United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
For the transition period From ______________to _______________
Commission file number:
FIRST TRINITY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address of principal executive offices)
(
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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).
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: ☐ | | 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
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of May 8, 2023, the registrant had
Securities registered pursuant to section 12(b) of the Act: None.
FIRST TRINITY FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED MARCH 31, 2023
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION |
Page Number |
| Item 1. Consolidated Financial Statements |
|
| Consolidated Statements of Financial Position as of March 31, 2023 (Unaudited) and December 31, 2022 | 3 |
| Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022 (Unaudited) | 4 |
| Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2023 and 2022 (Unaudited) |
5 |
| Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2023 and 2022 (Unaudited) |
6 |
| Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022 (Unaudited) | 7 |
| Notes to Consolidated Financial Statements (Unaudited) |
9 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
34 |
| Item 4. Controls and Procedures |
56 |
| Part II. OTHER INFORMATION |
|
| Item 1. Legal Proceedings |
57 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
58 |
| Item 3. Defaults upon Senior Securities |
58 |
| Item 4. Mine Safety Disclosures |
58 |
| Item 5. Other Information |
58 |
| Item 6. Exhibits |
58 |
| Signatures |
59 |
Exhibit No. 31.1
Exhibit No. 31.2
Exhibit No. 32.1
Exhibit No. 32.2
Exhibit No. 101.INS
Exhibit No. 101.SCH
Exhibit No. 101.CAL
Exhibit No. 101.DEF
Exhibit No. 101.LAB
Exhibit No. 101.PRE
PART I – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
| First Trinity Financial Corporation and Subsidiaries |
|||||||
| Consolidated Statements of Financial Position |
| (Unaudited) | ||||||||
| March 31, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Investments | ||||||||
| Available-for-sale fixed maturity securities at fair value (amortized cost: $ and $ as of March 31, 2023 and December 31, 2022, respectively) | $ | $ | ||||||
| Equity securities at fair value (cost: and $ as of March 31, 2023 and December 31, 2022, respectively) | ||||||||
| Mortgage loans on real estate | ||||||||
| Investment real estate | ||||||||
| Policy loans | ||||||||
| Short-term investments | ||||||||
| Other long-term investments | ||||||||
| Total investments | ||||||||
| Cash and cash equivalents | ||||||||
| Accrued investment income | ||||||||
| Recoverable from reinsurers | ||||||||
| Assets held in trust under coinsurance agreement | ||||||||
| Available-for-sale fixed maturity securities at fair value (amortized cost: $ and $ as of March 31, 2023 and December 31, 2022, respectively) | ||||||||
| Mortgage loans on real estate | ||||||||
| Short-term investments | ||||||||
| Cash and cash equivalents | ||||||||
| Total assets held in trust under coinsurance agreement | ||||||||
| Agents' balances and due premiums | ||||||||
| Deferred policy acquisition costs | ||||||||
| Value of insurance business acquired | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Shareholders' Equity | ||||||||
| Policy liabilities | ||||||||
| Policyholders' account balances | $ | $ | ||||||
| Future policy benefits | ||||||||
| Policy claims | ||||||||
| Other policy liabilities | ||||||||
| Total policy liabilities | ||||||||
| Funds withheld under coinsurance agreement | ||||||||
| Deferred federal income taxes | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Shareholders' equity | ||||||||
| Class A common stock, par value $ per share ( shares authorized as of March 31, 2023 and December 31, 2022, issued as of March 31, 2023 and December 31, 2022, outstanding as of March 31, 2023 and December 31, 2022) | ||||||||
| Class B common stock, par value $ per share ( shares authorized, issued and outstanding as of March 31, 2023 and December 31, 2022) | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost ( shares as of March 31, 2023 and December 31, 2022) | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated earnings | ||||||||
| Total shareholders' equity | ||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||
| See notes to consolidated financial statements. |
| First Trinity Financial Corporation and Subsidiaries |
|||||||
| Consolidated Statements of Operations |
|||||||
| (Unaudited) |
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues | ||||||||
| Premiums | $ | $ | ||||||
| Net investment income | ||||||||
| Net realized investment gains (losses) | ( | ) | ||||||
| Service fees | ||||||||
| Other income | ||||||||
| Total revenues | ||||||||
| Benefits, Claims and Expenses | ||||||||
| Benefits and claims | ||||||||
| Increase in future policy benefits | ||||||||
| Death benefits | ||||||||
| Surrenders | ||||||||
| Interest credited to policyholders | ||||||||
| Dividend, endowment and supplementary life contract benefits | ||||||||
| Total benefits and claims | ||||||||
| Policy acquisition costs deferred | ( | ) | ( | ) | ||||
| Amortization of deferred policy acquisition costs | ||||||||
| Amortization of value of insurance business acquired | ||||||||
| Commissions | ||||||||
| Other underwriting, insurance and acquisition expenses | ||||||||
| Total expenses | ||||||||
| Total benefits, claims and expenses | ||||||||
| Income before total federal income tax expense | ||||||||
| Current federal income tax expense | ||||||||
| Deferred federal income tax expense | ||||||||
| Total federal income tax expense | ||||||||
| Net income | $ | $ | ||||||
| Net income per common share | ||||||||
| Class A common stock | $ | $ | ||||||
| Class B common stock | $ | $ | ||||||
| See notes to consolidated financial statements (unaudited). |
| First Trinity Financial Corporation and Subsidiaries |
|||||||
| Consolidated Statements of Comprehensive Income (Loss) |
|||||||
| (Unaudited) |
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net income | $ | $ | ||||||
| Other comprehensive income (loss) | ||||||||
| Total net unrealized gains (losses) arising during the period | ( | ) | ||||||
| Less net realized investment gains (losses) having no credit losses | ( | ) | ||||||
| Net unrealized gains (losses) | ( | ) | ||||||
| Less adjustment to deferred acquisition costs | ( | ) | ||||||
| Other comprehensive income (loss) before income tax expense (benefit) | ( | ) | ||||||
| Income tax expense (benefit) | ( | ) | ||||||
| Total other comprehensive income (loss) | ( | ) | ||||||
| Total comprehensive income (loss) | $ | $ | ( | ) | ||||
| See notes to consolidated financial statements (unaudited). |
| First Trinity Financial Corporation and Subsidiaries |
|||||||||||||||||||||||||||
| Consolidated Statements of Changes in Shareholders' Equity |
|||||||||||||||||||||||||||
| Three Months Ended March 31, 2023 and 2022 |
|||||||||||||||||||||||||||
| (Unaudited) |
| Class A | Class B | Accumulated | ||||||||||||||||||||||||||
| Common | Common | Additional | Other | Total | ||||||||||||||||||||||||
| Stock | Stock | Paid-in | Treasury | Comprehensive | Accumulated | Shareholders' | ||||||||||||||||||||||
| $.01 Par Value | $.01 Par Value | Capital | Stock | Income (Loss) | Earnings | Equity | ||||||||||||||||||||||
| Balance as of January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Acquisition of Royalty Capital Life Insurance Company | - | - | - | - | ||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Balance as of January 1, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Cumulative effect adjustment as of January 1, 2023: | ||||||||||||||||||||||||||||
| Accumulated credit loss January 1, 2023 | ( | ) | ||||||||||||||||||||||||||
| Adjusted balance as of January 1, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| See notes to consolidated financial statements (unaudited). |
| First Trinity Financial Corporation and Subsidiaries |
|||||||
| Consolidated Statements of Cash Flows |
|||||||
| (Unaudited) |
| Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Accretion of discount on investments | ( | ) | ( | ) | ||||
| Net realized investment (gains) losses | ( | ) | ||||||
| Amortization of policy acquisition cost | ||||||||
| Policy acquisition cost deferred | ( | ) | ( | ) | ||||
| Amortization of value of insurance business acquired | ||||||||
| Allowance for mortgage loan losses | ( | ) | ||||||
| Provision for deferred federal income tax expense | ||||||||
| Interest credited to policyholders | ||||||||
| Change in assets and liabilities: | ||||||||
| Accrued investment income | ( | ) | ||||||
| Recoverable from reinsurers | ( | ) | ||||||
| Assets held in trust under coinsurance agreement | ||||||||
| Agents' balances and due premiums | ( | ) | ||||||
| Other assets | ( | ) | ( | ) | ||||
| Future policy benefits | ||||||||
| Policy claims | ( | ) | ||||||
| Other policy liabilities | ||||||||
| Other liabilities (exclude change in payable for securities purchased of $757,048 and $1,154,808 in 2023 and 2022, respectively) | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Purchases of fixed maturity securities | ( | ) | ( | ) | ||||
| Maturities of fixed maturity securities | ||||||||
| Sales of fixed maturity securities | ||||||||
| Purchases of equity securities | ( | ) | ( | ) | ||||
| Acquisition of Royalty Capital Life Insurance Company | ||||||||
| Joint venture distribution | ||||||||
| Purchases of mortgage loans | ( | ) | ( | ) | ||||
| Payments on mortgage loans | ||||||||
| Purchases of other long-term investments | ( | ) | ( | ) | ||||
| Payments on other long-term investments | ||||||||
| Sale of real estate | ||||||||
| Policy loans | ( | ) | ( | ) | ||||
| Short-term investments | ( | ) | ||||||
| Net change in receivable and payable for securities sold and purchased | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Financing activities | ||||||||
| Policyholders' account deposits | ||||||||
| Policyholders' account withdrawals | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| See notes to consolidated financial statements (unaudited). |
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Supplemental Disclosure – Cash and Non-Cash Impact on Operating, Investing and Financing Activities
On January 4, 2022, the Company acquired Royalty Capital Life Insurance Company. The Company acquired assets of $
In conjunction with this 2022 acquisition, the cash and non-cash impact on operating, investing and financing activities is summarized as follows.
| March 31, 2022 | ||||
| Cash used in acquisition of Royalty Capital Life Insurance Company | $ | |||
| Cash provided in acquisition of Royalty Capital Life Insurance Company | ||||
| Increase in cash from acquisition of Royalty Capital Life Insurance Company | ||||
| Fair value of assets acquired in acquisition of Royalty Capital Life Insurance Company (excluding cash) | ||||
| Short-term investments | ||||
| Recoverable from reinsurers | ||||
| Accrued investment income | ||||
| Due premiums | ||||
| Other assets | ||||
| Total fair value of assets acquired (excluding cash) | ||||
| Fair value of liabilities assumed in acquisition of Royalty Capital Life Insurance Company | ||||
| Future policy benefits | ||||
| Policyholders' account balance | ||||
| Policy claims | ||||
| Other liabilities | ||||
| Total fair value of liabilities assumed | ||||
| Fair value of net assets acquired in acquisition of Royalty Capital Life Insurance Company (excluding cash) | ||||
| Fair value of net assets acquired in acquisition of Royalty Capital Life Insurance Company (including cash) | $ | |||
| See notes to consolidated financial statements (unaudited). |
1. Organization and Significant Accounting Policies
Nature of Operations
First Trinity Financial Corporation (the “Company” or “FTFC”) is the parent holding company of Trinity Life Insurance Company (“TLIC”), Family Benefit Life Insurance Company (“FBLIC”), Trinity Mortgage Corporation (“TMC”) 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
The Company owns
The Company owns
Company Capitalization
The Company raised $
The Company also issued
The Company has also purchased
1. Organization and Significant Accounting Policies (continued)
Acquisition of Other Companies
On December 23, 2008, FTFC acquired
On December 31, 2008, FTFC made FLAC a
On August 31, 2009,
On December 28, 2011, TLIC acquired
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 $
On April 3, 2018, FTFC acquired
Effective January 1, 2020, the Company acquired
On January 4, 2022, FTFC acquired Royalty Capital Life Insurance Company (“RCLIC”) from Royalty Capital Corporation (“Royalty”) in exchange for
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included.
The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the year ended December 31, 2023 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to consolidated financial statements prepared in accordance with U.S. GAAP, but which is not required for interim reporting purposes, has been condensed or omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 2022.
1. Organization and Significant Accounting Policies (continued)
Change in Significant Accounting Policies – Investments and Allowance for Loan Losses from Mortgage Loans
In first quarter 2023, the Company adopted Accounting Standards Update 2016-13 Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments and all related guidance dealing with the FASB’s pronouncements dealing with changes in accounting for and recognizing credit losses.
Fixed maturity securities comprised of bonds and redeemable preferred securities are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable income taxes, reported in accumulated other comprehensive income. The amortized cost of fixed maturity securities available-for-sale is adjusted for amortization of premium and accretion of discount to maturity.
Interest income on fixed maturity securities, as well as the related amortization of premium and accretion of discount, is included in net investment income under the effective yield method. Dividend income on redeemable preferred securities are recognized in net investment income when declared. The amortized cost of fixed maturity securities available-for-sale are written down to fair value when a decline in value is considered to be other-than-temporary.
The Company evaluates the difference between the cost or amortized cost and estimated fair value of its fixed maturity securities to determine whether any decline in value is the result of a credit loss or other factors. An allowance for credit losses is recorded against available-for-sale securities to reflect the amount of an unrealized loss attributed to credit. This impairment is limited by the amount that the fair value is less than the amortized cost basis. Any remaining unrealized loss is recognized in other comprehensive income (loss) with no change to the cost basis of the security. This determination involves a degree of uncertainty. Changes in the allowance for credit losses are recognized in earnings.
The assessment and determination of whether or not a credit loss exists is based on consideration of the cash flows expected to be collected from the fixed maturity security. The Company develops those expectations after considering various factors such as agency ratings, the financial condition of the issuer or underlying obligors, payment history, payment structure of the security, industry and market conditions, underlying collateral, and other factors that may be relevant based on the facts and circumstances pertaining to individual securities.
If the Company intends to sell the fixed maturity security or will be more likely than not be required to sell the fixed maturity security before recovery of its amortized cost basis, then any allowance for credit losses, if previously recorded is written off and the fixed maturity security’s amortized cost is written down to the security’s fair value as of the reporting date with any incremental impairment recorded as a charge to noninterest income.
Prior to 2023, the Company evaluated the difference between the cost or amortized cost and estimated fair value of its fixed maturity securities to determine whether any decline in value was other-than-temporary in nature. That determination involved a degree of uncertainty. If a decline in the fair value of a security was determined to be temporary, the decline was recorded as an unrealized loss in shareholders' equity. If a decline in a security's fair value is considered to be other-than-temporary, the Company then determined the proper treatment for the other-than-temporary impairment. The amount of any other-than-temporary impairment related to a credit loss was recognized in earnings and reflected as a reduction in the cost basis of the security; and 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. If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, the Company amortized the reduced book value back to the security's expected recovery value over the remaining term of the bond. The Company continued to review the security for further impairment that would prompt another write-down in the value.
