872     $ 3,880,345     $ 692,527  

Net investment income

    5,038,141       3,995,064       1,043,077  

Net realized investment gains

    49,256       91,088       (41,832 )

Loss on other-than-temporary impairment

    -       (224,250 )     224,250  

Service fees

    230,161       3,614       226,547  

Other income

    28,345       13,621       14,724  

Total revenues

  $ 9,918,775     $ 7,759,482     $ 2,159,293  

 

The $2,159,293 increase in total revenues for the three months ended June 30, 2018 is discussed below.

 

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Premiums

 

Our premiums for the three months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Three Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Whole life and term first year

  $ 57,886     $ 42,262     $ 15,624  

Whole life and term renewal

    520,419       564,525       (44,106 )

Final expense first year

    1,119,185       1,205,408       (86,223 )

Final expense renewal

    2,875,382       2,068,150       807,232  

Total premiums

  $ 4,572,872     $ 3,880,345     $ 692,527  

 

The $692,527 increase in premiums for the three months ended June 30, 2018 is primarily due to an $807,232 increase in final expense renewal premiums that exceeded an $86,223 decrease in final expense first year premiums and a $44,106 decrease in whole life and term renewal premiums.

 

The increase in final expense renewal premiums reflects the persistency of prior years’ final expense production. The decrease in final expense first year premium reflects the increased competition by our competitors. Our marketing efforts are focused on final expense and annuity production.

 

Net Investment Income

 

The major components of our net investment income for the three months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Three Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Fixed maturity securities

  $ 1,669,950     $ 1,665,525     $ 4,425  

Preferred stock and equity securities

    28,034       5,086       22,948  

Other long-term investments

    1,009,007       882,009       126,998  

Mortgage loans

    2,887,505       2,002,184       885,321  

Policy loans

    30,342       28,453       1,889  

Real Estate

    94,003       93,712       291  

Short-term and other investments

    25,939       (12,749 )     38,688  

Gross investment income

    5,744,780       4,664,220       1,080,560  

Investment expenses

    (706,639 )     (669,156 )     37,483  

Net investment income

  $ 5,038,141     $ 3,995,064     $ 1,043,077  

 

The $1,080,560 increase in gross investment income for the three months ended June 30, 2018 is primarily due to the increase in investments in mortgage loans and other long-term investments. In the twelve months since June 30, 2017, we had increased investments in mortgage loans of $19.7 million and other long term investments of $1.0 million.

 

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Net Realized Investment Gains 

 

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

 

Our net realized investment gains for the three months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Three Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Fixed maturity securities available-for-sale:

                       

Sale proceeds

  $ 5,909,141     $ 8,154,018     $ (2,244,877 )

Amortized cost at sale date

    5,868,494       8,127,100       (2,258,606 )

Net realized gains

  $ 40,647     $ 26,918     $ 13,729  

Equity securities at fair value:

                       

Sale proceeds

  $ 15,000     $ -     $ 15,000  

Cost at sale date

    14,999       -       14,999  

Net realized gains

  $ 1     $ -     $ 1  

Investment real estate:

                       

Sale proceeds

  $ 54,853     $ 82,917     $ (28,064 )

Carrying value at sale date

    56,175       81,022       (24,847 )

Net realized gains (losses)

  $ (1,322 )   $ 1,895     $ (3,217 )

Other long-term investments

                       

Sale proceeds

  $ -     $ 792,012     $ (792,012 )

Carrying value at sale date

    -       729,737       (729,737 )

Net realized gains

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

Equity securites, changes in fair value

  $ 9,930     $ -     $ 9,930  
                         

Net realized investment gains

  $ 49,256     $ 91,088     $ (41,832 )

 

The Company has recorded other-than-temporary impairments on its fixed maturity available-for-sale investment in an energy corporation with a total par value of $650,000 as a result of continuing unrealized losses. During fourth quarter 2016 this security was initially impaired by a $207,450 charge to the statement of operations. During second quarter 2017 this security was further impaired by a $224,250 charge to the statement of operations. These impairments were considered fully credit-related and represent the difference between the amortized cost basis of the security and its fair value. The Company experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securities for the six months ended June 30, 2018 and the year ended December 31, 2017.

 

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Total Benefits, Claims and Expenses

 

Our benefits, claims and expenses are primarily generated from benefit payments, surrenders, interest credited to policyholders, change in reserves, commissions and other underwriting, insurance and acquisition expenses. Benefit payments can significantly impact expenses from period to period.

 

Our benefits, claims and expenses for the three months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Three Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Benefits and claims

                       

Increase in future policy benefits

  $ 1,526,060     $ 1,482,159     $ 43,901  

Death benefits

    1,525,130       887,745       637,385  

Surrenders

    235,172       248,212       (13,040 )

Interest credited to policyholders

    2,304,102       2,201,930       102,172  

Dividend, endowment and supplementary life contract benefits

    65,010       64,795       215  

Total benefits and claims

    5,655,474       4,884,841       770,633  

Expenses

                       

Policy acquisition costs deferred

    (2,180,425 )     (2,586,318 )     405,893  

Amortization of deferred policy acquisition costs

    1,172,075       747,306       424,769  

Amortization of value of insurance business acquired

    81,878       107,296       (25,418 )

Commissions

    1,926,536       2,345,063       (418,527 )

Other underwriting, insurance and acquisition expenses

    1,488,635       1,572,220       (83,585 )

Total expenses

    2,488,699       2,185,567       303,132  

Total benefits, claims and expenses

  $ 8,144,173     $ 7,070,408     $ 1,073,765  

 

The $1,073,765 increase in total benefits, claims and expenses for the three months ended June 30, 2018 is discussed below.

 

Benefits and Claims

 

The $770,633 increase in benefits and claims for the three months ended June 30, 2018 is primarily due to the following:

 

 

$637,385 increase in death benefits is primarily due to approximately $640,000 of increased final expense settlements, $44,000 of decreased ceded in course of settlement, $43,000 of increased ordinary life settlements that exceeded $71,000 of increased ceded claims.

 

 

$102,172 increase in interest credited to policyholders is primarily due to an increase of approximately $9.3 million in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits and interest credited in excess of withdrawals) since June 30, 2017.

