Company Quick10K Filing
First Trinity Financial
Price-0.00 EPS1
Shares8 P/E-0
MCap-0 P/FCF0
Net Debt-14 EBIT6
TEV-14 TEV/EBIT-3
TTM 2019-09-30, in MM, except price, ratios
10-K 2019-12-31 Filed 2020-03-12
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-13
10-Q 2019-03-31 Filed 2019-05-14
10-K 2018-12-31 Filed 2019-03-14
10-Q 2018-09-30 Filed 2018-11-13
10-Q 2018-06-30 Filed 2018-08-13
10-Q 2018-03-31 Filed 2018-05-14
10-K 2017-12-31 Filed 2018-03-08
10-Q 2017-09-30 Filed 2017-11-09
10-Q 2017-06-30 Filed 2017-08-10
10-Q 2017-03-31 Filed 2017-05-11
10-K 2016-12-31 Filed 2017-03-09
10-Q 2016-09-30 Filed 2016-11-10
10-Q 2016-06-30 Filed 2016-08-11
10-Q 2016-03-31 Filed 2016-05-12
10-K 2015-12-31 Filed 2016-03-11
10-Q 2015-09-30 Filed 2015-11-12
10-Q 2015-06-30 Filed 2015-08-13
10-Q 2015-03-31 Filed 2015-05-14
10-K 2014-12-31 Filed 2015-03-12
10-Q 2014-09-30 Filed 2014-11-13
10-Q 2014-06-30 Filed 2014-08-14
10-Q 2014-03-31 Filed 2014-05-14
10-K 2013-12-31 Filed 2014-03-14
10-Q 2013-09-30 Filed 2013-11-13
10-Q 2013-06-30 Filed 2013-08-13
10-Q 2013-03-31 Filed 2013-05-14
10-K 2012-12-31 Filed 2013-03-14
10-Q 2012-09-30 Filed 2012-11-13
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-14
10-K 2011-12-31 Filed 2012-03-30
8-K 2020-03-30 Amend Bylaw, Exhibits
8-K 2020-03-18 Earnings, Exhibits
8-K 2020-03-12 Enter Agreement, Exhibits
8-K 2019-10-02 Shareholder Vote
8-K 2019-08-15 Code of Ethics
8-K 2019-04-26 Other Events
8-K 2019-03-18 Enter Agreement, Officers, Exhibits, Exhibits
8-K 2018-12-07 Enter Agreement, Officers, Exhibits, Exhibits
8-K 2018-05-16 Shareholder Vote

FTFC 10K Annual Report

Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits
EX-21.1 ex_175510.htm
EX-31.1 ex_175511.htm
EX-31.2 ex_175512.htm
EX-32.1 ex_175513.htm
EX-32.2 ex_175514.htm

First Trinity Financial Earnings 2019-12-31

Balance SheetIncome StatementCash Flow
60548436324212102012201420172020
Assets, Equity
1511852-12012201420172020
Rev, G Profit, Net Income
754821-6-33-602012201420172020
Ops, Inv, Fin

10-K 1 ftfc20191231_10k.htm FORM 10-K ftfc20191231_10k.htm
 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2019

 

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

For the transition period From                               to                                  .

 

Commission file number 000-52613

 

FIRST TRINITY FINANCIAL CORPORATION

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

 

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

 

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

 

(918) 249-2438

(Issuer's telephone number)

 

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

Title of Each Class 

None

 

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

Title of Each Class 

Common Stock, $.01 Par Value

 

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

 

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

 

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

 

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

Yes ☒  No ☐

 

 

 

1

 

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

 

Large accelerated filer:  ☐

Accelerated filer:  ☐

Non-accelerated filer:  ☐

Smaller reporting company:  ☑

Emerging growth company:  ☐

 

   

 

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

 

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

Yes ☐       No ☒

 

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

  

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

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.    Common stock $.01 par value as of March 9, 2020: 7,802,593 shares

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement to be used in connection with its 2020 Annual Meeting of Shareholders, which is expected to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Form 10-K, are incorporated by reference into Part III of this report.

 

2

 

 

FIRST TRINITY FINANCIAL CORPORATION

 

TABLE OF CONTENTS

 

Part I

   
     

Item  1.

Business

4

Item  2.

Properties

9

Item  3.

Legal Proceedings

10

Item  4.

Mine Safety Disclosures

11

     

Part II

   
     

Item  5.

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

11

Item  7.

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

12

Item  8.

Financial Statements

37

Item  9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

80

Item  9A.

Controls and Procedures

80

Item  9B.

Other Information

81

     

Part III

   
     

Item  10.

Directors, Executive Officers and Corporate Governance

81

Item  11.

Executive Compensation

81

Item  12.

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

81

Item  13.

Certain Relationships and Related Transactions, and Director Independence

81

Item  14.

Principal Accounting Fees and Services.

81

Item  15.

Exhibits

81

Signatures

82

Exhibit Index

83

 

 

Exhibit 21.1

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

Exhibit 32.2

Exhibit No. 101.INS

Exhibit No. 101.SCH

Exhibit No. 101.CAL

Exhibit No. 101.DEF

Exhibit No. 101.LAB

Exhibit No. 101.PRE

 

3

 

 

PART I

 

Item 1. Business

 

Business Development

 

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

 

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

 

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

 

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

 

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

 

The Company owns 100% of TAI (formerly known as Citizens American Life, Inc.). TAI was incorporated in Barbados, West Indies on March 24, 2016 for the primary purpose of forming a life insurance company producing United States (U.S.) dollar denominated life insurance policies and annuity contracts outside of the United States and Barbados. TAI is licensed as an Exempt Insurance Company under the Exempt Insurance Act of Barbados. TAI was initially involved in developing life insurance and annuity contracts and identifying distribution channels but is now issuing life insurance policies and annuity contracts through associations with distribution channels. The Company’s acquisition of TAI was formally approved by Barbados regulators and the certifications were received in 2019.   

 

Company Capitalization

 

Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through December 31, 2019, we have received $27,119,480 from the sale of our shares. The Company raised $1,450,000 from two private placements during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012 and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings. The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012.

 

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

 

4

 

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.

 

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.

 

On April 3, 2018, FTFC acquired 100% of the outstanding stock of TAI domiciled in Barbados, West Indies. The Barbados regulators approved the acquisition and supplied certifications during 2019. The aggregate purchase price for the acquisition of TAI was $250,000. The acquisition of TAI was financed with the working capital of FTFC.    

 

Effective January 1, 2020, the Company acquired 100% of the outstanding common stock of K-TENN Insurance Company (“K-TENN”) from its sole shareholder in exchange for 168,866 shares of FTFC’s common stock. The acquisition of K-TENN was accounted for as a purchase. The aggregate purchase price of K-TENN was $1,837,469. Immediately subsequent to this acquisition, the $1,837,469 of net assets and liabilities of K-TENN along with the related life insurance business operations were contributed to TLIC.

 

Financial Information about Segments

 

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

 

Our business segments are as follows:

 

 

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

 

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

 

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

 

Please see below and Note 11 to the consolidated financial statements as of and for the years ended December 31, 2019 and 2018 for additional information regarding segment information.

