United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM
(Mark One)
| | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange act of 1934 |
|
| For the quarterly period ended |
| | 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:
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 10, 2022, 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, 2022
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION | Page Number |
| Item 1. Consolidated Financial Statements | |
| Consolidated Statements of Financial Position as of March 31, 2022 (Unaudited) and December 31, 2021 | 3 |
| Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021 (Unaudited) | 4 |
| Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2022 and 2021 (Unaudited) |
5 |
| Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (Unaudited) |
6 |
| Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (Unaudited) | 7 |
| Notes to Consolidated Financial Statements (Unaudited) | 9 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32 |
| Item 4. Controls and Procedures | 52 |
| Part II. OTHER INFORMATION | |
| Item 1. Legal Proceedings | 52 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 53 |
| Item 3. Defaults upon Senior Securities | 53 |
| Item 4. Mine Safety Disclosures | 53 |
| Item 5. Other Information | 53 |
| Item 6. Exhibits | 53 |
| Signatures | 54 |
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, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Investments | ||||||||
| Available-for-sale fixed maturity securities at fair value (amortized cost: $ and $ as of March 31, 2022 and December 31, 2021, respectively) | $ | $ | ||||||
| Equity securities at fair value (cost: $ and $ as of March 31, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, respectively) | ||||||||
| Mortgage loans on real estate | ||||||||
| 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, 2022 and December 31, 2021, and issued as of March 31, 2022 and December 31, 2021, respectively, and outstanding as of March 31, 2022 and December 31, 2021, respectively) | ||||||||
| Class B common stock, par value per share ( shares authorized, issued and outstanding as of March 31, 2022 and December 31, 2021) | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost ( shares as of March 31, 2022 and December 31, 2021) | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| 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, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | ||||||||
| Premiums | $ | $ | ||||||
| Net investment income | ||||||||
| Net realized investment gains | ||||||||
| 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 (loss) before total federal income tax expense (benefit) | ( | ) | ||||||
| Current federal income tax expense | ||||||||
| Deferred federal income tax expense (benefit) | ( | ) | ||||||
| Total federal income tax expense (benefit) | ( | ) | ||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Net income (loss) per common share basic and diluted | ||||||||
| 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 Loss
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Other comprehensive loss | ||||||||
| Total net unrealized losses arising during the period | ( | ) | ( | ) | ||||
| Less net realized investment gains having no credit losses | ||||||||
| Net unrealized losses | ( | ) | ( | ) | ||||
| Less adjustment to deferred acquisition costs | ( | ) | ( | ) | ||||
| Other comprehensive loss before income tax benefit | ( | ) | ( | ) | ||||
| Income tax benefit | ( | ) | ( | ) | ||||
| Total other comprehensive loss | ( | ) | ( | ) | ||||
| Total comprehensive 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, 2022 and 2021
(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 | Earnings | Equity | ||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| 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 | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
See notes to consolidated financial statements (unaudited).
First Trinity Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Accretion of discount on investments | ( | ) | ( | ) | ||||
| Net realized investment gains | ( | ) | ( | ) | ||||
| Amortization of policy acquisition cost | ||||||||
| Policy acquisition cost deferred | ( | ) | ( | ) | ||||
| Amortization of loan origination fees | ||||||||
| Amortization of value of insurance business acquired | ||||||||
| Allowance for mortgage loan losses | ( | ) | ||||||
| Provision for deferred federal income tax expense (benefit) | ( | ) | ||||||
| Interest credited to policyholders | ||||||||
| Change in assets and liabilities: | ||||||||
| Policy loans | ( | ) | ||||||
| Short-term investments | ||||||||
| 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 $ and in 2022 and 2021, respectively) | ( | ) | ( | ) | ||||
| Net cash provided by (used in) 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 | ||||||||
| Sales of equity securities | ||||||||
| 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 | ||||||||
| 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
During the three months ended March 31, 2021, the Company foreclosed on residential mortgage loans of real estate totaling $
In conjunction with this foreclosure, the non-cash impact on investing activities is summarized as follows:
| Three Months Ended | ||||
| March 31, 2021 | ||||
| Reductions in mortgage loans due to foreclosure | $ | |||
| Investment real estate held-for-sale acquired through foreclosure | ( | ) | ||
| Net cash used in investing 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).
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(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
In 2020, the Company paid a $
The Company has also purchased
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
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, 2022 are not necessarily indicative of the results to be expected for the year ended December 31, 2022 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, 2021.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
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
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
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
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).
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
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, 2022 through the date that these financial statements have been issued.
Recent Accounting Pronouncements
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board (“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).
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
1. Organization and Significant Accounting Policies (continued)
The implied fair value of goodwill is currently determined in Step 2 by deducting the fair value of all assets and liabilities of the reporting unit (determined in the same manner as a business combination) from the reporting unit’s fair value as determined in Step 1 (including any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unit in Step 1). The updated guidance requires an entity to perform its annual, or interim, impairment test by either: (1) an initial qualitative assessment of factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact a reporting unit’s fair value and lead to the determination that it is more likely than not that the reporting unit’s fair value is less than its carrying value, including goodwill (consistent with current guidance), or (2) applying Step 1.
The Company adopted this guidance in first quarter 2020. The adoption of this guidance did not 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 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 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 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 Company adopted this guidance in first quarter 2020. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued updated guidance (Accounting Standards Update 2019-12) for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The Company adopted this guidance in first quarter 2021. The adoption of this guidance did not 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
March 31, 2022
(Unaudited)
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 introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulties. The amendments promulgate 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 require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. The amendments in this guidance are effective for fiscal years beginning after December 15, 2022, including interim periods and should be applied prospectively. The adoption of this guidance should not have a material effect on the Company’s results of operations, financial position or liquidity.
2. Investments
Investments in fixed maturity available-for-sale securities as of March 31, 2022 and December 31, 2021 are summarized as follows:
| Gross | Gross | |||||||||||||||
| Amortized Cost | Unrealized | Unrealized | Fair | |||||||||||||
| or Cost | Gains | Losses | Value | |||||||||||||
| March 31, 2022 (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, 2021 | ||||||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(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 March 31, 2022 and December 31, 2021 are summarized as follows:
| Unrealized | Number of | |||||||||||
| Fair Value | Loss | Securities | ||||||||||
| March 31, 2022 (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 | ||||||||||||
| Exchange traded securities | ||||||||||||
| Foreign bonds | ||||||||||||
| Redeemable preferred securities | ||||||||||||
| Total less than 12 months in an unrealized loss position | ||||||||||||
| More than 12 months in an unrealized loss position | ||||||||||||
| States and political subdivisions | ||||||||||||
| Asset-backed 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 coisnurance agreement | ||||||||||||
| Total less 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, 2021 | ||||||||||||
| 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 | ||||||||||||
| Exchange traded securities | ||||||||||||
| Redeemable preferred securities | ||||||||||||
| Foreign bonds | ||||||||||||
| Total less than 12 months in an unrealized loss position | ||||||||||||
| More than 12 months in an unrealized loss position | ||||||||||||
| States and political subdivisions | ||||||||||||
| Asset-backed 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 fixed maturity securities held in trust under coinsurance agreement in a unrealized loss position | $ | $ | ||||||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
2. Investments (continued)
As of March 31, 2022, the Company held
As of December 31, 2021, the Company held
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 other-than-temporary impairments during the three months ended March 31, 2022 and 2021.
