United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

[ X ]

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

 

For the quarterly period ended September 30, 2019

 

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

For the transition period From                                 to                                   .

 

Commission file number: 000-52613

 

FIRST TRINITY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

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

 

 

7633 East 63rd Place, Suite 230

Tulsa, Oklahoma 74133-1246

(Address of principal executive offices)

 

(918) 249-2438

(Registrant's telephone number, including area code)

 

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

 

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

Yes ☑ No ☐

 

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

 

Large accelerated filer:  ☐	Accelerated filer:  ☐	Non-accelerated filer:  ☐	Smaller reporting company:  ☑
Emerging growth company:  ☐

 

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

 

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

Yes ☐       No ☑

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Common stock .01 par value as of November 5, 2019: 7,802,593 shares

 

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

 

 

 

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

 

TABLE OF CONTENTS

 

PART I.  FINANCIAL INFORMATION	Page Number
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Position as of September 30, 2019 (Unaudited) and December 31, 2018	3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)	4
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)	5
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)	6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (Unaudited)	7
Notes to Consolidated Financial Statements (Unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 4.  Controls and Procedures	62
Part II.  OTHER INFORMATION
Item 1.  Legal Proceedings	62
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3.  Defaults upon Senior Securities	63
Item 4.  Mine Safety Disclosures	63
Item 5.  Other Information	63
Item 6.  Exhibits	63
Signatures	64

 

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

 

		(Unaudited)
		September 30, 2019				December 31, 2018
Assets
Investments
Available-for-sale fixed maturity securities at fair value (amortized cost: $178,477,818 and $134,414,517 as of September 30, 2019 and December 31, 2018, respectively)		$	192,946,789			$	131,152,199
Available-for-sale preferred stock at fair value (cost: $49,945 and $99,945 as of September 30, 2019 and December 31, 2018, respectively)			51,320				90,580
Equity securities at fair value (cost: $182,186 and $187,122 as of September 30, 2019 and December 31, 2018, respectively)			199,710				198,668
Mortgage loans on real estate			156,504,177				130,049,610
Investment real estate			1,988,131				2,392,031
Policy loans			1,950,680				1,809,339
Short-term investments			209,045				896,371
Other long-term investments			72,711,634				59,255,477
Total investments			426,561,486				325,844,275
Cash and cash equivalents			14,083,748				29,665,605
Accrued investment income			5,170,977				2,672,978
Recoverable from reinsurers			1,161,862				2,323,157
Assets held in trust under coinsurance agreement			104,509,053				25,494,700
Agents' balances and due premiums			1,751,485				1,418,916
Deferred policy acquisition costs			36,492,172				29,681,737
Value of insurance business acquired			4,961,162				5,185,870
Other assets			9,298,364				11,219,612
Total assets		$	603,990,309			$	433,506,850
Liabilities and Shareholders' Equity
Policy liabilities
Policyholders' account balances		$	366,988,490			$	297,168,411
Future policy benefits			62,651,571				56,261,507
Policy claims			1,453,417				1,102,257
Other policy liabilities			71,365				72,559
Total policy liabilities			431,164,843				354,604,734
Funds withheld under coinsurance agreement			105,200,731				29,285,119
Deferred federal income taxes			6,446,615				2,373,478
Other liabilities			3,735,466				8,118,268
Total liabilities			546,547,655				394,381,599
Shareholders' equity
Common stock, par value $.01 per share (20,000,000 shares authorized 8,050,173 issued as of September 30, 2019 and December 31, 2018 and 7,802,593 outstanding as of September 30, 2019 and December 31, 2018)			80,502				80,502
Additional paid-in capital			28,684,598				28,684,598
Treasury stock, at cost (247,580 shares as of September 30, 2019 and December 31, 2018)			(893,947	)			(893,947	)
Accumulated other comprehensive income (loss)			11,414,146				(2,576,631	)
Accumulated earnings			18,157,355				13,830,729
Total shareholders' equity			57,442,654				39,125,251
Total liabilities and shareholders' equity		$	603,990,309			$	433,506,850