Equity securities are comprised of mutual funds and common stocks and are carried at fair value. The associated unrealized gains and losses are included in net realized investment gains (losses). Dividends from these investments are recognized in net investment income when declared.
1. Organization and Significant Accounting Policies (continued)
Mortgage loans are carried at unpaid balances, net of unamortized premium or discounts. This measurement of mortgage loans on an amortized cost basis is reduced by an allowance for credit losses representing a valuation allowance that is deducted from the amortized costs basis of mortgage loans to present the net carrying value at the amount expected to be collected on the mortgage loans.
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.
The statement of operations reflects the measurement of credit losses for newly recognized mortgage loans as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported mortgage loan balances. The Company uses judgment in determining the relevant information and estimation methods that are appropriate in establishing the valuation allowance for credit losses. The allowance for credit losses for mortgage loans with a more-than-insignificant amount of credit determination since origination is determined and the initial allowance for credit losses should be added to the purchase price of mortgage loans rather than being reported as a credit loss expenses.
The Company, however, has established and will continue to establish a valuation allowance for mortgage loans on real estate that are not supported by funds held in escrow based on historical patterns. The Company’s foreclosed properties have not resulted in accumulated losses and due to the low loan-to-value the Company holds with respect to its mortgage loans, the Company has not recorded and does not expect to record the addition to the purchase price of mortgage loans an initial allowance for credit losses to be amortized over the life of the mortgage loans. The Company will continue to record credit losses for mortgage loans not supported by funds held in escrow in accordance with its valuation policy for mortgage loans on real estate followed before 2023.
Prior to and continuing in 2023, the Company established a valuation allowance for mortgage loans on real estate that are not supported by funds held in escrow based on historical patterns. This allowance for possible loan losses from investments in mortgage loans on real estate continues to be a reserve established through a provision for possible loan losses charged to expense which represents, in our judgment, the known and inherent credit losses existing in the residential and commercial mortgage loan portfolio. This allowance, in the Company’s judgment, is necessary to reserve for estimated loan losses inherent in the residential and commercial mortgage loan portfolio and reduces the carrying value of investments in mortgage loans on real estate to the estimated net realizable value on the consolidated statement of financial position.
While the Company utilizes its 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. The 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.
The Company considers mortgage loans on real estate impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the mortgage loan agreement. Impairment is measured on a loan-by-loan basis. Factors that the Company considers in determining impairment include payment status, collateral value of the real estate subject to the mortgage loan and the probability of collecting scheduled principal and interest payments when due. Mortgage loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the mortgage loan 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.
1. Organization and Significant Accounting Policies (continued)
Investment real estate in land held for both the production of income and for sale is carried at cost. Investment real estate obtained through foreclosure on mortgage loans on real estate is carried at the lower of acquisition cost or net realizable value.
Policy loans are carried at unpaid principal balances. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned.
Other long-term investments are comprised of lottery prize receivables and are carried at amortized cost. Interest income and the accretion of discount are included in net investment income. These investments are backed by the lottery departments at the various states by U.S. Treasury Bonds and Notes or in the case of Pennsylvania, by annuities purchased from a highly rated life insurance company. Given this support to lottery prize receivables, the Company has not recorded and does not expect to incur any current estimated credit losses on its investments in lottery prize receivables.
Principles of Consolidation
The consolidated financial statements include the accounts and operations of the Company and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
Reclassifications
Certain reclassifications have been made in the prior year and prior quarter financial statements to conform to current year and current quarter classifications. These reclassifications had no effect on previously reported net income or shareholders' equity.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.
Common Stock and Treasury Stock
Class A and Class B common stock are both fully paid, non-assessable and has a par value of per share. Class B shareholders are entitled to elect a majority of FTFC’s Board of Directors (one-half plus one) but will only receive, compared to FTFC’s Class A shareholders,
Treasury stock, representing shares of the Company’s common stock that have been reacquired after having been issued and fully paid, is recorded at the reacquisition cost and the shares are no longer outstanding.
Coinsurance
In accordance with an annuity coinsurance agreement with an offshore annuity and life insurance company, 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
1. Organization and Significant Accounting Policies (continued)
In addition, in accordance with this annuity coinsurance agreement, investment income, investment expenses, other income and other expenses earned or incurred in relation to the operations of this annuity coinsurance agreement are not reported on the Company’s Consolidated Statements of Operations. The unrealized appreciation (depreciation) of fixed available-for-sale fixed maturity securities and the related income tax expense (benefit) is not reported as accumulated other comprehensive income in the shareholders’ equity section of the Company’s Consolidated Statements of Financial Position. Correspondingly, the net unrealized gains (losses) arising during the period, the net realized gains (losses) having no credit gains (losses) and the related income tax expense (benefit) associated with the available-for-sale fixed maturities held under this coinsurance agreement are not included in the computation of total other comprehensive income (loss) in the Company’s Consolidated Statement of Comprehensive Income (Loss).
The Company’s Consolidated Statement of Cash Flows only includes the cash flow activities related to the assets and funds withheld under the coinsurance agreement in a one-line presentation and does not include those cash flow activities in the other financial captions and categories presented in that financial statement.
Subsequent Events
Management has evaluated all events subsequent to March 31, 2023 through the date that these financial statements have been issued.
On April 24, 2023, as approved by the FTFC Board of Directors, the Company executed a definitive agreement to be acquired by Brickell L & A Holdings LLC, a portfolio company of the Brickell Insurance Group of companies, and an affiliate of 777 Partners LLC. All the Company’s Class A and Class B common stock (converted to Class A common stock at closing at a rate of
On April 24, 2023, FBLIC received a formal order from the Oklahoma Insurance Department approving its redomestication to Oklahoma. Prior to that date, FBLIC was domiciled in Missouri.
Adopted Accounting Standards
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 applied 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 required an entity to estimate the credit losses expected over the life of an exposure or pool of exposures.
The estimate of expected credit losses considers 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, are 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 amended the current other-than-temporary impairment model for available-for-sale debt securities and requires 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 Company adopted this standard in first quarter 2023 on a modified retrospective basis. The cumulative effect adjustment to January 1, 2023 accumulated earnings for the adoption of this standard was a charge of $
1. Organization and Significant Accounting Policies (continued)
Troubled Debt Restructurings and Vintage Disclosures
In March 2022, the FASB issued amendments (Accounting Standards Update 2022-2) for the accounting of troubled debt restructuring and disclosures. The amendments introduced new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulties. The amendments promulgated that an entity must apply specific loan refinancing and restructuring guidance to determine whether a modification results in a new loan or the continuation of an existing loan. The amendments also required that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. The Company adopted the amendments in this standard in first quarter 2023. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Recent Accounting Pronouncements
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 has been changed twice and the delayed effective date is now for reporting periods beginning after December 15, 2024. Early adoption is permitted but not likely to be elected by the Company. 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 2025 will be determined by the long-duration contracts then held by the Company and the economic conditions at that time.
Transition for Sold Contracts
In December 2022, the FASB issued amendments (Accounting Standards Update 2022-5) to Accounting Standards Update 2018-12 (Targeted Improvements for Long-Duration Contracts) that originally required an insurance entity to apply a retrospective transition method as of the beginning of the earliest period presented or the beginning of the prior fiscal year if early application was elected. This updated guidance reduces implementation costs and complexity associated with the adoption of targeted improvements in accounting for long-duration contracts that have been derecognized in accordance with Accounting Standards Update 2018-12 before the delayed effective date. Without the amendments in this Update, an insurance entity would be required to reclassify a portion of gains or losses previously recognized in the sale or disposal of insurance contracts or legal entities because of the adoption of a new accounting standard. Because there is no effect on an insurance entity’s future cash flows, this reclassification may not be useful to users of financial information.
The amendments in this guidance are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted but not likely to be elected by the Company. 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 2025 will be determined by the long-duration contracts then held by the Company and the economic conditions at that time.
2. Investments
Investments in fixed maturity available-for-sale securities as of March 31, 2023 and December 31, 2022 are summarized as follows:
| Gross | Gross | |||||||||||||||
| Amortized Cost | Unrealized | Unrealized | Fair | |||||||||||||
| or Cost | Gains | Losses | Value | |||||||||||||
| March 31, 2023 (Unaudited) | ||||||||||||||||
| Fixed maturity securities | ||||||||||||||||
| U.S. government and U.S. government agencies | $ | $ | $ | $ | ||||||||||||
| States and political subdivisions | ||||||||||||||||
| Commercial mortgage-backed securities | ||||||||||||||||
| Residential mortgage-backed securities | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Asset-backed securities | ||||||||||||||||
| Exchange traded securities | ||||||||||||||||
| Foreign bonds | ||||||||||||||||
| Redeemable preferred securities | ||||||||||||||||
| Certificate of deposits | ||||||||||||||||
| Total fixed maturity securities | $ | $ | $ | $ | ||||||||||||
| Fixed maturity securities held in trust under coinsurance agreement | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Fixed maturity securities | ||||||||||||||||
| U.S. government and U.S. government agencies | $ | $ | $ | $ | ||||||||||||
| States and political subdivisions | ||||||||||||||||
| Commercial mortgage-backed securities | ||||||||||||||||
| Residential mortgage-backed securities | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Asset-backed securities | ||||||||||||||||
| Exchange traded securities | ||||||||||||||||
| Foreign bonds | ||||||||||||||||
| Redeemable preferred securities | ||||||||||||||||
| Certificate of deposits | ||||||||||||||||
| Total fixed maturity securities | $ | $ | $ | $ | ||||||||||||
| Fixed maturity securities held in trust under coinsurance agreement | $ | $ | $ | $ | ||||||||||||
2. Investments (continued)
All securities in an unrealized loss position as of the financial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position as of March 31, 2023 and December 31, 2022 are summarized as follows:
| Unrealized | Number of | |||||||||||
| Fair Value | Loss | Securities | ||||||||||
| March 31, 2023 (Unaudited) | ||||||||||||
| Fixed maturity securities | ||||||||||||
| Less than 12 months in an unrealized loss position | ||||||||||||
| U.S. government and U.S. government agencies | $ | $ | ||||||||||
| States and political subdivisions | ||||||||||||
| Commercial mortgage-backed securities | ||||||||||||
| Corporate bonds | ||||||||||||
| Asset-backed securities | ||||||||||||
| Foreign bonds | ||||||||||||
| Certificate of deposits | ||||||||||||
| Total less than 12 months in an unrealized loss position | ||||||||||||
| More than 12 months in an unrealized loss position | ||||||||||||
| U.S. government and U.S. government agencies | ||||||||||||
| States and political subdivisions | ||||||||||||
| Commercial mortgage-backed securities | ||||||||||||
| Corporate bonds | ||||||||||||
| Asset-backed securities | ||||||||||||
| Exchange traded securities | ||||||||||||
| Foreign bonds | ||||||||||||
| Redeemable preferred securities | ||||||||||||
| Total more than 12 months in an unrealized loss position | ||||||||||||
| Total fixed maturity securities in an unrealized loss position | $ | $ | ||||||||||
| Fixed maturity securities held in trust under coisnurance agreement | ||||||||||||
| Total less than 12 months in an unrealized loss position | $ | $ | ||||||||||
| Total more than 12 months in an unrealized loss position | ||||||||||||
| Total fixed maturity securities held in trust under coinsurance agreement in a unrealized loss position | $ | $ | ||||||||||
| December 31, 2022 | ||||||||||||
| Fixed maturity securities | ||||||||||||
| Less than 12 months in an unrealized loss position | ||||||||||||
| U.S. government and U.S. government agencies | $ | $ | ||||||||||
| States and political subdivisions | ||||||||||||
| Commercial mortgage-backed securities | ||||||||||||
| Corporate bonds | ||||||||||||
| Asset-backed securities | ||||||||||||
| Certificate of deposits | ||||||||||||
| Foreign bonds | ||||||||||||
| Total less than 12 months in an unrealized loss position | ||||||||||||
| More than 12 months in an unrealized loss position | ||||||||||||
| U.S. government and U.S. government agencies | ||||||||||||
| States and political subdivisions | ||||||||||||
| Commercial mortgage-backed securities | ||||||||||||
| Corporate bonds | ||||||||||||
| Asset-backed securities | ||||||||||||
| Exchange traded securities | ||||||||||||
| Redeemable preferred securities | ||||||||||||
| Foreign bonds | ||||||||||||
| Total more than 12 months in an unrealized loss position | ||||||||||||
| Total fixed maturity securities in an unrealized loss position | $ | $ | ||||||||||
| Fixed maturity securities held in trust under coinsurance agreement | ||||||||||||
| Total less than 12 months in an unrealized loss position | $ | $ | ||||||||||
| Total more than 12 months in an unrealized loss position | ||||||||||||
| Total fixed maturity securities held in trust under coinsurance agreement in a unrealized loss position | $ | $ | ||||||||||
2. Investments (continued)
As of March 31, 2023, the Company held
As of December 31, 2022, the Company held
The change in the current estimate of credit losses on fixed maturity available-for -sale securities for the three months ended March 31, 2023 is summarized as follows:
| (Unaudited) | ||||
| March 31, 2023 | ||||
| Beginning balance | $ | |||
| Cumulative adjustment to accumulated earnings as of January 1, 2023 | ( | ) | ||
| Current estimate of credit losses | ( | ) | ||
| Ending balance | $ | ( | ) | |
There were no impairment losses recognized by the Company during the three months ended March 31, 2023. Management believes that the Company will fully recover its cost basis in the securities held as of March 31, 2023, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature.
