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EX-31.1 - EXHIBIT 31.1 - First Trinity Financial CORPex31-1.htm
EX-31.2 - EXHIBIT 31.2 - First Trinity Financial CORPex31-2.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

[ X ]

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

 

For the quarterly period ended March 31, 2015

 

[ ]

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

 

For the transition period From                                 to                                   .

 

Commission file number: 000-52613

 

FIRST TRINITY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Oklahoma   

 

 

 

34-1991436

(State or other jurisdiction of incorporation or organization)   

 

 

 

(I.R.S. Employer Identification Number)

 

7633 East 63rd Place, Suite 230

Tulsa, Oklahoma 74133-1246

(Address of principal executive offices)

 

(918) 249-2438

(Registrant's telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

 

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

 

Large accelerated filer:  ☐ 

Accelerated filer:  ☐

Non-accelerated filer:  ☐

Smaller reporting company:  

       

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

Yes ☐       No ☑

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Common stock .01 par value as of May 11, 2015: 7,802,613 shares

 

 
 

 

  

FIRST TRINITY FINANCIAL CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED MARCH 31, 2015

 

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION

Page Number

     

Item 1. Consolidated Financial Statements

   
     

Consolidated Statements of Financial Position as of March 31, 2015 (Unaudited) and December 31, 2014

 

3

     

Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

 

4

     

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

 

5

     

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

  6
     

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (Unaudited)

 

7

     

Notes to Consolidated Financial Statements (Unaudited)

 

8

     

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

 

31

     

Item 4. Controls and Procedures

 

49

     

Part II. OTHER INFORMATION

   
     

Item 1. Legal Proceedings

 

50

     

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

 

51

     

Item 3. Defaults upon Senior Securities

 

51

     

Item 4. Mine Safety Disclosures

 

51

     

Item 5. Other Information

 

51

     

Item 6. Exhibits

 

51

     

Signatures

  52

 

Exhibit No. 31.1                                                       

Exhibit No. 31.2                                                       

Exhibit No. 32.1                                                       

Exhibit No. 32.2

Exhibit No. 101.INS

Exhibit No. 101.SCH

Exhibit No. 101.CAL

Exhibit No. 101.DEF

Exhibit No. 101.LAB

Exhibit No. 101.PRE

 

 
2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Financial Position

 

   

March 31, 2015

   

December 31, 2014

 

 

 

(Unaudited)

         
Assets                

Investments

               

Available-for-sale fixed maturity securities at fair value (amortized cost: $108,212,909 and $107,412,322 as of March 31, 2015 and December 31, 2014, respectively)

  $ 112,520,002     $ 110,651,429  

Available-for-sale equity securities at fair value (cost: $525,901 and $519,595 as of March 31, 2015 and December 31, 2014, respectively)

    672,648       671,357  

Mortgage loans on real estate

    45,579,509       38,649,733  

Investment real estate

    2,435,674       9,165,090  

Policy loans

    1,461,576       1,520,620  

Short-term investments

    1,141,837       1,141,199  

Other long-term investments

    23,048,210       21,781,925  

Total investments

    186,859,456       183,581,353  

Cash and cash equivalents

    17,621,797       10,158,386  

Accrued investment income

    1,756,739       1,682,906  

Recoverable from reinsurers

    1,214,234       1,222,245  

Agents' balances and due premiums

    705,311       562,146  

Deferred policy acquisition costs

    9,847,853       9,287,851  

Value of insurance business acquired

    6,574,456       6,674,414  

Property and equipment, net

    71,069       84,001  

Other assets

    5,176,083       5,747,866  

Total assets

  $ 229,826,998     $ 219,001,168  

Liabilities and Shareholders' Equity

               

Policy liabilities

               

Policyholders' account balances

  $ 151,496,179     $ 140,554,973  

Future policy benefits

    36,708,320       35,913,730  

Policy claims

    671,407       602,269  

Other policy liabilities

    66,982       87,148  

Total policy liabilities

    188,942,888       177,158,120  

Notes payable

    -       4,076,473  

Deferred federal income taxes

    2,349,193       2,198,753  

Other liabilities

    4,163,805       2,357,484  

Total liabilities

    195,455,886       185,790,830  

Shareholders' equity

               

Common stock, par value $.01 per share (20,000,000 shares authorized, 8,050,193 issued as of March 31, 2015 and December 31, 2014, respectively, and 7,802,613 and 7,812,038 outstanding as of March 31, 2015 and December 31, 2014, respectively)

    80,502       80,502  

Additional paid-in capital

    28,684,748       28,684,748  

Treasury stock, at cost (247,580 and 238,155 shares as of March 31, 2015 and December 31, 2014, respectively)

    (893,947 )     (855,304 )

Accumulated other comprehensive income

    3,519,930       2,683,543  

Accumulated earnings

    2,979,879       2,616,849  

Total shareholders' equity

    34,371,112       33,210,338  

Total liabilities and shareholders' equity

  $ 229,826,998     $ 219,001,168  

 

See notes to consolidated financial statements (unaudited).