 

Life Insurance and Annuity Operations

 

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

  

5

 

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

 

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

 

TLIC continues to seek to serve middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas. TLIC markets its products through independent agents. With the acquisition of FBLIC in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico. FBLIC also had initial licenses in Kansas, Nebraska and Oklahoma where TLIC was also licensed. In late 2012, FBLIC was licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia. In 2013, FBLIC was licensed in Illinois and Pennsylvania. In 2014, FBLIC was licensed in Georgia, Louisiana, Michigan, Mississippi, North Carolina, Ohio, Tennessee and Virginia. In 2015, FBLIC was licensed in Alabama and Utah. In 2018, FBLIC and TLIC were licensed in Montana. In 2019, FBLIC and TLIC were licensed in Tennessee.

 

The following tables sets forth our direct collected life insurance premiums and annuity considerations by the policyholder’s state of residence at the time of premium collection and annuity consideration, for the most significant states in which we are licensed, for the years ended December 31, 2019 and 2018, in accordance with statutory accounting practices prescribed by the states of domicile of TLIC and FBLIC.

 

   

Year Ended December 31, 2019

 
   

Life

   

Annuity

 

State

 

Premiums

   

Percentage

   

Considerations

   

Percentage

 

Alabama

  $ 521,441       2.39 %   $ 239,232       0.15 %

Arizona

    153,169       0.70 %     3,512,507       2.15 %

Arkansas

    306,292       1.41 %     1,091,080       0.67 %

Colorado

    713,272       3.28 %     1,829,878       1.12 %

Georgia

    846,972       3.89 %     2,025,709       1.24 %

Illinois

    1,665,679       7.65 %     4,156,611       2.55 %

Indiana

    902,189       4.14 %     5,116,469       3.13 %

Kansas

    2,155,408       9.90 %     8,797,802       5.39 %

Kentucky

    673,336       3.09 %     1,486,046       0.91 %

Louisiana

    634,294       2.91 %     2,308,710       1.41 %

Michigan

    469,578       2.16 %     13,352,907       8.18 %

Missouri

    784,434       3.60 %     2,421,882       1.48 %

Nebraska

    210,395       0.97 %     5,037,505       3.08 %

North Carolina

    1,931,032       8.87 %     14,891,247       9.12 %

North Dakota

    89,808       0.41 %     18,626,695       11.41 %

Ohio

    2,886,556       13.26 %     4,518,836       2.77 %

Oklahoma

    1,160,860       5.33 %     3,001,413       1.84 %

Pennsylvania

    844,738       3.88 %     6,038,947       3.70 %

Tennessee

    454,065       2.09 %     1,697,493       1.04 %

Texas

    3,500,652       16.08 %     53,321,880       32.63 %

Virginia

    381,508       1.75 %     3,970,829       2.43 %

All other states

    488,075       2.24 %     5,873,697       3.60 %

Total direct collected premiums and considerations

  $ 21,773,753       100.00 %   $ 163,317,375       100.00 %

 

6

 

   

Year Ended December 31, 2018

 
   

Life

   

Annuity

 

State

 

Premiums

   

Percentage

   

Considerations

   

Percentage

 

Alabama

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

Arizona

    100,989       0.54 %     177,560       0.33 %

Arkansas

    256,591       1.36 %     205,795       0.38 %

Colorado

    582,423       3.09 %     343,234       0.63 %

Georgia

    630,534       3.35 %     695,687       1.28 %

Illinois

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

Indiana

    768,182       4.08 %     496,481       0.91 %

Kansas

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

Kentucky

    603,186       3.20 %     231,112       0.42 %

Louisiana

    573,141       3.04 %     160,132       0.29 %

Michigan

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

Missouri

    750,749       3.98 %     673,760       1.23 %

Nebraska

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

North Carolina

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

North Dakota

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

Ohio

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

Oklahoma

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

Pennsylvania

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

Tennessee

    339,087       1.80 %     414,392       0.76 %

Texas

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

Virginia

    310,985       1.65 %     50,000       0.09 %

All other states

    378,239       2.01 %     1,949,102       3.58 %

Total direct collected premiums and considerations

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

 

Reinsurance

 

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

 

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

 

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

 

FBLIC also participates in reinsurance in order to provide risk diversification, additional capacity for future growth and limit the maximum net loss potential arising from large amounts of risk. FBLIC reinsures initial amounts of risk on any one life in excess of $100,000 for individual life insurance with Optimum Re. TLIC and FBLIC also reinsure its accidental death benefit portion of their life policies under a bulk agreement with Optimum Re. To the extent that the reinsurance companies are unable to meet their obligations under the reinsurance agreements, TLIC and FBLIC remain primarily liable for the entire amount at risk.

 

7

 

Coinsurance

 

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

 

In accordance with this annuity coinsurance agreement, TLIC holds assets and recognizes a funds withheld liability for the benefit of the assuming company in an amount at least equal to the annuity reserves in accordance with U.S. statutory accounting principles generated by this ceded business. In addition, the assuming company maintains a trust related to this ceded business amounting to at least an additional 4% of assets above the 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.

 

In 2019, TLIC entered into a life insurance coinsurance agreement with TAI, effective October 1, 2018, whereby 100% of TAI’s life insurance policies and annuity contracts issued after September 30, 2018 were ceded to TLIC. TLIC contractually reimburses TAI for the related commissions, submission costs, maintenance costs, marketing costs and other costs related to the production of life insurance policies and annuity contracts.

  

Competition 

 

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

 

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

 

Governmental Regulation 

 

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

 

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

 

TLIC is subject to Oklahoma laws and FBLIC is subject to Missouri laws that limit the amount of dividends insurance companies can pay to stockholders without approval of the respective Departments of Insurance. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the greater of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year. Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is capacity for TLIC to pay a dividend up to $1,245,184 in 2020 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $918,511 in 2020 without prior approval. FBLIC paid a dividend of $760,347 to TLIC in 2018 but none in 2019. Dividends paid by FBLIC are eliminated in consolidation. TLIC has paid no dividends to FTFC.

 

8

 

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

 

Employees 

 

As of March 9, 2020, the Company had fifteen full-time employees and one part-time employee.

 

Item 2. Properties

 

The Company leases 6,769 square feet of office space pursuant to an original five-year lease that began October 1, 2010 and was amended on October 1, 2015 for another five-year term. Under the terms of the original home office lease, the monthly rent was $7,897 from October 1, 2010 through September 30, 2015. Under the terms of the amended home office lease, the monthly rent is $8,461 from October 1, 2015 through September 30, 2016, $8,630 from October 1, 2016 through September 30, 2017, $8,805 from October 1, 2017 through September 30, 2018, $8,920 from October 1, 2018 through September 30, 2019 and $9,161 from October 1, 2019 through September 30, 2020. The Company incurred rent expense (including charges for the lessor’s building operating expenses above those specified in the lease agreement less monthly amortization of the leasehold improvement allowance received from the lessor) of $97,489 and $97,063 for the years ended December 31, 2019 and 2018, respectively, under this lease.

 

On January 1, 2011, the Company received a $120,000 leasehold improvement allowance from the lessor related to the original lease that was fully amortized by September 30, 2015. In accordance with the amended lease on October 1, 2015, the Company was provided an allowance of $54,152 for leasehold improvements. The leasehold improvement allowance is amortized over the remaining amended non-cancellable lease term and reduced rent expense by $10,830 for both the years ended December 31, 2019 and 2018. The future minimum lease payments to be paid under the amended non-cancellable lease agreement is $82,446 for the year 2020.

