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FIRST TRINITY FINANCIAL CORP – 10-Q – : 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 ofAlabama ,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 andWest 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. Our profitability in the life insurance and annuity segments is a function of our ability to accurately price the policies that we write, adequately value life insurance business acquired, administer life insurance company acquisitions at an expense level that validates the acquisition cost and invest the premiums and annuity considerations in assets that earn investment income with a positive spread. Acquisitions The Company expects to facilitate growth through acquisitions of other life insurance companies and/or blocks of life insurance and annuity business. In lateDecember 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
outstanding stock of FBLIC for
OnApril 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
West Indies regulators.
EffectiveJanuary 1, 2020 , the Company acquired 100% of the outstanding common stock ofK-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 . Company Recapitalization
On
shareholders approved the following proposals:
1. An amendment and restatement of FTFC's Certificate of Incorporation to
authorize 40,000,000 shares of Class A common stock and 10,000,000 shares of
Class B common stock and to establish the relative rights, preferences and
privileges of, and the restrictions and limitations on, the Class A common
Stock and the Class B common stock.
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2. An amendment and restatement of FTFC's Certificate of Incorporation to
automatically reclassify each issued and outstanding share of our existing
common stock as one (1) share of Class A common stock or, at the
shareholder's election, into one (1) share of new Class B common stock.
These proposals received Form A regulatory approval from the OID onFebruary 27, 2020 and the MDCI onDecember 31, 2019 , followed by formal adoption by FTFC's Board of Directors onMarch 12, 2020 . EffectiveMarch 12, 2020 , FTFC's Class B shareholders were 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, 85% of cash dividends, stock dividends or amounts due upon any FTFC merger, sale or liquidation event. FTFC's Class B shareholders may also convert one share of FTFC's Class B common stock for a .85 share of FTFC's Class A common stock. FTFC's Class A shareholders will elect the remaining Board of Directors members and will receive 100% of cash dividends, stock dividends or amounts due upon any Company merger, sale or liquidation event.
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 withU.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 endedDecember 31, 2020 . The Company considers its most critical accounting estimates to be those applied to investments in fixed maturities, 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 sinceDecember 31, 2020 .
Recent Accounting Pronouncements
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial
Instruments
InJune 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. 36
-------------------------------------------------------------------------------- The updated guidance was effective for reporting periods beginning afterDecember 15, 2019 . As aSmaller Reporting Company , the effective date was recently changed and the delayed effective date is now for reporting periods beginning afterDecember 15, 2022 . Early adoption is permitted for reporting periods beginning afterDecember 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 -
InJanuary 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
InAugust 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 afterDecember 15, 2020 . As aSmaller Reporting Company , the effective date has been changed twice and the delayed effective date is now for reporting periods beginning afterDecember 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
to modify the disclosure requirements related to fair value measurements
including the consideration of costs and benefits of producing the modified
disclosures.
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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
InDecember 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.
Business Combinations - Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers
InOctober 2021 , the FASB issued guidance (Accounting Standards Update 2021-08) for the accounting for revenue contracts with customers acquired in a business combination. The amendments in this Update address how to determine whether a contract liability is recognized by the acquirer in a business combination and provide specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments to this Update require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification - Revenue from Contracts with Customers ("Topic 606") at the acquisition date as if the acquirer had originated the contracts. The amendments in this Update primarily address the accounting for contract assets and contract liabilities from revenue contracts with customers in a business combination. These amendments, however, also apply to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply. The amendments in this Update do not affect the accounting for other assets or liabilities that may arise from revenue contracts with customers in accordance with Topic 606 whether in or not in a business combination. The amendments in this Update are effective for the Company as a public business entity for fiscal years beginning afterDecember 15, 2022 , including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments retrospectively to all business for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and prospectively to all business combinations that occur on or after the date of initial application. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity. Business Segments 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 and nine months endedSeptember 30, 2021 and 2020 and as ofSeptember 30, 2021 andDecember 31, 2020 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.