 

 
3

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 

Revenues

               

Premiums

  $ 2,320,314     $ 2,009,983  

Net investment income

    2,407,560       1,970,808  

Net realized investment gains

    424,002       296,565  

Other income

    4,811       13,312  

Total revenues

    5,156,687       4,290,668  

Benefits, Claims and Expenses

               

Benefits and claims

               

Increase in future policy benefits

    791,311       619,972  

Death benefits

    918,791       722,449  

Surrenders

    142,394       91,446  

Interest credited to policyholders

    1,247,890       1,022,210  

Dividend, endowment and supplementary life contract benefits

    53,433       66,210  

Total benefits and claims

    3,153,819       2,522,287  

Policy acquisition costs deferred

    (971,951 )     (528,162 )

Amortization of deferred policy acquisition costs

    394,460       281,282  

Amortization of value of insurance business acquired

    99,958       105,854  

Commissions

    870,146       510,450  

Other underwriting, insurance and acquisition expenses

    1,230,916       1,133,459  

Total expenses

    1,623,529       1,502,883  

Total benefits, claims and expenses

    4,777,348       4,025,170  

Income before total federal income tax expense

    379,339       265,498  

Current federal income tax expense

    74,965       50,259  

Deferred federal income tax benefit

    (58,656 )     (27,915 )

Total federal income tax expense

    16,309       22,344  

Net income

  $ 363,030     $ 243,154  

Net income per common share basic and diluted

  $ 0.05     $ 0.03  

 

See notes to consolidated financial statements (unaudited).

 

 
4

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 

Net income

  $ 363,030     $ 243,154  

Other comprehensive income

               

Total net unrealized gains arising during the period

    1,085,720       1,654,985  

Less net realized investment gains

    22,749       296,565  

Net unrealized gains

    1,062,971       1,358,420  

Less adjustment to deferred acquisition costs

    17,489       9,510  

Other comprehensive income before income tax expense

    1,045,482       1,348,910  

Income tax expense

    209,095       269,782  

Total other comprehensive income

    836,387       1,079,128  

Total comprehensive income

  $ 1,199,417     $ 1,322,282  

 

See notes to consolidated financial statements (unaudited).

 

 
5

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended March 31, 2015 and 2014

(Unaudited)

 

                           

Accumulated

                 
   

Common

   

Additional

           

Other

           

Total

 
   

Stock

   

Paid-in

   

Treasury

   

Comprehensive

   

Accumulated

   

Shareholders'

 
   

$.01 Par Value

   

Capital

   

Stock

   

Income

   

Earnings

   

Equity

 

Balance as of January 1, 2014

  $ 80,502     $ 28,684,748     $ (693,731 )   $ 1,878,157     $ 691,338     $ 30,641,014  

Repurchase of common stock

    -       -       (80,000 )     -       -       (80,000 )

Comprehensive income:

                                               

Net income

    -       -       -       -       243,154       243,154  

Other comprehensive income

    -       -       -       1,079,128       -       1,079,128  

Balance as of March 31, 2014

  $ 80,502     $ 28,684,748     $ (773,731 )   $ 2,957,285     $ 934,492     $ 31,883,296  
                                                 

Balance as of January 1, 2015

  $ 80,502     $ 28,684,748     $ (855,304 )   $ 2,683,543     $ 2,616,849     $ 33,210,338  

Repurchase of common stock

    -       -       (38,643 )     -       -       (38,643 )

Comprehensive income:

                                               

Net income

    -       -       -       -       363,030       363,030  

Other comprehensive income

    -       -       -       836,387       -       836,387  

Balance as of March 31, 2015

  $ 80,502     $ 28,684,748     $ (893,947 )   $ 3,519,930     $ 2,979,879     $ 34,371,112  

 

See notes to consolidated financial statements (unaudited).