Net unrealized losses included in other comprehensive income (loss) for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the depreciation had been realized as of March 31, 2023 and December 31, 2022, are summarized as follows:
| (Unaudited) | ||||||||
| March 31, 2023 | December 31, 2022 | |||||||
| Unrealized depreciation on available-for-sale securities | $ | ( | ) | $ | ( | ) | ||
| Adjustment to deferred acquisition costs | ||||||||
| Deferred income taxes | ||||||||
| Net unrealized depreciation on available-for-sale securities | $ | ( | ) | $ | ( | ) | ||
| Assets held in trust under coinsurance agreement | ||||||||
| Unrealized depreciation on fixed maturity securities available-for-sale | $ | ( | ) | $ | ( | ) | ||
2. Investments (continued)
The Company’s investment in lottery prize cash flows categorized as other long-term investments in the statement of financial position was $
The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of March 31, 2023, by contractual maturity, are summarized as follows:
| March 31, 2023 (Unaudited) | ||||||||||||||||
| Fixed Maturity Available-For-Sale Securities | Other Long-Term Investments | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
| Due in one year or less | $ | $ | $ | $ | ||||||||||||
| Due after one year through five years | ||||||||||||||||
| Due after five years through ten years | ||||||||||||||||
| Due after ten years | ||||||||||||||||
| Due at multiple maturity dates | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The amortized cost and fair value of fixed maturity available-for-sale securities held in trust under coinsurance agreement as of March 31, 2023, by contractual maturity, are summarized as follows:
| March 31, 2023 (Unaudited) | ||||||||
| Fixed Maturity Available-For-Sale Securities | ||||||||
| Amortized Cost | Fair Value | |||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| Due at multiple maturity dates | ||||||||
| $ | $ | |||||||
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
2. Investments (continued)
Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity securities available-for-sale, equity securities and investment real estate for the three months ended March 31, 2023 and 2022 are summarized as follows:
| Three Months Ended March 31, (Unaudited) | ||||||||||||||||||||||||
| Fixed Maturity Securities | Equity Securities | Investment Real Estate | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Proceeds | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Gross realized gains | ||||||||||||||||||||||||
| Gross realized losses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
The accumulated change in unrealized investment gains (losses) for fixed maturity available-for-sale for the three months ended March 31, 2023 and 2022 and the amount of net realized investment gains (losses) on fixed maturity securities available-for-sale, equity securities and investment real estate for the three months ended March 31, 2023 and 2022 are summarized as follows:
| Three Months Ended March 31, (Unaudited) | ||||||||
| 2023 | 2022 | |||||||
| Change in unrealized investment gains (losses): | ||||||||
| Available-for-sale securities: | ||||||||
| Fixed maturity securities | $ | $ | ( | ) | ||||
| Fixed maturity securities held in trust under coinsurance agreement | ( | ) | ||||||
| Net realized investment gains (losses): | ||||||||
| Available-for-sale securities: | ||||||||
| Fixed maturity securities | ( | ) | ||||||
| Fixed maturity securities credit losses | ( | ) | ||||||
| Equity securities, sale of securities | ( | ) | ||||||
| Equity securities, changes in fair value | ( | ) | ||||||
| Investment real estate | ( | ) | ||||||
2. Investments (continued)
Major categories of net investment income for the three months ended March 31, 2023 and 2022 are summarized as follows:
| Three Months Ended March 31, (Unaudited) | ||||||||
| 2023 | 2022 | |||||||
| Fixed maturity securities | $ | $ | ||||||
| Preferred stock and equity securities | ||||||||
| Other long-term investments | ||||||||
| Mortgage loans | ||||||||
| Policy loans | ||||||||
| Short-term and other investments | ||||||||
| Gross investment income | ||||||||
| Investment expenses | ( | ) | ( | ) | ||||
| Net investment income | $ | $ | ||||||
TLIC and FBLIC are required to hold assets on deposit with various state insurance departments for the benefit of policyholders and other special deposits in accordance with statutory rules and regulations. As of March 31, 2023 and December 31, 2022, these required deposits, included in investment assets, had amortized costs that totaled $
2. Investments (continued)
The Company’s mortgage loans by property type as of March 31, 2023 and December 31, 2022 are summarized as follows:
| (Unaudited) | ||||||||
| March 31, 2023 | December 31, 2022 | |||||||
| Residential mortgage loans | $ | $ | ||||||
| Commercial mortgage loans by property type | ||||||||
| Agricultural | ||||||||
| Apartment | ||||||||
| Industrial | ||||||||
| Lodging | ||||||||
| Office building | ||||||||
| Retail | ||||||||
| Total commercial mortgage loans by property type | ||||||||
| Total mortgage loans | $ | $ | ||||||
| Mortgage loans held in trust under coinsurance agreement | ||||||||
| Commercial mortgage loans | $ | $ | ||||||
| Less unearned interest on mortgage loans | ||||||||
| Total mortgage loans held in trust under coinsurance agreement | $ | $ | ||||||
There were
There were
The Company’s investment real estate as of March 31, 2023 and December 31, 2022 is summarized as follows:
| (Unaudited) | ||||||||
| March 31, 2023 | December 31, 2022 | |||||||
| Land - held for investment | $ | $ | ||||||
| Residential real estate - held for sale | ||||||||
| Total investment in real estate | $ | $ | ||||||
TLIC owns approximately three acres of undeveloped land located in Topeka, Kansas with a carrying value of $
FBLIC owns approximately -half acre of undeveloped land located in Jefferson City, Missouri with a carrying value of $
During 2022, the Company sold investment real estate property with an aggregate carrying value of $
3. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) on the measurement date. The Company also considers the impact on fair value of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity.
The Company holds fixed maturity and equity securities that are measured and reported at fair market value on the statement of financial position. The Company determines the fair market values of its financial instruments based on the fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value, as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets include equity securities that are traded in an active exchange market.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 assets and liabilities include fixed maturity securities with quoted prices that are traded less frequently than exchange-traded instruments or assets and liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes U.S. government, U.S. government agencies, state and political subdivisions, commercial and residential mortgage-backed securities, corporate bonds, asset-backed securities, exchange traded securities, foreign bonds, redeemable preferred securities and certificate of deposit.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company’s Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments where independent pricing information was not able to be obtained for a significant portion of the underlying assets.
The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in and out of the Level 3 category as of the beginning of the period in which the reclassifications occur.
3. Fair Value Measurements (continued)
The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 is summarized as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| March 31, 2023 (Unaudited) | ||||||||||||||||
| Fixed maturity securities, available-for-sale | ||||||||||||||||
| U.S. government and U.S. government agencies | $ | $ | $ | $ | ||||||||||||
| States and political subdivisions | ||||||||||||||||
| Commercial mortgage-backed securities | ||||||||||||||||
| Residential mortgage-backed securities | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Asset-backed securities | ||||||||||||||||
| Exchange traded securities | ||||||||||||||||
| Foreign bonds | ||||||||||||||||
| Redeemable preferred securities | ||||||||||||||||
| Certificate of deposit | ||||||||||||||||
| Total fixed maturity securities | $ | $ | $ | $ | ||||||||||||
| Fixed maturity securities, available-for-sale held in trust under coinsurance agreement | $ | $ | $ | |||||||||||||
| Equity securities | ||||||||||||||||
| Mutual funds | $ | $ | $ | $ | ||||||||||||
| Corporate common stock | ||||||||||||||||
| Total equity securities | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Fixed maturity securities, available-for-sale | ||||||||||||||||
| U.S. government and U.S. government agencies | $ | $ | $ | $ | ||||||||||||
| States and political subdivisions | ||||||||||||||||
| Commercial mortgage-backed securities | ||||||||||||||||
| Residential mortgage-backed securities | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Asset-backed securities | ||||||||||||||||
| Exchange traded securities | ||||||||||||||||
| Foreign bonds | ||||||||||||||||
| Redeemable preferred securities | ||||||||||||||||
| Certificate of deposit | ||||||||||||||||
| Total fixed maturity securities | $ | $ | $ | $ | ||||||||||||
| Fixed maturity securities, available-for-sale held in trust under coinsurance agreement | $ | $ | $ | $ | ||||||||||||
| Equity securities | ||||||||||||||||
| Mutual funds | $ | $ | $ | $ | ||||||||||||
| Corporate common stock | ||||||||||||||||
| Total equity securities | $ | $ | $ | $ | ||||||||||||
3. Fair Value Measurements (continued)
As of March 31, 2023 and December 31, 2022, Level 3 financial instruments consisted of a private placement common stock that has no active trading and a joint venture investment with a mortgage loan originator.
This private placement common stock represents an investment in a small insurance holding company. The fair value for this security was determined through the use of unobservable assumptions about market participants. The Company has assumed a willing market participant would purchase the security for the same price as the Company paid until such time as this small insurance holding company commences significant operations. The joint venture investment with a mortgage loan originator is accounted for under the equity method of accounting.
Fair values for Level 1 and Level 2 assets for the Company’s fixed maturity available-for-sale and equity securities are primarily based on prices supplied by a third party investment service. The third party investment service provides quoted prices in the market which use observable inputs in developing such rates.
The Company analyzes market valuations received to verify reasonableness and to understand the key assumptions used and the sources. Since the fixed maturity securities owned by the Company do not trade on a daily basis, the third party investment service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing. As the fair value estimates of the Company’s fixed maturity securities are based on observable market information rather than market quotes, the estimates of fair value on these fixed maturity securities are included in Level 2 of the hierarchy. The Company’s Level 2 investments include obligations of U.S. government, U.S. government agencies, state and political subdivisions, commercial and residential mortgage-backed securities, corporate bonds, asset-backed securities, exchange traded securities, foreign bonds, redeemable preferred securities and certificate of deposit.
The Company’s equity securities are included in Level 1 and Level 2 and the private placement common stocks and joint venture investment are included in Level 3. Level 1 for the equity securities classified as such is appropriate since they trade on a daily basis, are based on quoted market prices in active markets and are based upon unadjusted prices. Level 2 for those equity securities classified as such is appropriate since they are not actively traded.
The Company’s fixed maturity available-for-sale securities and equity securities are highly liquid and allows for a high percentage of the portfolio to be priced through pricing services.
The change in the fair value of the Company’s Level 3 equity securities available-for-sale for the three months ended March 31, 2023 and December 31, 2022 is summarized as follows:
| (Unaudited) | ||||||||
| March 31, 2023 | December 31, 2022 | |||||||
| Beginning balance | $ | $ | ||||||
| Joint venture net income | ||||||||
| Joint venture distribution | ( | ) | ( | ) | ||||
| Net realized invemstment losses | ( | ) | ||||||
| Ending balance | $ | $ | ||||||
3. Fair Value Measurements (continued)
The carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of March 31, 2023 and December 31, 2022 and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:
| Carrying | Fair | |||||||||||||||||||
| Amount | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| March 31, 2023 (Unaudited) | ||||||||||||||||||||
| Financial assets | ||||||||||||||||||||
| Mortgage loans on real estate | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | |||||||||||||||
| Residential | ||||||||||||||||||||
| Policy loans | ||||||||||||||||||||
| Short-term investments | ||||||||||||||||||||
| Other long-term investments | ||||||||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||
| Accrued investment income | ||||||||||||||||||||
| Total financial assets | $ | $ | $ | $ | $ | |||||||||||||||
| Held in trust under coinsurance agreement | ||||||||||||||||||||
| Mortgage loans on real estate | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | |||||||||||||||
| Less unearned interest on mortgage loans | ||||||||||||||||||||
| Short-term investments | ||||||||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||
| Total financial assets held in trust under coinsurance agreement | $ | $ | $ | $ | $ | |||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Policyholders' account balances | $ | $ | $ | $ | $ | |||||||||||||||
| Policy claims | ||||||||||||||||||||
| Total financial liabilities | $ | $ | $ | $ | $ | |||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Financial assets | ||||||||||||||||||||
| Mortgage loans on real estate | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | |||||||||||||||
| Residential | ||||||||||||||||||||
| Policy loans | ||||||||||||||||||||
| Short-term investments | ||||||||||||||||||||
| Other long-term investments | ||||||||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||
| Accrued investment income | ||||||||||||||||||||
| Total financial assets | $ | $ | $ | $ | $ | |||||||||||||||
| Held in trust under coinsurance agreement | ||||||||||||||||||||
| Mortgage loans on real estate | ||||||||||||||||||||
| Commercial | $ | $ | $ | $ | $ | |||||||||||||||
| Less unearned interest on mortgage loans | ||||||||||||||||||||
| Short-term investments | ||||||||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||
| Total financial assets held in trust under coinsurance agreement | $ | $ | $ | $ | $ | |||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Policyholders' account balances | $ | $ | $ | $ | $ | |||||||||||||||
| Policy claims | ||||||||||||||||||||
| Total financial liabilities | $ | $ | $ | $ | $ | |||||||||||||||
3. Fair Value Measurements (continued)
The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment was required to interpret market data to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.
The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying financial statements and notes thereto:
Fixed Maturity and Equity Securities
The fair value of fixed maturity securities and equity securities are based on the principles previously discussed as Level 1, Level 2 and Level 3.
Mortgage Loans on Real Estate
The fair values for mortgage loans are estimated using discounted cash flow analyses. For both residential and commercial mortgage loans, the discount rate used was indexed to the Secured Overnight Financing Rate as of March 31, 2023 and December 31, 2022.
Cash and Cash Equivalents, Short-Term Investments, Accrued Investment Income and Policy Loans
The carrying value of these financial instruments approximates their fair values. Cash and cash equivalents and short-term investments are included in Level 1 of the fair value hierarchy due to their highly liquid nature.
Other Long-Term Investments
Other long-term investments are comprised of lottery prize receivables and fair value is derived by using a discounted cash flow approach. Projected cash flows are discounted using the average FTSE Pension Liability Index in effect at the end of each period.
Investment Contracts – Policyholders’ Account Balances
The fair value for liabilities under investment-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and the nonperformance risk of the liabilities.
The fair values for insurance contracts other than investment-type contracts are not required to be disclosed.
Policy Claims
The carrying amounts reported for these liabilities approximate their fair value.
4. Segment Data
The Company has a life insurance segment, consisting of the life insurance operations of TLIC, FBLIC and TAI, an annuity segment, consisting of the annuity operations of TLIC, FBLIC and TAI and a corporate segment. Results for the parent company and the operations of TMC, after elimination of intercompany amounts, are allocated to the corporate segment. These segments as of March 31, 2023 and December 31, 2022 and for the three months ended March 31, 2023 and 2022 are summarized as follows:
| Three Months Ended March 31, (Unaudited) | ||||||||
| 2023 | 2022 | |||||||
| Revenues: | ||||||||
| Life insurance operations | $ | $ | ||||||
| Annuity operations | ||||||||
| Corporate operations | ||||||||
| Total | $ | $ | ||||||
| Income before income taxes: | ||||||||
| Life insurance operations | $ | ( | ) | $ | ( | ) | ||
| Annuity operations | ||||||||
| Corporate operations | ||||||||
| Total | $ | $ | ||||||
| Depreciation and amortization expense: | ||||||||
| Life insurance operations | $ | $ | ||||||
| Annuity operations | ||||||||
| Total | $ | $ | ||||||
| (Unaudited) | ||||||||
| March 31, 2023 | December 31, 2022 | |||||||
| Assets: | ||||||||
| Life insurance operations | $ | $ | ||||||
| Annuity operations | ||||||||
| Corporate operations | ||||||||
| Total | $ | $ | ||||||
5. Federal Income Taxes
The provision for federal income taxes is based on the asset and liability method of accounting for income taxes. Deferred income taxes are provided for the cumulative temporary differences between balances of assets and liabilities determined under GAAP and the balances using tax bases.