Management believes that the Company will fully recover its cost basis in the securities held as of March 31, 2022, 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
March 31, 2022
(Unaudited)
2. Investments (continued)
Net unrealized gains included in other comprehensive 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 March 31, 2022 and December 31, 2021, are summarized as follows:
| (Unaudited) | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Unrealized appreciation on available-for-sale securities | $ | $ | ||||||
| Adjustment to deferred acquisition costs | ( | ) | ( | ) | ||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Net unrealized appreciation on available-for-sale securities | $ | $ | ||||||
| Assets held in trust under coinsurance agreement | ||||||||
| Unrealized appreciation (depreciation) on fixed maturity securities available-for-sale | $ | ( | ) | $ | ||||
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, 2022, by contractual maturity, are summarized as follows:
| March 31, 2022 (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 | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
2. Investments (continued)
The amortized cost and fair value of fixed maturity available-for-sale securities held in trust under coinsurance agreement as of March 31, 2022, by contractual maturity, are summarized as follows:
| March 31, 2022 (Unaudited) | ||||||||
| Fixed Maturity Available-For-Sale Securities | ||||||||
| Amortized Cost | Fair Value | |||||||
| 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.
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, 2022 and 2021 are summarized as follows:
| Three Months Ended March 31, (Unaudited) | ||||||||||||||||||||||||
| Fixed Maturity Securities | Equity Securities | Investment Real Estate | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Proceeds | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Gross realized gains | ||||||||||||||||||||||||
| Gross realized losses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
The accumulated change in unrealized investment (losses) for fixed maturity available-for-sale for the three months ended March 31, 2022 and 2021 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, 2022 and 2021 are summarized as follows:
| Three Months Ended March 31, (Unaudited) | ||||||||
| 2022 | 2021 | |||||||
| Change in unrealized investment 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 | ||||||||
| Equity securities, sale of securities | ( | ) | ||||||
| Equity securities, changes in fair value | ||||||||
| Investment real estate | ( | ) | ||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
2. Investments (continued)
Major categories of net investment income for the three months ended March 31, 2022 and 2021 are summarized as follows:
| Three Months Ended March 31, (Unaudited) | ||||||||
| 2022 | 2021 | |||||||
| 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, 2022 and December 31, 2021, these required deposits, included in investment assets, had amortized costs that totaled $
The Company’s mortgage loans by property type as of March 31, 2022 and December 31, 2021 are summarized as follows:
| March 31, 2022 | December 31, 2021 | |||||||
| 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 | ||||||||
| Residential mortgage loans | $ | $ | ||||||
| Commercial mortgage loans | ||||||||
| Less unearned interest on mortgage loans | ||||||||
| Total mortgage loans held in trust under coinsurance agreement | $ | $ | ||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
2. Investments (continued)
There were
There were
The Company’s investment real estate as of March 31, 2022 and December 31, 2021 is summarized as follows:
| (Unaudited) | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| 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 $
During 2021, the Company foreclosed on residential mortgage loans of real estate totaling $
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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
3. Fair Value Measurements (continued)
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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(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 March 31, 2022 and December 31, 2021 is summarized as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| March 31, 2022 (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, 2021 | ||||||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
3. Fair Value Measurements (continued)
As of March 31, 2022 and December 31, 2021, Level 3 financial instruments consisted of private placement common stocks that have no active trading and a joint venture investment with a mortgage loan originator.
These private placement common 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.
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, 2022 and December 31, 2021 is summarized as follows:
| (Unaudited) | ||||||||
| March 31, 2022 | December 31, 2021 | |||||||
| Beginning balance | $ | $ | ||||||
| Joint venture net income | ||||||||
| Joint venture distribution | ( | ) | ( | ) | ||||
| Net realized invemstment losses | ( | ) | ||||||
| Ending balance | $ | $ | ||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(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 March 31, 2022 and December 31, 2021, 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, 2022 (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 | $ | $ | $ | $ | $ | |||||||||||||||
| Residential | ||||||||||||||||||||
| Less unearned interest on mortgage loans | ||||||||||||||||||||
| 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, 2021 | ||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | |||||||||||||||
| Residential | ||||||||||||||||||||
| Less unearned interest on mortgage loans | ||||||||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||
| Total financial assets held in trust under coinsurance agreement | $ | $ | $ | $ | $ | |||||||||||||||
| Financial liabilities | ||||||||||||||||||||
| Policyholders' account balances | $ | $ | $ | $ | $ | |||||||||||||||
| Policy claims | ||||||||||||||||||||
| Total financial liabilities | $ | $ | $ | $ | $ | |||||||||||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(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 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 and LIBOR yield curve as of March 31, 2022 and December 31, 2021, respectively.
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
March 31, 2022
(Unaudited)
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, 2022 and December 31, 2021 and for the three months ended March 31, 2022 and 2021 are summarized as follows:
| Three Months Ended March 31, (Unaudited) | ||||||||
| 2022 | 2021 | |||||||
| 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, 2022 | December 31, 2021 | |||||||
| 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 2018 through 2020 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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
6. Legal Matters and Contingent Liabilities
A lawsuit filed by the Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, in 2013 against former Company Board of Directors member Wayne Pettigrew and Mr. Pettigrew's company, Group & Pension Planners, Inc. (the "Defendants"), originally concluded on February 17, 2017. The lawsuit was filed in the District Court of Tulsa County, Oklahoma. In the lawsuit, the Company alleged that Mr. Pettigrew had defamed the Company by making untrue statements to certain shareholders of the Company, to the press and to regulators of the state of Oklahoma and had breached his fiduciary duties. Mr. Pettigrew denied the allegations.
The jury originally concluded that Mr. Pettigrew, while still a member of the Company’s Board of Directors, did, in fact, make untrue statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company and the jury awarded the Company $
Mr. Pettigrew appealed this decision. In February 2020, the Court of Civil Appeals of the state of Oklahoma reversed the judgments entered by the trial court and remanded the case for a new trial. The Court of Appeals reversal, however, was not final. The Company filed a Petition for Certiorari with the Oklahoma Supreme Court to request that it reverse and vacate the decision of the Court of Appeals. In December 2020, the Oklahoma Supreme Court declined to grant certiorari and remanded that the case be retried in the District Court of Tulsa County, Oklahoma.
It remains the Company’s intention to again vigorously prosecute this action against the Defendants for damages and for correction of the defamatory statements. In the opinion of the Company’s management, the ultimate resolution of any contingencies that may arise from this litigation is not considered material in relation to the financial position or results of operations of the Company.
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.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
7. Other Comprehensive Loss and Accumulated Other Comprehensive Income
The changes in the components of the Company’s accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021 are summarized as follows:
| Three Months Ended March 31, 2022 and 2021 (Unaudited) | ||||||||||||
| Unrealized | ||||||||||||
| Appreciation | Accumulated | |||||||||||
| (Depreciation) on | Adjustment to | Other | ||||||||||
| Available-For-Sale | Deferred Acquisition | Comprehensive | ||||||||||
| Securities | Costs | Income | ||||||||||
| 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 | $ | $ | ( | ) | $ | |||||||
| 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 | $ | $ | ( | ) | $ | |||||||
The pretax components of the Company’s other comprehensive loss and the related income tax benefit for each component for the three months ended March 31, 2022 and 2021 are summarized as follows:
| Income Tax | ||||||||||||
| Pretax | Benefit | Net of Tax | ||||||||||
| 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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
| Three Months Ended March 31, 2021 (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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
7. Other Comprehensive Loss and Accumulated Other Comprehensive Income (continued)
Realized gains and losses on the sales of investments are determined based upon the specific identification method and include provisions for other-than-temporary impairments where appropriate.