 

TLIC owns approximately six and one-half acres of land located in Topeka, Kansas. A 20,000 square foot office building has been constructed on approximately one-fourth of this land. TLIC executed a two year lease agreement effective January 1, 2015, for 7,500 square feet of its building in Topeka, Kansas. Effective January 1, 2017, this lease was renewed for two years. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance. The monthly lease payments were $8,696 for 2015, 2016, 2017 and 2018. Effective December 31, 2018, the lease agreement expired without renewal. TLIC renewed a five year lease agreement effective June 1, 2011, for 10,000 square feet in the Topeka, Kansas office building. Beginning June 1, 2014, the lessee can terminate the lease with a 180 day written notice. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance with partial reimbursement from the lessee. The lease agreement calls for minimum monthly base lease payments of $17,750.

 

This 10,000 square feet lease was renewed for five years to be effective from June 1, 2016 through May 31, 2021, with an option for an additional five years from June 1, 2021 through May 31, 2026. Beginning June 1, 2021, the lessee can terminate the lease with a 120 day written notice. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance with partial reimbursement from the lessee. The lease agreement calls for a monthly lease payment of $16,598 from June 1, 2016 through June 30, 2016. Starting July 1, 2016, the lease agreement includes an $88,833 tenant improvement allowance that is amortized over 59 months with interest at 5.00%. The monthly lease payments were $18,299 from July 1, 2016 through May 31, 2017, $18,376 from June 1, 2017 through May 31, 2018, $18,508 from June 1, 2018 through May 31, 2019 and $18,584 from June 1, 2019 through May 31, 2021.

 

A five year lease agreement effective September 1, 2010 automatically renewed on 2,500 square feet of the Topeka, Kansas office building with a 90 day notice by the lessee to terminate the lease. This lease was renewed on September 1, 2015 to run through August 31, 2017 with an option for an additional three years through August 31, 2020. Beginning September 1, 2017, the lessee can terminate the lease with a 120 day written notice. The terms of the lease leave TLIC responsible for paying real estate taxes, building insurance and building and ground maintenance with partial reimbursement from the lessee. The lease payments are $4,236 per month from September 1, 2015 through August 31, 2016, $4,242 from September 1, 2016 through August 31, 2017, $4,263 from September 1, 2017 through August 31, 2018, $4,293 from September 1, 2018 through August 31, 2019 and $4,310 from September 1, 2019 through December 31, 2019.

 

9

 

The future minimum lease payments to be received under the non-cancellable lease agreements are $223,008 and $92,920 for the years 2020 and 2021, respectively.

 

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

 

During 2019 and 2018 the Company foreclosed on residential mortgage loans of real estate totaling $99,218 and $467,593, respectively, and transferred those properties to investment real estate held for sale. The Company’s policy is to reduce the carrying value of this residential real estate obtained through foreclosure to the lower of acquisition cost or net realizable value.

 

During 2019, the Company sold investment real estate property with an aggregate carrying value of $394,002. The Company recorded a gross realized investment loss on sale of $43,185 based on an aggregate sales price of $350,817. During 2018, the Company sold investment real estate property with an aggregate carrying value of $313,040. The Company recorded a gross realized investment gain on sale of $51,649 based on an aggregate sales price of $364,689.

 

Item 3. Legal Proceedings

 

A lawsuit filed by the Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, in 2013 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.  Mr. Pettigrew denied the allegations.

 

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 appealed this decision.  The appeal challenged two trial court judgments based on separate verdicts against him in the jury trial.  On February 28, 2020, the Court of Civil Appeals of the state of Oklahoma reversed the judgments entered by the trial court and remanded the case for a new trial.  The Court of Appeals reversal, however, is not final.  The Company will request that the Court of Appeals grant a rehearing and reverse its decision.  Should it not do so, the Company will petition the Oklahoma Supreme Court to reverse the Court of Appeals decision.

 

In 2013, the Company’s Board of Directors, represented by independent counsel, concluded that there was no action to be taken against Mr. Zahn and that the allegations by Mr. Pettigrew were without substance.  The Company was also informed back in 2013 by the Oklahoma Insurance Department that it would take no action and was also informed in 2013 that the Oklahoma Department of Securities, after its investigation of the allegations, concluded that no proceedings were needed with respect to the alleged matters.  It remains the Company’s intention to again vigorously prosecute this action against the Defendants for damages and for correction of the defamatory statements.  In the opinion of the Company’s management, the ultimate resolution of any contingencies that may arise from this litigation is not considered material in relation to the financial position or results of operations of the Company.

 

Prior to being acquired by TLIC, FBLIC developed, marketed, and sold life insurance products known as “Decreasing Term to 95” policies. On January 17, 2013, FBLIC’s Board of Directors voted that, effective March 1, 2013, it was not approving, and therefore was not providing, a non-guaranteed dividend for the Decreasing Term to 95 policies since that group of policies was not producing a positive divisible surplus to allow the payment of a non-guaranteed dividend.

 

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

 

10

 

Item 4. Mine Safety Disclosures

 

None

 

PART II

 

Item 5.

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

 

(a)

Market Information

 

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

 

(b)

Holders

 

As of March 9, 2020, there were approximately 4,500 shareholders of the Company’s outstanding common stock.

 

On October 2, 2019, at our Annual Shareholders’ Meeting, our shareholders approved the following proposals subject to regulatory approval and adoption by our Board of Directors:

 

 

An amendment and restatement of our Certificate of Incorporation to authorize 40,000,000 shares of Class A common stock and 10,000,000 shares of Class B common stock and to establish the relative rights, preferences and privileges of, and the restrictions and limitations on, the Class A common Stock and the Class B common stock.

     
 

An amendment and restatement of the Certificate of Incorporation to automatically reclassify each issued and outstanding share of our existing common stock as one (1) share of Class A common stock or, at the shareholder’s election, into one (1) share of new Class B common stock.

 

These proposals recently received regulatory approval from the OID and MDOI. Upon full implementation after formal adoption by our Board of Directors in March 2020, Class B shareholders will be entitled to elect a majority of our Board of Directors (one-half plus one) but will only receive, compared to Class A shareholders, 85% of cash dividends, stock dividends or amounts due upon any Company merger, sale or liquidation event. Class B shareholders may also convert one share of Class B common stock for a .85 share of Class A common stock. Class A shareholders will elect the remaining Board of Directors members and will receive 100% of cash dividends, stock dividends or amounts due upon any Company merger, sale or liquidation event.

 

(c)

Dividends

 

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

 

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

 

On January 10, 2011, the Company’s Board of Directors approved a 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold. The dividend was payable to the holders of shares of the Corporation as of March 10, 2011. Fractional shares were rounded to the nearest whole number of shares. The Company issued 323,777 shares in connection with the stock dividend.

 

11

 

On January 11, 2012, the Company’s Board of Directors approved another 5% share dividend by which shareholders received a share of common stock for each 20 shares of common stock of the Company they hold. The dividend was payable to the holders of shares of the Corporation as of March 10, 2012. Fractional  shares were rounded to the nearest whole number of shares. The Company issued 378,908 shares in connection with the stock dividend.

 

Upon full implementation after formal adoption by our Board of Directors in March 2020, Class A shareholders will receive a $0.05 per share cash dividend followed by a 10% stock dividend. The Class B shareholders will not receive these cash and stock dividends.

 

(d)

Securities Authorized for Issuance Under Equity Compensation Plans

 

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

 

(e)

Performance Graph – Not Required

 

(f)

Purchases of Equity Securities by Issuer

 

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

 

 

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

 

Overview 

 

First Trinity Financial Corporation (“we” “us”, “our”, “FTFC” or the “Company”) conducts operations as an insurance holding company emphasizing ordinary life insurance products and annuity contracts in niche markets. We are no longer operating a premium finance company that financed casualty insurance premiums. As an insurance provider, we collect premiums and annuity considerations in the current period to pay future benefits to our policy and contract holders. Our core TLIC operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense and term products and annuity contracts to predominately middle income households in the states of Illinois, Kansas, Kentucky, Nebraska, North Dakota, Ohio, Oklahoma and Texas through independent agents. In 2018, TLIC was licensed in Montana. In 2019, TLIC was licensed in Tennessee.