 

 
6

 

 

First Trinity Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows 

(Unaudited) 

 

   

Three Months Ended March 31,

 
   

2015

   

2014

 

Operating activities

               

Net income

  $ 363,030     $ 243,154  

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

               

Provision for depreciation

    49,304       103,524  

Accretion of discount on investments

    (229,755 )     (221,043 )

Net realized investment gains

    (424,002 )     (296,565 )

Amortization of policy acquisition cost

    394,460       281,282  

Policy acquisition cost deferred

    (971,951 )     (528,162 )

Mortgage loan origination fees deferred

    (26,000 )     (21,500 )

Amortization of loan origination fees

    9,320       17,923  

Amortization of value of insurance business acquired

    99,958       105,854  

Provision for deferred federal income tax benefit

    (58,656 )     (27,915 )

Interest credited to policyholders

    1,247,890       1,022,210  

Change in assets and liabilities:

               

Accrued investment income

    (73,833 )     (44,414 )

Policy loans

    59,044       (27,035 )

Short-term investments

    (638 )     -  

Allowance for mortgage and premium finance loan losses

    24,603       17,603  

Recoverable from reinsurers

    8,011       (5,609 )

Agents' balances and due premiums

    (143,165 )     8,027  

Other assets

    571,783       627,282  

Future policy benefits

    794,590       620,107  

Policy claims

    69,138       7,281  

Other policy liabilities

    (20,166 )     (2,813 )

Other liabilities

    1,806,321       (22,855 )

Net cash provided by operating activities

    3,549,286       1,856,336  
                 

Investing activities

               

Purchases of fixed maturity securities

    (2,170,526 )     (8,075,994 )

Maturities of fixed maturity securities

    567,000       1,487,000  

Sales of fixed maturity securities

    621,229       1,943,330  

Purchases of equity securities

    (534,687 )     (2,230 )

Sales of equity securities

    526,284       -  

Purchases of mortgage loans

    (8,455,196 )     (4,753,722 )

Payments on mortgage loans

    1,550,599       709,836  

Purchases of other long-term investments

    (2,022,600 )     (1,837,619 )

Payments on other long-term investments

    1,170,576       758,383  

Purchases of real estate

    -       (2,817,857 )

Sale of real estate

    7,083,246       -  

Net cash used in investing activities

    (1,664,075 )     (12,588,873 )
                 

Financing activities

               

Policyholders' account deposits

    12,577,187       8,031,177  

Policyholders' account withdrawals

    (2,883,871 )     (2,100,680 )

Purchases of treasury stock

    (38,643 )     (80,000 )

Proceeds from issuance of notes payable

    -       4,076,473  

Repayment of notes payable

    (4,076,473 )     -  

Net cash provided by financing activities

    5,578,200       9,926,970  
                 

Increase (decrease) in cash

    7,463,411       (805,567 )

Cash and cash equivalents, beginning of period

    10,158,386       10,608,438  

Cash and cash equivalents, end of period

  $ 17,621,797     $ 9,802,871  

 

See notes to consolidated financial statements (unaudited).

 

 
7

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies

 

Nature of Operations

 

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

 

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

 

The Company owns 100% of FTCC that was incorporated in 2006, and began operations in January 2007. FTCC provided financing for casualty insurance premiums for individuals and companies and was licensed to conduct premium financing business in the states of Alabama, Arkansas, Louisiana, Mississippi and Oklahoma. FTCC currently has no operations other than minor premium refunds, collections of past due accounts and accounts involved in litigation.

 

Company Capitalization

 

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

 

The Company also issued 702,705 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 $5,270,288 with an offsetting credit of $5,270,288 to common stock and additional paid-in capital. The historic impact of these two stock dividend charges of $5,270,288 decreased during 2011 and 2012 the balance of accumulated earnings and resulted in a reported balance as of March 31, 2015 of $2,979,879, as shown in the accumulated earnings caption in the March 31, 2015 consolidated statement of financial position.

 

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

 

Acquisition of Other Companies 

 

On December 23, 2008, FTFC acquired 100% of the outstanding common stock of First Life America Corporation (“FLAC”) from an unaffiliated company. The acquisition of FLAC was accounted for as a purchase. The aggregate purchase price for FLAC was approximately $2,695,000 (including direct cost associated with the acquisition of approximately $195,000). The acquisition of FLAC was financed with the working capital of FTFC. On December 31, 2008, FTFC made FLAC a 15 year loan in the form of a surplus note in the amount of $250,000 with an interest rate of 6% payable monthly, that was approved by the Oklahoma Insurance Department (“OID”). This surplus note is eliminated in consolidation.