---

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Revenues
Premiums		$	5,754,771			$	4,701,250			$	16,831,658			$	13,760,857
Net investment income			6,316,342				4,979,031				18,172,841				14,701,414
Net realized investment gains			339,108				245,059				325,196				269,531
Service fees			58,902				66,474				1,079,780				300,035
Other income			91,354				11,977				154,093				58,149
Total revenues			12,560,477				10,003,791				36,563,568				29,089,986
Benefits, Claims and Expenses
Benefits and claims
Increase in future policy benefits			2,231,442				1,719,073				6,412,219				4,684,724
Death benefits			1,762,961				876,629				4,869,866				3,963,815
Surrenders			204,932				203,287				801,413				666,128
Interest credited to policyholders			3,123,621				2,329,858				8,686,026				6,941,291
Dividend, endowment and supplementary life contract benefits			63,101				64,339				206,891				197,034
Total benefits and claims			7,386,057				5,193,186				20,976,415				16,452,992
Policy acquisition costs deferred			(2,409,231	)			(1,673,638	)			(9,681,748	)			(6,162,096	)
Amortization of deferred policy acquisition costs			997,249				682,295				2,839,129				2,677,918
Amortization of value of insurance business acquired			69,717				83,935				224,708				255,424
Commissions			2,348,478				1,934,194				9,644,315				5,963,852
Other underwriting, insurance and acquisition expenses			1,931,334				1,849,373				7,054,193				4,981,401
Total expenses			2,937,547				2,876,159				10,080,597				7,716,499
Total benefits, claims and expenses			10,323,604				8,069,345				31,057,012				24,169,491
Income before total federal income tax expense			2,236,873				1,934,446				5,506,556				4,920,495
Current federal income tax expense			124,807				-				825,861				-
Deferred federal income tax expense			341,202				409,687				354,069				1,055,978
Total federal income tax expense			466,009				409,687				1,179,930				1,055,978
Net income		$	1,770,864			$	1,524,759			$	4,326,626			$	3,864,517
Net income per common share basic and diluted		$	0.23			$	0.20			$	0.55			$	0.50

---

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Net income		$	1,770,864			$	1,524,759			$	4,326,626			$	3,864,517
Other comprehensive income (loss)
Total net unrealized investment gains (losses) arising during the period			6,470,486				(717,379	)			18,092,060				(7,531,191	)
Cumulative effect, adoption of accounting guidance for equity securities			-				-				-				(68,508	)
Less net realized investment gains having no credit losses			340,869				205,453				350,031				244,930
Net unrealized investment gains (losses)			6,129,617				(922,832	)			17,742,029				(7,844,629	)
Less adjustment to deferred acquisition costs			9,088				(14,204	)			32,184				(132,210	)
Other comprehensive income (loss) before federal income tax expense (benefit)			6,120,529				(908,628	)			17,709,845				(7,712,419	)
Federal income tax expense (benefit)			1,285,311				(190,813	)			3,719,068				(1,619,608	)
Total other comprehensive income (loss)			4,835,218				(717,815	)			13,990,777				(6,092,811	)
Total comprehensive income (loss)		$	6,606,082			$	806,944			$	18,317,403			$	(2,228,294	)

---

 

														Accumulated
		Common				Additional								Other								Total
		Stock				Paid-in				Treasury				Comprehensive				Accumulated				Shareholders'
		$.01 Par Value				Capital				Stock				Income (Loss)				Earnings				Equity
Three months ended September 30, 2018
Balance as of July 1, 2018		$	80,502			$	28,684,598			$	(893,947	)		$	(614,045	)		$	11,028,341			$	38,285,449
Comprehensive income:
Net income			-				-				-				-				1,524,759				1,524,759
Other comprehensive loss			-				-				-				(717,815	)			-				(717,815	)
Balance as of September 30, 2018		$	80,502			$	28,684,598			$	(893,947	)		$	(1,331,860	)		$	12,553,100			$	39,092,393
Nine months ended September 30, 2018
Balance as of January 1, 2018		$	80,502			$	28,684,598			$	(893,947	)		$	4,760,951			$	8,620,075			$	41,252,179
Comprehensive loss:
Net income			-				-				-				-				3,864,517				3,864,517
Cumulative effect, adoption of accounting guidance for equity securities			-				-				-				-				68,508				68,508
Other comprehensive loss			-				-				-				(6,092,811	)			-				(6,092,811	)
Balance as of September 30, 2018		$	80,502			$	28,684,598			$	(893,947	)		$	(1,331,860	)		$	12,553,100			$	39,092,393
Three months ended September 30, 2019
Balance as of July 1, 2019		$	80,502			$	28,684,598			$	(893,947	)		$	6,578,928			$	16,386,491			$	50,836,572
Comprehensive income:
Net income			-				-				-				-				1,770,864				1,770,864
Other comprehensive income			-				-				-				4,835,218				-				4,835,218
Balance as of September 30, 2019		$	80,502			$	28,684,598			$	(893,947	)		$	11,414,146			$	18,157,355			$	57,442,654
Nine months ended September 30, 2019
Balance as of January 1, 2019		$	80,502			$	28,684,598			$	(893,947	)		$	(2,576,631	)		$	13,830,729			$	39,125,251
Comprehensive income:
Net income			-				-				-				-				4,326,626				4,326,626
Other comprehensive income			-				-				-				13,990,777				-				13,990,777
Balance as of September 30, 2019		$	80,502			$	28,684,598			$	(893,947	)		$	11,414,146			$	18,157,355			$	57,442,654