The Company has no known uncertain tax benefits within its provision for income taxes. In addition, the Company does not believe it would be subject to any penalties or interest relative to any open tax years and, therefore, has not accrued any such amounts. The Company files U.S. federal income tax returns and income tax returns in various state jurisdictions. The 2019 through 2021 U.S. federal tax years are subject to income tax examination by tax authorities. The Company classifies any interest and penalties (if applicable) as income tax expense in the financial statements.
6. Contingent Liabilities
From time to time, we are a party to various legal proceedings in the ordinary course of business. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from them will not have a material effect on the Company’s financial position, results of operations or cash flow. We are not currently a party to any bankruptcy, receivership, reorganization, adjustment or similar proceeding, and we are not aware of any material threatened litigation. As summarized below, the Company is currently involved in pending lawsuits.
A lawsuit filed by the Company and its Chairman and Chief Executive Officer, Gregg E. Zahn (“Mr. Zahn”) styled First Trinity Financial Corporation and Gregg E. Zahn vs. C. Wayne Pettigrew and Group & Pension Planners was originally filed in 2013 in the District Court of Tulsa County, Oklahoma against former Company Board of Director, C. Wayne Pettigrew (“Mr. Pettigrew”). The Company and Mr. Zahn alleged that Mr. Pettigrew defamed Mr. Zahn and the Company and that Mr. Pettigrew breached his fiduciary duties to the Company by making untrue statements about the Company and Mr. Zahn to the press, state regulators and to certain shareholders.
In February 2017, the lawsuit resulted in a jury verdict in favor of the Company and Mr. Zahn, with the jury awarding damages of $
The Company, through its life insurance subsidiary, TLIC, commenced lawsuits as plaintiff, both in the New York Supreme Court, New York County, on June 29, 2020 and another on March 4, 2022, for breach of contract against a company for failure to advance funding to lottery ticket winners to the detriment of TLIC and against various of that company’s associated persons for unjust enrichment and fraud perpetuated on TLIC. The cases are entitled “Trinity Life Insurance Company v. Advance Funding LLC, Dan Cevallos, and Monica L. Ray, Index No. 652780/2020” (New York Supreme Court, New York County) and “Trinity Life Insurance Company v. Advance Funding LLC, Dan Cevallos, Julie Casal, and Monica L. Ray, Index No. 651023/2022” (New York Supreme Court, New York County). The Company is vigorously prosecuting this case against the defendants. The Company faces no exposure in connection with either action since no counterclaims or cross claims have been made against the Company. Management believes that this lawsuit is not material in relation to the Company’s financial position or results of operations.
The third lawsuit involves an insurance holding company and one of its insurance subsidiaries, which was instituted suit in District Court of Travis County, Texas, entitled Citizens, Inc., CICA Life Ltd., and CICA Life Insurance Company of America, Plaintiffs, v. Randall H. Riley, Citizens American Life, LLC, Citizens American Life, Inc., Alexis Enrique Delgado, Carlos Nalsen Landa, Enrique Pinzon Ruiz, Johan Emilio Mikuski Silva, Esperanza Peralta De Delgado, Michael P. Buchweitz, Jonathan M. Pollio, Steven A. Rekedal, First Trinity Financial Corporation, Trinity American, Inc., and International Marketing Group S.A., LLC, Defendants, against the Company and several associated persons on November 7, 2018. The plaintiffs accused the several defendants, including the Company and its subsidiary company, Trinity American, Inc. (“Trinity American”) of misappropriating trade secrets under the Texas Uniform Trade Secrets Act. The plaintiffs have also alleged claims for common law unfair competition, civil conspiracy, and unjust enrichment against all of the defendants. The plaintiffs also alleged that Trinity American’s predecessor entity tortiously interfered with the plaintiffs’ contracts, and alleged several other causes of action, including breaches of contract and tortious interference with contract against the remaining defendants.
6. Contingent Liabilities (continued)
The causes of action all are alleged to have arisen from the alleged conduct of the various individual defendants, of whom are former employees of the plaintiffs. The plaintiffs alleged that defendant Randall H. Riley and other terminated employees, after being terminated by the plaintiffs, worked on creating a competing business selling whole life insurance in international markets. Several of the individual defendants have counterclaimed against the plaintiffs seeking damages for breach of contract based on commissions they were denied when the plaintiffs wrongfully terminated their sales agreements. Mr. Riley died in October 2022. Trial of the case has been delayed indefinitely pending action from the Travis County Probate Court with respect to the estate of Mr. Riley. The Company believes the plaintiffs’ claims against the Company are entirely without merit and it is conducting a vigorous defense. Management believes that the ultimate resolution of this lawsuit will not be material in relation to the Company’s financial position or results of operations.
Guaranty fund assessments, brought about by the insolvency of life and health insurers, are levied at the discretion of the various state guaranty fund associations to cover association obligations. In most states, guaranty fund assessments may be taken as a credit against premium taxes, typically over a five-year period.
7. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
The changes in the components of the Company’s accumulated other comprehensive income (loss) for the three months ended March 31, 2023 and 2022 are summarized as follows:
| Three Months Ended March 31, 2023 and 2022 (Unaudited) | ||||||||||||
| Unrealized | ||||||||||||
| Appreciation | Accumulated | |||||||||||
| (Depreciation) on | Adjustment to | Other | ||||||||||
| Available-For-Sale | Deferred Acquisition | Comprehensive | ||||||||||
| Securities | Costs | Income (Loss) | ||||||||||
| Balance as of January 1, 2023 | $ | ( | ) | $ | $ | ( | ) | |||||
| Cumulative effect adjustment as of January 1, 2023 | ||||||||||||
| Accumulated credit loss January 1, 2023 | ||||||||||||
| Other comprehensive income before reclassifications, net of tax | ( | ) | ||||||||||
| Less amounts reclassified from accumulated other comprehensive income having no credit losses, net of tax | ( | ) | ( | ) | ||||||||
| Other comprehensive income | ( | ) | ||||||||||
| Balance as of March 31, 2023 | $ | ( | ) | $ | $ | ( | ) | |||||
| Balance as of January 1, 2022 | $ | $ | ( | ) | $ | |||||||
| Other comprehensive loss before reclassifications, net of tax | ( | ) | ( | ) | ||||||||
| Less amounts reclassified from accumulated other comprehensive income having no credit losses, net of tax | ||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||
| Balance as of March 31, 2022 | $ | $ | ( | ) | $ | |||||||
7. Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss) (continued)
The pretax components of the Company’s other comprehensive income (loss) and the related income tax expense (benefit) for each component for the three months ended March 31, 2023 and 2022 are summarized as follows:
| Income Tax | ||||||||||||
| Pretax | Expense (Benefit) | Net of Tax | ||||||||||
| Three Months Ended March 31, 2023 (Unaudited) | ||||||||||||
| Other comprehensive income: | ||||||||||||
| Change in net unrealized gains on available-for-sale securities: | ||||||||||||
| Unrealized holding gains arising during the period | $ | $ | $ | |||||||||
| Reclassification adjustment for net losses included in operations having no credit losses | ( | ) | ( | ) | ( | ) | ||||||
| Net unrealized gains on investments | ||||||||||||
| Adjustment to deferred acquisition costs | ( | ) | ( | ) | ( | ) | ||||||
| Total other comprehensive income | $ | $ | $ | |||||||||
| Three Months Ended March 31, 2022 (Unaudited) | ||||||||||||
| Other comprehensive loss: | ||||||||||||
| Change in net unrealized losses on available-for-sale securities: | ||||||||||||
| Unrealized holding losses arising during the period | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Reclassification adjustment for net gains included in operations having no credit losses | ||||||||||||
| Net unrealized losses on investments | ( | ) | ( | ) | ( | ) | ||||||
| Adjustment to deferred acquisition costs | ||||||||||||
| Total other comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Realized gains and losses on the sales of investments are determined based upon the specific identification method and include provisions for other-than-temporary impairments where appropriate.
The pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income (loss) to the Company’s consolidated statement of operations for the three months ended March 31, 2023 and 2022 are summarized as follows:
| Three Months Ended March 31, (Unaudited) | ||||||||
| Reclassification Adjustments | 2023 | 2022 | ||||||
| Realized gains (losses) on sales of securities (a) | $ | ( | ) | $ | ||||
| Income tax expense (benefit) (b) | ( | ) | ||||||
| Total reclassification adjustments | $ | ( | ) | $ | ||||
| (a) These items appear within net realized investment gains in the consolidated statements of operations. | |||||||
| (b) These items appear within federal income taxes in the consolidated statements of operations. |
8. Allowance for Loan Losses from Mortgage Loans on Real Estate
As of March 31, 2023, $
As of December 31, 2022, $
As of March 31, 2023, the Company’s Chairman, President and Chief Executive Officer has provided approximately $
The balances of and changes in the Company’s credit losses related to mortgage loans on real estate as of and for the three months ended March 31, 2023 and 2022 are summarized as follows (excluding $
| As of and for the Three Months Ended March 31, (Unaudited) | ||||||||||||||||||||||||
| Residential Mortgage Loans | Commercial Mortgage Loans | Total | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Allowance, beginning | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Charge offs | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||
| Provision | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Allowance, ending | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Allowance, ending: | ||||||||||||||||||||||||
| Individually evaluated for impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Carrying Values: | ||||||||||||||||||||||||
| Individually evaluated for reserve allowance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Collectively evaluated for reserve allowance | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
8. Allowance for Loan Losses from Mortgage Loans on Real Estate (continued)
The Company utilizes the ratio of the carrying value of individual residential and commercial mortgage loans compared to the individual appraisal value to evaluate the credit quality of its mortgage loans on real estate (commonly referred to as the loan-to-value ratio). The Company’s residential and commercial mortgage loans on real estate by credit quality using this ratio as of March 31, 2023 and December 31, 2022 are summarized as follows:
| Residential Mortgage Loans | Commercial Mortgage Loans | Total Mortgage Loans | ||||||||||||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||
| Loan-To-Value Ratio | March 31, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | ||||||||||||||||||
| Over 70% to 80% | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Over 60% to 70% | ||||||||||||||||||||||||
| Over 50% to 60% | ||||||||||||||||||||||||
| Over 40% to 50% | ||||||||||||||||||||||||
| Over 30% to 40% | ||||||||||||||||||||||||
| Over 20% to 30% | ||||||||||||||||||||||||
| Over 10% to 20% | ||||||||||||||||||||||||
| 10% or less | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
9. Line of Credit
On September 15, 2022, the Company did not renew its $
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
First Trinity Financial Corporation (“we” “us”, “our”, “FTFC” or the “Company”) conducts operations as an insurance holding company emphasizing ordinary life insurance products and annuity contracts in niche markets.
As an insurance provider, we collect premiums in the current period to pay future benefits to our policy and contract holders. Our core TLIC and FBLIC operations include issuing modified premium whole life insurance with a flexible premium deferred annuity, ordinary whole life, final expense, term and annuity products to predominately middle income households in the states of Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia through independent agents.
We also realize revenues from our investment portfolio, which is a key component of our operations. The revenues we collect as premiums from policyholders are invested to ensure future benefit payments under the policy contracts. Life insurance companies earn profits on the investment spread, which reflects the investment income earned on the premiums paid to the insurer between the time of receipt and the time benefits are paid out under policies. Changes in interest rates, changes in economic conditions and volatility in the capital markets can all impact the amount of earnings that we realize from our investment portfolio.
Acquisitions
The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance and annuity business. In late December 2008, the Company completed its acquisition of 100% of the outstanding stock of FLAC for $2,500,000 and had additional acquisition related expenses of $195,234.
In late December 2011, the Company completed its acquisition of 100% of the outstanding stock of FBLIC for $13,855,129.
On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement and assumed liabilities of $3,055,916.
In 2019, FTFC’s acquisition of TAI for $250,000 was approved by the Barbados, West Indies regulators.
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 aggregate purchase price of K-TENN was $1,746,240.
On January 4, 2022, FTFC acquired RCLIC from Royalty in exchange for 722,644 shares of FTFC’s Class A common stock issued to unrelated parties. Royalty was dissolved immediately after FTFC acquired RCLIC. On March 1, 2022, the Missouri Department of Commerce and Insurance approved FTFC’s contribution and merger of RCLIC into FBLIC.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition, results of operations and liquidity and capital resources is based on our consolidated financial statements that have been prepared in accordance with U.S. GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We evaluate our estimates and assumptions continually, including those related to investments, deferred acquisition costs, allowance for loan losses from mortgages, value of insurance business acquired, policy liabilities, regulatory requirements, contingencies and litigation. We base our estimates on historical experience and on various other factors and assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For a description of the Company’s critical accounting policies and estimates, please refer to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The Company considers its most critical accounting estimates to be those applied to investments in fixed maturities securities, mortgage loans on real estate, deferred policy acquisition costs, value of insurance business acquired and future policy benefits. There has been a material change to the Company’s critical accounting policies and estimates involving Investments in Fixed Maturity Securities and Mortgage Loans on Real Estate since December 31, 2022 involving the current estimates of credit losses related to the Company’s first quarter 2023 adoption of Accounting Standards Update 2016-13 Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments and all related guidance dealing with the FASB’s pronouncements dealing with changes in accounting for and recognizing credit losses. These revised critical accounting policies are summarized as follows:
Investments in Fixed Maturity Securities
We hold fixed maturity interests in a variety of companies. The Company continuously evaluates the difference between the cost or amortized cost and estimated fair value of its fixed maturity securities to determine whether any decline in value is the result of a credit loss or other factors. An allowance for credit losses is recorded against available-for-sale securities to reflect the amount of an unrealized loss attributed to credit. This impairment is limited by the amount that the fair value is less than the amortized cost basis. Any remaining unrealized loss is recognized in other comprehensive income (loss) with no change to the cost basis of the security. This determination involves a degree of uncertainty. Changes in the allowance for credit losses are recognized in earnings.
The assessment and determination of whether or not a credit loss exists is based on consideration of the cash flows expected to be collected from the fixed maturity security. The Company develops those expectations after considering various factors such as agency ratings, the financial condition of the issuer or underlying obligors, payment history, payment structure of the security, industry and market conditions, underlying collateral, and other factors that may be relevant based on the facts and circumstances pertaining to individual securities.