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FINANCIAL HIGHLIGHTS Consolidated Condensed Results of Operations for the Three Months EndedSeptember 30, 2021 and 2020 (Unaudited) Three Months Ended September 30, Amount Change 2021 2020 2021 less 2020 Premiums$ 8,323,522 $ 7,166,641 $ 1,156,881 Net investment income 5,757,862 5,749,175 8,687 Net realized investment gains 320,735 118,960 201,775 Service fees 12,245 23,212 (10,967 ) Other income 13,793 17,681 (3,888 ) Total revenues 14,428,157 13,075,669 1,352,488 Benefits and claims 9,228,117 8,980,079 248,038 Expenses 3,854,074 3,031,775 822,299 Total benefits, claims and expenses 13,082,191 12,011,854 1,070,337 Income before federal income tax expense 1,345,966 1,063,815 282,151 Federal income tax expense 278,632 223,758 54,874 Net income$ 1,067,334 $ 840,057 $ 227,277 Net income per common share basic and diluted Class A common stock $ 0.1220$ 0.0960 $ 0.0260 Class B common stock $ 0.1037$ 0.0816 $ 0.0221 Consolidated Condensed Results of Operations for the Nine Months EndedSeptember 30, 2021 and 2020 (Unaudited) Nine Months Ended September 30, Amount Change 2021 2020 2021 less 2020 Premiums$ 23,182,831 $ 19,971,741 $ 3,211,090 Net investment income 17,979,206 17,895,091 84,115 Net realized investment gains 491,098 552,842 (61,744 ) Service fees 191,833 41,108 150,725 Other income 73,134 136,472 (63,338 ) Total revenues 41,918,102 38,597,254 3,320,848 Benefits and claims 27,295,385 25,094,895 2,200,490 Expenses 12,209,049 10,810,777 1,398,272 Total benefits, claims and expenses 39,504,434 35,905,672 3,598,762 Income before federal income tax expense 2,413,668 2,691,582 (277,914 ) Federal income tax expense 585,943 588,673 (2,730 ) Net income$ 1,827,725 $ 2,102,909 $ (275,184 ) Net income per common share basic and diluted Class A common stock $ 0.2089$ 0.2408 $ (0.0319 ) Class B common stock $ 0.1776$ 0.1670 $ 0.0106 39
-------------------------------------------------------------------------------- Consolidated Condensed Financial Position as ofSeptember 30, 2021 andDecember 31, 2020 (Unaudited) Amount Change September 30, 2021 December 31, 2020 2021 to 2020 Investment assets$ 416,249,893 $ 422,960,668 $ (6,710,775 ) Assets held in trust under coinsurance agreement 109,072,674 112,160,307 (3,087,633 ) Other assets 136,137,593 108,474,294 27,663,299 Total assets$ 661,460,160 $ 643,595,269 $ 17,864,891 Policy liabilities$ 464,297,439 $ 441,412,797 $ 22,884,642 Funds withheld under coinsurance agreement 109,678,542 112,681,925 (3,003,383 ) Deferred federal income taxes 9,079,407 9,220,905 (141,498 ) Other liabilities 9,449,432 10,427,430 (977,998 ) Total liabilities 592,504,820 573,743,057 18,761,763 Shareholders' equity 68,955,340 69,852,212 (896,872 ) Total liabilities and shareholders' equity$ 661,460,160 $
643,595,269
Shareholders' equity per common share Class A common stock$ 7.8827 $ 7.9853$ (0.1026 ) Class B common stock$ 6.7003 $ 6.7875$ (0.0872 )
Results of Operations - Three Months Ended
Revenues Our primary sources of revenue are life insurance premium income and investment income. Premium payments are classified as first-year, renewal and single. In addition, realized gains and losses on investment holdings can significantly impact revenues from period to period. Our revenues for the three months endedSeptember 30, 2021 and 2020 are summarized as follows: (Unaudited) Three Months Ended September 30, Amount Change 2021 2020 2021 less 2020 Premiums$ 8,323,522 $ 7,166,641 $ 1,156,881 Net investment income 5,757,862 5,749,175 8,687 Net realized investment gains 320,735 118,960 201,775 Service fees 12,245 23,212 (10,967 ) Other income 13,793 17,681 (3,888 ) Total revenues$ 14,428,157 $ 13,075,669 $ 1,352,488