---

 

		Nine Months Ended September 30,
		2019				2018
Operating activities
Net income		$	4,326,626			$	3,864,517
Adjustments to reconcile net income to net cash used in operating activities:
Provision for depreciation			109,116				109,116
Accretion of discount on investments			(3,440,762	)			(2,951,473	)
Net realized investment gains			(325,196	)			(269,531	)
Amortization of policy acquisition cost			2,839,129				2,677,918
Policy acquisition cost deferred			(9,681,748	)			(6,162,096	)
Amortization of loan origination fees			20,185				32,376
Amortization of value of insurance business acquired			224,708				255,424
Allowance for mortgage loan losses			73,783				61,083
Provision for deferred federal income tax expense			354,069				1,055,978
Interest credited to policyholders			8,686,026				6,941,291
Change in assets and liabilities:
Policy loans			(141,341	)			(95,095	)
Short-term investments			687,326				412,006
Accrued investment income			(2,497,999	)			(182,814	)
Recoverable from reinsurers			1,161,295				(434,381	)
Assets held in trust under coinsurance agreement			(79,014,353	)			(15,831,355	)
Agents' balances and due premiums			(332,569	)			(32,242	)
Other assets (excludes change in receivable for securities sold of ($201,401) and ($185,389) in 2019 and 2018, respectively)			2,122,649				(850,863	)
Future policy benefits			6,390,064				4,653,803
Policy claims			351,160				(118,473	)
Other policy liabilities			(1,194	)			(159	)
Other liabilities (excludes change in payable for securities purchased of ($393,762) and $142,361 in 2019 and 2018, respectively)			(3,989,040	)			768,279
Net cash used in operating activities			(72,078,066	)			(6,096,691	)
Investing activities
Purchases of fixed maturity securities			(65,392,840	)			(11,958,357	)
Maturities of fixed maturity securities			3,650,000				4,876,000
Sales of fixed maturity securities			17,585,794				15,933,074
Sales of preferred stock securities			50,000				-
Purchases of equity securities			(92,956	)			(53,828	)
Sales of equity securities			19,371				361,947
Joint venture distribution			90,893				34,877
Purchases of mortgage loans			(57,015,493	)			(47,077,889	)
Payments on mortgage loans			30,648,943				28,034,586
Purchases of other long-term investments			(17,590,689	)			(6,068,995	)
Payments on other long-term investments			7,737,867				6,606,259
Sale of real estate			350,817				261,470
Net change in receivable and payable for securities sold and purchased			(595,163	)			(43,028	)
Net cash used in investing activities			(80,553,456	)			(9,093,884	)
Financing activities
Policyholders' account deposits			162,175,450				35,533,959
Policyholders' account withdrawals			(30,178,584	)			(21,925,881	)
Funds withheld amounts due to reinsurer			5,052,799				-
Net cash provided by financing activities			137,049,665				13,608,078
Decrease in cash			(15,581,857	)			(1,582,497	)
Cash and cash equivalents, beginning of period			29,665,605				31,496,159
Cash and cash equivalents, end of period		$	14,083,748			$	29,913,662

---

 

During 2019 and 2018, the Company foreclosed on residential mortgage loans of real estate totaling $99,218 and $378,411 respectively, and transferred those properties to investment real estate that are now held for sale.

 

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

 

 

See notes to consolidated financial statements (unaudited).

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

1. Organization and Significant Accounting Policies

 

Nature of Operations

 

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

 

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

 

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

 

Company Capitalization

 

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

 

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

 

Acquisitions

 

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

 

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

 

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

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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

 

On April 28, 2015, the Company acquired a block of life insurance policies and annuity contracts according to the terms of an assumption reinsurance agreement and assumed liabilities of $3,055,916.