If the Company intends to sell the fixed maturity security or will be more likely than not be required to sell the fixed maturity security before recovery of its amortized cost basis, then any allowance for credit losses, if previously recorded is written off and the fixed maturity security’s amortized cost is written down to the security’s fair value as of the reporting date with any incremental impairment recorded as a charge to noninterest income.
Prior to 2023, the Company evaluated the difference between the amortized cost and estimated fair value of its fixed maturity investments to determine whether any decline in fair value was other-than-temporary in nature. This determination involved a degree of uncertainty. If a decline in the fair value of a fixed maturity security was determined to be temporary, the decline was recognized in other comprehensive income (loss) within shareholders’ equity. If a decline in a security’s fair value was considered to be other-than-temporary, we then determined 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 was 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 was 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 was considered temporary or other-than-temporary included 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. If an other-than-temporary impairment related to a credit loss occurred with respect to a fixed maturity security, we amortized the reduced book value back to the security’s expected recovery value over the remaining term of the fixed maturity investment.
Mortgage Loans on Real Estate
Mortgage loans are carried at unpaid balances, net of unamortized premium or discounts. This measurement of mortgage loans on an amortized cost basis is reduced by an allowance for credit losses representing a valuation allowance that is deducted from the amortized costs basis of mortgage loans to present the net carrying value at the amount expected to be collected on the mortgage loans.
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.
The statement of operations reflects the measurement of credit losses for newly recognized mortgage loans as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported mortgage loan balances. The Company uses judgment in determining the relevant information and estimation methods that are appropriate in establishing the valuation allowance for credit losses. The allowance for credit losses for mortgage loans with a more-than-insignificant amount of credit determination since origination is determined and the initial allowance for credit losses should be added to the purchase price of mortgage loans rather than being reported as a credit loss expenses.
The Company, however, has established and will continue to establish a valuation allowance for mortgage loans on real estate that are not supported by funds held in escrow based on historical patterns. The Company’s foreclosed properties have not resulted in accumulated losses and due to the low loan-to-value the Company holds with respect to its mortgage loans, the Company has not recorded and does not expect to record the addition to the purchase price of mortgage loans an initial allowance for credit losses to be amortized over the life of the mortgage loans. The Company will continue to record credit losses for mortgage loans not supported by funds held in escrow in accordance with its valuation policy for mortgage loans on real estate followed before 2023.
Prior to and continuing in 2023, the Company established a valuation allowance for mortgage loans on real estate that are not supported by funds held in escrow based on historical patterns. This allowance for possible loan losses from investments in mortgage loans on real estate continues to be a reserve established through a provision for possible loan losses charged to expense which represents, in our judgment, the known and inherent credit losses existing in the residential and commercial mortgage loan portfolio. This allowance, in the Company’s judgment, is necessary to reserve for estimated loan losses inherent in the residential and commercial mortgage loan portfolio and reduces the carrying value of investments in mortgage loans on real estate to the estimated net realizable value on the consolidated statement of financial position.
While the Company utilizes its 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. The 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.
The Company considers mortgage loans on real estate impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the mortgage loan agreement. Impairment is measured on a loan-by-loan basis. Factors that the Company considers in determining impairment include payment status, collateral value of the real estate subject to the mortgage loan and the probability of collecting scheduled principal and interest payments when due. Mortgage loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the mortgage loan 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.
Adopted Accounting Standards
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 applied 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 required an entity to estimate the credit losses expected over the life of an exposure or pool of exposures.
The estimate of expected credit losses considers 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, are 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 amended the current other-than-temporary impairment model for available-for-sale debt securities and requires 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 Company adopted this standard in first quarter 2023 on a modified retrospective basis. The cumulative effect adjustment to January 1, 2023 accumulated earnings for the adoption of this standard was a charge of $230,036.
Troubled Debt Restructurings and Vintage Disclosures
In March 2022, the FASB issued amendments (Accounting Standards Update 2022-2) for the accounting of troubled debt restructuring and disclosures. The amendments introduced new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulties. The amendments promulgated that an entity must apply specific loan refinancing and restructuring guidance to determine whether a modification results in a new loan or the continuation of an existing loan. The amendments also required that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. The Company adopted the amendments in this standard in first quarter 2023. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Recent Accounting Pronouncements
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 has been changed twice and the delayed effective date is now for reporting periods beginning after December 15, 2024. Early adoption is permitted but not likely to be elected by the Company. 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 2025 will be determined by the long-duration contracts then held by the Company and the economic conditions at that time.
Transition for Sold Contracts
In December 2022, the FASB issued amendments (Accounting Standards Update 2022-5) to Accounting Standards Update 2018-12 (Targeted Improvements for Long-Duration Contracts) that originally required an insurance entity to apply a retrospective transition method as of the beginning of the earliest period presented or the beginning of the prior fiscal year if early application was elected. This updated guidance reduces implementation costs and complexity associated with the adoption of targeted improvements in accounting for long-duration contracts that have been derecognized in accordance with Accounting Standards Update 2018-12 before the delayed effective date. Without the amendments in this Update, an insurance entity would be required to reclassify a portion of gains or losses previously recognized in the sale or disposal of insurance contracts or legal entities because of the adoption of a new accounting standard. Because there is no effect on an insurance entity’s future cash flows, this reclassification may not be useful to users of financial information.
The amendments in this guidance are effective for fiscal years beginning after December 15, 2024. Early adoption is permitted but not likely to be elected by the Company. 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 2025 will be determined by the long-duration contracts then held by the Company and the economic conditions at that time.
Business Segments
FASB guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units. The discussion of segment operating results that follows is being provided based on segment data prepared in accordance with this methodology.
Our business segments are as follows:
| ● |
Life insurance operations, consisting of the life insurance operations of TLIC, FBLIC and TAI; |
|
| ● |
Annuity operations, consisting of the annuity operations of TLIC, FBLIC and TAI and |
|
| ● |
Corporate operations, which includes the results of the parent company and TMC after the elimination of intercompany amounts. |
Please see below and Note 4 to the Consolidated Financial Statements for the three months ended March 31, 2023 and 2022 and as of March 31, 2023 and December 31, 2022 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 Three Months Ended March 31, 2023 and 2022
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2023 |
2022 |
2023 less 2022 |
||||||||||
| Premiums |
$ | 9,108,309 | $ | 8,228,782 | $ | 879,527 | ||||||
| Net investment income |
7,627,816 | 6,448,995 | 1,178,821 | |||||||||
| Net realized investment gains (losses) |
(31,451 | ) | 1,237,806 | (1,269,257 | ) | |||||||
| Service fees |
982,848 | 57,540 | 925,308 | |||||||||
| Other income |
419 | 58,497 | (58,078 | ) | ||||||||
| Total revenues |
17,687,941 | 16,031,620 | 1,656,321 | |||||||||
| Benefits and claims |
11,371,070 | 10,789,536 | 581,534 | |||||||||
| Expenses |
5,068,944 | 4,112,525 | 956,419 | |||||||||
| Total benefits, claims and expenses |
16,440,014 | 14,902,061 | 1,537,953 | |||||||||
| Income before federal income tax expense |
1,247,927 | 1,129,559 | 118,368 | |||||||||
| Federal income tax expense (benefit) |
232,831 | 217,024 | 15,807 | |||||||||
| Net income |
$ | 1,015,096 | $ | 912,535 | $ | 102,561 | ||||||
| Net income per common share |
||||||||||||
| Class A common stock |
$ | 0.1072 | $ | 0.0964 | $ | 0.0108 | ||||||
| Class B common stock |
$ | 0.0911 | $ | 0.0819 | $ | 0.0092 | ||||||
Consolidated Condensed Financial Position as of March 31, 2023 and December 31, 2022
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2023 |
December 31, 2022 |
2023 to 2022 | ||||||||||
| Investment assets |
$ | 438,677,158 | $ | 442,069,335 | $ | (3,392,177 | ) | |||||
| Assets held in trust under coinsurance agreement |
92,168,607 | 92,033,769 | 134,838 | |||||||||
| Other assets |
156,693,138 | 131,760,933 | 24,932,205 | |||||||||
| Total assets |
$ | 687,538,903 | $ | 665,864,037 | $ | 21,674,866 | ||||||
| Policy liabilities |
$ | 523,571,709 | $ | 504,059,423 | $ | 19,512,286 | ||||||
| Funds withheld under coinsurance agreement |
90,754,691 | 92,301,039 | (1,546,348 | ) | ||||||||
| Deferred federal income taxes |
3,519,145 | 2,677,411 | 841,734 | |||||||||
| Other liabilities |
14,186,359 | 15,173,652 | (987,293 | ) | ||||||||
| Total liabilities |
632,031,904 | 614,211,525 | 17,820,379 | |||||||||
| Shareholders' equity |
55,506,999 | 51,652,512 | 3,854,487 | |||||||||
| Total liabilities and shareholders' equity |
$ | 687,538,903 | $ | 665,864,037 | $ | 21,674,866 | ||||||
| Shareholders' equity per common share |
||||||||||||
| Class A common stock |
$ | 5.8612 | $ | 5.4542 | $ | 0.4070 | ||||||
| Class B common stock |
$ | 4.9820 | $ | 4.6360 | $ | 0.3460 | ||||||
Results of Operations – Three Months Ended March 31, 2023 and 2022
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 on investment holdings can significantly impact revenues from period to period.
Our revenues for the three months ended March 31, 2023 and 2022 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2023 |
2022 |
2023 less 2022 |
||||||||||
| Premiums |
$ | 9,108,309 | $ | 8,228,782 | $ | 879,527 | ||||||
| Net investment income |
7,627,816 | 6,448,995 | 1,178,821 | |||||||||
| Net realized investment gains (losses) |
(31,451 | ) | 1,237,806 | (1,269,257 | ) | |||||||
| Service fees |
982,848 | 57,540 | 925,308 | |||||||||
| Other income |
419 | 58,497 | (58,078 | ) | ||||||||
| Total revenues |
$ | 17,687,941 | $ | 16,031,620 | $ | 1,656,321 | ||||||
The $1,656,321 increase in total revenues for the three months ended March 31, 2023 is discussed below.
Premiums
Our premiums for the three months ended March 31, 2023 and 2022 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2023 |
2022 |
2023 less 2022 |
||||||||||
| Ordinary life first year |
$ | 658,615 | $ | 458,139 | $ | 200,476 | ||||||
| Ordinary life renewal |
1,339,413 | 899,975 | 439,438 | |||||||||
| Final expense first year |
881,081 | 1,236,375 | (355,294 | ) | ||||||||
| Final expense renewal |
6,229,200 | 5,634,293 | 594,907 | |||||||||
| Total premiums |
$ | 9,108,309 | $ | 8,228,782 | $ | 879,527 | ||||||
The $879,527 increase in premiums for the three months ended March 31, 2023 is primarily due to a $594,907 increase in final expense renewal premiums, $439,438 increase in ordinary life renewal premiums and a $200,476 increase in ordinary life first year premiums that exceeded a $355,294 decrease in final expense first year premiums.
The increase in final expense renewal premiums reflects the persistency of prior years’ final expense production. The increase in ordinary life renewal premiums and ordinary life first year premiums primarily reflects ordinary dollar denominated life insurance policies sold in the international market by TAI. The decrease in final expense first year premiums reflects changes in competitor underwriting guidelines.
Net Investment Income
The major components of our net investment income for the three months ended March 31, 2023 and 2022 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2023 |
2022 |
2023 less 2022 |
||||||||||
| Fixed maturity securities |
$ | 1,560,033 | $ | 1,935,754 | $ | (375,721 | ) | |||||
| Preferred stock and equity securities |
28,255 | 65,073 | (36,818 | ) | ||||||||
| Other long-term investments |
1,360,330 | 1,311,694 | 48,636 | |||||||||
| Mortgage loans |
4,724,356 | 3,778,025 | 946,331 | |||||||||
| Policy loans |
56,576 | 43,322 | 13,254 | |||||||||
| Short-term and other investments |
494,678 | 21,272 | 473,406 | |||||||||
| Gross investment income |
8,224,228 | 7,155,140 | 1,069,088 | |||||||||
| Investment expenses |
(596,412 | ) | (706,145 | ) | (109,733 | ) | ||||||
| Net investment income |
$ | 7,627,816 | $ | 6,448,995 | $ | 1,178,821 | ||||||
The $1,069,088 increase in gross investment income for the three months ended March 31, 2023 is primarily due to $946,331 increase in mortgage loans, $473,406 increase in short term and other investments that exceeded a $375,721 decrease in fixed maturity securities.
In twelve months since March 31, 2022, our investments in mortgage loans increased approximately $41.9 million and investments in fixed maturity securities decreased approximately $35.9 million. The increase in short term and other investments is due to higher gross effective yields on securities held in the portfolio and other investments.
Net Realized Investment Gains (Losses)
Our net realized investment gains (losses) result from sales of fixed maturity securities available-for-sale, investment real estate, equity securities, changes in fair value of equity securities and changes in estimate of credit losses. Our net realized investment gains for the three months ended March 31, 2023 and 2022 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2023 |
2022 |
2023 less 2022 |
||||||||||
| Fixed maturity securities available-for-sale: |
||||||||||||
| Sale proceeds / maturities |
$ | 1,783,450 | $ | 30,949,960 | $ | (29,166,510 | ) | |||||
| Amortized cost at sale date |
1,801,772 | 29,725,885 | (27,924,113 | ) | ||||||||
| Net realized gains (losses) |
$ | (18,322 | ) | $ | 1,224,075 | $ | (1,242,397 | ) | ||||
| Investment real estate: |
||||||||||||
| Sales proceeds |
$ | - | $ | 49,371 | $ | (49,371 | ) | |||||
| Cost at sale date |
- | 53,067 | (53,067 | ) | ||||||||
| Net realized losses |
$ | - | $ | (3,696 | ) | $ | 3,696 | |||||
| Equity securities at fair value: |
||||||||||||
| Sales proceeds |
$ | - | $ | - | $ | - | ||||||
| Cost at sale date |
- | 8,000 | (8,000 | ) | ||||||||
| Net realized losses |
$ | - | $ | (8,000 | ) | $ | 8,000 | |||||
| Equity securities, changes in fair value |
$ | (6,206 | ) | $ | 25,427 | $ | (31,633 | ) | ||||
| Changes in current estimate of credit losses |
$ | (6,923 | ) | $ | - | $ | (6,923 | ) | ||||
| Net realized investment gains (losses) |
$ | (31,451 | ) | $ | 1,237,806 | $ | (1,269,257 | ) | ||||
Service Fees
The $925,308 increase in service fees for the three months ended March 31, 2023 is primarily due to an increase in fees from brokering mortgage loans for a fee to third parties.