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30, 2021
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Premiums Our premiums for the three months endedSeptember 30, 2021 and 2020 are summarized as follows: (Unaudited) Three Months Ended September 30, Amount Change 2021 2020 2021 less 2020 Ordinary life first year $ 521,628 $ 378,729$ 142,899 Ordinary life renewal 1,031,007 903,553 127,454 Final expense first year 1,508,894 1,471,145 37,749 Final expense renewal 5,261,993 4,413,214 848,779 Total premiums$ 8,323,522 $ 7,166,641 $ 1,156,881 The$1,156,881 increase in premiums for the three months endedSeptember 30, 2021 is primarily due to a$848,779 increase in final expense renewal premiums,$142,899 increase in ordinary life first year premiums and a$127,454 increase in ordinary life renewal premiums. The increase in final expense renewal premiums reflects the persistency of prior years' final expense production. The increase in ordinary life first year premiums and ordinary life renewal premiums primarily reflects ordinary dollar denominated life insurance policies sold in the international market by TAI. Net Investment Income
The major components of our net investment income for the three months ended
(Unaudited)
Three Months Ended September 30, Amount Change
2021 2020 2021 less 2020
Fixed maturity securities $ 1,737,661 $ 1,930,697 $ (193,036 )
Preferred stock and equity securities 37,732 22,946 14,786
Other long-term investments 1,151,057 1,275,834 (124,777 )
Mortgage loans 3,517,394 3,503,652 13,742
Policy loans 40,461 37,985 2,476
Real estate - 68,663 (68,663 )
Short-term and other investments 20,854 38,662 (17,808 )
Gross investment income 6,505,159 6,878,439 (373,280 )
Investment expenses (747,297 ) (1,129,264 ) (381,967 )
Net investment income $ 5,757,862 $ 5,749,175 $ 8,687
The $373,280 decrease in gross investment income for the three months ended
September 30, 2021 is primarily due to $193,036 decrease in fixed maturity
securities, $124,777 decrease in other long-term investments and $68,663
decrease in real estate. The $193,036 decline in fixed maturity securities is
due to lower gross effective yields on fixed maturity securities purchased and
held during third quarter 2021. The $124,777 decline in investment income from
other long-term investments is due to decreased holdings in this investment
category. The $68,663 decline in investment income from real estate is due the
November 16, 2020 sale of an office building and land located in Topeka, Kansas .
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-------------------------------------------------------------------------------- The$381,967 decrease in investment expense for the three months endedSeptember 30, 2021 primarily due to decreased mortgage loan acquisition expenses and the sale of theTopeka, Kansas office building and land onNovember 16, 2020 . Net Realized Investment Gains Our net realized investment gains result from sales of fixed maturity securities available-for-sale, investment real estate, mortgage loans on real estate and preferred stock securities available-for-sale plus changes in fair value of equity securities.