 

 
8

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

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

 

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

 

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, 2015 are not necessarily indicative of the results to be expected for the year ended December 31, 2015 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, 2014.

 

 

Principles of Consolidation

 

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

 

Reclassifications

 

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

 

Use of Estimates

 

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

 

Common Stock

 

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

 

Treasury Stock

 

Treasury stock represents 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 are no longer outstanding.

 

 
9

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Subsequent Events

 

Management has evaluated all events subsequent to March 31, 2015 through the date that these financial statements have been issued. On April 15, 2015, the Company loaned $400,000 to its former Chairman. The loan has a term of one year and has a contractual interest rate of 5.50%. The loan is collateralized by 100,000 shares of the Company’s Class A Common stock owned by the former Chairman.

 

Recent Accounting Pronouncements

 

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity

        

In April 2014, the Financial Accounting Standards Board (“FASB”) issued revised guidance to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group was eligible for discontinued operations presentation.

 

The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity) and that have a major effect on a reporting entity's operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation.

 

The updated guidance is effective for the quarter ending March 31, 2015. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing services will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services.

 

The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when, or as, the entity satisfies a performance obligation.

 

The updated guidance is effective for the quarter ending March 31, 2017. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

 

In June 2014, the FASB issued updated guidance to resolve diversity in practice concerning employee share-based payments that contain performance targets that could be achieved after the requisite service period. Many reporting entities account for performance targets that could be achieved after the requisite service period as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance targets in the estimate of the grant-date fair value of the award. Other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award.

 

 
10

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. As such, the performance target that affects vesting should not be reflected in estimating that fair value of the award at the grant date. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest.

 

The updated guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern

 

In August 2014, the FASB issued guidance to address the diversity in practice in determining when there is substantial doubt about an entity's ability to continue as a going concern and when an entity must disclose certain relevant conditions and events. The new guidance requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The new guidance allows the entity to consider the mitigating effects of management's plans that will alleviate the substantial doubt and requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans.

 

If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations and management's plans that are intended to mitigate those conditions.

 

The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter.

 

Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity

        

In November 2014, the FASB issued updated guidance to clarify when the separation of certain embedded derivative features in a hybrid financial instrument that is issued in the form of a share is required. That is, an entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument.

 

The updated guidance is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

 
11

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

1. Organization and Significant Accounting Policies (continued)

 

Receivables – Troubled Debt Restructurings by Creditors

 

In January 2014, the FASB issued updated guidance for troubled debt restructurings clarifying when an in substance repossession or foreclosure occurs, and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The new guidance is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015. This guidance can be elected for prospective adoption or by using a retrospective transition method. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

 

Amendments to the Consolidation Analysis

 

In February 2015, the FASB issued updated guidance that makes targeted amendments to the current consolidation accounting guidance. The update is in response to accounting complexity concerns, particularly from the asset management industry. The guidance simplifies consolidation accounting by reducing the number of approaches to consolidation, provides a scope exception to registered money market funds and similar unregistered money market funds and ends the indefinite deferral granted to investment companies from applying the variable interest entity guidance.

 

The updated guidance is effective for annual and interim periods beginning after December 15, 2015. The adoption of this guidance is not expected to have a material effect on the Company’s results of operations, financial position or liquidity.

 

Simplifying the Presentation of Debt Issuance Costs

 

In April 2015, the FASB issued updated guidance to clarify the required presentation of debt issuance costs.   The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts.   Amortization of debt issuance costs is to be reported as interest expense.   The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance.

 

The updated guidance is effective for reporting periods beginning after December 15, 2015.   Early adoption is permitted.  The adoption of this guidance will not have any effect on the Company’s results of operations, financial position or liquidity.