 

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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.

 

For the three months ended June 30, 2018 and 2017, capitalized costs were $2,180,425 and $2,586,318, respectively. Amortization of deferred policy acquisition costs for the three months ended June 30, 2018 and 2017 were $1,172,075 and $747,306, respectively.

 

The $405,893 decrease in the 2018 acquisition costs deferred primarily relates to decreased annuity production resulting in decreased annuity commissions available for deferral. The $424,769 increase in the 2018 amortization of deferred acquisition costs is primarily due to increased death benefits.

 

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 $81,878 and $107,296 for the three months ended June 30, 2018 and 2017, respectively.

 

Commissions

 

Our commissions for the three months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Three Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Annuity

  $ 235,850     $ 652,895     $ (417,045 )

Whole life and term first year

    52,560       36,963       15,597  

Whole life and term renewal

    14,937       17,886       (2,949 )

Final expense first year

    1,340,040       1,440,721       (100,681 )

Final expense renewal

    283,149       196,598       86,551  

Total commissions

  $ 1,926,536     $ 2,345,063     $ (418,527 )

 

The $418,527 decrease in commissions for the three months ended June 30, 2018 is primarily due to a $417,045 decrease in annuity commissions (due to a $17,841,720 decrease in annuity considerations) and a $100,681 decrease in final expense first year commissions (due to a $86,223 decrease in first year final expense premiums) that exceeded an $86,551 increase in final expense renewal commissions (due to a $807,232 increase in final expense renewal premiums).

 

45

 

 

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. We continue to file consolidated life insurance company federal tax returns for TLIC and FBLIC. 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 three months ended June 30, 2017, current income tax expense $19,909. For the three months ended June 30, 2018 and 2017, deferred federal income tax expense was $375,225 and $119,121, respectively. The $256,104 increase in deferred income taxes is primarily due to the $925,000 lawsuit settlement payment during second quarter of 2018 and the corresponding $194,250 increase in deferred tax expense.

 

Net Income Per Common Share Basic and Diluted

 

Net income was $1,399,377 ($0.18 per common share basic and diluted) and $550,044 ($0.07 per common share basic and diluted) for the three months ended June 30, 2018 and 2017, respectively. Net income per common share basic and diluted is calculated using the weighted average number of common shares outstanding during the period. The weighted average outstanding and subscribed common shares basic and diluted for the three months ended June 30, 2018 and 2017 were 7,802,593.

 

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 three months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Three Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Revenues:

                       

Life insurance operations

  $ 5,362,692     $ 4,413,296     $ 949,396  

Annuity operations

    4,423,642       3,285,595       1,138,047  

Corporate operations

    132,441       60,591       71,850  

Total

  $ 9,918,775     $ 7,759,482     $ 2,159,293  

Income before federal income taxes:

                       

Life insurance operations

  $ 128,003     $ 436,176     $ (308,173 )

Annuity operations

    1,533,032       186,941       1,346,091  

Corporate operations

    113,567       65,957       47,610  

Total

  $ 1,774,602     $ 689,074     $ 1,085,528  

  

Life Insurance Operations

 

The $949,396 increase in revenues from Life Insurance Operations for the three months ended June 30, 2018 is primarily due to the following:

 

 

$692,527 increase in premiums

 

 

$225,941 increase in net investment income

 

46

 

 

 

$24,365 increase in net realized investment gains (that also includes a loss on other-than-temporary impairment)

 

 

$6,563 increase in service fees and other income

 

The $308,173 decreased profitability from Life Insurance Operations for the three months ended June 30, 2018 is primarily due to the following:

 

 

$637,385 increase in death benefits

 

 

$359,880 increase in other underwriting, insurance and acquisition expenses

 

 

$243,419 decrease in policy acquisition costs deferred net of amortization

 

 

$43,901 increase in future policy benefits

 

 

$215 increase in dividend, endowment and supplementary life contract benefits

 

 

$1,482 decrease in commissions

 

 

$6,563 increase in service fees and other income

 

 

$12,709 decrease in amortization of value of insurance business acquired

 

 

$13,040 decrease in surrenders

 

 

$24,365 increase in net realized investment gains (that also includes a loss on other-than-temporary impairment)

 

 

$225,941 increase in net investment income

 

 

$692,527 increase in premiums

 

Annuity Operations

 

The $1,138,047 increase in revenues from Annuity Operations for the three months ended June 30, 2018 is due to the following:

 

 

$753,167 increase in net investment income

 

 

$226,827 increase in service fees and other income

 

 

$158,053 increase in net realized investment gains (that also includes a loss on other-than-temporary impairment)

 

The $1,346,091 increased profitability from Annuity Operations for the three months ended June 30, 2018 is due to the following:

 

 

$753,167 increase in net investment income

 

 

$467,705 decrease in other underwriting, insurance and acquisition expenses

 

 

$417,045 decrease in commissions

 

 

$226,827 increase in service fees and other income

 

47

 

 

 

$158,053 increase in net realized investment gains (that also includes a loss on other-than-temporary impairment)

 

 

$12,709 decrease in amortization of value of insurance business acquired

 

 

$102,172 increase in interest credited to policyholders

 

 

$587,243 decrease in policy acquisition costs deferred net of amortization

 

Corporate Operations

 

The $71,850 increase in revenues from Corporate Operations for the three months ended June 30, 2018 is due to $63,969 of increased net investment income and $7,881 of increased service fees and other income.

 

The $47,610 increase in Corporate Operations profitability for the three months ended June 30, 2018 is primarily due to $63,969 of increased net investment income and $7,881 of increased service fees and other income that exceeded $24,240 of increased operating expenses.

 

Results of Operations – Six Months Ended June 30, 2018 and 2017

 

Revenues

 

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

 

Our revenues for the six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Six Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Premiums

  $ 9,059,607     $ 7,502,035     $ 1,557,572  

Net investment income

    9,722,383       7,664,935       2,057,448  

Net realized investment gains

    24,472       257,594       (233,122 )

Loss on other-than-temporary impairment

    -       (224,250 )     224,250  

Service fees

    233,561       7,289       226,272  

Other income

    46,172       59,838       (13,666 )

Total revenues

  $ 19,086,195     $ 15,267,441     $ 3,818,754  

 

The $3,818,754 increase in total revenues for the six months ended June 30, 2018 is discussed below.