Total Benefits, Claims and Expenses
Our benefits, claims and expenses are primarily generated from benefit payments, surrenders, interest credited to policyholders, change in reserves, commissions and other underwriting, insurance and acquisition expenses. Benefit payments can significantly impact expenses from period to period.
Our benefits, claims and expenses for the three months ended March 31, 2023 and 2022 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2023 |
2022 |
2023 less 2022 |
||||||||||
| Benefits and claims |
||||||||||||
| Increase in future policy benefits |
$ | 3,287,664 | $ | 3,214,973 | $ | 72,691 | ||||||
| Death benefits |
3,953,162 | 4,006,240 | (53,078 | ) | ||||||||
| Surrenders |
432,866 | 315,390 | 117,476 | |||||||||
| Interest credited to policyholders |
3,616,106 | 3,176,136 | 439,970 | |||||||||
| Dividend, endowment and supplementary life contract benefits |
81,272 | 76,797 | 4,475 | |||||||||
| Total benefits and claims |
11,371,070 | 10,789,536 | 581,534 | |||||||||
| Expenses |
||||||||||||
| Policy acquisition costs deferred |
(3,735,611 | ) | (2,852,880 | ) | (882,731 | ) | ||||||
| Amortization of deferred policy acquisition costs |
2,021,411 | 1,368,983 | 652,428 | |||||||||
| Amortization of value of insurance business acquired |
68,242 | 72,209 | (3,967 | ) | ||||||||
| Commissions |
3,560,008 | 2,661,129 | 898,879 | |||||||||
| Other underwriting, insurance and acquisition expenses |
3,154,894 | 2,863,084 | 291,810 | |||||||||
| Total expenses |
5,068,944 | 4,112,525 | 956,419 | |||||||||
| Total benefits, claims and expenses |
$ | 16,440,014 | $ | 14,902,061 | $ | 1,537,953 | ||||||
The $1,537,953 increase in total benefits, claims and expenses for the three months ended March 31, 2023 is discussed below.
Benefits and Claims
The $581,534 increase in benefits and claims for the three months ended March 31, 2023 is primarily due to the following:
| ● |
$439,970 increase in interest credited to policyholders is primarily due to an increase of approximately $34.3 million in the amount of policyholders’ account balance in the consolidated statement of financial position since March 31, 2022. |
| ● |
$117,476 increase in surrenders is based upon policyholder election and corresponds to the growth in the number of policies in force. |
| ● |
$72,691 increase in future policy benefits is primarily due to the increased number of life policies in force and the aging of existing life policies. |
| ● |
$53,078 decrease in death benefits is primarily due to approximately $382,000 of decreased final expense benefits that exceeded $328,000 of increased ordinary life benefits. |
Deferral and Amortization of Deferred Acquisition Costs
Certain costs related to the successful acquisition of traditional life insurance policies are capitalized and amortized over the premium-paying period of the policies. Certain costs related to the successful acquisition of insurance and annuity policies that subject us to mortality or morbidity risk over a period that extends beyond the period or periods in which premiums are collected and that have terms that are fixed and guaranteed (i.e., limited-payment long-duration annuity contracts) are capitalized and amortized in relation to the present value of actual and expected gross profits on the policies.
These acquisition costs, which are referred to as deferred policy acquisition costs, include commissions and other successful costs of acquiring policies and contracts, which vary with, and are primarily related to, the successful production of new and renewal life insurance policies and annuity contracts.
For the three months ended March 31, 2023 and 2022, capitalized costs were $3,735,611 and $2,852,880, respectively. Amortization of deferred policy acquisition costs for the three months ended March 31, 2023 and 2022 were $2,021,411 and $1,368,983, respectively.
The $882,731 increase in the 2023 acquisition costs deferred primarily relates to increased annuity production with a corresponding increase in deferral of eligible annuity commissions. There was a $652,428 increase in the 2023 amortization of deferred acquisition costs primarily due to increased 2023 surrenders and withdrawal activity and the impact of increased mortality.
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 $68,242 and $72,209 for the three months ended March 31, 2023 and 2022, respectively.
Commissions
Our commissions for the three months ended March 31, 2023 and 2022 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2023 |
2022 |
2023 less 2022 |
||||||||||
| Annuity |
$ | 1,081,284 | $ | 59,469 | $ | 1,021,815 | ||||||
| Ordinary life first year |
665,440 | 492,800 | 172,640 | |||||||||
| Ordinary life renewal |
141,145 | 89,929 | 51,216 | |||||||||
| Final expense first year |
1,073,811 | 1,474,665 | (400,854 | ) | ||||||||
| Final expense renewal |
598,328 | 544,266 | 54,062 | |||||||||
| Total commissions |
$ | 3,560,008 | $ | 2,661,129 | $ | 898,879 | ||||||
The $898,879 increase in commissions for the three months ended March 31, 2023 is primarily due to a $1,021,815 increase annuity commissions (corresponding to $27,052,093 of increased annuity deposits retained) and a $172,640 increase in ordinary life first year commissions (corresponding to $200,476 increased ordinary life first year premiums) that exceed a $400,854 decrease in final expense first year commissions (corresponding to $355,294 decreased final expense first year premiums).
Other Underwriting, Insurance and Acquisition Expenses
There was a $291,810 increase in other underwriting, insurance and acquisition expenses for the three months ended March 31, 2023 that is primarily due to increases in salaries, bonuses and legal cost.
Federal Income Taxes
FTFC filed its 2021 consolidated federal income tax return with TLIC, FBLIC and TMC. Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes.
For the three months ended March 31, 2023 and 2022, current federal income tax expense was $145,873 and $8,270, respectively. For the three months ended March 31, 2023 and 2022, deferred federal income tax expense was $86,958 and $208,754, respectively.
Net Income Per Common Share Basic and Diluted
For the three months ended March 31, 2023 and 2022, the net income allocated to the Class B shareholders is the total net income multiplied by the right to receive dividends at 85% for Class B shares (85,937) as of the reporting date divided by the allocated total shares (9,470,277) of Class A shares (9,384,340) and Class B shares (85,937) as of the reporting date.
For the three months ended March 31, 2023, the net income allocated to the Class A shareholders of $1,005,885 is the total net income $1,015,096 less the net income allocated to the Class B shareholders $9,211. For the three months ended March 31, 2022, the net income allocated to the Class A shareholders of $904,254 is the total net income $912,535 less the net income allocated to the Class B shareholders $8,281.
The weighted average outstanding common shares basic for the three months ended March 31, 2023 and 2022 were 9,384,340 and 8,661,696 for Class A shares, respectively and 101,102 for Class B shares.
Business Segments
The Company has a life insurance segment, consisting of the life insurance operations of TLIC, FBLIC and TAI, an annuity segment, consisting of the annuity operations of TLIC, FBLIC and TAI and a corporate segment. Results for the parent company and the operations of TMC, after elimination of intercompany amounts, are allocated to the corporate segment.
The revenues and income before federal income taxes from our business segments for the three months ended March 31, 2023 and 2022 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2023 |
2022 |
2023 less 2022 |
||||||||||
| Revenues: |
||||||||||||
| Life insurance operations |
$ | 10,825,816 | $ | 9,897,724 | $ | 928,092 | ||||||
| Annuity operations |
6,081,155 | 5,955,860 | 125,295 | |||||||||
| Corporate operations |
780,970 | 178,036 | 602,934 | |||||||||
| Total |
$ | 17,687,941 | $ | 16,031,620 | $ | 1,656,321 | ||||||
| Income before federal income taxes: |
||||||||||||
| Life insurance operations |
$ | (248,274 | ) | $ | (131,262 | ) | $ | (117,012 | ) | |||
| Annuity operations |
1,009,698 | 1,126,234 | (116,536 | ) | ||||||||
| Corporate operations |
486,503 | 134,587 | 351,916 | |||||||||
| Total |
$ | 1,247,927 | $ | 1,129,559 | $ | 118,368 | ||||||
The increases and decreases of revenues and profitability from our business segments for the three months ended March 31, 2023 and 2022 are summarized as follows:
| Life Insurance |
Annuity |
Corporate |
||||||||||||||
| Operations |
Operations |
Operations |
Total |
|||||||||||||
| Revenues |
||||||||||||||||
| Premiums |
$ | 879,527 | $ | - | $ | - | $ | 879,527 | ||||||||
| Net investment income |
254,513 | 861,871 | 62,437 | 1,178,821 | ||||||||||||
| Net realized investment gains (losses) |
(275,788 | ) | (1,001,469 | ) | 8,000 | (1,269,257 | ) | |||||||||
| Service fees and other income |
69,840 | 264,893 | 532,497 | 867,230 | ||||||||||||
| Total revenue |
928,092 | 125,295 | 602,934 | 1,656,321 | ||||||||||||
| Benefits and claims |
||||||||||||||||
| Increase in future policy benefits |
72,691 | - | - | 72,691 | ||||||||||||
| Death benefits |
(53,078 | ) | - | - | (53,078 | ) | ||||||||||
| Surrenders |
117,476 | - | - | 117,476 | ||||||||||||
| Interest credited to policyholders |
- | 439,970 | - | 439,970 | ||||||||||||
| Dividend, endowment and supplementary life contract benefits |
4,475 | - | - | 4,475 | ||||||||||||
| Total benefits and claims |
141,564 | 439,970 | - | 581,534 | ||||||||||||
| Expenses |
||||||||||||||||
| Policy acquisition costs deferred net of amortization |
878,545 | (1,108,848 | ) | - | (230,303 | ) | ||||||||||
| Amortization of value of insurance business acquired |
(1,983 | ) | (1,984 | ) | - | (3,967 | ) | |||||||||
| Commissions |
(122,936 | ) | 1,021,815 | - | 898,879 | |||||||||||
| Other underwriting, insurance and acquisition expenses |
149,914 | (109,122 | ) | 251,018 | 291,810 | |||||||||||
| Total expenses |
903,540 | (198,139 | ) | 251,018 | 956,419 | |||||||||||
| Total benefits, claims and expenses |
1,045,104 | 241,831 | 251,018 | 1,537,953 | ||||||||||||
| Income (loss) before federal income taxes (benefits) |
$ | (117,012 | ) | $ | (116,536 | ) | $ | 351,916 | $ | 118,368 | ||||||
Consolidated Financial Condition
Our invested assets as of March 31, 2023 and December 31, 2022 are summarized as follows:
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2023 |
December 31, 2022 |
2023 less 2022 |
||||||||||
| Assets |
||||||||||||
| Investments |
||||||||||||
| Available-for-sale fixed maturity securities at fair value (amortized cost: $142,810,570 and $144,744,158 as of March 31, 2023 and December 31, 2022, respectively) |
$ | 128,565,745 | $ | 126,612,890 | $ | 1,952,855 | ||||||
| Equity securities at fair value (cost: $279,620 and $276,131 as of March 31, 2023 and December 31, 2022, respectively) |
396,916 | 399,633 | (2,717 | ) | ||||||||
| Mortgage loans on real estate |
233,503,495 | 242,314,128 | (8,810,633 | ) | ||||||||
| Investment real estate |
540,436 | 540,436 | - | |||||||||
| Policy loans |
2,999,041 | 2,840,887 | 158,154 | |||||||||
| Short-term investments |
2,076,730 | 1,860,578 | 216,152 | |||||||||
| Other long-term investments |
70,594,795 | 67,500,783 | 3,094,012 | |||||||||
| Total investments |
$ | 438,677,158 | $ | 442,069,335 | $ | (3,392,177 | ) | |||||
The increase and decrease in fixed maturity available-for-sale securities for the three months ended March 31, 2023 and 2022, respectively, are summarized as follows:
| (Unaudited) Three Months Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Amount |
Amount |
|||||||
| Fixed maturity securities, available-for-sale, beginning |
$ | 126,612,890 | $ | 184,077,038 | ||||
| Purchases |
223,594 | 26,767,100 | ||||||
| Unrealized appreciation (depreciation) |
3,595,258 | (16,579,786 | ) | |||||
| Net realized investment gains (losses) |
(18,322 | ) | 1,224,075 | |||||
| Change in credit loss |
(6,923 | ) | - | |||||
| Sales proceeds |
(1,428,450 | ) | (30,399,960 | ) | ||||
| Maturities |
(355,000 | ) | (550,000 | ) | ||||
| Premium amortization |
(57,302 | ) | (102,477 | ) | ||||
| Increase (decrease) |
1,952,855 | (19,641,048 | ) | |||||
| Fixed maturity securities, available-for-sale, ending |
$ | 128,565,745 | $ | 164,435,990 | ||||
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 U.S. government, U.S. government agencies, state and political subdivisions, commercial and residential mortgage-backed securities, corporate bonds, asset-backed securities, exchange traded securities, foreign bonds, redeemable preferred securities and certificate of deposit.
The decrease and increase in equity securities for the three months ended March 31, 2023 and 2022, respectively, are summarized as follows:
| (Unaudited) |
||||||||
| Three Months Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Amount |
Amount |
|||||||
| Equity securities, beginning |
$ | 399,633 | $ | 348,218 | ||||
| Purchases |
27,056 | 43,414 | ||||||
| Joint venture distributions |
(23,567 | ) | (30,522 | ) | ||||
| Net realized investment gains (losses) |
- | (8,000 | ) | |||||
| Net realized investment gains (losses), changes in fair value |
(6,206 | ) | 25,427 | |||||
| Increase (decrease) |
(2,717 | ) | 30,319 | |||||
| Equity securities, ending |
$ | 396,916 | $ | 378,537 | ||||
Equity securities are reported at fair value with the change in fair value reflected in net realized investment gains (losses) within the consolidated statements of operations.