Our net realized investment gains for the three months ended
and 2020 are summarized as follows:
(Unaudited)
Three Months Ended September 30, Amount Change
2021 2020 2021 less 2020
Fixed maturity securities
available-for-sale:
Sale proceeds $ 2,981,658 $ 4,209,686 $ (1,228,028 )
Amortized cost at sale date 2,959,726 4,098,067 (1,138,341 )
Net realized gains $ 21,932 $ 111,619 $ (89,687 )
Investment real estate:
Sale proceeds $ 742,078 $ - $ 742,078
Carrying value at sale date 458,587 - 458,587
Net realized gains $ 283,491 $ - $ 283,491
Mortgage loans on real estate:
Sale proceeds $ 25,158,102 $ 12,357,549 $ 12,800,553
Carrying value at sale date 25,156,758 12,357,548 12,799,210
Net realized gains $ 1,344 $ 1 $ 1,343
Preferred stock securities
available-for-sale:
Sale proceeds $ - $ 50,000 $ (50,000 )
Amortized cost at sale date - 49,945 (49,945 )
Net realized gains $ - $ 55 $ (55 )
Equity securities, changes in fair
value $ 13,968 $
7,285 $ 6,683
Net realized investment gains $ 320,735$ 118,960 $ 201,775 42
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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
and 2020 are summarized as follows:
(Unaudited)
Three Months Ended September 30, Amount Change
2021 2020 2021 less 2020
Benefits and claims
Increase in future policy benefits $ 3,437,541 $ 2,995,221 $ 442,320
Death benefits 2,315,438 2,600,833 (285,395 )
Surrenders 112,980 242,460 (129,480 )
Interest credited to policyholders 3,279,558 3,071,581 207,977
Dividend, endowment and
supplementary life contract benefits 82,600 69,984 12,616
Total benefits and claims 9,228,117 8,980,079 248,038
Expenses
Policy acquisition costs deferred (3,142,259 ) (3,056,211 ) (86,048 ) Amortization of deferred policy acquisition costs 1,683,068 1,144,749 538,319 Amortization of value of insurance business acquired 67,030 73,778 (6,748 ) Commissions 3,161,051 2,960,619 200,432 Other underwriting, insurance and acquisition expenses 2,085,184 1,908,840 176,344 Total expenses 3,854,074 3,031,775 822,299
Total benefits, claims and expenses
The
months ended
Benefits and Claims
The
?
number of life policies in force and the aging of existing life policies.
?
increase of approximately
policyholders' account balances in the consolidated statement of financial
position (increased deposits and interest credited in excess of withdrawals)
sinceSeptember 30, 2020 . ?$129,480 decrease in surrenders is based upon policyholder election.
?
of decreased ordinary life benefits that exceeded
expense benefits.
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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 endedSeptember 30, 2021 and 2020, capitalized costs were$3,142,259 and$3,056,211 , respectively. Amortization of deferred policy acquisition costs for the three months endedSeptember 30, 2021 and 2020 were$1,683,068 and$1,144,749 , respectively. The$86,048 increase in the 2021 acquisition costs deferred primarily relates to increased final expense first year deferral of increased eligible commissions. There was a$538,319 increase in the 2021 amortization of deferred acquisition costs due to 2021 surrenders and withdrawal activity and the impact of mortality.
Amortization of Value of Insurance Business Acquired
The cost of acquiring insurance business is amortized over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was$67,030 and$73,778 for the three months endedSeptember 30, 2021 and 2020, respectively, representing a$6,748 decrease. Commissions Our commissions for the three months endedSeptember 30, 2021 and 2020 are summarized as follows: (Unaudited) Three Months Ended September 30, Amount Change 2021 2020 2021 less 2020 Annuity $ 202,611 $ 337,634$ (135,023 ) Ordinary life first year 574,792 405,204 169,588 Ordinary life renewal 80,333 44,316 36,017 Final expense first year 1,795,193 1,748,223 46,970 Final expense renewal 508,122 425,242 82,880 Total commissions$ 3,161,051 $ 2,960,619 $ 200,432 The$200,432 increase in commissions for the three months endedSeptember 30, 2021 is primarily due to a$169,588 increase in ordinary life first year commissions,$82,880 increase in final expense renewal commissions that exceeded a$135,023 decrease in annuity commissions that corresponded to a$142,899 increase in ordinary life first year premiums, a$848,779 increase in final expense renewal premiums and a$4,692,001 decrease in retained annuity deposits. 44
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Other Underwriting, Insurance and Acquisition Expenses
There was a$176,344 increase in underwriting, insurance and acquisition expenses for the three months endedSeptember 30, 2021 was primarily related to increased legal fees related to acquisition activities and increased third party administration fees primarily related to maintaining increased number of policies in force and increased service requests to the third party administrator. Federal Income Taxes FTFC filed its 2020 consolidated federal income tax return with TLIC, FBLIC and TMC onOctober 13, 2021 . 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 endedSeptember 30, 2021 and 2020, current income tax expense was$1,670 and$45,654 , respectively. For the three months endedSeptember 30, 2021 and 2020, deferred federal income tax expense was$276,962 and$178,104 , respectively.