 

48

 

 

Premiums

 

Our premiums for the six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Six Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Whole life and term first year

  $ 108,740     $ 81,887     $ 26,853  

Whole life and term renewal

    1,094,783       1,160,967       (66,184 )

Final expense first year

    2,267,213       2,281,387       (14,174 )

Final expense renewal

    5,502,661       3,971,224       1,531,437  

Supplementary contracts with life contingencies

    86,210       6,570       79,640  

Total premiums

  $ 9,059,607     $ 7,502,035     $ 1,557,572  

 

The $1,557,572 increase in premiums for the six months ended June 30, 2018 is primarily due to the a $1,531,437 increase in final expense renewal premiums and $79,640 increase in considerations for supplementary contracts with life contingencies that exceeded the $66,184 decrease in whole life and term renewal premiums.

 

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

 

Net Investment Income

 

The major components of our net investment income for the six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Six Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Fixed maturity securities

  $ 3,300,424     $ 3,155,895     $ 144,529  

Prefered stock and equity securities

    33,117       10,158       22,959  

Other long-term investments

    1,979,063       1,739,479       239,584  

Mortgage loans

    5,375,918       3,669,578       1,706,340  

Policy loans

    59,425       56,017       3,408  

Real estate

    188,006       187,423       583  

Short-term and other investments

    67,681       97,537       (29,856 )

Gross investment income

    11,003,634       8,916,087       2,087,547  

Investment expenses

    (1,281,251 )     (1,251,152 )     30,099  

Net investment income

  $ 9,722,383     $ 7,664,935     $ 2,057,448  

 

The $2,087,547 increase in gross investment income for the six months ended June 30, 2018 is primarily due to increases in investments in mortgage loans and other long-term investments. In the twelve months since June 30, 2017, our investments in mortgage loans have increased approximately $19.7 million and other long term investments have increased approximately $1.0 million. The increase in gross investment income from fixed maturity securities is primarily due to securities that have been called or matured and replaced with securities with higher yields.

 

49

 

 

Net Realized Investment Gains

 

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

 

Our net realized investment gains for the six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Six Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Fixed maturity securities available-for-sale:

                       

Sale proceeds

  $ 8,488,932     $ 12,603,249     $ (4,114,317 )

Amortized cost at sale date

    8,449,455       12,412,312       (3,962,857 )

Net realized gains

  $ 39,477     $ 190,937     $ (151,460 )

Equity securities at fair value:

                       

Sale proceeds

  $ 15,412     $ -     $ 15,412  

Cost at sale date

    15,305       -       15,305  

Net realized gains

  $ 107     $ -     $ 107  

Investment real estate:

                       

Sale proceeds

  $ 54,853     $ 190,084     $ (135,231 )

Carrying value at sale date

    56,175       185,702       (129,527 )

Net realized gains (losses)

  $ (1,322 )   $ 4,382     $ (5,704 )

Other long-term investments

                       

Sale proceeds

  $ -     $ 792,012     $ (792,012 )

Carrying value at sale date

    -       729,737       (729,737 )

Net realized gains

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

Equity securites, changes in fair value

  $ (13,790 )   $ -     $ (13,790 )
                         

Net realized investment gains

  $ 24,472     $ 257,594     $ (233,122 )

 

The Company has recorded other-than-temporary impairments on its fixed maturity available-for-sale investment in an energy corporation with a total par value of $650,000 as a result of continuing unrealized losses. During fourth quarter 2016 this security was initially impaired by a $207,450 charge to the statement of operations. During second quarter 2017 this security was further impaired by a $224,250 charge to the statement of operations. These impairments were considered fully credit-related and represent the difference between the amortized cost basis of the security and its fair value. The Company experienced no additional other-than-temporary impairments on fixed maturity available-for-sale securities for the six months ended June 30, 2018 and the year ended December 31, 2017.

 

50

 

 

Total Benefits, Claims and Expenses

 

Our benefits, claims and expenses are primarily generated from benefit payments, surrenders, interest credited to policyholders, change in reserves, commissions and other underwriting, insurance and acquisition expenses. Benefit payments can significantly impact expenses from period to period.

 

Our benefits, claims and expenses for the six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Six Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Benefits and claims

                       

Increase in future policy benefits

  $ 2,965,651     $ 2,441,964     $ 523,687  

Death benefits

    3,087,186       2,433,581       653,605  

Surrenders

    462,841       531,588       (68,747 )

Interest credited to policyholders

    4,611,433       4,236,984       374,449  

Dividend, endowment and supplementary life contract benefits

    132,695       131,768       927  

Total benefits and claims

    11,259,806       9,775,885       1,483,921  

Expenses

                       

Policy acquisition costs deferred

    (4,488,458 )     (5,001,037 )     512,579  

Amortization of deferred policy acquisition costs

    1,995,623       1,428,142       567,481  

Amortization of value of insurance business acquired

    171,489       209,464       (37,975 )

Commissions

    4,029,658       4,589,973       (560,315 )

Other underwriting, insurance and acquisition expenses

    3,132,028       3,226,423       (94,395 )

Total expenses

    4,840,340       4,452,965       387,375  

Total benefits, claims and expenses

  $ 16,100,146     $ 14,228,850     $ 1,871,296  

 

The $1,871,296 increase in total benefits, claims and expenses for the six months ended June 30, 2018 is discussed below.

 

Benefits and Claims

 

The $1,483,921 increase in benefits and claims for the six months ended June 30, 2018 is primarily due to the following:

 

 

$653,605 increase in death benefits is primarily due to approximately $916,000 of increased final expense settlements that exceeded $186,000 of decreased ordinary life settlements and $105,000 of increased ceded claims.

 

 

$523,687 increase in future policy benefits is primarily due to the increased number of life policies in force and the aging of existing life policies.

 

 

$374,449 increase in interest credited to policyholders is primarily due to an increase of approximately $9.3 million in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits and interest credited in excess of withdrawals) since June 30, 2017.