 

 
12

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments

 

Fixed Maturity and Equity Securities Available-For-Sale

 

Investments in fixed maturity and equity securities available-for-sale as of March 31, 2015 and December 31, 2014 are summarized as follows:

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

March 31, 2015 (Unaudited)

 

Cost

   

Gains

   

Losses

   

Value

 

Fixed maturity securities

                               

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

  $ 2,660,706     $ 161,883     $ 30,894     $ 2,791,695  

States and political subdivisions

    1,638,578       36,652       3,523       1,671,707  

Residential mortgage-backed securities

    66,318       53,134       -       119,452  

Corporate bonds

    91,767,774       4,538,852       778,313       95,528,313  

Foreign bonds

    12,079,533       502,975       173,673       12,408,835  

Total fixed maturity securities

    108,212,909       5,293,496       986,403       112,520,002  

 

           

Gross

   

Gross

         
           

Unrealized

   

Unrealized

   

Fair

 

Equity securities

 

Cost

   

Gains

   

Losses

   

Value

 

Mutual funds

    83,081       454       -       83,535  

Corporate preferred stock

    256,299       6,555       320       262,534  

Corporate common stock

    186,521       140,058       -       326,579  

Total equity securities

    525,901       147,067       320       672,648  

Total fixed maturity and equity securities

  $ 108,738,810     $ 5,440,563     $ 986,723     $ 113,192,650  

 

           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

December 31, 2014

 

Cost

   

Gains

   

Losses

   

Value

 

Fixed maturity securities

                               

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

  $ 2,650,994     $ 168,071     $ 69,052     $ 2,750,013  

States and political subdivisions

    1,184,034       20,982       863       1,204,153  

Residential mortgage-backed securities

    68,242       62,193       -       130,435  

Corporate bonds

    92,367,191       3,711,276       885,169       95,193,298  

Foreign bonds

    11,141,861       426,197       194,528       11,373,530  

Total fixed maturity securities

    107,412,322       4,388,719       1,149,612       110,651,429  

 

           

Gross

   

Gross

         
           

Unrealized

   

Unrealized

   

Fair

 

Equity securities

 

Cost

   

Gains

   

Losses

   

Value

 

Mutual funds

    80,879       2,586       -       83,465  

Corporate preferred stock

    254,502       3,273       1,700       256,075  

Corporate common stock

    184,214       147,603       -       331,817  

Total equity securities

    519,595       153,462       1,700       671,357  

Total fixed maturity and equity securities

  $ 107,931,917     $ 4,542,181     $ 1,151,312     $ 111,322,786  

 

 
13

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(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, 2015 and December 31, 2014 are summarized as follows:

 

           

Unrealized

   

Number of

 

March 31, 2015 (Unaudited)

 

Fair Value

   

Loss

   

Securities

 

Fixed maturity securities

                       

Less than 12 months

                       

States and political subdivisions

  $ 300,289     $ 3,523       2  

Corporate bonds

    7,558,260       443,485       28  

Foreign bonds

    3,070,382       173,673       14  

Total less than 12 months

    10,928,931       620,681       44  

More than 12 months

                       

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

    1,099,106       30,894       2  

Corporate bonds

    2,705,235       334,828       14  

Total more than 12 months

    3,804,341       365,722       16  

Total fixed maturity securities

    14,733,272       986,403       60  

Equity securities

                       

Less than 12 months

                       

Corporate preferred stock

    49,680       320       1  

Total equity securities

    49,680       320       1  

Total fixed maturity and equity securities

  $ 14,782,952     $ 986,723       61  

 

           

Unrealized

   

Number of

 

December 31, 2014

 

Fair Value

   

Loss

   

Securities

 

Fixed maturity securities

                       

Less than 12 months

                       

Corporate bonds

  $ 12,258,681     $ 477,590       47  

Foreign bonds

    3,446,676       194,528       16  

Total less than 12 months

    15,705,357       672,118       63  

More than 12 months

                       

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

    1,360,948       69,052       3  

States and political subdivisions

    105,569       863       1  

Corporate bonds

    2,761,555       407,579       14  

Total more than 12 months

    4,228,072       477,494       18  

Total fixed maturity securities

    19,933,429       1,149,612       81  

Equity securities

                       

Greater than 12 months

                       

Corporate preferred stock

    48,300       1,700       1  

Total equity securities

    48,300       1,700       1  

Total fixed maturity and equity securities

  $ 19,981,729     $ 1,151,312       82  

 

 
14

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments (continued)

 

As of March 31, 2015, the Company held 60 available-for-sale fixed maturity securities with an unrealized loss of $986,403, fair value of $14,733,272 and amortized cost of $15,719,675. These unrealized losses were primarily due to market interest rate movements in the bond market as of March 31, 2015. The ratio of the fair value to the amortized cost of these 60 securities is 94%.

 

However, the Company holds three available-for-sale fixed maturity securities in a mining industry company that when combined have unrealized losses of $270,243, fair values of $338,625 and amortized costs of $608,868. Management’s analysis indicates that this mining industry company will more than likely be able to make principal and interest payments through the maturity of these three securities in 2020 and 2021. The ratio of the fair value to the amortized cost of these three securities was 56%. The ratio of the fair value to the amortized cost of the other 57 securities in an unrealized loss position as of March 31, 2015 is 95% with all 57 securities having a fair value to amortized cost ratio above 76%.