The pretax and the related income tax components of the amounts reclassified from the Company’s accumulated other comprehensive income to the Company’s consolidated statement of operations for the three months ended March 31, 2022 and 2021 are summarized as follows:
| Three Months Ended March 31, (Unaudited) | ||||||||
| Reclassification Adjustments | 2022 | 2021 | ||||||
| Realized gains on sales of securities (a) | $ | $ | ||||||
| Income tax expense (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
The allowance for possible loan losses from investments in mortgage loans on real estate is a reserve established through a provision for possible loan losses charged to expense which represents, in the Company’s judgment, the known and inherent credit losses existing in the mortgage loan portfolio. The allowance, in the judgment of the Company, is necessary to reserve for estimated loan losses inherent in the mortgage loan portfolio and reduces the carrying value of investments in mortgage loans on real estate to the estimated net realizable value on the consolidated statement of financial position.
While the Company utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the mortgage loan portfolio, the economy and changes in interest rates. The Company’s allowance for possible mortgage loan 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.
Mortgage loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the mortgage loan agreement. Factors considered by the Company in determining impairment include payment status, collateral value of the real estate subject to the mortgage loan, and the probability of collecting scheduled principal and interest payments when due. Mortgage loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
The Company determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the mortgage loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis.
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
8. Allowance for Loan Losses from Mortgage Loans on Real Estate (continued)
As of March 31, 2022, $
As of December 31, 2021, $
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, 2022 and 2021 are summarized as follows (excluding $
| As of and for the Three Months Ended March 31, (Unaudited) | ||||||||||||||||||||||||
| Residential Mortgage Loans | Commercial Mortgage Loans | Total | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
First Trinity Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2022
(Unaudited)
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, 2022 and December 31, 2021 are summarized as follows:
| Residential Mortgage Loans | Commercial Mortgage Loans | Total Mortgage Loans | ||||||||||||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||
| Loan-To-Value Ratio | March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | ||||||||||||||||||
| 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, 2021, the Company renewed 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 Royalty Capital Life Insurance Company (“RCLIC”) from Royalty Capital Corporation (“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, 2021. 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 have been no material changes to the Company’s critical accounting policies and estimates since December 31, 2021.
Recent Accounting Pronouncements
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.
The Company adopted this guidance in first quarter 2020. The adoption of this guidance did not 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 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 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 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 Company adopted this guidance in first quarter 2020. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Income Taxes - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued updated guidance (Accounting Standards Update 2019-12) for the accounting for income taxes. The updated guidance is intended to simplify the accounting for income taxes by removing several exceptions contained in existing guidance and amending other existing guidance to simplify several other income tax accounting matters. The Company adopted this guidance in first quarter 2021. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
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 introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulties. The amendments promulgate that an entity must apply specific loam refinancing and restructuring guidance to determine whether a modification results in a new loan or the continuation of an existing loan. The amendments also require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investment in leases. The amendments in this guidance are effective for fiscal years beginning after December 15, 2022, including interim periods and should be applied prospectively. The adoption of his guidance should not have a material effect on the Company’s results of operations, financial position or liquidity.
Business Segments
FASB guidance requires a "management approach" in the presentation of business segments based on how management internally evaluates the operating performance of business units. The discussion of segment operating results that follows is being provided based on segment data prepared in accordance with this methodology.
Our business segments are as follows:
| ● |
Life insurance operations, consisting of the life insurance operations of TLIC, 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, 2022 and 2021 and as of March 31, 2022 and December 31, 2021 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, 2022 and 2021
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2022 |
2021 |
2022 less 2021 |
||||||||||
| Premiums |
$ | 8,228,782 | $ | 6,979,876 | $ | 1,248,906 | ||||||
| Net investment income |
6,448,995 | 6,148,842 | 300,153 | |||||||||
| Net realized investment gains |
1,237,806 | 52,095 | 1,185,711 | |||||||||
| Service fees |
57,540 | 97,987 | (40,447 | ) | ||||||||
| Other income |
58,497 | 13,774 | 44,723 | |||||||||
| Total revenues |
16,031,620 | 13,292,574 | 2,739,046 | |||||||||
| Benefits and claims |
10,789,536 | 9,219,254 | 1,570,282 | |||||||||
| Expenses |
4,112,525 | 4,592,764 | (480,239 | ) | ||||||||
| Total benefits, claims and expenses |
14,902,061 | 13,812,018 | 1,090,043 | |||||||||
| Income (loss) before federal income tax expense (benefit) |
1,129,559 | (519,444 | ) | 1,649,003 | ||||||||
| Federal income tax expense (benefit) |
217,024 | (58,792 | ) | 275,816 | ||||||||
| Net income (loss) |
$ | 912,535 | $ | (460,652 | ) | $ | 1,373,187 | |||||
| Net income (loss) per common share basic and duluted |
||||||||||||
| Class A common stock |
$ | 0.0964 | $ | (0.0527 | ) | $ | 0.1491 | |||||
| Class B common stock |
$ | 0.0819 | $ | (0.0448 | ) | $ | 0.1267 | |||||
Consolidated Condensed Financial Position as of March 31, 2022 and December 31, 2021
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2022 |
December 31, 2021 |
2022 to 2021 | ||||||||||
| Investment assets |
$ | 429,477,295 | $ | 434,120,334 | $ | (4,643,039 | ) | |||||
| Assets held in trust under coinsurance agreement |
101,327,251 | 106,210,246 | (4,882,995 | ) | ||||||||
| Other assets |
120,202,729 | 119,428,354 | 774,375 | |||||||||
| Total assets |
$ | 651,007,275 | $ | 659,758,934 | $ | (8,751,659 | ) | |||||
| Policy liabilities |
$ | 474,931,540 | $ | 464,853,615 | $ | 10,077,925 | ||||||
| Funds withheld under coinsurance agreement |
101,508,074 | 106,586,633 | (5,078,559 | ) | ||||||||
| Deferred federal income taxes |
5,694,754 | 8,966,303 | (3,271,549 | ) | ||||||||
| Other liabilities |
8,061,627 | 10,957,832 | (2,896,205 | ) | ||||||||
| Total liabilities |
590,195,995 | 591,364,383 | (1,168,388 | ) | ||||||||
| Shareholders' equity |
60,811,280 | 68,394,551 | (7,583,271 | ) | ||||||||
| Total liabilities and shareholders' equity |
$ | 651,007,275 | $ | 659,758,934 | $ | (8,751,659 | ) | |||||
| Shareholders' equity per common share |
||||||||||||
| Class A common stock |
$ | 6.4213 | $ | 7.8186 | $ | (1.3973 | ) | |||||
| Class B common stock |
$ | 5.4581 | $ | 6.6458 | $ | (1.1877 | ) | |||||
Results of Operations – Three Months Ended March 31, 2022 and 2021
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, 2022 and 2021 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2022 |
2021 |
2022 less 2021 |
||||||||||
| Premiums |
$ | 8,228,782 | $ | 6,979,876 | $ | 1,248,906 | ||||||
| Net investment income |
6,448,995 | 6,148,842 | 300,153 | |||||||||
| Net realized investment gains |
1,237,806 | 52,095 | 1,185,711 | |||||||||
| Service fees |
57,540 | 97,987 | (40,447 | ) | ||||||||
| Other income |
58,497 | 13,774 | 44,723 | |||||||||
| Total revenues |
$ | 16,031,620 | $ | 13,292,574 | $ | 2,739,046 | ||||||
The $2,739,046 increase in total revenues for the three months ended March 31, 2022 is discussed below.