 

51

 

 

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 insurance and annuity contracts.

 

For the six months ended June 30, 2018 and 2017, capitalized costs were $4,488,458 and $5,001,037, respectively. Amortization of deferred policy acquisition costs for the six months ended June 30, 2018 and 2017 were $1,995,623 and $1,428,142, respectively.

 

The $512,579 decrease in the 2018 acquisition costs deferred primarily relates to decreased annuity production resulting in decreased annuity commissions available for deferral. The $567,481 increase in the 2018 amortization of deferred acquisition costs is primarily due to increased death benefits.

 

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 $171,489 and $209,464 for the six months ended June 30, 2018 and 2017, respectively.

 

Commissions

 

Our commissions for the six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Six Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Annuity

  $ 642,779     $ 1,371,805     $ (729,026 )

Whole life and term first year

    100,219       72,789       27,430  

Whole life and term renewal

    32,637       41,872       (9,235 )

Final expense first year

    2,714,480       2,728,416       (13,936 )

Final expense renewal

    539,543       375,091       164,452  

Total commissions

  $ 4,029,658     $ 4,589,973     $ (560,315 )

 

The $560,315 decrease in commissions for the six months ended June 30, 2018 is primarily due to a $729,026 decrease in annuity commissions (due to a $35,460,331 decline in annuity considerations) that exceeded a $164,452 increase in final expense renewal commissions (due to a $1,531,437 increase in final expense renewal premiums).

 

52

 

 

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. We continue to file consolidated life insurance company federal tax returns for TLIC and FBLIC. 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 six months ended June 30, 2017, current income tax expense was $19,909. Deferred federal income tax expense was $646,291 and $207,160 for the six months ended June 30, 2018 and 2017, respectively. The $439,131 increase in deferred income taxes is primarily due to the $1,850,000 lawsuit settlement payment during 2018 and the corresponding $388,500 increase in deferred tax expense.   

 

Net Income Per Common Share Basic and Diluted

 

Net income was $2,339,758 ($0.30 per common share basic and diluted) and $811,522 ($0.10 per common share basic and diluted) for the six months ended June 30, 2018 and 2017, respectively.

 

Net income per common share basic and diluted is calculated using the weighted average number of common shares outstanding and subscribed during the period. The weighted average outstanding and subscribed common shares basic and diluted for both the six months ended June 30, 2018 and 2017 were 7,802,593.

 

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 six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Six Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Revenues:

                       

Life insurance operations

  $ 10,538,864     $ 8,597,949     $ 1,940,915  

Annuity operations

    8,301,779       6,474,566       1,827,213  

Corporate operations

    245,552       194,926       50,626  

Total

  $ 19,086,195     $ 15,267,441     $ 3,818,754  

Income before income taxes:

                       

Life insurance operations

  $ 299,522     $ 554,026     $ (254,504 )

Annuity operations

    2,490,421       347,356       2,143,065  

Corporate operations

    196,106       137,209       58,897  

Total

  $ 2,986,049     $ 1,038,591     $ 1,947,458  

  

Life Insurance Operations

 

The $1,940,915 increase in revenues from Life Insurance Operations for the six months ended June 30, 2018 is primarily due to the following:

 

 

$1,557,572 increase in premiums

 

53

 

 

 

$387,287 increase in net investment income

 

 

$1,304 increase in service fees and other income

 

 

$5,248 decrease in net realized investment gains (that also includes a loss on other-than-temporary impairment)

 

The $254,504 decreased profitability from Life Insurance Operations for the six months ended June 30, 2018 is primarily due to the following:

 

 

$767,702 increase in other underwriting, insurance and acquisition expenses

 

 

$653,605 increase in death benefits

 

 

$523,687 increase in future policy benefits

 

 

$168,711 increase in commissions

 

 

$168,522 decrease in policy acquisition costs deferred net of amortization

 

 

$5,248 decrease in net realized investment gains (that also includes a loss on other-than-temporary impairment)

 

 

$927 increase in dividend, endowment and supplementary life contract benefits

 

 

$1,304 increase in service fees and other income

 

 

$18,988 decrease in amortization of value of insurance business acquired

 

 

$68,747 decrease in surrenders

 

 

$387,287 increase in net investment income

 

 

$1,557,572 increase in premiums

 

Annuity Operations

 

The $1,827,213 increase in revenues from Annuity Operations for the six months ended June 30, 2018 is due to the following:

 

 

$1,604,013 increase in net investment income

 

 

$226,824 increase in service fees and other income

 

 

$3,624 decrease in net realized investment gains (that also includes a loss on other-than-temporary impairment)

 

The $2,143,065 increased profitability from Annuity Operations for the six months ended June 30, 2018 is due to the following:

 

 

$1,604,013 increase in net investment income

 

 

$853,826 decrease in other underwriting, insurance and acquisition expenses

 

 

$729,026 decrease in commissions

 

 

$226,824 increase in service fees and other income

 

 

$18,987 decrease in amortization of value of insurance business acquired

 

54

 

 

 

$3,624 decrease in net realized investment gains (that also includes a loss on other-than-temporary impairment)

 

 

$374,449 increase in interest credited to policyholders

 

 

$911,538 decrease in policy acquisition costs deferred net of amortization

 

Corporate Operations

 

The $50,626 increase in revenues from Corporate Operations for the six months ended June 30, 2018 is primarily due to $66,148 of increased net investment income that exceeded $15,522 of decreased service fees and other income.

 

The $58,897 increased Corporate Operations profitability for the six months ended June 30, 2018 is primarily due to $66,148 of increased net investment income and $8,271 of decreased operating expenses that exceeded $15,522 of decreased service fees and other income.