 

As of December 31, 2014, the Company held 81 available-for-sale fixed maturity securities with an unrealized loss of $1,149,612, fair value of $19,933,429 and amortized cost of $21,083,041. These unrealized losses were primarily due to market interest rate movements in the bond market as of December 31, 2014. The ratio of the fair value to the amortized cost of these 81 securities is 95%.

 

As of March 31, 2015, the Company held one available-for-sale equity security with an unrealized loss of $320, fair value of $49,680 and cost of $50,000. The ratio of fair value to cost of this security is 99%.

 

As of December 31, 2014, the Company held one available-for-sale equity security with an unrealized loss of $1,700, fair value of $48,300 and cost of $50,000. The ratio of fair value to cost of this security is 97%.

 

Fixed maturity securities were 93% and 95% investment grade as rated by Standard & Poor’s as of March 31, 2015 and December 31, 2014, respectively.

 

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

 

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

 

Based on management’s review, the Company experienced no other-than-temporary impairments during the three months ended March 31, 2015 and the year ended December 31, 2014. Management believes that the Company will fully recover its cost basis in the securities held at March 31, 2015, 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. 

 

 
15

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments (continued)

 

Net unrealized gains included in other comprehensive income for investments classified as available-for-sale, net of the effect of deferred income taxes and deferred acquisition costs assuming that the appreciation had been realized as of March 31, 2015 and December 31, 2014, are summarized as follows:

 

   

(Unaudited)

         
   

March 31, 2015

   

December 31, 2014

 

Unrealized appreciation on available-for-sale securities

  $ 4,453,840     $ 3,390,869  

Adjustment to deferred acquisition costs

    (53,929 )     (36,440 )

Deferred income taxes

    (879,981 )     (670,886 )

Net unrealized appreciation on available-for-sale securities

  $ 3,519,930     $ 2,683,543  

 

The Company’s investment in lottery prize cash flows categorized as other long-term investments in the statement of financial position was $23,048,210 and $21,781,925 as of March 31, 2015 and December 31, 2014, respectively. The lottery prize cash flows are assignments of the future rights from lottery winners purchased at a discounted price. Payments on these investments are made by state run lotteries.

 

The amortized cost and fair value of fixed maturity available-for-sale securities and other long-term investments as of March 31, 2015, by contractual maturity, are summarized as follows:

 

   

March 31, 2015 (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

  $ 2,754,581     $ 2,801,862     $ 3,915,108     $ 3,976,523  

Due in one year through five years

    36,096,965       38,044,550       9,452,822       10,405,428  

Due after five years through ten years

    53,807,893       55,404,752       6,632,945       8,482,488  

Due after ten years

    15,487,152       16,149,386       3,047,335       4,705,400  

Due at multiple maturity dates

    66,318       119,452       -       -  
    $ 108,212,909     $ 112,520,002     $ 23,048,210     $ 27,569,839  

 

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 available-for-sale, mortgage loans on real estate and investment real estate for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

Fixed Maturity Securities

   

Equity Securities

   

Mortgage Loans on Real Estate

   

Investment Real Estate

 
   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

   

2015

   

2014

 

Proceeds

  $ 1,188,229     $ 3,430,330     $ 526,284     $ -     $ 1,550,599     $ 709,836     $ 7,083,246     $ -  

Gross realized gains

    25,841       279,570       996       -       11,051       17,961       390,202       -  

Gross realized losses

    (1,192 )     (966 )     (2,896 )     -       -       -       -       -  

 

 
16

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments (continued)

 

The accumulated change in net unrealized investment gains for fixed maturity and equity securities available-for-sale for the three months ended March 31, 2015 and 2014 and the amount of realized investment gains on fixed maturity securities available-for-sale, equity securities available-for-sale, mortgage loans on real estate and investment real estate for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2015

   

2014

 

Change in unrealized investment gains:

               

Available-for-sale securities:

               

Fixed maturity securities

  $ 1,067,986     $ 1,363,002  

Equity securities

    (5,015 )     (4,582 )

Net realized investment gains (losses):

               

Available-for-sale securities:

               

Fixed maturity securities

    24,649       278,604  

Equity securities

    (1,900 )     -  

Mortgage loans on real estate

    11,051       17,961  

Investment real estate

    390,202       -  

 