 

With the acquisition of FBLIC in late 2011, we expanded into Arizona, Colorado, Missouri and New Mexico. FBLIC also had initial licenses in Kansas, Nebraska and Oklahoma where TLIC was also licensed. In late 2012, FBLIC was licensed in Arkansas, Indiana, Kentucky, North Dakota, South Dakota, Texas and West Virginia. In 2013, FBLIC was licensed in Illinois and Pennsylvania. In 2014, FBLIC was licensed in Georgia, Louisiana, Michigan, Mississippi, North Carolina, Ohio, and Virginia. In 2015, FBLIC was licensed in Alabama and Utah. In 2018, FBLIC was licensed in Montana. In 2019, FBLIC was licensed in Tennessee.

 

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

 

12

 

Acquisitions 

 

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

 

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

 

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

 

On April 3, 2018, FTFC acquired 100% of the outstanding stock of TAI domiciled in Barbados, West Indies. The Barbados regulators approved the acquisition and supplied certifications during 2019. The aggregate purchase price for the acquisition of TAI was $250,000. The acquisition of TAI was financed with the working capital of FTFC.    

 

Effective January 1, 2020, the Company acquired 100% of the outstanding common stock of K-TENN Insurance Company (“K-TENN”) from its sole shareholder in exchange for 168,866 shares of FTFC’s common stock. The acquisition of K-TENN was accounted for as a purchase. The aggregate purchase price of K-TENN was $1,837,469. Immediately subsequent to this acquisition, the $1,837,469 of net assets and liabilities of K-TENN along with the related life insurance business operations were contributed to TLIC.

 

Critical Accounting Policies and Estimates

 

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

 

Investments in Fixed Maturity Securities

 

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

 

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

 

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

 

13

 

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

 

Mortgage Loans on Real Estate

 

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

 

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

 

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

 

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

 

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

 

Deferred Policy Acquisition Costs

 

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

 

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

 

14

 

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

 

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

 

Value of Insurance Business Acquired

 

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

 

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

 

As of December 31, 2019 and 2018, there was $3,848,430 and $3,554,008, respectively, of accumulated amortization of the value of insurance business acquired due to the purchases of FLAC and FBLIC. The Company expects to amortize the value of insurance business acquired by the following amounts over the next five years: $275,501 in 2020, $257,083 in 2021, $237,034 in 2022, $226,150 in 2023 and $216,735 in 2024.

 

Future Policy Benefits

 

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

 

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

 

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

 

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

 

15

 

Recent Accounting Pronouncements

 

Leases

 

In February 2016, the FASB issued updated guidance (Accounting Standards Update 2016-02) to require lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months. The updated guidance retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease). Both lease classifications require the lessee to record the right-of-use asset and the lease liability based upon the present value of cash flows. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The accounting by lessors is not significantly changed by the updated guidance. The updated guidance requires expanded qualitative and quantitative disclosures, including additional information about the amounts recorded in the financial statements.

 

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

 

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

 

The Company adopted this guidance in first quarter 2019. The adoption of this guidance in 2019 did not have a material effect on the Company’s results of operations, financial position or liquidity.

 

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

 

In June 2016, the FASB issued updated guidance (Accounting Standards Update 2016-13) for the accounting for credit losses for financial instruments. The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance recoverables, including structured settlements that are recorded as part of reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.

 

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 was effective for reporting periods beginning after December 15, 2019. As a Smaller Reporting Company, the effective date was recently changed and the delayed effective date is now for reporting periods beginning after December 15, 2022. Early adoption is permitted for reporting periods beginning after December 15, 2018.

 

16

 

Based on the financial instruments currently held by the Company, there would not be a material effect on the Company’s results of operations, financial position or liquidity if the new guidance had been adopted in the current accounting period. The impact on the Company’s results of operations, financial position or liquidity at the date of adoption of the updated guidance will be determined by the financial instruments held by the Company and the economic conditions at that time.

 

Intangibles - Goodwill and Other

 

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

 

The updated guidance is effective for reporting periods beginning after December 15, 2019 and is to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Targeted Improvements to the Accounting for Long-Duration Contracts

 

In August 2018, the FASB issued updated guidance (Accounting Standards Update 2018-12) to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. This update improves the timeliness of recognizing changes in the liability for future policy benefits, modifies the rate used to discount future cash flows, simplifies and improves accounting for certain market-based options or guarantees associated with deposit (i.e., account balance) contracts, simplifies the amortization of deferred acquisitions costs and expands required disclosures.

 

The expanded disclosure requires an insurance entity to provide disaggregated roll forwards of beginning to ending balances of the following: liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities and deferred acquisition costs including disclosure about, changes to and effect of changes for significant inputs, judgments, assumptions and methods used in measurements.

 

The updated guidance was effective for reporting periods beginning after December 15, 2020. As a Smaller Reporting Company, the effective date was recently changed and the delayed effective date is now for reporting periods beginning after December 15, 2023. Early adoption is permitted. With respect to the liability for future policyholder benefits for traditional and limited-payment contracts and deferred acquisition costs, an insurance entity may elect to apply the amendments retrospectively as of the beginning of the earliest period presented. With respect to the market risk benefits, an insurance entity should apply the amendments retrospectively as of the beginning of the earliest period presented. The Company expects that the impact on the Company’s results of operations, financial position and liquidity at the date of adoption of the updated guidance in 2024 will be determined by the long-duration contracts then held by the Company and the economic conditions at that time.

 

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

 

In August 2018, the FASB issued amendments (Accounting Standards Update 2018-13) to modify the disclosure requirements related to fair value measurements including the consideration of costs and benefits of producing the modified disclosures. The updated guidance is effective for reporting periods beginning after December 15, 2019. Early adoption is permitted and an entity is permitted to early adopt any removed or modified disclosures upon issuance and delay adoption of the additional disclosures until their effective date. The adoption of this guidance in 2020 is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

17

 

Income Taxes - Simplifying the Accounting for Income Taxes


In December 2019, the FASB issued updated guidance (Accounting Standards Update 2019-12) for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The updated guidance is effective for the quarter ending March 31, 2021. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Business Segments

 

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

 

Our business segments are as follows:

 

 

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

 

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

 

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

 

Please see below and Note 11 to the consolidated financial statements as of and for the years ended December 31, 2019 and 2018 for additional information regarding segment information.