 

Consolidated Financial Condition

 

Our invested assets as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

   

(Unaudited)

           

Amount Change

 
   

June 30, 2018

   

December 31, 2017

   

2018 less 2017

 

Assets

                       

Investments

                       

Available-for-sale fixed maturity securities at fair value (amortized cost: $145,519,627 and $143,621,947 as of June 30, 2018 and December 31, 2017, respectively)

  $ 144,729,230     $ 149,683,139     $ (4,953,909 )

Available-for-sale preferred stock at fair value (cost: $99,945 as of June 30, 2018 and December 31, 2017)

    99,020       100,720       (1,700 )

Equity securities (available-for-sale 2017) at fair value (cost: $513,490 and $502,919 as of June 30, 2018 and December 31, 2017, respectively)

    568,208       571,427       (3,219 )

Mortgage loans on real estate

    120,023,916       102,496,451       17,527,465  

Investment real estate

    2,632,458       2,382,966       249,492  

Policy loans

    1,683,744       1,660,175       23,569  

Short-term investments

    685,898       547,969       137,929  

Other long-term investments

    58,904,792       55,814,583       3,090,209  

Total investments

  $ 329,327,266     $ 313,257,430     $ 16,069,836  

 

55

 

 

The $4,953,909 decrease and $22,239,968 increase in fixed maturity available-for-sale securities for the six months ended June 30, 2018 and 2017, respectively, are summarized as follows:

 

   

(Unaudited)

 
   

Six Months Ended June 30,

 
   

2018

   

2017

 

Fixed maturity securities, available-for-sale, beginning

  $ 149,683,139     $ 129,311,155  

Purchases

    10,665,969       32,301,685  

Unrealized appreciation (depreciation)

    (6,851,589 )     3,734,842  

Net realized investment gains (losses)

    39,477       (33,313 )

Sales proceeds

    (3,988,932 )     (7,735,249 )

Maturities

    (4,500,000 )     (4,868,000 )

Transfer to other long-term investments

    -       (729,737 )

Premium amortization

    (318,834 )     (430,260 )

Increase (decrease)

    (4,953,909 )     22,239,968  

Fixed maturity securities, available-for-sale, ending

  $ 144,729,230     $ 151,551,123  

 

Fixed maturity securities available-for-sale are reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.” 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.

 

The $1,700 decrease and $5,578 increase in preferred stock available-for-sale for the six months ended June 30, 2018 and 2017, respectively, are summarized as follows:

 

   

(Unaudited)

 
   

Six Months Ended June 30,

 
   

2018

   

2017

 

Preferred stock, available-for-sale, beginning

  $ 100,720     $ 96,360  

Unrealized appreciation (depreciation)

    (1,700 )     5,578  

Increase (decrease)

    (1,700 )     5,578  

Preferred stock, available-for-sale, ending

  $ 99,020     $ 101,938  

 

Preferred stock available-for-sale is also reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.”

 

56

 

 

The $3,219 decrease and $14,967 increase in equity securities for the six months ended June 30, 2018 and 2017, respectively, are summarized as follows:

 

   

(Unaudited)

 
   

Six Months Ended June 30,

 
   

2018

   

2017

 

Equity securities, beginning

  $ 571,427     $ 542,047  

Purchases

    25,876       1,807  

Sales proceeds

    (15,412 )     -  

Unrealized appreciation

    -       13,160  

Net realized investment gains sale of securities

    107       -  

Net realized investment losses, changes in fair value

    (13,790 )     -  

Increase (decrease)

    (3,219 )     14,967  

Equity securities, ending

  $ 568,208     $ 557,014  

 

Equity securities in 2018 are reported at fair value with the change in fair value reflected in net realized investment gains (losses) within the consolidated statements of operations. Equity securities in 2017 were reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income.” 

 

The $17,527,465 and $25,965,773 increases in mortgage loans on real estate for the six months ended June 30, 2018 and 2017, respectively, are summarized as follows:

 

   

(Unaudited)

 
   

Six Months Ended June 30,

 
   

2018

   

2017

 

Mortgage loans on real estate, beginning

  $ 102,496,451     $ 74,371,286  

Purchases

    34,435,782       36,741,329  

Discount accretion

    214,157       72,996  

Payments

    (16,655,627 )     (10,724,113 )

Foreclosed - transfer to real estate

    (378,411 )        

Increase in allowance for bad debts

    (67,481 )     (101,031 )

Amortization of loan origination fees

    (20,955 )     (23,408 )

Increase

    17,527,465       25,965,773  

Mortgage loans on real estate, ending

  $ 120,023,916     $ 100,337,059  

 

57

 

 

The $249,492 increase and $258,445 decrease in investment real estate for the six months ended June 30, 2018 and 2017, respectively, are summarized as follows:

 

   

(Unaudited)

 
   

Six Months Ended June 30,

 
   

2018

   

2017

 

Investment real estate, beginning

  $ 2,382,966     $ 2,506,673  

Real estate acquired through mortgage loan foreclosure

    378,411       -  

Sales proceeds

    (54,853 )     (190,084 )

Depreciation of building

    (72,744 )     (72,743 )

Net realized investment gains (losses)

    (1,322 )     4,382  

Increase (decrease)

    249,492       (258,445 )

Investment real estate, ending

  $ 2,632,458     $ 2,248,228  

 

 

The $3,090,209 and $11,106,707 increases in other long-term investments (composed of lottery receivables) for the six months ended June 30, 2018 and 2017, respectively, are summarized as follows:

 

   

(Unaudited)

 
   

Six Months Ended June 30,

 
   

2018

   

2017

 

Other long-term investments, beginning

  $ 55,814,583     $ 46,788,873  

Purchases

    5,877,273       13,362,692  

Transfer from fixed maturity available-for-sale securities

    -       729,737  

Accretion of discount

    1,982,029       1,743,693  

Net realized investment gains

    -       62,275  

Sales proceeds

    -       (792,012 )

Payments

    (4,769,093 )     (3,999,678 )

Increase

    3,090,209       11,106,707  

Other long-term investments, ending

  $ 58,904,792     $ 57,895,580  

 

Our assets other than invested assets as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

   

(Unaudited)

           

Amount Change

 
   

June 30, 2018

   

December 31, 2017

   

2018 less 2017

 
                         

Cash and cash equivalents

  $ 16,585,991     $ 31,496,159     $ (14,910,168 )

Accrued investment income

    2,707,701       2,544,963       162,738  

Recoverable from reinsurers

    1,659,698       1,340,700       318,998  

Assets held in trust under coinsurance agreement

    7,464,922       -       7,464,922  

Agents' balances and due premiums

    1,500,290       1,485,305       14,985  

Deferred policy acquisition costs

    27,166,743       24,555,902       2,610,841  

Value of insurance business acquired

    5,355,156       5,526,645       (171,489 )

Other assets

    11,532,357       10,920,570       611,787  

Assets other than investment assets

  $ 73,972,858     $ 77,870,244     $ (3,897,386 )

 

 

The $14,910,168 decrease in cash and cash equivalents is discussed below in the “Liquidity and Capital Resources” section where cash flows are addressed.