Premiums
Our premiums for the three months ended March 31, 2022 and 2021 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2022 |
2021 |
2022 less 2021 |
||||||||||
| Ordinary life first year |
$ | 458,139 | $ | 305,591 | $ | 152,548 | ||||||
| Ordinary life renewal |
899,975 | 798,234 | 101,741 | |||||||||
| Final expense first year |
1,236,375 | 1,425,313 | (188,938 | ) | ||||||||
| Final expense renewal |
5,634,293 | 4,450,738 | 1,183,555 | |||||||||
| Total premiums |
$ | 8,228,782 | $ | 6,979,876 | $ | 1,248,906 | ||||||
The $1,248,906 increase in premiums for the three months ended March 31, 2022 is primarily due to a $1,183,555 increase in final expense renewal premiums, $152,548 increase in ordinary life first year premiums and a $101,741 increase in ordinary life renewal premiums that exceeded a $188,938 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 tightening of underwriting guidelines.
Net Investment Income
The major components of our net investment income for the three months ended March 31, 2022 and 2021 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2022 |
2021 |
2022 less 2021 |
||||||||||
| Fixed maturity securities |
$ | 1,935,754 | $ | 1,695,894 | $ | 239,860 | ||||||
| Preferred stock and equity securities |
65,073 | 16,999 | 48,074 | |||||||||
| Other long-term investments |
1,311,694 | 1,282,894 | 28,800 | |||||||||
| Mortgage loans |
3,778,025 | 3,748,232 | 29,793 | |||||||||
| Policy loans |
43,322 | 38,618 | 4,704 | |||||||||
| Short-term and other investments |
21,272 | 9,295 | 11,977 | |||||||||
| Gross investment income |
7,155,140 | 6,791,932 | 363,208 | |||||||||
| Investment expenses |
(706,145 | ) | (643,090 | ) | 63,055 | |||||||
| Net investment income |
$ | 6,448,995 | $ | 6,148,842 | $ | 300,153 | ||||||
The $363,208 increase in gross investment income for the three months ended March 31, 2022 is primarily due to the increased investments in fixed maturity securities held during most of 2022 but sold during March 2022 to acquire higher yielding investments.
Net Realized Investment Gains (Losses)
Our net realized investment gains result from sales of fixed maturity securities available-for-sale, investment real estate, equity securities and changes in fair value of equity securities. Our net realized investment gains for the three months ended March 31, 2022 and 2021 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2022 |
2021 |
2022 less 2021 |
||||||||||
| Fixed maturity securities available-for-sale: |
||||||||||||
| Sale proceeds / maturities |
$ | 30,949,960 | $ | 2,419,079 | $ | 28,530,881 | ||||||
| Amortized cost at sale date |
29,725,885 | 2,381,428 | 27,344,457 | |||||||||
| Net realized gains |
$ | 1,224,075 | $ | 37,651 | $ | 1,186,424 | ||||||
| Investment real estate: |
||||||||||||
| Sales proceeds |
$ | 49,371 | $ | - | $ | 49,371 | ||||||
| Cost at sale date |
53,067 | - | 53,067 | |||||||||
| Net realized loss |
$ | (3,696 | ) | $ | - | $ | (3,696 | ) | ||||
| Equity securities at fair value: |
||||||||||||
| Sales proceeds |
$ | - | $ | 88 | $ | (88 | ) | |||||
| Cost at sale date |
8,000 | (1 | ) | 8,001 | ||||||||
| Net realized gains |
$ | (8,000 | ) | $ | 89 | $ | (8,089 | ) | ||||
| Equity securities, changes in fair value |
$ | 25,427 | $ | 14,355 | $ | 11,072 | ||||||
| Net realized investment gains |
$ | 1,237,806 | $ | 52,095 | $ | 1,185,711 | ||||||
Service Fees
The $40,447 decrease in service fees for the three months ended March 31, 2022 is primarily due to a decrease in fees from Trinity Mortgage Corporation 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, 2022 and 2021 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2022 |
2021 |
2022 less 2021 |
||||||||||
| Benefits and claims |
||||||||||||
| Increase in future policy benefits |
$ | 3,214,973 | $ | 2,156,185 | $ | 1,058,788 | ||||||
| Death benefits |
4,006,240 | 3,523,718 | 482,522 | |||||||||
| Surrenders |
315,390 | 348,906 | (33,516 | ) | ||||||||
| Interest credited to policyholders |
3,176,136 | 3,118,535 | 57,601 | |||||||||
| Dividend, endowment and supplementary life contract benefits |
76,797 | 71,910 | 4,887 | |||||||||
| Total benefits and claims |
10,789,536 | 9,219,254 | 1,570,282 | |||||||||
| Expenses |
||||||||||||
| Policy acquisition costs deferred |
(2,852,880 | ) | (2,829,473 | ) | (23,407 | ) | ||||||
| Amortization of deferred policy acquisition costs |
1,368,983 | 1,789,823 | (420,840 | ) | ||||||||
| Amortization of value of insurance business acquired |
72,209 | 75,169 | (2,960 | ) | ||||||||
| Commissions |
2,661,129 | 2,872,583 | (211,454 | ) | ||||||||
| Other underwriting, insurance and acquisition expenses |
2,863,084 | 2,684,662 | 178,422 | |||||||||
| Total expenses |
4,112,525 | 4,592,764 | (480,239 | ) | ||||||||
| Total benefits, claims and expenses |
$ | 14,902,061 | $ | 13,812,018 | $ | 1,090,043 | ||||||
The $1,090,043 increase in total benefits, claims and expenses for the three months ended March 31, 2022 is discussed below.
Benefits and Claims
The $1,570,282 increase in benefits and claims for the three months ended March 31, 2022 is primarily due to the following:
| ● |
$1,058,788 increase in future policy benefits is primarily due to the increased number of life policies in force and the aging of existing life policies. |
| ● |
$482,522 increase in death benefits is primarily due to increased final expense death 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, 2022 and 2021, capitalized costs were $2,852,880 and $2,829,473, respectively. Amortization of deferred policy acquisition costs for the three months ended March 31, 2022 and 2021 were $1,368,983 and $1,789,823, respectively.
There was a $420,840 decrease in the 2022 amortization of deferred acquisition costs is primarily due to contacts and polices no longer insured having minimal deferred cost.
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 $72,209 and $75,169 for the three months ended March 31, 2022 and 2021, respectively.