 

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

 

 

FINANCIAL HIGHLIGHTS

 

Consolidated Condensed Results of Operations for the Years Ended December 31, 2019 and 2018

 

   

Years Ended December 31,

   

Amount Change

 
   

2019

   

2018

   

2019 less 2018

 

Premiums

  $ 23,125,090     $ 18,822,517     $ 4,302,573  

Net investment income

    24,370,040       19,609,386       4,760,654  

Net realized investment gains

    967,978       266,498       701,480  

Service fees

    1,087,181       465,528       621,653  

Other income

    226,406       77,166       149,240  

Total revenues

    49,776,695       39,241,095       10,535,600  

Benefits and claims

    28,395,457       22,455,883       5,939,574  

Expenses

    13,161,622       10,180,945       2,980,677  

Total benefits, claims and expenses

    41,557,079       32,636,828       8,920,251  

Income before federal income tax expense

    8,219,616       6,604,267       1,615,349  

Federal income tax expense

    2,119,896       1,462,121       657,775  

Net income

  $ 6,099,720     $ 5,142,146     $ 957,574  

Net income per common share basic and diluted

  $ 0.78     $ 0.66     $ 0.12  

 

18

 

Consolidated Condensed Financial Position as of December 31, 2019 and 2018

 

                   

Amount Change

 
   

December 31, 2019

   

December 31, 2018

   

2019 less 2018

 
                         
                         

Investment assets

  $ 419,242,515     $ 325,844,275     $ 93,398,240  

Assets held in trust under coinsurance agreement

    105,089,240       25,494,700       79,594,540  

Other assets

    80,604,619       82,167,875       (1,563,256 )

Total assets

  $ 604,936,374     $ 433,506,850     $ 171,429,524  
                         

Policy liabilities

  $ 429,631,596     $ 354,604,734     $ 75,026,862  

Funds withheld under coinsurance agreement

    105,638,974       29,285,119       76,353,855  

Deferred federal income taxes

    6,345,918       2,373,478       3,972,440  

Other liabilities

    5,901,624       8,118,268       (2,216,644 )

Total liabilities

    547,518,112       394,381,599       153,136,513  

Shareholders' equity

    57,418,262       39,125,251       18,293,011  

Total liabilities and shareholders' equity

  $ 604,936,374     $ 433,506,850     $ 171,429,524  
                         

Shareholders' equity per common share

  $ 7.36     $ 5.01     $ 2.35  

 

 

 

Results of Operations – Years Ended December 31, 2019 and 2018

 

Revenues

 

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

 

Our revenues for the years ended December 31, 2019 and 2018 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2019

   

2018

   

2019 less 2018

 

Premiums

  $ 23,125,090     $ 18,822,517     $ 4,302,573  

Net investment income

    24,370,040       19,609,386       4,760,654  

Net realized investment gains

    967,978       266,498       701,480  

Service fees

    1,087,181       465,528       621,653  

Other income

    226,406       77,166       149,240  

Total revenues

  $ 49,776,695     $ 39,241,095     $ 10,535,600  

 

The $10,535,600 increase in total revenues for the year ended December 31, 2019 is discussed below.

 

19

 

Premiums

 

Our premiums for the years ended December 31, 2019 and 2018 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2019

   

2018

   

2019 less 2018

 

Ordinary life first year

  $ 1,533,619     $ 406,793     $ 1,126,826  

Ordinary life renewal

    2,224,638       2,094,982       129,656  

Final expense first year

    4,809,064       4,498,389       310,675  

Final expense renewal

    14,430,278       11,736,143       2,694,135  

Supplementary contracts with life contingencies

    127,491       86,210       41,281  

Total premiums

  $ 23,125,090     $ 18,822,517     $ 4,302,573  

 

The $4,302,573 increase in premiums for the year ended December 31, 2019 is primarily due to a $2,694,135 increase in final expense renewal premiums and a $1,126,826 increase in ordinary life first year 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. The increase in ordinary life first year premiums reflects ordinary life insurance sold in the international market that the Company started producing in fourth quarter 2018.

 

Net Investment Income

 

The major components of our net investment income for the years ended December 31, 2019 and 2018 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2019

   

2018

   

2019 less 2018

 

Fixed maturity securities

  $ 7,419,650     $ 6,278,105     $ 1,141,545  

Preferred stock and equity securities

    131,823       83,263       48,560  

Other long-term investments

    4,860,323       3,992,882       867,441  

Mortgage loans

    13,544,895       11,079,802       2,465,093  

Policy loans

    137,492       122,587       14,905  

Real estate

    269,123       376,599       (107,476 )

Short-term and other investments

    637,999       233,366       404,633  

Gross investment income

    27,001,305       22,166,604       4,834,701  

Investment expenses

    (2,631,265 )     (2,557,218 )     74,047  

Net investment income

  $ 24,370,040     $ 19,609,386     $ 4,760,654  

 

The $4,834,701 increase in gross investment income for the year ended December 31, 2019 is primarily due to increased investments in fixed maturity securities, mortgage loans and other long-term investments. In the year ended December 31, 2019, we have increased investments in fixed maturity securities by $47.8 million, mortgage loans on real estate by $32.4 million and other long-term investments by $12.6 million.

 

The $74,047 increase in investment expense is primarily related to production of investments in mortgage loans on real estate.

 

20

 

Net Realized Investment Gains

 

Our net realized investment gains result from sales of fixed maturity securities, equity securities, investment real estate, preferred stock securities and changes in the fair value of equity securities.

 

Our net realized investment gains for the years ended December 31, 2019 and 2018 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2019

   

2018

   

2019 less 2018

 

Fixed maturity securities available-for-sale:

                       

Sale proceeds

  $ 33,700,106     $ 22,037,796     $ 11,662,310  

Amortized cost at sale date

    32,710,599       21,791,718       10,918,881  

Net realized gains

  $ 989,507     $ 246,078     $ 743,429  

Equity securities at fair value:

                       

Sale proceeds

  $ 19,371     $ 361,947     $ (342,576 )

Cost at sale date

    6,999       336,214       (329,215 )

Net realized gains

  $ 12,372     $ 25,733     $ (13,361 )

Investment real estate:

                       

Sale proceeds

  $ 350,817     $ 364,689     $ (13,872 )

Carrying value at sale date

    394,002       313,040       80,962  

Net realized gains (losses)

  $ (43,185 )   $ 51,649     $ (94,834 )

Preferred stock securities available-for-sale:

                       

Sale proceeds

  $ 50,000     $ -     $ 50,000  

Cost at sale date

    50,000       -       50,000  

Net realized gains (losses)

  $ -     $ -     $ -  
                         

Equity securities, changes in fair value

  $ 9,284     $ (56,962 )   $ 66,246  
                         

Net realized investment gains

  $ 967,978     $ 266,498     $ 701,480  

 

Service Fees

 

The $621,653 increase in service fees for the year ended December 31, 2019 is primarily due to ceding fees related to TLIC’s annuity coinsurance agreement with an offshore annuity and life insurance company.

 

21

 

Total Benefits, Claims and Expenses

 

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

 

Our benefits, claims and expenses for the years ended December 31, 2019 and 2018 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2019

   

2018

   

2019 less 2018

 

Benefits and claims

                       

Increase in future policy benefits

  $ 8,769,777     $ 6,634,114     $ 2,135,663  

Death benefits

    6,555,001       5,345,707       1,209,294  

Surrenders

    1,000,447       913,977       86,470  

Interest credited to policyholders

    11,782,286       9,282,425       2,499,861  

Dividend, endowment and supplementary life contract benefits

    287,946       279,660       8,286  

Total benefits and claims

    28,395,457       22,455,883       5,939,574  

Expenses

                       

Policy acquisition costs deferred

    (12,369,350 )     (8,527,380 )     (3,841,970 )

Amortization of deferred policy acquisition costs

    4,015,480       3,515,624       499,856  

Amortization of value of insurance business acquired

    294,422       340,775       (46,353 )

Commissions

    12,125,929       8,228,279       3,897,650  

Other underwriting, insurance and acquisition expenses

    9,095,141       6,623,647       2,471,494  

Total expenses

    13,161,622       10,180,945       2,980,677  

Total benefits, claims and expenses

  $ 41,557,079     $ 32,636,828     $ 8,920,251  

 

The $8,920,251 increase in total benefits, claims and expenses for the year ended December 31, 2019 is discussed below.