 

58

 

 

The increase in deferred policy acquisition costs for the six months ended June 30, 2018 and 2017, respectively, are summarized as follows:

 

   

(Unaudited)

 
   

Six Months Ended June 30,

 
   

2018

   

2017

 

Balance, beginning of year

  $ 24,555,902     $ 18,191,990  

Capitalization of commissions, sales and issue expenses

    4,488,458       5,001,037  

Amortization

    (1,995,623 )     (1,428,142 )

Deferred acquisition costs allocated to investments

    118,006       (69,278 )

Balance, end of year

  $ 27,166,743     $ 21,695,607  

 

Our other assets as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

   

(Unaudited)

           

Amount Change

 
   

June 30, 2018

   

December 31, 2017

   

2018 less 2017

 

Advances to mortgage loan originator

  $ 4,863,234     $ 4,925,259     $ (62,025 )

Federal and state income taxes recoverable

    3,514,219       2,504,494       1,009,725  

Notes receivable

    447,496       448,006       (510 )

Accrual of mortgage loan and long-term investment payments due

    1,538,357       2,516,490       (978,133 )

Receivable for securities sold

    1,039,027       364,611       674,416  

Guaranty funds

    77,440       73,151       4,289  

Other receivables, prepaid assets and deposits

    52,584       88,559       (35,975 )

Total other assets

  $ 11,532,357     $ 10,920,570     $ 611,787  

 

There was a $1,009,725 increase in federal and state income taxes recoverable primarily due to federal and state tax withholdings on lottery receivables.

 

As of June 30, 2018, the Company had $1,039,027 of security sales where the trade date and settlement date were in different financial reporting periods compared to $364,611 of security sales overlapping financial reporting periods as of December 31, 2017.

 

There was a $978,133 decrease in the accrual of mortgage loans and long-term investment payments due based upon the scheduled timing of investment payments remitted by the third party servicers. Those cash payments were received in July 2018.

    

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

 

59

 

 

Our liabilities as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

   

(Unaudited)

           

Amount Change

 
   

June 30, 2018

   

December 31, 2017

   

2018 less 2017

 
                         

Policy liabilities

                       

Policyholders' account balances

  $ 294,488,224     $ 292,909,762     $ 1,578,462  

Future policy benefits

    52,601,174       49,663,099       2,938,075  

Policy claims

    1,187,074       1,148,513       38,561  

Other policy liabilities

    66,445       68,490       (2,045 )

Total policy liabilities

    348,342,917       343,789,864       4,553,053  

Funds withheld under coinsurance agreement

    11,335,660       -       11,335,660  

Deferred federal income taxes

    2,179,425       2,961,929       (782,504 )

Other liabilities

    3,156,673       3,123,702       32,971  

Total liabilities

  $ 365,014,675     $ 349,875,495     $ 15,139,180  

  

The $1,578,462 and $39,889,063 increases in policyholders’ account balances for the six months ended June 30, 2018 and 2017, respectively, are summarized as follows:

 

   

(Unaudited)

 
   

Six Months Ended June 30,

 
   

2018

   

2017

 

Policyholders' account balances, beginning

  $ 292,909,762     $ 245,346,489  

Deposits

    21,557,499       45,682,170  

Withdrawals

    (13,254,810 )     (10,030,091 )

Funds withheld under coinsurance agreement

    (11,335,660 )     -  

Interest credited

    4,611,433       4,236,984  

Increase

    1,578,462       39,889,063  

Policyholders' account balances, ending

  $ 294,488,224     $ 285,235,552  

 

The $2,938,075 increase in future policy benefits during the six months ended June 30, 2018 is primarily related to the production of new life insurance policies, initial sales of policies to older age bands (resulting in increased mortality reserve charges) and the aging of existing policies.

 

The $782,504 decrease in deferred federal income taxes during the six months ended June 30, 2018 was due to $1,428,795 of decreased deferred federal income taxes on the unrealized appreciation (depreciation) of fixed maturity and preferred stock available-for-sale and $646,291 of operating deferred federal tax expense.

 

60

 

 

Our other liabilities as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

   

(Unaudited)

           

Amount Change

 
   

June 30, 2018

   

December 31, 2017

   

2018 less 2017

 

Suspense accounts payable

  $ 2,312,575     $ 42,901     $ 2,269,674  

Accounts payable

    36,471       1,898,817       (1,862,346 )

Accrued expenses payable

    522,000       776,000       (254,000 )

Payable for securities purchased

    562,209       462,598       99,611  

Guaranty fund assessments

    43,000       43,000       -  

Unearned investment income

    54,870       62,326       (7,456 )

Deferred revenue

    24,368       29,784       (5,416 )

Unclaimed funds

    30,796       23,622       7,174  

Other payables, withholdings and escrows

    (429,616 )     (215,346 )     (214,270 )

Total other liabilities

  $ 3,156,673     $ 3,123,702     $ 32,971  

 

The $2,269,674 increase in suspense accounts payable is due to increased deposits on policy applications that had not been issued as of the financial reporting date.

 

The $1,862,346 decrease in accounts payable is primarily due to a payment of $1,850,000 to settle the FBLIC Term to 95 lawsuit.

 

The $254,000 decrease in accrued expenses payable is primarily due to payments of accrued legal fees.

 

As of June 30, 2018, the Company had $562,209 of security purchases where the trade date and settlement date were in different financial reporting periods compared to $462,598 of security purchases overlapping financial reporting periods as of December 31, 2017.

 

The $214,270 decline in other payables, withholdings and escrows is primarily due to an increase in escrows on commercial mortgage loans.

 

Liquidity and Capital Resources

 

Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through June 30, 2018, we have received $27,119,480 from the sale of our shares.