The decrease and increase in mortgage loans on real estate for the three months ended March 31, 2023 and 2022, respectively, are summarized as follows:
| (Unaudited) |
||||||||
| Three Months Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Amount |
Amount |
|||||||
| Mortgage loans on real estate, beginning |
$ | 242,314,128 | $ | 177,508,051 | ||||
| Purchases |
30,763,562 | 32,447,546 | ||||||
| Discount premium amortization |
(68,339 | ) | (3,476 | ) | ||||
| Payments |
(39,540,138 | ) | (18,291,543 | ) | ||||
| (Increase) decrease in allowance for bad debts |
34,282 | (83,700 | ) | |||||
| Increase (decrease) |
(8,810,633 | ) | 14,068,827 | |||||
| Mortgage loans on real estate, ending |
$ | 233,503,495 | $ | 191,576,878 | ||||
The decrease in investment real estate for the three months ended March 31, 2022 is summarized as follows:
| (Unaudited) |
||||||||
| Three Months Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Amount |
Amount |
|||||||
| Investment real estate, beginning |
$ | 540,436 | $ | 688,345 | ||||
| Sales proceeds |
- | (49,371 | ) | |||||
| Net realized investment losses |
- | (3,696 | ) | |||||
| Decrease |
- | (53,067 | ) | |||||
| Investment real estate, ending |
$ | 540,436 | $ | 635,278 | ||||
The increase and decrease in other long-term investments (composed of lottery receivables) for the three months ended March 31, 2023 and 2022, respectively, are summarized as follows:
| (Unaudited) |
||||||||
| Three Months Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Amount |
Amount |
|||||||
| Other long-term investments, beginning |
$ | 67,500,783 | $ | 65,929,215 | ||||
| Purchases |
5,444,219 | 2,671,200 | ||||||
| Accretion of discount |
1,360,406 | 1,311,709 | ||||||
| Payments |
(3,710,613 | ) | (4,686,815 | ) | ||||
| Incease (decrease) |
3,094,012 | (703,906 | ) | |||||
| Other long-term investments, ending |
$ | 70,594,795 | $ | 65,225,309 | ||||
Our assets other than invested assets as of March 31, 2023 and December 31, 2022 are summarized as follows:
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2023 |
December 31, 2022 |
2023 less 2022 |
||||||||||
| Cash and cash equivalents |
$ | 55,332,570 | $ | 33,542,725 | $ | 21,789,845 | ||||||
| Accrued investment income |
5,877,937 | 5,580,175 | 297,762 | |||||||||
| Recoverable from reinsurers |
10,896,297 | 11,102,875 | (206,578 | ) | ||||||||
| Assets held in trust under coinsurance agreement |
92,168,607 | 92,033,769 | 134,838 | |||||||||
| Agents' balances and due premiums |
1,265,782 | 1,253,077 | 12,705 | |||||||||
| Deferred policy acquisition costs |
57,896,894 | 56,183,785 | 1,713,109 | |||||||||
| Value of insurance business acquired |
3,979,863 | 4,048,105 | (68,242 | ) | ||||||||
| Other assets |
21,443,795 | 20,050,191 | 1,393,604 | |||||||||
| Assets other than investment assets |
$ | 248,861,745 | $ | 223,794,702 | $ | 25,067,043 | ||||||
The $21,789,845 increase in cash and cash equivalents is discussed below in the “Liquidity and Capital Resources” section where cash flows are addressed.
The increases in deferred policy acquisition costs for the three months ended March 31, 2023 and 2022 are summarized as follows:
| (Unaudited) |
||||||||
| Three Months Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Balance, beginning of year |
$ | 56,183,785 | $ | 49,717,323 | ||||
| Capitalization of commissions, sales and issue expenses |
3,735,611 | 2,852,880 | ||||||
| Amortization |
(2,021,411 | ) | (1,368,983 | ) | ||||
| Deferred acquisition costs allocated to investments |
(1,091 | ) | 6,913 | |||||
| Increase |
1,713,109 | 1,490,810 | ||||||
| Balance, end of year |
$ | 57,896,894 | $ | 51,208,133 | ||||
Our other assets as of March 31, 2023 and December 31, 2022 are summarized as follows:
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2023 |
December 31, 2022 |
2023 less 2022 |
||||||||||
| Federal and state income taxes recoverable |
$ | 9,820,144 | $ | 8,887,609 | $ | 932,535 | ||||||
| Advances to mortgage loan originator |
5,202,978 | 4,743,041 | 459,937 | |||||||||
| Advances to an independently owned investment firm |
5,000,000 | 5,000,000 | - | |||||||||
| Guaranty funds |
690,419 | 699,865 | (9,446 | ) | ||||||||
| Lease asset - right to use |
442,929 | 467,536 | (24,607 | ) | ||||||||
| Other receivables, prepaid assets and deposits |
232,227 | 194,737 | 37,490 | |||||||||
| Notes receivable |
55,098 | 57,403 | (2,305 | ) | ||||||||
| Total other assets |
$ | 21,443,795 | $ | 20,050,191 | $ | 1,393,604 | ||||||
There was a $932,535 increase in federal and state income taxes recoverable primarily due to federal and state tax withholdings on lottery receivables.
There was a $459,937 increase in advances to one mortgage loan originator who acquires residential mortgage loans for our life companies. As of March 31, 2023, the Company’s Chairman, President and Chief Executive Officer has provided approximately $2,040,000 of loans to this mortgage loan originator.
Our liabilities as of March 31, 2023 and December 31, 2022 are summarized as follows:
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2023 |
December 31, 2022 |
2023 less 2022 |
||||||||||
| Policy liabilities |
||||||||||||
| Policyholders' account balances |
$ | 407,959,474 | $ | 391,359,944 | $ | 16,599,530 | ||||||
| Future policy benefits |
113,063,945 | 110,012,174 | 3,051,771 | |||||||||
| Policy claims |
2,307,066 | 2,541,088 | (234,022 | ) | ||||||||
| Other policy liabilities |
241,224 | 146,217 | 95,007 | |||||||||
| Total policy liabilities |
523,571,709 | 504,059,423 | 19,512,286 | |||||||||
| Funds withheld under coinsurance agreement |
90,754,691 | 92,301,039 | (1,546,348 | ) | ||||||||
| Deferred federal income taxes |
3,519,145 | 2,677,411 | 841,734 | |||||||||
| Other liabilities |
14,186,359 | 15,173,652 | (987,293 | ) | ||||||||
| Total liabilities |
$ | 632,031,904 | $ | 614,211,525 | $ | 17,820,379 | ||||||
The increase and decrease in policyholders’ account balances for the three months ended March 31, 2023 and 2022, respectively, are summarized as follows:
| (Unaudited) |
||||||||
| Three Months Ended March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Amount |
Amount |
|||||||
| Policyholders' account balances, beginning |
$ | 391,359,944 | $ | 373,647,869 | ||||
| Deposits |
32,734,475 | 5,912,187 | ||||||
| Withdrawals |
(23,245,578 | ) | (15,909,047 | ) | ||||
| Change in funds withheld under coinsurance agreement |
3,494,527 | 1,477,724 | ||||||
| Acquisition of Royalty Capital Life Insurance Company |
- | 3,019,610 | ||||||
| Interest credited |
3,616,106 | 3,176,136 | ||||||
| Increase (decrease) |
16,599,530 | (2,323,390 | ) | |||||
| Policyholders' account balances, ending |
$ | 407,959,474 | $ | 371,324,479 | ||||
The $3,051,771 increase in future policy benefits during the three months ended March 31, 2023 is primarily related to the production of new life insurance policies and the aging of existing policies an additional year.
The $841,734 increase in deferred federal income taxes during the three months ended March 31, 2023 was due to $754,776 of increased deferred federal income taxes on the unrealized appreciation of fixed maturity securities available-for-sale and $86,958 of operating deferred federal tax.
The $1,546,348 decrease in funds withheld under coinsurance agreement is due to the Company owing the reinsurer less under the coinsurance agreement with an offshore annuity and life insurance company.
Our other liabilities as of March 31, 2023 and December 31, 2022 are summarized as follows:
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2023 |
December 31, 2022 |
2023 less 2022 |
||||||||||
| Suspense accounts payable |
$ | 5,620,328 | $ | 9,706,063 | $ | (4,085,735 | ) | |||||
| Mortgage loans suspense |
5,081,305 | 2,655,185 | 2,426,120 | |||||||||
| Payable for securities purchased |
1,147,556 | 390,508 | 757,048 | |||||||||
| Accrued expenses payable |
814,000 | 830,000 | (16,000 | ) | ||||||||
| Guaranty fund assessments |
681,000 | 681,000 | - | |||||||||
| Lease liability |
442,929 | 467,536 | (24,607 | ) | ||||||||
| Unclaimed funds |
354,754 | 338,204 | 16,550 | |||||||||
| Unearned investment income |
105,023 | 105,236 | (213 | ) | ||||||||
| Accounts payable |
54,451 | 80,964 | (26,513 | ) | ||||||||
| Deferred revenue |
49,500 | 52,250 | (2,750 | ) | ||||||||
| Other payables, withholdings and escrows |
(164,487 | ) | (133,294 | ) | (31,193 | ) | ||||||
| Total other liabilities |
$ | 14,186,359 | $ | 15,173,652 | $ | (987,293 | ) | |||||
The $4,085,735 decrease in suspense accounts payable is due to decreased annuity deposits on policy applications that had not been issued as of the financial reporting date.
The increase in mortgage loan suspense of $2,426,120 is primarily due to timing of principal loan payments on mortgage loans.
As of March 31, 2023, the Company had $1,147,556 in security purchases where the trade date and settlement date were in different financial reporting periods compared to $390,508 of security purchases overlapping financial reporting periods as of December 31, 2022.
Liquidity and Capital Resources
Our operations have been financed primarily through the private placement of equity securities and intrastate public stock offerings. Through March 31, 2023, we have received $27,119,480 from the sale of our shares and recorded $1,746,240 from the exchange of our shares to acquire K-TENN in 2020.
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.
In 2020, the Company paid a $0.05 per share cash dividend for a total of $393,178 and issued 791,339 shares of class A common stock in connection with a 10% stock dividend to its Class A shareholders. The 10% stock dividend resulted in accumulated earnings being charged $8,657,249 with an offsetting credit of $8,657,249 to common stock and additional paid-in capital.
During 2012, 2013, 2014 and 2015, the Company repurchased 247,580 shares of its common stock at a total cost of $893,947 from former members of the Board of Directors including the former Chairman of the Board of Directors, a former agent, the former spouse of the Company’s current Chairman, Chief Executive Officer and President and a charitable organization where a former member of the Board of Directors had donated shares of the Company’s common stock.
As of March 31, 2023, we had cash and cash equivalents totaling $55,332,570. As of March 31, 2023, cash and cash equivalents of $31,065,764 and $18,916,127, respectively, totaling $49,981,891 were held by TLIC and FBLIC and may not be available for use by FTFC due to the required pre-approval by the OID and Missouri Department of Commerce and Insurance of any dividend or intercompany transaction to transfer funds to FTFC. The maximum dividend, which may be paid in any twelve-month period without notification or approval, is limited to the greater of 10% of statutory surplus as of December 31 of the preceding year or the net gain from operations of the preceding calendar year.
Cash dividends may only be paid out of surplus derived from realized net profits. Based on these limitations, there is no capacity for TLIC to pay a dividend due to a negative unassigned surplus of $3,633,769 as of December 31, 2022. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $1,237,769 in 2023 without prior approval. FBLIC has paid no dividends to TLIC in 2023. In 2022, FBLIC paid a $3,200,000 dividend to TLIC, of which $1,495,631 was considered ordinary and $1,704,369 was considered extraordinary. Dividends paid by FBLIC to TLIC are eliminated in consolidation. TLIC has paid no dividends to FTFC in 2023 and 2022. In 2022, TLIC returned $2,200,000 in capital to FTFC. This return of capital by TLIC to FTFC is eliminated in consolidation.
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 $35,526,411 and $32,933,850 as of March 31, 2023 and December 31, 2022, 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 September 15, 2022, the Company did not renew its $1.5 million line of credit with a bank to provide working capital and funds for expansion. For the one-year period ending September 15, 2022, the Company’s line of credit with a bank allowed for advances, repayments and re-borrowings. Any outstanding advances would have incurred interest at a variable interest rate of the prime rate set forth in the Wall Street Journal plus 1% per annum adjusting monthly based on a 360-day year with a minimum interest rate floor of 5.75%. The non-utilized portion of the $1.5 million line of credit would have been assessed a 1% non-usage fee calculated in arrears and paid at the maturity date. No amounts were outstanding on this line of credit during the years it was available.
Our cash flows for the three months ended March 31, 2023 and 2022 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2023 |
2022 |
2023 less 2022 |
||||||||||
| Net cash provided by operating activities |
$ | 3,318,869 | $ | 2,146,819 | $ | 1,172,050 | ||||||
| Net cash provided by (used in) investing activities |
8,982,079 | (3,309,661 | ) | 12,291,740 | ||||||||
| Net cash provided by (used in) financing activities |
9,488,897 | (9,996,860 | ) | 19,485,757 | ||||||||
| Increase (decrease) in cash and cash equivalents |
21,789,845 | (11,159,702 | ) | 32,949,547 | ||||||||
| Cash and cash equivalents, beginning of period |
33,542,725 | 42,528,046 | (8,985,321 | ) | ||||||||
| Cash and cash equivalents, end of period |
$ | 55,332,570 | $ | 31,368,344 | $ | 23,964,226 | ||||||
The cash provided by operating activities for the three months ended March 31, 2023 and 2022 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2023 |
2022 |
2023 less 2022 |
||||||||||
| Premiums collected |
$ | 8,983,396 | $ | 8,392,587 | $ | 590,809 | ||||||
| Net investment income collected |
6,095,077 | 5,329,641 | 765,436 | |||||||||
| Service fees and other income collected |
983,267 | 116,037 | 867,230 | |||||||||
| Death benefits paid |
(3,980,606 | ) | (3,058,446 | ) | (922,160 | ) | ||||||
| Surrenders paid |
(432,866 | ) | (315,390 | ) | (117,476 | ) | ||||||
| Dividends and endowments paid |
(81,947 | ) | (76,424 | ) | (5,523 | ) | ||||||
| Commissions paid |
(3,588,011 | ) | (2,511,921 | ) | (1,076,090 | ) | ||||||
| Other underwriting, insurance and acquisition expenses paid |
(3,274,819 | ) | (2,753,083 | ) | (521,736 | ) | ||||||
| Taxes paid |
(1,078,408 | ) | (33,670 | ) | (1,044,738 | ) | ||||||
| Decreased assets held in trust under coinsurance agreement |
1,813,339 | 1,282,160 | 531,179 | |||||||||
| (Increased) decreased mortgage loan suspense |
2,426,119 | (3,905,417 | ) | 6,331,536 | ||||||||
| Increased advances to mortgage loan originator |
(459,937 | ) | (170,210 | ) | (289,727 | ) | ||||||
| Decreased deposits of pending policy applications |
(4,085,735 | ) | (106,186 | ) | (3,979,549 | ) | ||||||
| Other |
- | (42,859 | ) | 42,859 | ||||||||
| Cash provided by operating activities |
$ | 3,318,869 | $ | 2,146,819 | $ | 1,172,050 | ||||||
Please see the statements of cash flows for the three months ended March 31, 2023 and 2022 for a summary of the components of net cash used in investing activities and net cash provided by financing activities.