Commissions
Our commissions for the three months ended March 31, 2022 and 2021 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2022 |
2021 |
2022 less 2021 |
||||||||||
| Annuity |
$ | 59,469 | $ | 344,706 | $ | (285,237 | ) | |||||
| Ordinary life first year |
492,800 | 330,720 | 162,080 | |||||||||
| Ordinary life renewal |
89,929 | 69,813 | 20,116 | |||||||||
| Final expense first year |
1,474,665 | 1,701,441 | (226,776 | ) | ||||||||
| Final expense renewal |
544,266 | 425,903 | 118,363 | |||||||||
| Total commissions |
$ | 2,661,129 | $ | 2,872,583 | $ | (211,454 | ) | |||||
The $211,454 decrease in commissions for the three months ended March 31, 2022 is primarily due to a $285,237 decrease annuity commissions (corresponding to $5,436,865 of decrease annuity deposits retained) and a $226,776 decrease in final expense first year commissions (corresponding to $188,938 decreased final expense first year premiums) that exceed a $162,080 increase in ordinary life first year commissions (corresponding to $152,548 increased ordinary life first year premiums) and a $118,363 increase in final expense renewal commissions (corresponding to $1,183,555 increased final expense renewal premiums) .
Other Underwriting, Insurance and Acquisition Expenses
There was a $178,422 increase in other underwriting, insurance and acquisition expenses for the three months ended March 31, 2022 is due to increased legal cost.
Federal Income Taxes
FTFC filed its 2020 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, 2022, current federal income tax expense was $8,270. For the three months ended March 31, 2022 and 2021, deferred federal income tax expense (benefit) was $208,754 and ($58,792), respectively.
Net Income (Loss) Per Common Share Basic and Diluted
For the three months ended March 31, 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, 2021, 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 (8,747,633) of Class A shares (8,661,696) and Class B shares (85,937) as of the reporting date.
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. For the three months ended March 31, 2021, the net loss allocated to the Class A shareholders $456,127 is the total net loss $460,652 less the net loss allocated to the Class B shareholders $4,525.
The weighted average outstanding common shares basic for the three months ended March 31, 2022 and 2021 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, 2022 and 2021 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2022 |
2021 |
2022 less 2021 |
||||||||||
| Revenues: |
||||||||||||
| Life insurance operations |
$ | 9,948,321 | $ | 8,036,885 | $ | 1,911,436 | ||||||
| Annuity operations |
5,905,263 | 5,041,530 | 863,733 | |||||||||
| Corporate operations |
178,036 | 214,159 | (36,123 | ) | ||||||||
| Total |
$ | 16,031,620 | $ | 13,292,574 | $ | 2,739,046 | ||||||
| Income before federal income taxes: |
||||||||||||
| Life insurance operations |
$ | (80,665 | ) | $ | (623,469 | ) | $ | 542,804 | ||||
| Annuity operations |
1,075,636 | 205,990 | 869,646 | |||||||||
| Corporate operations |
134,588 | (101,965 | ) | 236,553 | ||||||||
| Total |
$ | 1,129,559 | $ | (519,444 | ) | $ | 1,649,003 | |||||
The increases and decreases of revenues and profitability from our business segments for the three months ended March 31, 2022 and 2021 are summarized as follows:
| Life Insurance |
Annuity |
Corporate |
||||||||||||||
| Operations |
Operations |
Operations |
Total |
|||||||||||||
| Revenues |
||||||||||||||||
| Premiums |
$ | 1,248,906 | $ | - | $ | - | $ | 1,248,906 | ||||||||
| Net investment income |
341,936 | (65,927 | ) | 24,144 | 300,153 | |||||||||||
| Net realized investment gains (losses) |
255,777 | 937,934 | (8,000 | ) | 1,185,711 | |||||||||||
| Service fees and other income |
64,817 | (8,274 | ) | (52,267 | ) | 4,276 | ||||||||||
| Total revenue |
1,911,436 | 863,733 | (36,123 | ) | 2,739,046 | |||||||||||
| Benefits and claims |
||||||||||||||||
| Increase in future policy benefits |
1,058,788 | - | - | 1,058,788 | ||||||||||||
| Death benefits |
482,522 | - | - | 482,522 | ||||||||||||
| Surrenders |
(33,516 | ) | - | - | (33,516 | ) | ||||||||||
| Interest credited to policyholders |
- | 57,601 | - | 57,601 | ||||||||||||
| Dividend, endowment and supplementary life contract benefits |
4,887 | - | - | 4,887 | ||||||||||||
| Total benefits and claims |
1,512,681 | 57,601 | - | 1,570,282 | ||||||||||||
| Expenses |
||||||||||||||||
| Policy acquisition costs deferred net of amortization |
(484,722 | ) | 40,475 | - | (444,247 | ) | ||||||||||
| Amortization of value of insurance business acquired |
(1,481 | ) | (1,479 | ) | - | (2,960 | ) | |||||||||
| Commissions |
73,783 | (285,237 | ) | - | (211,454 | ) | ||||||||||
| Other underwriting, insurance and acquisition expenses |
268,371 | 182,727 | (272,676 | ) | 178,422 | |||||||||||
| Total expenses |
(144,049 | ) | (63,514 | ) | (272,676 | ) | (480,239 | ) | ||||||||
| Total benefits, claims and expenses |
1,368,632 | (5,913 | ) | (272,676 | ) | 1,090,043 | ||||||||||
| Income (loss) before federal income taxes (benefits) |
$ | 542,804 | $ | 869,646 | $ | 236,553 | $ | 1,649,003 | ||||||||
Consolidated Financial Condition
Our invested assets as of March 31, 2022 and December 31, 2021 are summarized as follows:
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2022 |
December 31, 2021 |
2022 less 2021 |
||||||||||
| Assets | ||||||||||||
| Investments |
||||||||||||
| Available-for-sale fixed maturity securities at fair value (amortized cost: $164,295,102 and $167,356,364 as of March 31, 2022 and December 31, 2021, respectively) |
$ | 164,435,990 | $ | 184,077,038 | $ | (19,641,048 | ) | |||||
| Equity securities at fair value (cost: $290,450 and $285,558 as of March 31, 2022 and December 31, 2021, respectively) |
378,537 | 348,218 | 30,319 | |||||||||
| Mortgage loans on real estate |
191,576,878 | 177,508,051 | 14,068,827 | |||||||||
| Investment real estate |
635,278 | 688,345 | (53,067 | ) | ||||||||
| Policy loans |
2,371,791 | 2,272,629 | 99,162 | |||||||||
| Short-term investments |
4,853,512 | 3,296,838 | 1,556,674 | |||||||||
| Other long-term investments |
65,225,309 | 65,929,215 | (703,906 | ) | ||||||||
| Total investments |
$ | 429,477,295 | $ | 434,120,334 | $ | (4,643,039 | ) | |||||
The $19,641,048 and $5,275,168 decreases in fixed maturity available-for-sale securities for the three months ended March 31, 2022 and 2021, respectively, are summarized as follows:
| Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Amount |
Amount |
|||||||
| Fixed maturity securities, available-for-sale, beginning |
$ | 184,077,038 | $ | 170,647,836 | ||||
| Purchases |
26,767,100 | 4,004,267 | ||||||
| Unrealized depreciation |
(16,579,786 | ) | (6,761,082 | ) | ||||
| Net realized investment gains |
1,224,075 | 37,651 | ||||||
| Sales proceeds |
(30,399,960 | ) | (2,019,079 | ) | ||||
| Maturities |
(550,000 | ) | (400,000 | ) | ||||
| Premium amortization |
(102,477 | ) | (136,925 | ) | ||||
| Decrease |
(19,641,048 | ) | (5,275,168 | ) | ||||
| Fixed maturity securities, available-for-sale, ending |
$ | 164,435,990 | $ | 165,372,668 | ||||
Fixed maturity securities available-for-sale are reported at fair value with unrealized gains and losses, net of applicable income taxes, reflected as a separate component in shareholders' equity within “Accumulated Other Comprehensive Income”. The available-for-sale fixed maturity securities portfolio is invested primarily in a variety of 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 $30,319 and $10,301 increases in equity securities for the three months ended March 31, 2022 and 2021, respectively, are summarized as follows:
| (Unaudited) |
||||||||
| Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Amount |
Amount |
|||||||
| Equity securities, beginning |
$ | 348,218 | $ | 203,003 | ||||
| Purchases |
43,414 | 14,640 | ||||||
| Joint venture distributions |
(30,522 | ) | (18,695 | ) | ||||
| Net realized investment gains (losses) |
(8,000 | ) | 89 | |||||
| Sales proceeds |
- | (88 | ) | |||||
| Net realized investment gains, changes in fair value |
25,427 | 14,355 | ||||||
| Increase |
30,319 | 10,301 | ||||||
| Equity securities, ending |
$ | 378,537 | $ | 213,304 | ||||
Equity securities are reported at fair value with the change in fair value reflected in net realized investment gains within the consolidated statements of operations.