 

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 nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ended December 31, 2019 or for any other interim period or for any other future year. Certain financial information which is normally included in notes to consolidated financial statements prepared in accordance with U.S. GAAP, but which is not required for interim reporting purposes, has been condensed or omitted. The accompanying consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 2018.

 

Principles of Consolidation

 

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

 

Reclassifications

 

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

 

Use of Estimates

 

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

 

Common Stock

 

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

 

Treasury Stock

 

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

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Subsequent Events

 

Management has evaluated all events subsequent to September 30, 2019 through the date that these financial statements have been issued and reports the following subsequent events.

 

On October 2, 2019 at its Annual Shareholders’ Meeting, the Company’s shareholders approved the following:

 

●

an amendment and restatement of the Certificate of Incorporation to authorize 50,000,000 shares of Common Stock $0.01 par value divided into 40,000,000 shares of Class A Common Stock and 10,000,000 shares of Class B Common Stock and to establish the relative rights, preferences and privileges of, and the restrictions and limitations on, the Class A Common Stock and the Class B Common Stock;

 

●

an amendment and restatement of the Certificate of Incorporation to automatically reclassify each issued and outstanding share of the Company’s existing Common Stock as one (1) share of new Class A Common Stock or, at the shareholder’s election, into one (1) share of new Class B Common Stock and

 

●

First Trinity Financial Corporation’s 2019 Long-Term Incentive Plan.

 

These amendments, restatements and plans will be implemented during late 2019 or early 2020.

 

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

 

Recent Accounting Pronouncements

 

Leases

 

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

 

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

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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

 

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

 

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

 

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

 

 

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

 

The updated guidance was effective for reporting periods beginning after December 15, 2019. As a Smaller Reporting Company, the effective date was recently changed and the delayed effective date is now for reporting periods beginning after December 15, 2022. Early adoption is permitted for reporting periods beginning after December 15, 2018. Based on the financial instruments currently held by the Company, there would not be a material effect on the Company’s results of operations, financial position or liquidity if the new guidance had been adopted in the current accounting period. The impact on the Company’s results of operations, financial position or liquidity at the date of adoption of the updated guidance will be determined by the financial instruments held by the Company and the economic conditions at that time.

 

Intangibles - Goodwill and Other

 

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

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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

 

Targeted Improvements to the Accounting for Long-Duration Contracts

 

In August 2018, the FASB issued updated guidance (Accounting Standards Update 2018-12) to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. This update improves the timeliness of recognizing changes in the liability for future policy benefits, modifies the rate used to discount future cash flows, simplifies and improves accounting for certain market-based options or guarantees associated with deposit (i.e., account balance) contracts, simplifies the amortization of deferred acquisitions costs and expands required disclosures. The expanded disclosure requires an insurance entity to provide disaggregated roll forwards of beginning to ending balances of the following: liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities and deferred acquisition costs including disclosure about, changes to and effect of changes for significant inputs, judgments, assumptions and methods used in measurements.

 

The updated guidance was effective for reporting periods beginning after December 15, 2020. As a Smaller Reporting Company, the effective date was recently changed and the delayed effective date is now for reporting periods beginning after December 15, 2023. Early adoption is permitted. With respect to the liability for future policyholder benefits for traditional and limited-payment contracts and deferred acquisition costs, an insurance entity may elect to apply the amendments retrospectively as of the beginning of the earliest period presented.

 

With respect to the market risk benefits, an insurance entity should apply the amendments retrospectively as of the beginning of the earliest period presented. The Company expects that the impact on the Company’s results of operations, financial position and liquidity at the date of adoption of the updated guidance in 2024 will be determined by the long-duration contracts then held by the Company and the economic conditions at that time.

 

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

 

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

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

2. Investments

 

Investments in fixed maturity and preferred stock available-for-sale and equity securities as of September 30, 2019 and December 31, 2018 are summarized as follows:

 

 

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

2. Investments (continued)

 

All securities in an unrealized loss position as of the financial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position as of September 30, 2019 and December 31, 2018 are summarized as follows:

 

 

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

2. Investments (continued)

 

As of September 30, 2019, the Company held 25 available-for-sale fixed maturity securities with an unrealized loss of $614,326, fair value of $6,196,829 and amortized cost of $6,811,155. These unrealized losses were primarily due to market interest rate movements in the bond market as of September 30, 2019. The ratio of the fair value to the amortized cost of these 25 securities is 91%.

 

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

 

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

 

As of September 30, 2019, the Company held one equity security with an unrealized loss of $6,941, fair value of $85,040 and cost of $91,981. The ratio of fair value to cost of this security is 92%.