Net Income Per Common Share Basic and Diluted
For the three months endedSeptember 30, 2021 and 2020, the net income allocated to the Class B shareholders is the total net income less shareholders' cash dividends 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 endedSeptember 30, 2021 , the net income allocated to the Class A shareholders of$1,056,848 is the total net income$1,067,334 less the net income allocated to the Class B shareholders$10,486 . For the three months endedSeptember 30, 2020 , the net income allocated to the Class A shareholders$831,804 is the total net income$840,057 less the net income allocated to the Class B shareholders$8,253 . The weighted average outstanding common shares basic for the three months endedSeptember 30, 2021 and 2020 were 8,661,696 for Class A shares and 101,102 for Class B shares. The weighted average Class A shares reflect the retrospective adjustment for the impacts of the 10% stock dividend declared by the Company onNovember 12, 2020 and issued to holders of Class A common stock shares of the Company as ofNovember 12, 2020 . Business Segments
The Company has a life insurance segment, consisting of the life insurance
operations of TLIC, FBLIC and TAI, an annuity segment, consisting of the annuity
operations of TLIC, FBLIC and TAI and a corporate segment. Results for the
parent company and the operations of TMC, after elimination of intercompany
amounts, are allocated to the corporate segment.
The revenues and income before federal income taxes from our business segments for the three months endedSeptember 30, 2021 and 2020 are summarized as follows: (Unaudited) Three Months Ended September 30, Amount Change 2021 2020 2021 less 2020 Revenues: Life insurance operations$ 9,404,804 $ 8,201,655 $ 1,203,149 Annuity operations 4,932,938 4,729,579 203,359 Corporate operations 90,415 144,435 (54,020 ) Total$ 14,428,157 $ 13,075,669 $ 1,352,488 Income (loss) before federal income taxes: Life insurance operations $ 923,202$ 141,246 $ 781,956 Annuity operations 385,534 795,043 (409,509 ) Corporate operations 37,230 127,526 (90,296 ) Total$ 1,345,966 $ 1,063,815 $ 282,151 45
-------------------------------------------------------------------------------- The increases and decreases of revenues and profitability from our business segments for the three months endedSeptember 30, 2021 and 2020 are summarized as follows: Life Insurance Annuity Corporate Operations Operations Operations Total Revenues Premiums$ 1,156,881 $ - $ -$ 1,156,881 Net invesment income (36,647 ) 92,002 (46,668 ) 8,687 Net realized investment gains 60,478 141,297 - 201,775 Service fees and other income 22,437 (29,940 ) (7,352 ) (14,855 ) Total revenue 1,203,149 203,359
(54,020 ) 1,352,488
Benefits and claims Increase in future policy benefits 442,320 - - 442,320 Death benefits (285,395 ) - - (285,395 ) Surrenders (129,480 ) - - (129,480 ) Interest credited to policyholders - 207,977 - 207,977 Dividend, endowment and supplementary life contract benefits 12,616 - - 12,616 Total benefits and claims 40,061 207,977 - 248,038 Expenses Policy acquisition costs deferred net of amortization 3,555 448,716 - 452,271 Amortization of value of insurance business acquired (3,374 ) (3,374 ) - (6,748 ) Commissions 335,455 (135,023 ) - 200,432 Other underwriting, insurance and acquisition expenses 45,496 94,572 36,276 176,344 Total expenses 381,132 404,891 36,276 822,299 Total benefits, claims and expenses 421,193 612,868 36,276 1,070,337 Income (loss) before federal income taxes (benefits)$ 781,956 $ (409,509 ) $ (90,296 ) $ 282,151
Results of Operations - Nine Months Ended