 

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

 

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

 

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.

 

61

 

 

As of June 30, 2018, we had cash and cash equivalents totaling $16,585,991. As of June 30, 2018, cash and cash equivalents of $8,769,469 and $5,546,821, respectively, of the total $16,585,991 were held by TLIC and FBLIC and may not be available for use by FTFC due to the required pre-approval by the OID and Missouri Department of Insurance of any dividend or intercompany transaction to transfer funds to FTFC. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the greater of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year.

 

Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is capacity for TLIC to pay a dividend up to $1,124,823 in 2018 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $760,348 in 2018 without prior approval. FBLIC paid no dividends to TLIC in 2018 and 2017. TLIC has paid no dividends to FTFC in 2018 and 2017.

 

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 $11,604,852 and $21,835,216 as of June 30, 2018 and December 31, 2017, respectively. Other funds are invested in mutual funds that invest in U.S. government securities. We monitor the solvency of all financial institutions in which we have funds to minimize the exposure for loss. The Company has not experienced any losses in such accounts.

 

Through June 30, 2018, the Company had a $1.0 million line of credit with a bank to provide working capital and funds for expansion.  The terms of the line of credit allowed for advances, repayments and re-borrowings through the maturity date of July 1, 2018.  Any outstanding advances would have incurred interest at a variable interest rate of the prime rate set forth in the Wall Street Journal plus 1% per annum adjusting monthly based on a 360 day year.  The Company did not utilize this line of credit during 2018 or 2017.    

 

Our cash flows for the six months ended June 30, 2018 and 2017 are summarized as follows:

 

   

(Unaudited)

         
   

Six Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Net cash provided (used) by operating activities

  $ (1,617,069 )   $ 1,235,293     $ (2,852,362 )

Net cash used in investing activities

    (21,595,788 )     (53,569,539 )     31,973,751  

Net cash provided by financing activities

    8,302,689       35,652,079       (27,349,390 )

Decrease in cash and cash equivalents

    (14,910,168 )     (16,682,167 )     1,771,999  

Cash and cash equivalents, beginning of period

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

Cash and cash equivalents, end of period

  $ 16,585,991     $ 17,541,778     $ (955,787 )

 

62

 

 

The $1,617,069 cash used by operating activities and $1,235,293 cash provided by operating activities for the six months ended June 30, 2018 and 2017, respectively, are summarized as follows:

 

   

(Unaudited)

         
   

Six Months Ended June 30,

   

Amount Change

 
   

2018

   

2017

   

2018 less 2017

 

Premiums collected

  $ 9,062,439     $ 7,518,703     $ 1,543,736  

Net investment income collected

    8,652,970       5,151,116       3,501,854  

Service fees and other income collected

    279,733       67,127       212,606  

Death benefits paid

    (3,367,623 )     (2,488,197 )     (879,426 )

Surrenders paid

    (462,841 )     (531,588 )     68,747  

Dividends and endowments paid

    (134,205 )     (132,503 )     (1,702 )

Commissions paid

    (4,048,010 )     (4,822,442 )     774,432  

Other underwriting, insurance and acquisition expenses paid

    (5,267,507 )     (3,130,568 )     (2,136,939 )

Taxes paid

    (1,009,725 )     (182,819 )     (826,906 )

Decreased advances to mortgage loan originator

    62,025       1,637,477       (1,575,452 )

Increased (decreased) deposits of pending policy applications

    2,269,674       (1,844,872 )     4,114,546  

Increased assets held in trust under coinsurance agreement

    (7,464,922 )     -       (7,464,922 )

Increased short-term investments

    (137,929 )     -       (137,929 )

Increased policy loans

    (23,569 )     (6,144 )     (17,425 )

Other

    (27,579 )     3       (27,582 )

Cash provided (used) by operating activities

  $ (1,617,069 )   $ 1,235,293     $ (2,852,362 )

 

Please see the statements of cash flows for the six months ended June 30, 2018 and 2017 for a summary of the components of net cash used in investing activities and net cash provided by financing activities.

 

Our shareholders’ equity as of June 30, 2018 and December 31, 2017 is summarized as follows:

 

 

 

(Unaudited)

           

Amount Change

 
   

June 30, 2018

   

December 31, 2017

   

2018 less 2017

 
                         

Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,173 issued as of June 30, 2018 and December 31, 2017 and 7,802,593 outstanding as of June 30, 2018 and December 31, 2017)

  $ 80,502     $ 80,502     $ -  

Additional paid-in capital

    28,684,598       28,684,598       -  

Treasury stock, at cost (247,580 shares as of June 30, 2018 and December 31, 2017)

    (893,947 )     (893,947 )     -  

Accumulated other comprehensive income (loss)

    (614,045 )     4,760,951       (5,374,996 )

Accumulated earnings

    11,028,341       8,620,075       2,408,266  

Total shareholders' equity

  $ 38,285,449     $ 41,252,179     $ (2,966,730 )

 

The decrease in shareholders’ equity of $2,966,730 for the six months ended June 30, 2018 is due to $5,374,996 in other comprehensive loss that exceeded $2,339,758 in net income and a $68,508 cumulative-effect of adoption of accounting guidance for reporting changes in fair value of equity securities in net realized gains and losses instead of accumulated other comprehensive income.

 

Equity per common share outstanding decreased 7.2% from $5.29 per share as of December 31, 2017 to $4.91 per share as of June 30, 2018, based upon 7,802,593 common shares outstanding as of both June 30, 2018 and December 31, 2017.

 

The liquidity requirements of our life insurance companies are met primarily by funds provided from operations. Premium and annuity consideration deposits, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. There were no liquidity issues in 2018 or 2017. Our investments include marketable debt securities that could be readily converted to cash for liquidity needs.

 

63

 

 

We are subject to various market risks. The quality of our investment portfolio and the current level of shareholders’ equity continue to provide a sound financial base as we strive to expand our marketing to offer competitive products. Our investment portfolio had unrealized appreciation (depreciation) on available-for-sale securities of ($791,322) and $6,130,475 as of June 30, 2018 and December 31, 2017, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. A decrease of $6,813,812 in unrealized losses arising for the six months ended June 30, 2018 has been offset by the cumulative effect adjustment for the adoption of accounting guidance for equity securities of $68,508 and 2018 net realized investment gains of $39,477 originating from the sale and call activity for fixed maturity securities available-for-sale resulting in net unrealized losses on investments of $6,921,797.