 

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

 

Fixed maturity securities were 97% and 96% investment grade as rated by Standard & Poor’s as of September 30, 2019 and December 31, 2018, respectively.

 

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

 

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

 

There were no impairments during the nine months ended September 30, 2019 and 2018.

 

Management believes that the Company will fully recover its cost basis in the securities held as of September 30, 2019, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature.  The remaining temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment. 

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

2. Investments (continued)

 

Net unrealized gains (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 appreciation (depreciation) had been realized as of September 30, 2019 and December 31, 2018, are summarized as follows:

 

 

The Company’s investment in lottery prize cash flows categorized as other long-term investments in the statement of financial position was $72,711,634 and $59,255,477 as of September 30, 2019 and December 31, 2018, respectively. The lottery prize cash flows are assignments of the future rights from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries.

 

The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of September 30, 2019, by contractual maturity, are summarized as follows:

 

 

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.

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

2. Investments (continued)

 

Proceeds and gross realized gains (losses) from the sales, calls and maturities of fixed maturity securities available-for-sale, equity securities, investment real estate and preferred stock securities available-for-sale for the three and nine months ended September 30, 2019 and 2018 are summarized as follows:

 

 

 

 

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

2. Investments (continued)

 

The accumulated change in unrealized investment gains (losses) for fixed maturity and preferred stock available-for-sale for the three and nine months ended September 30, 2019 and 2018 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 and nine months ended September 30, 2019 and 2018 are summarized as follows:

 

Major categories of net investment income for the three and nine months ended September 30, 2019 and 2018 are summarized as follows:

 

 

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 September 30, 2019 and December 31, 2018, these required deposits, included in investment assets, had amortized costs that totaled $4,411,930 and $4,376,463, respectively. As of September 30, 2019 and December 31, 2018, these required deposits had fair values that totaled $4,443,617 and $4,292,657, respectively.

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

2. Investments (continued)

 

The Company’s mortgage loans by property type as of September 30, 2019 and December 31, 2018 are summarized as follows:

 

 

There were 16 loans with a remaining principal balance of $3,920,813 that were more than 90 days past due as of September 30, 2019. There were 11 loans with a remaining principal balance of $2,233,575 that were more than 90 days past due as of December 31, 2018.

 

There were no mortgage loans in default and in the foreclosure process as of September 30, 2019 and December 31, 2018.

 

The Company’s investment real estate as of September 30, 2019 and December 31, 2018 is summarized as follows:

 

 

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

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

2. Investments (continued)

 

During 2019, the Company foreclosed on one residential mortgage loans of real estate totaling $99,218 and transferred that property to investment real estate that is now held for sale. During 2019, the Company sold investment real estate property with an aggregate carrying value of $394,002. The Company recorded a gross realized investment loss on sale of $43,185 based on an aggregate sales price of $350,817.

 

During 2018, the Company foreclosed on residential mortgage loans of real estate totaling $378,411 and transferred those properties to investment real estate held for sale. During 2018, the Company sold investment real estate property with an aggregate carrying value of $209,821. The Company recorded a gross realized investment gain on sale of $51,649 based on an aggregate sales price of $261,470.

 

3. Fair Value Measurements

 

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

 

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

 

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

 

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

 

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.

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

3. Fair Value Measurements (continued)

 

The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 is summarized as follows:

 

 

 

As of September 30, 2019 and December 31, 2018, Level 3 financial instruments consisted of two private placement common stocks that have no active trading and a joint venture investment with a mortgage loan originator.

 

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

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

3. Fair Value Measurements (continued)

 

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

 

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

 

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

 

The Company’s fixed maturity and preferred stock available-for-sale and equity securities portfolio is 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 for the nine months ended September 30, 2019 and 2018 is summarized as follows:

 

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

3. Fair Value Measurements (continued)

 

The carrying amount and fair value of the Company’s financial assets and financial liabilities disclosed, but not carried, at fair value as of September 30, 2019 and December 31, 2018, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:

 

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

 

 

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)

 

3. Fair Value Measurements (continued)

 

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

 

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

 

Fixed Maturity Securities, Preferred Stock and Equity Securities

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

 

Mortgage Loans on Real Estate

 

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

 

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

 

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

 

Other Long-Term Investments

 

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

 

Investment Contracts – Policyholders’ Account Balances

 

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

 

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

 

Policy Claims

 

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

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2019

(Unaudited)