 

Benefits and Claims

 

The $5,939,574 increase in total benefits and claims for the year ended December 31, 2019 is primarily due to the following:

 

 

$2,499,861 increase in interest credited to policyholders is primarily due to an increase of approximately $65.9 million in the amount of policyholders’ account balances in the consolidated statement of financial position (increased deposits and interest credited in excess of withdrawals) during the year ended December 31, 2019.

 

 

$2,135,663 increase in future policy benefits is primarily due to the increased number of life policies in force and the aging of existing life policies.

 

 

$1,209,294 increase in death benefits is primarily due to approximately $1.2 million of increased final expense settlements. The increase in final expense incurred claims is expected by the Company due to the continued growth in the number and amount of final expense policies in force.

 

22

 

Deferral and Amortization of Deferred Acquisition Costs

 

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

 

For the years ended December 31, 2019 and 2018, capitalized costs were $12,369,350 and $8,527,380, respectively. During 2019, $11,521,406 of commissions (95.0% of total 2019 commissions of $12,125,929) and $847,944 of expenses (9.3% of total 2019 other underwriting, insurance and acquisition expenses of $9,095,141) were eligible for deferral and were capitalized. During 2018, $7,505,616 of commissions (91.2% of total 2018 commissions of $8,228,279) and $1,021,764 of expenses (15.4% of total 2018 other underwriting, insurance and acquisition expenses of $6,623,647) were eligible for deferral and were capitalized. The $3,841,970 increase in the 2019 acquisition costs deferred primarily relates to increased ordinary life, final expense and annuity production and deferral and capitalization of the increased eligible commissions and decreased eligible expenses.

 

Amortization of deferred policy acquisition costs for the years ended December 31, 2019 and 2018 were $4,015,480 and $3,515,624, respectively. The $499,856 increase in the 2019 amortization of deferred acquisition costs is primarily due to an increased number and amount of final expense policies and annuity contracts in force and lapsation of ordinary life policies reflected by increased death benefits, surrenders and annuity withdrawals.

 

Amortization of Value of Insurance Business Acquired

 

The cost of acquiring insurance business is amortized over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was $294,422 and $340,775 for the years ended December 31, 2019 and 2018, respectively.

 

Commissions

 

Our commissions for the years ended December 31, 2019 and 2018 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2019

   

2018

   

2019 less 2018

 

Annuity

  $ 3,225,813     $ 1,221,517     $ 2,004,296  

Ordinary life first year

    1,672,935       406,707       1,266,228  

Ordinary life renewal

    73,071       61,268       11,803  

Final expense first year

    5,734,930       5,385,178       349,752  

Final expense renewal

    1,419,180       1,153,609       265,571  

Total commissions

  $ 12,125,929     $ 8,228,279     $ 3,897,650  

 

The $3,897,650 increase in commissions for the year ended December 31, 2019 is primarily due to a $2,004,296 increase in annuity commissions (due to a $67,299,833 increase in annuity considerations net of coinsurance), a $1,266,228 increase in ordinary life first year commissions (due to a $1,126,826 increase in ordinary life first year premiums), a $349,752 increase in final expense first year commissions (due to a $310,675 increase in final expense first year premiums) and a $265,571 increase in final expense renewal commissions (due to $2,694,135 increase in final expense renewal premiums).

 

23

 

Other Underwriting, Insurance and Acquisition Expenses

 

The $2,471,494 increase in other underwriting, insurance and acquisition expenses for the year ended December 31, 2019 was primarily related to increases in bonuses, salaries, benefits, consulting fees, legal fees, third party administration fees and expenses associated with the increased production of ordinary life, final expense and annuity policies and contracts.

 

Federal Income Taxes

 

FTFC files a consolidated federal income tax return with TLIC, FBLIC and FTCC. Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes.

 

For the years ended December 31, 2019 and 2018, current income tax expense was $1,388,711 and $100,075, respectively. Deferred federal income tax expense was $731,185 and $1,362,046 for the years ended December 31, 2019 and 2018, respectively.

 

Net Income Per Common Share Basic and Diluted

 

Net income was $6,099,720 ($0.78 per common share basic and diluted) and $5,142,146 ($0.66 per common share basic and diluted) for the years ended December 31, 2019 and 2018, respectively.

 

Net income per common share basic and diluted is calculated using the weighted average number of common shares outstanding during the year. The weighted average outstanding common shares basic and diluted were 7,802,593 for both of the years ended December 31, 2019 and 2018.

 

Business Segments

 

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

 

The revenues and income before federal income taxes from our business segments for the years ended December 31, 2019 and 2018 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2019

   

2018

   

2019 less 2018

 

Revenues:

                       

Life insurance operations

  $ 27,170,994     $ 21,985,441     $ 5,185,553  

Annuity operations

    21,931,249       16,739,274       5,191,975  

Corporate operations

    674,452       516,380       158,072  

Total

  $ 49,776,695     $ 39,241,095     $ 10,535,600  

Income before federal income taxes:

                       

Life insurance operations

  $ 621,436     $ 780,362     $ (158,926 )

Annuity operations

    7,109,199       5,369,900       1,739,299  

Corporate operations

    488,981       454,005       34,976  

Total

  $ 8,219,616     $ 6,604,267     $ 1,615,349  

 

 

Life Insurance Operations

 

The $5,185,553 increase in revenues from Life Insurance Operations for the year ended December 31, 2019 is primarily due to the following:

 

 

$4,302,573 increase in premiums

 

 

$711,824 increase in net investment income

 

24

 

 

$104,777 increase in service fees and other income

 

 

$66,379 increase in net realized investment gains

 

The $158,926 decreased profitability from Life Insurance Operations for the year ended December 31, 2019 is primarily due to the following:

 

 

$2,135,663 increase in future policy benefits

 

 

$1,893,354 increase in commissions

 

 

$1,603,984 increase in other underwriting, insurance and acquisition expenses

 

 

$1,209,294 increase in death benefits

 

 

$86,470 increase in surrenders

 

 

$8,286 increase in dividend, endowment and supplementary life contract benefits

 

 

$23,177 decrease in amortization of value of insurance business acquired

 

 

$66,379 increase in net realized investment gains

 

 

$104,777 increase in service fees and other income

 

 

$711,824 increase in net investment income

 

 

$1,569,395 increase in policy acquisition costs deferred net of amortization

 

 

$4,302,573 increase in premiums

 

Annuity Operations

 

The $5,191,975 increase in revenues from Annuity Operations for the year ended December 31, 2019 is due to the following:

 

 

$3,947,177 increase in net investment income

     
 

$635,101 increase in net realized investment gains

     
 

$609,697 increase in service fees and other income

 

The $1,739,299 increased profitability from Annuity Operations for the year ended December 31, 2019 is due to the following:

 

 

$3,947,177 increase in net investment income

     
 

$1,772,719 increase in policy acquisition costs deferred net of amortization

     
 

$635,101 increase in net realized investment gains

     
 

$609,697 increase in service fees and other income

     
 

$23,176 decrease in amortization of value of insurance business acquired

     
 

$744,414 increase in other underwriting, insurance and acquisition expenses

 

25

 

 

$2,004,296 increase in commissions

     
 

$2,499,861 increase in interest credited to policyholders

 

Corporate Operations

 

The $158,072 increase in revenues from Corporate Operations for the year ended December 31, 2019 is primarily due to $101,653 of increased net investment income and $56,419 of increased other income.