The $14,068,827 increase and $4,622,466 decrease in mortgage loans on real estate for the three months ended March 31, 2022 and 2021, respectively, are summarized as follows:
| (Unaudited) |
||||||||
| Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Amount |
Amount |
|||||||
| Mortgage loans on real estate, beginning |
$ | 177,508,051 | $ | 174,909,062 | ||||
| Purchases |
32,447,546 | 14,954,163 | ||||||
| Discount accretion (premium amortization) |
(3,476 | ) | 167,480 | |||||
| Payments |
(18,291,543 | ) | (19,311,674 | ) | ||||
| Foreclosed - transferred to real estate |
- | (458,587 | ) | |||||
| (Increase) decrease in allowance for bad debts |
(83,700 | ) | 30,714 | |||||
| Amortization of loan origination fees |
- | (4,562 | ) | |||||
| Increase (decrease) |
14,068,827 | (4,622,466 | ) | |||||
| Mortgage loans on real estate, ending |
$ | 191,576,878 | $ | 170,286,596 | ||||
The $53,067 decrease and $458,587 increase in investment real estate for the three months ended March 31, 2022 and 2021, respectively, are summarized as follows:
| (Unaudited) |
||||||||
| Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Amount |
Amount |
|||||||
| Investment real estate, beginning |
$ | 688,345 | $ | 757,936 | ||||
| Real estate acquired through |
||||||||
| Mortgage loan foreclosure |
- | 458,587 | ||||||
| Sales proceeds |
(49,371 | ) | - | |||||
| Net realized investment losses |
(3,696 | ) | - | |||||
| Increase (decrease) |
(53,067 | ) | 458,587 | |||||
| Investment real estate, ending |
$ | 635,278 | $ | 1,216,523 | ||||
The $703,906 and $1,130,460 decreases in other long-term investments (composed of lottery receivables) for the three months ended March 31, 2022 and 2021, respectively, are summarized as follows:
| (Unaudited) |
||||||||
| Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Amount |
Amount |
|||||||
| Other long-term investments, beginning |
$ | 65,929,215 | $ | 71,025,133 | ||||
| Purchases |
2,671,200 | 882,027 | ||||||
| Accretion of discount |
1,311,709 | 1,283,147 | ||||||
| Payments |
(4,686,815 | ) | (3,295,634 | ) | ||||
| Decrease |
(703,906 | ) | (1,130,460 | ) | ||||
| Other long-term investments, ending |
$ | 65,225,309 | $ | 69,894,673 | ||||
Our assets other than invested assets as of March 31, 2022 and December 31, 2021 are summarized as follows:
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2022 |
December 31, 2021 |
2022 less 2021 |
||||||||||
| Cash and cash equivalents |
$ | 31,368,344 | $ | 42,528,046 | $ | (11,159,702 | ) | |||||
| Accrued investment income |
4,798,164 | 4,879,290 | (81,126 | ) | ||||||||
| Recoverable from reinsurers |
11,718,681 | 1,046,381 | 10,672,300 | |||||||||
| Assets held in trust under coinsurance agreement |
101,327,251 | 106,210,246 | (4,882,995 | ) | ||||||||
| Agents' balances and due premiums |
1,515,227 | 1,713,050 | (197,823 | ) | ||||||||
| Deferred policy acquisition costs |
51,208,133 | 49,717,323 | 1,490,810 | |||||||||
| Value of insurance business acquired |
4,246,290 | 4,318,499 | (72,209 | ) | ||||||||
| Other assets |
15,347,890 | 15,225,765 | 122,125 | |||||||||
| Assets other than investment assets |
$ | 221,529,980 | $ | 225,638,600 | $ | (4,108,620 | ) | |||||
The $11,159,702 decrease in cash and cash equivalents is discussed below in the “Liquidity and Capital Resources” section where cash flows are addressed.
The $10,672,300 increase in recoverable from reinsurers is primarily due to the acquisition of Royalty Capital Life Insurance Company.
The $4,882,995 decrease in assets held in trust under the coinsurance agreement is due to a decrease in assets held under TLIC’s annuity coinsurance agreement with an offshore annuity and life insurance company that is administered on a fund withheld basis. The decrease is primarily related to a decrease in the fair value of available-for-sale fixed maturity securities.
The $1,490,810 and $1,055,379 increases in deferred policy acquisition costs for the three months ended March 31, 2022 and 2021, respectively, are summarized as follows:
| (Unaudited) |
||||||||
| Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Balance, beginning of year |
$ | 49,717,323 | $ | 44,513,669 | ||||
| Capitalization of commissions, sales and issue expenses |
2,852,880 | 2,829,473 | ||||||
| Amortization |
(1,368,983 | ) | (1,789,823 | ) | ||||
| Deferred acquisition costs allocated to investments |
6,913 | 15,729 | ||||||
| Increase |
1,490,810 | 1,055,379 | ||||||
| Balance, end of year |
$ | 51,208,133 | $ | 45,569,048 | ||||
Our other assets as of March 31, 2022 and December 31, 2021 are summarized as follows:
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2022 |
December 31, 2021 |
2022 less 2021 |
||||||||||
| Federal and state income taxes recoverable |
$ | 7,130,190 | $ | 7,104,791 | $ | 25,399 | ||||||
| Advances to mortgage loan originator |
4,553,106 | 4,382,896 | 170,210 | |||||||||
| Advances to private equity company |
3,000,000 | 3,000,000 | - | |||||||||
| Lease asset - right to use |
541,357 | 565,964 | (24,607 | ) | ||||||||
| Other receivables, prepaid assets and deposits |
83,414 | 81,571 | 1,843 | |||||||||
| Guaranty funds |
39,823 | 49,256 | (9,433 | ) | ||||||||
| Notes receivable |
- | 41,287 | (41,287 | ) | ||||||||
| Total other assets |
$ | 15,347,890 | $ | 15,225,765 | $ | 122,125 | ||||||
There was a $170,210 increase in advances to one mortgage loan originator who acquires residential mortgage loans for our life companies.