Our shareholders’ equity as of March 31, 2023 and December 31, 2022 is summarized as follows:
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2023 |
December 31, 2022 |
2023 less 2022 |
||||||||||
| Shareholders' equity |
||||||||||||
| Class A common stock, par value $.01 per share (40,000,000 shares authorized as of March 31, 2023 and December 31, 2022, 9,631,920 issued as of March 31, 2023 and December 31, 2022, 9,384,340 outstanding as of March 31, 2023 and December 31, 2022) |
$ | 96,319 | $ | 96,319 | $ | - | ||||||
| Class B common stock, par value $.01 per share (10,000,000 shares authorized, 101,102 issued and outstanding as of March 31, 2023 and December 31, 2022) |
1,011 | 1,011 | - | |||||||||
| Additional paid-in capital |
43,668,023 | 43,668,023 | - | |||||||||
| Treasury stock, at cost (247,580 shares as of March 31, 2023 and December 31, 2022) |
(893,947 | ) | (893,947 | ) | - | |||||||
| Accumulated other comprehensive loss |
(11,250,252 | ) | (14,319,679 | ) | 3,069,427 | |||||||
| Accumulated earnings |
23,885,845 | 23,100,785 | 785,060 | |||||||||
| Total shareholders' equity |
$ | 55,506,999 | $ | 51,652,512 | $ | 3,854,487 | ||||||
The increase in shareholders’ equity of $3,854,487 for the three months ended March 31, 2023 is due to $2,839,391 in other comprehensive income and $1,015,096 in net income that have both been impacted by the January 1, 2023 cumulative effect adjustment for accumulated credit loss as presented in the Company’s Consolidated Statements of Changes in Shareholders’ Equity.
The liquidity requirements of our life insurance companies are met primarily by funds provided from operations. Premium and annuity consideration deposits, investment income and investment maturities are the primary sources of funds, while investment purchases, policy benefits, and operating expenses are the primary uses of funds. There were no liquidity issues in 2023 or 2022. Our investments include marketable debt securities that could be readily converted to cash for liquidity needs.
We are subject to various market risks. The quality of our investment portfolio and the current level of shareholders’ equity continue to provide a sound financial base as we strive to expand our marketing to offer competitive products. Our investment portfolio had unrealized depreciation on available-for-sale securities of $14,244,825 and $18,131,268 as of March 31, 2023 and December 31, 2022, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. A decrease of $3,576,936 in unrealized losses arising for the three months ended March 31, 2023 has been impacted by 2023 net realized investment losses of $18,322 originating from the sale and call activity for fixed maturity securities available-for-sale resulting in net unrealized losses on investments of $3,595,258.
A primary liquidity concern is the risk of an extraordinary level of early policyholder withdrawals. We include provisions within our insurance policies, such as surrender charges, that help limit and discourage early withdrawals. Individual life insurance policies are less susceptible to withdrawal than annuity reserves and deposit liabilities because policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. Cash flow projections and cash flow tests under various market interest rate scenarios are also performed annually to assist in evaluating liquidity needs and adequacy. We currently anticipate that available liquidity sources and future cash flows will be adequate to meet our needs for funds.
One of our significant risks relates to the fluctuations in interest rates. Regarding interest rates, the value of our available-for-sale fixed maturity securities investment portfolio will increase or decrease in an inverse relationship with fluctuations in interest rates, while net investment income earned on newly acquired available-for-sale fixed maturity securities increases or decreases in direct relationship with interest rate changes.
From an income perspective, we are exposed to rising interest rates which could be a significant risk, as TLIC's and FBLIC’s annuity business is impacted by changes in interest rates. Life insurance company policy liabilities bear fixed rates. From a liquidity perspective, our fixed rate policy liabilities are relatively insensitive to interest rate fluctuations.
We believe gradual increases in interest rates do not present a significant liquidity exposure for the life insurance policies and annuity contracts. We maintain conservative durations in our fixed maturity portfolio.
As of March 31, 2023, cash and cash equivalents, short-term investments, the fair value of fixed maturity available-for-sale securities with maturities of less than one year and the fair value of lottery receivables with maturities of less than one year equaled 14.2% of total policy liabilities. If interest rates rise significantly in a short time frame, there can be no assurance that the life insurance industry, including the Company, would not experience increased levels of surrenders and reduced sales, and thereby be materially adversely affected.
In addition to the measures described above, TLIC and FBLIC must comply with the National Association of Insurance Commissioners promulgated Standard Valuation Law ("SVL") which specifies minimum reserve levels and prescribes methods for determining them, with the intent of enhancing solvency. Upon meeting certain tests, which TLIC and FBLIC met during 2022, the SVL also requires the Company to perform annual cash flow testing for TLIC and FBLIC. This testing is designed to ensure that statutory reserve levels will maintain adequate protection in a variety of potential interest rate scenarios. The Actuarial Standards Board of the American Academy of Actuaries also requires cash flow testing as a basis for the actuarial opinion on the adequacy of the reserves which is a required part of the annual statutory reporting process.
Our marketing plan could be modified to emphasize certain product types and reduce others. New business levels could be varied in order to find the optimum level. We believe that our current liquidity, current bond portfolio maturity distribution and cash position give us substantial resources to administer our existing business and fund growth generated by direct sales.
The operations of TLIC and FBLIC may require additional capital contributions to meet statutory capital and surplus requirements mandated by state insurance departments. Life insurance contract liabilities are generally long term in nature and are generally paid from future cash flows or existing assets and reserves. We will service other expenses and commitments by: (1) using available cash, (2) dividends from TLIC and FBLIC that are limited by law to the greater of prior year net operating income or 10% of prior year‑end surplus unless specifically approved by the controlling insurance department, (3) public and private offerings of our common stock and (4) corporate borrowings, if necessary.
We are not aware of any commitments or unusual events that could materially affect our capital resources. We are not aware of any current recommendations by any regulatory authority which, if implemented, would have a material adverse effect on our liquidity, capital resources or operations. We believe that our existing cash and cash equivalents as of March 31, 2023 will be sufficient to fund our anticipated operating expenses.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements. The forward-looking statements are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning; and include, but are not limited to, statements regarding the outlook of our business and financial performance. These forward-looking statements are subject to change and uncertainty, which are, in many instances, beyond our control and have been made based upon our expectations and beliefs concerning future developments and their potential effect upon us.
There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be as anticipated. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. These factors include among others:
| ● |
general economic conditions and financial factors, including the performance and fluctuations of fixed income, equity, real estate, credit capital and other financial markets; |
| ● |
differences between actual experience regarding mortality, morbidity, persistency, surrenders, investment returns, and our pricing assumptions establishing liabilities and reserves or for other purposes; |
| ● |
the effect of increased claims activity from natural or man-made catastrophes, pandemic disease, or other events resulting in catastrophic loss of life; |
| ● |
adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities; |
| ● |
inherent uncertainties in the determination of investment allowances and impairments and in the determination of the valuation allowance on the deferred income tax asset; |
| ● |
investment losses and defaults; |
| ● |
competition in our product lines; |
| ● |
attraction and retention of qualified employees and agents; |
| ● |
ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; |
| ● |
the availability, affordability and adequacy of reinsurance protection; |
| ● |
the effects of emerging claim and coverage issues; |
| ● |
the cyclical nature of the insurance business; |
| ● |
interest rate fluctuations; |
| ● |
changes in our experiences related to deferred policy acquisition costs; |
| ● |
the ability and willingness of counterparties to our reinsurance arrangements and derivative instruments to pay balances due to us; |
| ● |
impact of medical epidemics and viruses; |
| ● |
domestic or international military actions; |
| ● |
the effects of extensive government regulation of the insurance industry; |
| ● |
changes in tax and securities law; |
| ● |
changes in statutory or U.S. generally accepted accounting principles (“GAAP”), practices or policies; |
| ● |
regulatory or legislative changes or developments; |
| ● |
the effects of unanticipated events on our disaster recovery and business continuity planning; |
| ● |
failures or limitations of our computer, data security and administration systems; |
| ● |
risks of employee error or misconduct; |
| ● |
the assimilation of life insurance businesses we acquire and the sound management of these businesses; |
| ● |
the availability of capital to expand our business; and |
| ● |
Coronavirus disease impact on economic environment. |
It is not our corporate policy to make specific projections relating to future earnings, and we do not endorse any projections regarding future performance made by others. In addition, we do not publicly update or revise forward-looking statements based on the outcome of various foreseeable or unforeseeable developments.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (“Certifying Officers”), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934 as amended (“Exchange Act”) as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Certifying Officers have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is made known to management, including our Certifying Officers, as appropriate, to allow timely decisions regarding disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Changes to Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are a party to various legal proceedings in the ordinary course of business. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from them will not have a material effect on the Company’s financial position, results of operations or cash flow. We are not currently a party to any bankruptcy, receivership, reorganization, adjustment or similar proceeding, and we are not aware of any material threatened litigation. As summarized below, the Company is currently involved in three pending lawsuits.
A lawsuit filed by the Company and its Chairman and Chief Executive Officer, Gregg E. Zahn (“Mr. Zahn”) styled First Trinity Financial Corporation and Gregg E. Zahn vs. C. Wayne Pettigrew and Group & Pension Planners was originally filed in 2013 in the District Court of Tulsa County, Oklahoma against former Company Board of Director, C. Wayne Pettigrew (“Mr. Pettigrew”). The Company and Mr. Zahn alleged that Mr. Pettigrew defamed Mr. Zahn and the Company and that Mr. Pettigrew breached his fiduciary duties to the Company by making untrue statements about the Company and Mr. Zahn to the press, state regulators and to certain shareholders.
In February 2017, the lawsuit resulted in a jury verdict in favor of the Company and Mr. Zahn, with the jury awarding damages of $800,000 to the Company and $3,500,000 to Mr. Zahn. In February 2020, the Oklahoma Court of Civil Appeals, upon an appeal by Mr. Pettigrew, reversed the judgment and remanded the case for a new trial. A Petition for Certiorari review with the Oklahoma Supreme Court by the Company and Mr. Zahn was declined in December, 2020. The case is now scheduled to be retried in the District Court. The Company is vigorously prosecuting this case. The Company faces no exposure in connection with this action since there were no counterclaims or cross claims made against the Company. Management believes that this lawsuit is not material in relation to the Company’s financial position or results of operations.
The Company, through its life insurance subsidiary, TLIC, commenced two lawsuits as plaintiff, both in the New York Supreme Court, New York County, one on June 29, 2020 and another on March 4, 2022, for breach of contract against a company for failure to advance funding to lottery ticket winners to the detriment of TLIC and against various of that company’s associated persons for unjust enrichment and fraud perpetuated on TLIC. The cases are entitled “Trinity Life Insurance Company v. Advance Funding LLC, Dan Cevallos, and Monica L. Ray, Index No. 652780/2020” (New York Supreme Court, New York County) and “Trinity Life Insurance Company v. Advance Funding LLC, Dan Cevallos, Julie Casal, and Monica L. Ray, Index No. 651023/2022” (New York Supreme Court, New York County). The Company is vigorously prosecuting this case against the defendants. The Company faces no exposure in connection with either action since no counterclaims or cross claims have been made against the Company. Management believes that this lawsuit is not material in relation to the Company’s financial position or results of operations.
The third lawsuit involves an insurance holding company and one of its insurance subsidiaries, which was instituted suit in District Court of Travis County, Texas, entitled Citizens, Inc., CICA Life Ltd., and CICA Life Insurance Company of America, Plaintiffs, v. Randall H. Riley, Citizens American Life, LLC, Citizens American Life, Inc., Alexis Enrique Delgado, Carlos Nalsen Landa, Enrique Pinzon Ruiz, Johan Emilio Mikuski Silva, Esperanza Peralta De Delgado, Michael P. Buchweitz, Jonathan M. Pollio, Steven A. Rekedal, First Trinity Financial Corporation, Trinity American, Inc., and International Marketing Group S.A., LLC, Defendants, against the Company and several associated persons on November 7, 2018. The plaintiffs accused the several defendants, including the Company and its subsidiary company, Trinity American, Inc. (“Trinity American”) of misappropriating trade secrets under the Texas Uniform Trade Secrets Act. The plaintiffs have also alleged claims for common law unfair competition, civil conspiracy, and unjust enrichment against all of the defendants. The plaintiffs also alleged that Trinity American’s predecessor entity tortiously interfered with the plaintiffs’ contracts, and alleged several other causes of action, including breaches of contract and tortious interference with contract against the remaining defendants.
The causes of action all are alleged to have arisen from the alleged conduct of the various individual defendants, three of whom are former employees of the plaintiffs. The plaintiffs alleged that defendant Randall H. Riley and other terminated employees, after being terminated by the plaintiffs, worked on creating a competing business selling whole life insurance in international markets. Several of the individual defendants have counterclaimed against the plaintiffs seeking damages for breach of contract based on commissions they were denied when the plaintiffs wrongfully terminated their sales agreements. Mr. Riley died in October 2022. Trial of the case has been delayed indefinitely pending action from the Travis County Probate Court with respect to the estate of Mr. Riley. The Company believes the plaintiffs’ claims against the Company are entirely without merit and it is conducting a vigorous defense. Management believes that the ultimate resolution of this lawsuit will not be material in relation to the Company’s financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None
Item 6. Exhibits
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer |
| 32.1 | Section 1350 Certification of Principal Executive Officer |
| 32.2 | Section 1350 Certification of Principal Financial Officer |
| 101.INS** | Inline XBRL Instance |
| 101.SCH** | Inline XBRL Taxonomy Extension Schema |
| 101.CAL** | Inline XBRL Taxonomy Extension Calculation |
| 101.DEF** | Inline XBRL Taxonomy Extension Definition |
| 101.LAB** | Inline XBRL Taxonomy Extension Labels |
| 101.PRE** | Inline XBRL Taxonomy Extension Presentation |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
| **XBRL | Information is furnished and not filed as part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FIRST TRINITY FINANCIAL CORPORATION |
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| an Oklahoma corporation |
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| May 15, 2023 | By |
/s/ Gregg E. Zahn |
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| Gregg E. Zahn, President and Chief Executive Officer |
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| May 15, 2023 |
By |
/s/ Jeffrey J. Wood |
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| Jeffrey J. Wood, Chief Financial Officer |
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