Major categories of net investment income for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

   

Three Months Ended March 31, (Unaudited)

 
   

2015

   

2014

 

Fixed maturity securities

  $ 1,173,781     $ 1,119,896  

Equity securities

    11,529       10,657  

Other long-term investments

    414,242       415,411  

Mortgage loans

    956,144       453,972  

Policy loans

    25,141       24,943  

Real estate

    187,588       173,195  

Short-term and other investments

    48,192       36,297  

Gross investment income

    2,816,617       2,234,371  

Investment expenses

    (409,057 )     (263,563 )

Net investment income

  $ 2,407,560     $ 1,970,808  

 

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, 2015 and December 31, 2014, these required deposits, included in investment assets, had amortized costs that totaled $3,966,145 and $3,954,696, respectively. As of March 31, 2015 and December 31, 2014, these required deposits had fair values that totaled $4,105,198 and $4,057,740, respectively.

 

 
17

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments (continued)

 

The Company’s mortgage loans by property type as of March 31, 2015 and December 31, 2014 are summarized as follows:

 

   

March 31, 2015

   

December 31, 2014

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Commercial mortgage loans

                               

Retail stores

  $ 1,603,192       3.52 %   $ 1,635,412       4.23 %

Office buildings

    321,920       0.70 %     327,181       0.85 %

Total commercial mortgage loans

    1,925,112       4.22 %     1,962,593       5.08 %

Residential mortgage loans

    43,654,397       95.78 %     36,687,140       94.92 %

Total mortgage loans

  $ 45,579,509       100.00 %   $ 38,649,733       100.00 %

 

The Company’s investment real estate as of March 31, 2015 and December 31, 2014 is summarized as follows:

 

   

March 31, 2015

   

December 31, 2014

 

Land - held for the production of income

  $ 213,160     $ 213,160  

Land - held for sale

    750,047       2,034,478  

Total land

    963,207       2,247,638  

Building - held for the production of income

    2,267,557       2,267,557  

Less - accumulated depreciation

    (795,090 )     (758,718 )

Buildings net of accumulated depreciation

    1,472,467       1,508,839  

Building - held for sale

    -       5,408,613  

Total buildings

    1,472,467       6,917,452  

Investment real estate, net of accumulated depreciation

  $ 2,435,674     $ 9,165,090  

 

TLIC owns approximately six and one-half acres of land located in Topeka, Kansas that includes a 20,000 square foot office building on approximately one-fourth of this land. This building and one and one-half acre of land is held for the production of income. The remaining five acres of land are held for sale. In addition, FBLIC owns one-half acre of undeveloped land located in Jefferson City, Missouri. This land is held for sale. FTCC also owned a small, undeveloped land parcel in Carthage, Mississippi that was sold during 2014.

 

In December 2013, TLIC purchased one acre of land in Greensburg, Indiana that included a 3,975 square foot retail building on approximately 8% of this land. Also in December 2013, TLIC purchased another acre of land in Norman, Oklahoma that included a 9,100 square foot retail building on approximately 18% of this land. These buildings and land were held for sale.

 

In February 2014, TLIC purchased one acre of land in Houston, Texas that included a 9,195 square foot building constructed on approximately 25% of this land. Also in February 2014, TLIC purchased three-fourths of an acre of land in Harrisonville, Missouri that included a 6,895 square foot building constructed on approximately 20% of this land. These buildings and land were also held for sale.

 

 
18

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

2. Investments (continued)

 

On March 11, 2015, the Company sold its investment real estate in buildings and land held for sale in Greensburg, Indiana; Norman, Oklahoma; Houston, Texas and Harrisonville, Missouri with an aggregate carrying value of $6,693,044 as of both December 31, 2014 and March 11, 2015. The Company recorded a gross profit on these sales of $390,202 based on an aggregate sales price of $7,083,246 less closing costs and expenses of $20,119.

 

In addition, simultaneously with these sales, the Company settled its two notes payable, collateralized by the held for sale buildings and land (including assignment of the tenant leases), with an aggregate payment to Grand Bank (the creditor) of $4,076,473. In connection with the repayments of the two notes payable, the Company expensed the loan origination fees remaining as of March 11, 2015 of $72,744. During the period from January 1, 2015 to March 11, 2015, the Company incurred interest expense of $35,181 on the two notes payable and amortized $7,423 of loan origination fees.