 

The $34,976 increase in Corporate Operations profitability for the year ended December 31, 2019 is primarily due to $101,653 of increased net investment income and $56,419 of increased other income that exceeded $123,096 of increased operating expenses.

 

Consolidated Financial Condition

 

Our invested assets as of December 31, 2019 and 2018 are summarized as follows:

 

                   

Amount Change

 
   

December 31, 2019

   

December 31, 2018

   

2019 less 2018

 

Assets

                       

Investments

                       

Available-for-sale fixed maturity securities at fair value (amortized cost: $166,760,448 and $134,414,517 as of December 31, 2019 and 2018, respectively)

  $ 178,951,324     $ 131,152,199     $ 47,799,125  

Available-for-sale preferred stock at fair value (cost: $49,945 and $99,945 as of December 31, 2019 and 2018, respectively)

    51,900       90,580       (38,680 )

Equity securities at fair value (cost: $180,194 and $187,122 as of December 31, 2019 and 2018 respectively)

    201,024       198,668       2,356  

Mortgage loans on real estate

    162,404,640       130,049,610       32,355,030  

Investment real estate

    1,951,759       2,392,031       (440,272 )

Policy loans

    2,026,301       1,809,339       216,962  

Short-term investments

    1,831,087       896,371       934,716  

Other long-term investments

    71,824,480       59,255,477       12,569,003  

Total investments

  $ 419,242,515     $ 325,844,275     $ 93,398,240  

 

The $47,799,125 increase and $18,530,940 decrease in fixed maturity available-for-sale securities for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2019

   

2018

 

Fixed maturity securities, available-for-sale, beginning

  $ 131,152,199     $ 149,683,139  

Purchases

    65,657,914       13,191,134  

Unrealized appreciation (depreciation)

    15,453,194       (9,323,510 )

Net realized investment gains

    989,507       246,078  

Sales proceeds

    (29,175,106 )     (16,961,796 )

Maturities

    (4,525,000 )     (5,076,000 )

Premium amortization

    (601,384 )     (606,846 )

Increase (decrease)

    47,799,125       (18,530,940 )

Fixed maturity securities, available-for-sale, ending

  $ 178,951,324     $ 131,152,199  

 

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

 

26

 

The $38,680 and $10,140 decreases in preferred stock available-for-sale for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2019

   

2018

 

Preferred stock, available-for-sale, beginning

  $ 90,580     $ 100,720  

Sale proceeds

    (50,000 )     -  

Unrealized appreciation (depreciation)

    11,320       (10,140 )

Decrease

    (38,680 )     (10,140 )

Preferred stock, available-for-sale, ending

  $ 51,900     $ 90,580  

 

Preferred stock available-for-sale is also reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within accumulated other comprehensive income (loss).

 

The $2,356 increase and $372,759 decrease in equity securities available-for-sale for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2019

   

2018

 

Equity securities, available-for-sale, beginning

  $ 198,668     $ 571,427  

Purchases

    115,357       76,127  

Sales proceeds

    (19,371 )     (361,947 )

Joint venture distribution

    (115,286 )     (55,710 )

Net realized investment gains, sale of securities

    12,372       25,733  

Net realized investment gains (losses), changes in fair value

    9,284       (56,962 )

Increase (decrease)

    2,356       (372,759 )

Equity securities, available-for-sale, ending

  $ 201,024     $ 198,668  

 

Equity securities are reported at fair value with the change in fair value reflected in net realized investment gains within the consolidated statements of operations.

 

The $32,355,030 and $27,553,159 increases in mortgage loans on real estate for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2019

   

2018

 

Mortgage loans on real estate, beginning

  $ 130,049,610     $ 102,496,451  

Purchases

    74,689,461       63,066,644  

Discount accretion

    374,670       536,331  

Payments

    (42,502,954 )     (35,461,456 )

Foreclosed - transferred to real estate

    (99,218 )     (467,593 )

Increase in allowance for bad debts

    (81,212 )     (81,351 )

Amortization of loan origination fees

    (25,717 )     (39,416 )

Increase

    32,355,030       27,553,159  

Mortgage loans on real estate, ending

  $ 162,404,640     $ 130,049,610  

 

27

 

The $440,272 decrease and $9,065 increase in investment real estate for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2019

   

2018

 

Investment real estate, beginning

  $ 2,392,031     $ 2,382,966  

Real estate acquired through mortgage loan foreclosure

    99,218       467,593  

Sales proceeds

    (350,817 )     (364,689 )

Depreciation of building

    (145,488 )     (145,488 )

Net realized investment gains (losses)

    (43,185 )     51,649  

Increase (decrease)

    (440,272 )     9,065  

Investment real estate, ending

  $ 1,951,759     $ 2,392,031  

 

The $12,569,003 and $3,440,894 increases in other long-term investments (comprised of lottery receivables) for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2019

   

2018

 

Other long-term investments, beginning

  $ 59,255,477     $ 55,814,583  

Purchases

    18,605,374       9,143,277  

Accretion of discount

    4,862,978       3,998,117  

Payments

    (10,899,349 )     (9,700,500 )

Increase

    12,569,003       3,440,894  

Other long-term investments, ending

  $ 71,824,480     $ 59,255,477  

 

The $934,716 increase in short-term investments is due to management’s decision to increase our investment in funds that have a maturity of more than 90 days but less than one year at the date of purchase.

 

Our assets other than invested assets as of December 31, 2019 and 2018 are summarized as follows:

 

                   

Amount Change

 
   

December 31, 2019

   

December 31, 2018

   

2019 less 2018

 
                         

Cash and cash equivalents

  $ 23,212,170     $ 29,665,605     $ (6,453,435 )

Accrued investment income

    5,207,823       2,672,978       2,534,845  

Recoverable from reinsurers

    1,244,733       2,323,157       (1,078,424 )

Assets held in trust under coinsurance agreement

    105,089,240       25,494,700       79,594,540  

Agents' balances and due premiums

    1,618,115       1,418,916       199,199  

Deferred policy acquisition costs

    38,005,639       29,681,737       8,323,902  

Value of insurance business acquired

    4,891,448       5,185,870       (294,422 )

Other assets

    6,424,691       11,219,612       (4,794,921 )

Assets other than investment assets

  $ 185,693,859     $ 107,662,575     $ 78,031,284  

 

The $6,453,435 decrease in cash and cash equivalents for the year ended December 31, 2019 and the corresponding decrease of $1,830,554 for the year ended December 31, 2018 are summarized in the Company’s consolidated statements of cash flows.

 

28

 

The $79,594,540 increase in assets held in trust under the coinsurance agreement is due to assets acquired under TLIC’s annuity coinsurance agreement with an offshore annuity and life insurance company that is administered on a funds withheld basis.

 

The increase in deferred policy acquisition costs for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2019

   

2018

 

Balance, beginning of year

  $ 29,681,737     $ 24,555,902  

Capitalization of commissions, sales and issue expenses

    12,369,350       8,527,380  

Amortization

    (4,015,480 )     (3,515,624 )

Deferred acquisition costs allocated to investments

    (29,968 )     114,079  

Balance, end of year

  $ 38,005,639     $ 29,681,737  

 

Our other assets as of December 31, 2019 and December 31, 2018 are summarized as follows:

 

                   

Amount Change

 
   

December 31, 2019

   

December 31, 2018

   

2019 less 2018

 

Advances to mortgage loan originator

  $ 4,436,787     $ 4,942,870     $ (506,083 )

Federal and state income taxes recoverable

    1,301,868       4,492,793       (3,190,925 )

Notes receivable

    445,778       446,978       (1,200 )

Accrual of mortgage loan and long-term investment payments due

    -       1,045,634       (1,045,634 )

Receivable for securities sold

    -       33,600       (33,600 )

Guaranty funds

    71,455       69,740       1,715  

Lease asset - right to use

    76,711       -       76,711  

Other receivables, prepaid assets and deposits

    92,092       187,997       (95,905 )

Total other assets

  $ 6,424,691     $ 11,219,612     $ (4,794,921 )

 

There was a $3,190,925 decrease in federal and state income taxes recoverable primarily due to receipt of the 2017 and 2018 federal tax refunds in excess of federal and state tax withholdings on lottery receivables.