Our liabilities as of March 31, 2022 and December 31, 2021 are summarized as follows:
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2022 |
December 31, 2021 |
2022 less 2021 |
||||||||||
| Policy liabilities |
||||||||||||
| Policyholders' account balances |
$ | 371,324,479 | $ | 373,647,869 | $ | (2,323,390 | ) | |||||
| Future policy benefits |
100,009,920 | 88,735,716 | 11,274,204 | |||||||||
| Policy claims |
3,417,916 | 2,381,183 | 1,036,733 | |||||||||
| Other policy liabilities |
179,225 | 88,847 | 90,378 | |||||||||
| Total policy liabilities |
474,931,540 | 464,853,615 | 10,077,925 | |||||||||
| Funds withheld under coinsurance agreement |
101,508,074 | 106,586,633 | (5,078,559 | ) | ||||||||
| Deferred federal income taxes |
5,694,754 | 8,966,303 | (3,271,549 | ) | ||||||||
| Other liabilities |
8,061,627 | 10,957,832 | (2,896,205 | ) | ||||||||
| Total liabilities |
$ | 590,195,995 | $ | 591,364,383 | $ | (1,168,388 | ) | |||||
The $2,323,390 decrease and $7,963,624 increase in policyholders’ account balances for the three months ended March 31, 2022 and 2021, respectively, are summarized as follows:
| (Unaudited) |
||||||||
| Three Months Ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Amount |
Amount |
|||||||
| Policyholders' account balances, beginning |
$ | 373,647,869 | $ | 362,519,753 | ||||
| Deposits |
5,912,187 | 11,445,347 | ||||||
| Withdrawals |
(15,909,047 | ) | (8,013,057 | ) | ||||
| Change in funds withheld under coinsurance agreement |
1,477,724 | 1,412,799 | ||||||
| Acquisition of Royalty Capital Life Insurance Company |
3,019,610 | - | ||||||
| Interest credited |
3,176,136 | 3,118,535 | ||||||
| Increase (decrease) |
(2,323,390 | ) | 7,963,624 | |||||
| Policyholders' account balances, ending |
$ | 371,324,479 | $ | 370,483,377 | ||||
The $11,274,204 increase in future policy benefits during the three months ended March 31, 2022 is primarily related to the acquisition of Royalty Capital Life Insurance Company of $8,102,093, the production of new life insurance policies and the aging of existing policies an additional year.
The $3,271,549 decrease in deferred federal income taxes during the three months ended March 31, 2022 was due to $3,480,303 of decreased deferred federal income taxes on the unrealized appreciation of fixed maturity securities available-for-sale that exceeded $208,754 of operating deferred federal tax.
The $5,078,559 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, 2022 and December 31, 2021 are summarized as follows:
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2022 |
December 31, 2021 |
2022 less 2021 |
||||||||||
| Mortgage loans suspense |
$ | 3,612,586 | $ | 7,533,274 | $ | (3,920,688 | ) | |||||
| Payable for securities purchased |
2,619,981 | 1,465,173 | 1,154,808 | |||||||||
| Accrued expenses payable |
600,399 | 728,000 | (127,601 | ) | ||||||||
| Lease liability |
541,357 | 565,964 | (24,607 | ) | ||||||||
| Suspense accounts payable |
329,284 | 435,471 | (106,187 | ) | ||||||||
| Unclaimed funds |
272,825 | 159,627 | 113,198 | |||||||||
| Accounts payable |
108,951 | 61,307 | 47,644 | |||||||||
| Unearned investment income |
96,474 | 91,206 | 5,268 | |||||||||
| Deferred revenue |
60,500 | 63,250 | (2,750 | ) | ||||||||
| Guaranty fund assessments |
21,000 | 21,000 | - | |||||||||
| Other payables, withholdings and escrows |
(201,730 | ) | (166,440 | ) | (35,290 | ) | ||||||
| Total other liabilities |
$ | 8,061,627 | $ | 10,957,832 | $ | (2,896,205 | ) | |||||
The reduction in mortgage loan suspense of $3,920,688 is primarily due to timing of principal loan payments on mortgage loans.
As of March 31, 2022, the Company had $2,619,981 in security purchases where the trade date and settlement date were in different financial reporting periods compared to $1,465,173 of security purchases overlapping financial reporting periods as of December 31, 2021.
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, 2022, we have received $27,119,480 from the sale of our shares.
The Company raised $1,450,000 from two private placements during 2004 and $25,669,480 from two public stock offerings and one private placement stock offering from June 22, 2005 through February 23, 2007; June 29, 2010 through April 30, 2012; and August 15, 2012 through March 8, 2013. The Company issued 7,347,488 shares of its common stock and incurred $3,624,518 of offering costs during these private placements and public stock offerings.
The Company also issued 702,685 shares of its common stock in connection with two stock dividends paid to shareholders in 2011 and 2012 that resulted in accumulated earnings being charged $5,270,138 with an offsetting credit of $5,270,138 to common stock and additional paid-in capital.
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, 2022, we had cash and cash equivalents totaling $31,368,344. As of March 31, 2022, cash and cash equivalents of $6,966,723 and $19,695,529, respectively, totaling $26,662,252 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 capacity for TLIC to pay a dividend up to $1,430,596 in 2022 without prior approval. In addition, based on those limitations, there is the capacity for FBLIC to pay a dividend up to $1,495,631 in 2022 without prior approval. FBLIC has paid no dividends to TLIC in 2022 and 2021. Dividends paid by FBLIC would be eliminated in consolidation. TLIC has paid no dividends to FTFC.
The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures interest and non-interest bearing accounts up to $250,000. Uninsured balances aggregate $13,938,494 and $40,431,952 as of March 31, 2022 and December 31, 2021, 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, 2021, the Company renewed its $1.5 million line of credit with a bank to provide working capital and funds for expansion. The terms of the line of credit allows for advances, repayments and re-borrowings through a maturity date of September 15, 2022. 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 4.5%. The non-utilized portion of the $1.5 million line of credit will be assessed a 1% non usage fee calculated in arrears and paid at the maturity date. No amounts were outstanding on this line of credit as of March 31, 2022 and December 31, 2021.