 

 

3. Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three-level fair value hierarchy. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in and out of the Level 3 category as of the beginning of the period in which the reclassifications occur.

 

 
19

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(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, 2015 and December 31, 2014 is summarized as follows:

 

March 31, 2015 (Unaudited)

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 2,791,695     $ -     $ 2,791,695  

States and political subdivisions

    -       1,671,707       -       1,671,707  

Residential mortgage-backed securities

    -       119,452       -       119,452  

Corporate bonds

    -       95,528,313       -       95,528,313  

Foreign bonds

    -       12,408,835       -       12,408,835  

Total fixed maturity securities

  $ -     $ 112,520,002     $ -     $ 112,520,002  
                                 

Equity securities, available-for-sale

                               

Mutual funds

  $ 3,592     $ 79,943     $ -     $ 83,535  

Corporate preferred stock

    209,554       52,980       -       262,534  

Corporate common stock

    280,079       -       46,500       326,579  

Total equity securities

  $ 493,225     $ 132,923     $ 46,500     $ 672,648  

 

December 31, 2014

 

Level 1

   

Level 2

   

Level 3

   

Total

 

Fixed maturity securities, available-for-sale

                               

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

  $ -     $ 2,750,013     $ -     $ 2,750,013  

States and political subdivisions

    -       1,204,153       -       1,204,153  

Residential mortgage-backed securities

    -       130,435       -       130,435  

Corporate bonds

    -       95,193,298       -       95,193,298  

Foreign bonds

    -       11,373,530       -       11,373,530  

Total fixed maturity securities

  $ -     $ 110,651,429     $ -     $ 110,651,429  
                                 

Equity securities, available-for-sale

                               

Mutual funds

  $ 3,592     $ 79,873     $ -     $ 83,465  

Corporate preferred stock

    203,999       52,076       -       256,075  

Corporate common stock

    285,317       -       46,500       331,817  

Total equity securities

  $ 492,908     $ 131,949     $ 46,500     $ 671,357  

 

As of both March 31, 2015 and December 31, 2014, Level 3 financial instruments consisted of two private placement common stocks that have no active trading. These private placement stocks represent investments in small insurance holding companies. The fair value for these securities was determined through the use of unobservable assumptions about market participants. The Company has assumed a willing market participant would purchase the securities for the same price as the Company paid until such time as the development stage company commences operations.

 

Fair values for Level 1 and Level 2 assets for the Company’s fixed maturity and equity securities available-for-sale 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.

 

 
20

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(Unaudited)

 

3. Fair Value Measurements (continued)

 

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, states and political subdivisions, mortgage-backed securities, corporate bonds and foreign bonds.

 

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

 

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

 

 
21

 

 

First Trinity Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2015

(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, 2015 and December 31, 2014, and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:

 

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

 

   

March 31, 2015 (Unaudited)

 
   

Carrying

   

Fair

                         
   

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial

  $ 1,925,112     $ 1,958,153     $ -     $ -     $ 1,958,153  

Residential

    43,654,397       45,872,031       -       -       45,872,031  

Policy loans

    1,461,576       1,461,576       -       -       1,461,576  

Short-term investments

    1,141,837       1,141,837       1,141,837       -       -  

Other long-term investments

    23,048,210       27,569,839       -       -       27,569,839  

Cash and cash equivalents

    17,621,797       17,621,797       17,621,797       -       -  

Accrued investment income

    1,756,739       1,756,739       -       -       1,756,739  

Loans from premium financing

    123,886       123,886       -       -       123,886  

Total financial assets

  $ 90,733,554     $ 97,505,858     $ 18,763,634     $ -     $ 78,742,224  

Financial liabilities

                                       

Policyholders' account balances

  $ 151,496,179     $ 132,634,781     $ -     $ -     $ 132,634,781  

Policy claims

    671,407       671,407       -       -       671,407  

Total financial liabilities

  $ 152,167,586     $ 133,306,188     $ -     $ -     $ 133,306,188  
                                         

 

   

December 31, 2014

 
   

Carrying

   

Fair

                         
   

Amount

   

Value

   

Level 1

   

Level 2

   

Level 3

 

Financial assets

                                       

Mortgage loans on real estate

                                       

Commercial

  $ 1,962,593     $ 2,000,041     $ -     $ -     $ 2,000,041  

Residential

    36,687,140       38,613,679       -       -       38,613,679  

Policy loans

    1,520,620       1,520,620       -       -       1,520,620  

Short-term investments

    1,141,199       1,141,199