 

During second quarter 2019 the Company changed its accounting practice and no longer accrued the principal collections on mortgage loans causing this change of $1,045,634.

 

There was a $506,083 decrease in advances to one mortgage loan originator who acquires residential mortgage loans for our life insurance companies.

 

The decrease in other receivables, prepaid assets and deposits of $95,905 was primarily due to a reclassification of a $125,000 deposit to record the acquisition of Trinity American, Inc., a Barbados, West Indies domiciled life insurance company, approved by local country regulators and the certifications were received in 2019.

 

The Company reported a lease asset of $76,711 as of December 31, 2019, in accordance with the lease guidance adopted in 2019.

 

On April 15, 2019, the Company renewed its previous one-year loan of $400,000 to its former Chairman. The renewed loan 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 Common stock owned by the former Chairman.

 

29

 

Our liabilities as of December 31, 2019 and 2018 are summarized as follows:

 

                   

Amount Change

 
   

December 31, 2019

   

December 31, 2018

   

2019 less 2018

 
                         

Policy liabilities

                       

Policyholders' account balances

  $ 363,083,838     $ 297,168,411     $ 65,915,427  

Future policy benefits

    65,015,390       56,261,507       8,753,883  

Policy claims

    1,399,393       1,102,257       297,136  

Other policy liabilities

    132,975       72,559       60,416  

Total policy liabilities

    429,631,596       354,604,734       75,026,862  

Funds withheld under coinsurance agreement

    105,638,974       29,285,119       76,353,855  

Deferred federal income taxes

    6,345,918       2,373,478       3,972,440  

Other liabilities

    5,901,624       8,118,268       (2,216,644 )

Total liabilities

  $ 547,518,112     $ 394,381,599     $ 153,136,513  

 

The $76,353,855 increase in the liability for funds withheld under coinsurance agreement is due to liabilities incurred under TLIC’s annuity coinsurance agreement with an offshore annuity and life insurance company that is administered on a funds withheld basis.

 

The $65,915,427 and $4,258,649 increases in policyholders’ account balances for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:

 

   

Years Ended December 31,

 
   

2019

   

2018

 

Policyholders' account balances, beginning

  $ 297,168,411     $ 292,909,762  

Deposits

    163,781,048       54,957,500  

Withdrawals

    (33,294,052 )     (30,696,157 )

Funds withheld under coinsurance agreement

    (76,353,855 )     (29,285,119 )

Interest credited

    11,782,286       9,282,425  

Increase

    65,915,427       4,258,649  

Policyholders' account balances, ending

  $ 363,083,838     $ 297,168,411  

 

The $8,753,883 increase in future policy benefits during the year ended December 31, 2019 is primarily related to the production of new life insurance policies and the aging of existing policies.

 

The $3,972,440 increase in deferred federal income taxes during the year ended December 31, 2019 was due to $3,241,255 of increased deferred federal income taxes on the unrealized appreciation of fixed maturity and preferred stock available-for-sale and $731,185 of operating deferred federal tax expense.

 

30

 

Our other liabilities as of December 31, 2019 and December 31, 2018 are summarized as follows:

 

                   

Amount Change

 
   

December 31, 2019

   

December 31, 2018

   

2019 less 2018

 

Suspense accounts payable

  $ 20,166     $ 7,379,975     $ (7,359,809 )

Accounts payable

    21,387       47,309       (25,922 )

Accrued expenses payable

    679,000       668,000       11,000  

Payable for securities purchased

    564       393,762       (393,198 )

Guaranty fund assessments

    25,000       35,000       (10,000 )

Unearned investment income

    62,404       71,234       (8,830 )

Deferred revenue

    8,123       18,953       (10,830 )

Unclaimed funds

    38,273       39,325       (1,052 )

Lease liability

    76,711       -       76,711  

Mortgage loans suspense

    5,782,427       -       5,782,427  

Other payables, withholdings and escrows

    (812,431 )     (535,290 )     (277,141 )

Total other liabilities

  $ 5,901,624     $ 8,118,268     $ (2,216,644 )

 

The $7,359,809 decrease in suspense accounts payable is due to decreased deposits on policy applications that had not been issued as of the financial reporting date primarily due to a suspension of annuity production after June 30, 2019.

 

As of December 31, 2019, the Company had $564 of security purchases where the trade date and settlement date were in different financial reporting periods compared to $393,762 of security purchases overlapping financial reporting periods as of December 31, 2018.

 

The $277,141 decrease in other payables, withholdings and escrows is primarily due to a $273,000 increase in escrow amounts on purchased mortgage loans due from previous servicers that has been traditionally recorded as a contra liability.

 

The Company reported a lease liability of $76,711 as of December 31, 2019, in accordance with the lease guidance adopted in 2019.

 

The Company changed its accounting practice and no longer reclassified its mortgage loan suspense account to reduce balances of mortgage loans on real estate causing this change of $5,782,427.

 

 

Liquidity and Capital Resources

 

Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through December 31, 2019, we have received $27,119,480 from the sale of our shares.

 

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

 

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

 

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

 

31

 

As of December 31, 2019, we had cash and cash equivalents totaling $23,212,170. As of December 31, 2019, cash and cash equivalents of $11,650,247 and $9,690,063, respectively, totaling $21,340,310 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 MDOI of any dividend or intercompany transaction to transfer funds to FTFC. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the greater of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year.

 

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 $1,245,184 in 2020 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $918,511 in 2020 without prior approval. FBLIC paid dividends of $760,347 to TLIC in 2018 but none in 2019. Dividends paid by FBLIC are eliminated in consolidation. TLIC has paid no dividends to FTFC.

 

The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures interest and non-interest bearing accounts up to $250,000. Uninsured balances aggregate $18,089,331 and $14,663,402 as of December 31, 2019 and December 31, 2018, respectively. Other funds are invested in mutual funds that invest in U.S. government securities. We monitor the solvency of all financial institutions in which we have funds to minimize the exposure for loss. The Company has not experienced any losses in such accounts.

 

On November 8, 2019, the Company renewed its $1.5 million line of credit with a bank to provide working capital and funds for expansion.  The terms of the line of credit allows for advances, repayments and re-borrowings through a maturity date of September 15, 2020.  Any outstanding advances will incur interest at a variable interest rate of the prime rate set forth in the Wall Street Journal plus 1% per annum adjusting monthly based on a 360 day year with a minimum interest rate floor of 5%. 

 

Our cash flows for the years ended December 31, 2019 and 2018 are summarized as follows:

 

   

Years Ended December 31,

   

Amount Change

 
   

2019

   

2018

   

2019 less 2018

 

Net cash used in operating activities

  $ (65,150,610 )   $ (8,858,987 )   $ (56,291,623 )

Net cash used in investing activities

    (71,789,821 )     (17,232,910 )     (54,556,911 )

Net cash provided by financing activities

    130,486,996       24,261,343       106,225,653  

Decrease in cash

    (6,453,435