 

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 June 30, 2018, cash and cash equivalents, short-term investments, the fair value of fixed maturity available-for-sale securities with maturities of less than one year and the fair value of lottery receivables with maturities of less than one year equaled 9.1% 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 2017, the SVL also requires the Company to perform annual cash flow testing for TLIC and FBLIC. This testing is designed to ensure that statutory reserve levels will maintain adequate protection in a variety of potential interest rate scenarios. The Actuarial Standards Board of the American Academy of Actuaries also requires cash flow testing as a basis for the actuarial opinion on the adequacy of the reserves which is a required part of the annual statutory reporting process.

 

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

 

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

 

64

 

 

Effective January 1, 2017, the Company entered into a revised advance agreement with one loan originator. As of June 30, 2018, the Company has outstanding advances to this loan originator totaling $4,863,235. The advances are secured by $6,801,940 of residential mortgage loans on real estate that are assigned to the Company. The Company has committed to fund up to an additional $636,765 to the loan originator that would result in additional security in the form of residential mortgage loans on real estate to be assigned to the Company.

 

Effective January 1, 2017, the Company also entered into a revised escrow agreement with the same loan originator. According to the revised terms of the escrow agreement, as of June 30, 2018, $599,645 of additional and secured residential mortgage loan balances on real estate are held in escrow by the Company.  As of June 30, 2018, $409,546 of that escrow amount is available to the Company as additional collateral on $4,863,235 of advances to the loan originator. The remaining June 30, 2018 escrow amount of $190,099 is available to the Company as additional collateral on its investment of $38,019,842 in residential mortgage loans on real estate.

 

We are not aware of any commitments or unusual events that could materially affect our capital resources. We are not aware of any current recommendations by any regulatory authority which, if implemented, would have a material adverse effect on our liquidity, capital resources or operations. We believe that our existing cash and cash equivalents as of June 30, 2018 will be sufficient to fund our anticipated operating expenses.

 

Off-Balance Sheet Arrangements

 

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

 

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

 

Certain statements contained herein are forward-looking statements. The forward-looking statements are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning; and include, but are not limited to, statements regarding the outlook of our business and financial performance. These forward-looking statements are subject to change and uncertainty, which are, in many instances, beyond our control and have been made based upon our expectations and beliefs concerning future developments and their potential effect upon us.

 

There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be as anticipated. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. These factors include among others:

 

 

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

 

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

 

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

 

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

 

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

 

investment losses and defaults;

 

competition in our product lines;

 

attraction and retention of qualified employees and agents;

 

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

 

the availability, affordability and adequacy of reinsurance protection;

 

the effects of emerging claim and coverage issues;

 

the cyclical nature of the insurance business;

 

interest rate fluctuations;

 

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changes in our experiences related to deferred policy acquisition costs;

 

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

 

impact of medical epidemics and viruses;

 

domestic or international military actions;

 

the effects of extensive government regulation of the insurance industry;

 

changes in tax and securities law;

 

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

 

regulatory or legislative changes or developments;

 

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

 

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

 

risks of employee error or misconduct;

 

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

 

the availability of capital to expand our business.

 

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

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (“Certifying Officers”), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934 as amended (“Exchange Act”) as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is made known to management, including our Certifying Officers, as appropriate, to allow timely decisions regarding disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

Changes to Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

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

Mr. Pettigrew has appealed this decision but has failed to post an appeal bond. As a consequence, the Company and Mr. Zahn are in the process of executing on the judgments against Mr. Pettigrew’s assets. The Company and Mr. Zahn have so far collected some property and money in the execution process and will continue to execute on the judgments. Any money or property collected to date during the execution of the judgments are held in an escrow by a third party, have not been reflected in the June 30, 2018 consolidated financial statements and would have to be returned to Mr. Pettigrew in the event the judgments are reversed by the appellate courts.

 

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Prior to being acquired by TLIC, FBLIC developed, marketed, and sold life insurance products known as “Decreasing Term to 95” policies. On January 17, 2013, FBLIC’s Board of Directors voted that, effective March 1, 2013, it was not approving, and therefore was not providing, a dividend for the Decreasing Term to 95 policies. On November 22, 2013, a lawsuit was filed in the Circuit Court of Greene County, Missouri asserting claims against FBLIC relating to this decision. A trial was held November 27, 2017 through December 1, 2017 on the individual claims of two policyholders asserting fraud and negligent misrepresentation and on claims of a class of Missouri residents asking 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, plus interest and attorneys’ fees.

 

During 2018, a settlement was reached by the parties and the Court approved the settlement agreement on June 11, 2018. FBLIC paid $1.85 million to resolve all class and individual claims and all active Decreasing Term to 95 policies for individuals in the class will be cancelled.

 

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

 

None

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

31.1

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

 

 

31.2

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

 

 

32.1

Section 1350 Certification of Principal Executive Officer

 

 

32.2

Section 1350 Certification of Principal Financial Officer

 

 

101.INS**

XBRL Instance

 

 

101.SCH**

XBRL Taxonomy Extension Schema

 

 

101.CAL**

XBRL Taxonomy Extension Calculation

 

 

101.DEF**

XBRL Taxonomy Extension Definition

 

 

101.LAB**

XBRL Taxonomy Extension Labels

 

 

101.PRE**

XBRL Taxonomy Extension Presentation

 

 

**XBRL

Information is furnished and not filed as part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

 

In accordance with requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

FIRST TRINITY FINANCIAL CORPORATION

an Oklahoma corporation  

 

 

 

 

 

 

 

 

 

August 13, 2018 

By:

/s/ Gregg E. Zahn

 

 

 

Gregg E. Zahn, President and Chief Executive Officer

 

 

 

 

 

       
August 13, 2018 By: /s/ Jeffrey J. Wood  
    Jeffrey J. Wood, Chief Financial Officer  

 

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