Our cash flows for the three months ended March 31, 2022 and 2021 are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2022 |
2021 |
2022 less 2021 |
||||||||||
| Net cash provided by (used in) operating activities |
$ | 2,077,650 | $ | (3,340,643 | ) | $ | 5,418,293 | |||||
| Net cash provided by (used in) investing activities |
(3,240,492 | ) | 5,162,811 | (8,403,303 | ) | |||||||
| Net cash provided by (used in) financing activities |
(9,996,860 | ) | 3,432,290 | (13,429,150 | ) | |||||||
| Increase (decrease) in cash and cash equivalents |
(11,159,702 | ) | 5,254,458 | (16,414,160 | ) | |||||||
| Cash and cash equivalents, beginning of period |
42,528,046 | 40,230,095 | 2,297,951 | |||||||||
| Cash and cash equivalents, end of period |
$ | 31,368,344 | $ | 45,484,553 | $ | (14,116,209 | ) | |||||
The $2,077,650 of cash provided by operating activities and 3,340,643 of cash used in operating activities for the three months ended March 31, 2022 and 2021, respectively, are summarized as follows:
| (Unaudited) |
||||||||||||
| Three Months Ended March 31, |
Amount Change |
|||||||||||
| 2022 |
2021 |
2022 less 2021 |
||||||||||
| Premiums collected |
$ | 8,392,587 | $ | 7,089,101 | $ | 1,303,486 | ||||||
| Net investment income collected |
5,329,641 | 4,998,801 | 330,840 | |||||||||
| Service fees and other income collected |
116,037 | 111,761 | 4,276 | |||||||||
| Death benefits paid |
(3,058,446 | ) | (3,679,692 | ) | 621,246 | |||||||
| Surrenders paid |
(315,390 | ) | (348,909 | ) | 33,519 | |||||||
| Dividends and endowments paid |
(76,424 | ) | (72,816 | ) | (3,608 | ) | ||||||
| Commissions paid |
(2,511,921 | ) | (2,861,834 | ) | 349,913 | |||||||
| Other underwriting, insurance and acquisition expenses paid |
(2,753,083 | ) | (2,952,680 | ) | 199,597 | |||||||
| Taxes paid |
(33,670 | ) | (912,318 | ) | 878,648 | |||||||
| Decreased assets held in trust under coinsurance agreement |
1,282,160 | 814,210 | 467,950 | |||||||||
| Decreased mortgage loan suspense |
(3,905,417 | ) | (2,046,144 | ) | (1,859,273 | ) | ||||||
| Increased mortgage loan receivable |
- | (2,460,170 | ) | 2,460,170 | ||||||||
| (Increased) decreased advances to mortgage loan originator |
(170,210 | ) | 997,326 | (1,167,536 | ) | |||||||
| Decreased deposits of pending policy applications |
(106,186 | ) | (2,007,725 | ) | 1,901,539 | |||||||
| Decreased short-term investments |
29,993 | 3,957 | 26,036 | |||||||||
| (Increased) decreased policy loans |
(99,162 | ) | 27,128 | (126,290 | ) | |||||||
| Other |
(42,859 | ) | (40,639 | ) | (2,220 | ) | ||||||
| Cash provided by (used in) operating activities |
$ | 2,077,650 | $ | (3,340,643 | ) | $ | 5,418,293 | |||||
Please see the statements of cash flows for the three months ended March 31, 2022 and 2021 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, 2022 and December 31, 2021 is summarized as follows:
| (Unaudited) |
Amount Change |
|||||||||||
| March 31, 2022 |
December 31, 2021 |
2022 less 2021 |
||||||||||
| Shareholders' equity |
||||||||||||
| Class A common stock, par value $.01 per share (40,000,000 shares authorized as of March 31, 2022 and December 31, 2021, 9,631,920 and 8,909,276 issued as of March 31, 2022 and December 31, 2021, respectively, 9,384,340 and 8,661,696 outstanding as of March 31, 2022 and December 31, 2021, respectively) |
$ | 96,319 | $ | 89,093 | $ | 7,226 | ||||||
| Class B common stock, par value $.01 per share (10,000,000 shares authorized, 101,102 issued and outstanding as of March 31, 2022 and December 31, 2021) |
1,011 | 1,011 | - | |||||||||
| Additional paid-in capital |
43,668,023 | 39,078,485 | 4,589,538 | |||||||||
| Treasury stock, at cost (247,580 shares as of March 31, 2022 and December 31, 2021) |
(893,947 | ) | (893,947 | ) | - | |||||||
| Accumulated other comprehensive income |
111,257 | 13,203,827 | (13,092,570 | ) | ||||||||
| Accumulated earnings |
17,828,617 | 16,916,082 | 912,535 | |||||||||
| Total shareholders' equity |
$ | 60,811,280 | $ | 68,394,551 | $ | (7,583,271 | ) | |||||
The decrease in shareholders’ equity of $7,583,271 for the three months ended March 31, 2022 is due to $13,092,570 in other comprehensive loss that exceeded an increase in additional paid-in capital of $4,589,538 (acquisition of Royalty Capital Life Insurance Company) and $912,535 in net income.
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 2022 or 2021. 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 appreciation on available-for-sale securities of $140,888 and $16,720,674 as of March 31, 2022 and December 31, 2021, respectively, prior to the impact of income taxes and deferred acquisition cost adjustments. An increase of $15,355,711 in unrealized losses arising for the three months ended March 31, 2022 has been impacted by 2022 net realized investment gains of $1,224,075 originating from the sale and call activity for fixed maturity securities available-for-sale resulting in net unrealized losses on investments of $16,579,786.
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, 2022, 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 11.0% 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 2021, 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, 2022 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, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A lawsuit filed by the Company and Chairman, President and Chief Executive Officer, Gregg E. Zahn, in 2013 against former Company Board of Directors member Wayne Pettigrew and Mr. Pettigrew's company, Group & Pension Planners, Inc. (the "Defendants"), originally concluded on February 17, 2017. The lawsuit was filed in the District Court of Tulsa County, Oklahoma. In the lawsuit, the Company alleged that Mr. Pettigrew had defamed the Company by making untrue statements to certain shareholders of the Company, to the press and to regulators of the state of Oklahoma and had breached his fiduciary duties. Mr. Pettigrew denied the allegations.
The jury originally concluded that Mr. Pettigrew, while still a member of the Company’s Board of Directors, did, in fact, make untrue statements regarding the Company and Mr. Zahn and committed breaches of his fiduciary duties to the Company and the jury awarded the Company $800,000 of damages against Mr. Pettigrew. In addition, the jury found that Mr. Pettigrew had defamed Mr. Zahn and intentionally inflicted emotional distress on Mr. Zahn and awarded Mr. Zahn $3,500,000 of damages against Mr. Pettigrew. In addition to the original damages awarded by the jury, the Company and Mr. Zahn began to aggressively communicate the correction of the untrue statements to outside parties.
Mr. Pettigrew appealed this decision. In February 2020, the Court of Civil Appeals of the state of Oklahoma reversed the judgments entered by the trial court and remanded the case for a new trial. The Court of Appeals reversal, however, was not final. The Company filed a Petition for Certiorari with the Oklahoma Supreme Court to request that it reverse and vacate the decision of the Court of Appeals. In December 2020, the Oklahoma Supreme Court declined to grant certiorari and remanded that the case be retried in the District Court of Tulsa County, Oklahoma.
It remains the Company’s intention to again vigorously prosecute this action against the Defendants for damages and for correction of the defamatory statements. In the opinion of the Company’s management, the ultimate resolution of any contingencies that may arise from this litigation is not considered material in relation to the financial position or results of operations of the Company.
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 |
| 32.2 |
| 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.
|
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FIRST TRINITY FINANCIAL CORPORATION |
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| an Oklahoma corporation | |||
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| May 13, 2022 |
By |
/s/ Gregg E. Zahn |
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Gregg E. Zahn, President and Chief Executive Officer |
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| May 13, 2022 | By | /s/ Jeffrey J. Wood | |
| Jeffrey J. Wood, Chief Financial Officer | |||