Revenues Our primary sources of revenue are life insurance premium income and investment income. Premium payments are classified as first-year, renewal and single. In addition, realized gains and losses on investment holdings can significantly impact revenues from period to period. Our revenues for the nine months endedSeptember 30, 2021 and 2020 are summarized as follows: (Unaudited) Nine Months Ended September 30, Amount Change 2021 2020 2021 less 2020 Premiums$ 23,182,831 $ 19,971,741 $ 3,211,090 Net investment income 17,979,206 17,895,091 84,115 Net realized investment gains 491,098 552,842 (61,744 ) Service fees 191,833 41,108 150,725 Other income 73,134 136,472 (63,338 ) Total revenues$ 41,918,102 $ 38,597,254 $ 3,320,848
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46
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Premiums Our premiums for the nine months endedSeptember 30, 2021 and 2020 are summarized as follows: (Unaudited) Nine Months Ended September 30, Amount Change 2021 2020 2021 less 2020 Ordinary life first year$ 1,300,290 $ 1,074,637 $ 225,653 Ordinary life renewal 2,667,323 2,228,261 439,062 Final expense first year 4,505,903 4,021,256 484,647 Final expense renewal 14,709,315 12,647,587 2,061,728 Total premiums$ 23,182,831 $ 19,971,741 $ 3,211,090 The$3,211,090 increase in premiums for the nine months endedSeptember 30, 2021 is primarily due to the$2,061,728 increase in final expense renewal premiums,$484,647 increase in final expense first year premiums,$439,062 increase in ordinary life renewal premiums and$225,653 increase in ordinary life first year premiums. The increase in final expense renewal premiums reflects the persistency of prior years' final expense production. The increase in final expense first year premiums represents management's focus on expanding final expense production by contracting new, independent agents in expanded locations. 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. Net Investment Income
The major components of our net investment income for the nine months ended
(Unaudited)
Nine Months Ended September 30, Amount Change
2021 2020 2021 less 2020
Fixed maturity securities $ 5,161,051 $ 5,443,419 $ (282,368 )
Preferred stock and equity securities 81,136 79,015 2,121
Other long-term investments 3,656,131 3,927,257 (271,126 )
Mortgage loans 10,743,701 10,870,548 (126,847 )
Policy loans 118,036 113,814 4,222
Real estate - 206,026 (206,026 )
Short-term and other investments 65,227 92,479 (27,252 )
Gross investment income 19,825,282 20,732,558 (907,276 )
Investment expenses (1,846,076 ) (2,837,467 ) (991,391 )
Net investment income $ 17,979,206 $ 17,895,091 $ 84,115
The
securities,
in real estate and
47 -------------------------------------------------------------------------------- The$282,368 decline in fixed maturity securities is due to lower gross effective yields on fixed maturity securities purchased and held during 2021. The$271,126 decline in investment income from other long-term investments is due to decreased holdings in this investment category. The$206,026 decline in investment income from real estate is due theNovember 16, 2020 sale of an office building and land located inTopeka, Kansas . The$126,847 decline in mortgage loans investment income is due to decreased holdings of mortgage loans and lower gross effective yields on mortgage loan purchased. The$991,391 decrease in investment expense for the nine months endedSeptember 30, 2021 is primarily related to decreased mortgage loan acquisition expenses and the sale of theTopeka, Kansas office building and land onNovember 16, 2020 . Net Realized Investment Gains Our net realized investment gains result from sales of fixed maturity securities available-for-sale, equity securities, investment real estate, mortgage loans on real estate and preferred stock securities available-for-sale plus changes in fair value of equity securities.
Our net realized investment gains for the nine months ended
and 2020 are summarized as follows:
(Unaudited)
Nine Months Ended September 30, Amount Change
2021 2020 2021 less 2020
Fixed maturity securities
available-for-sale:
Sale proceeds $ 6,949,876 $ 15,923,450 $ (8,973,574 )
Amortized cost at sale date 6,824,279 15,493,692 (8,669,413 )
Net realized gains $ 125,597 $ 429,758 $ (304,161 )
Equity securities sold:
Sale proceeds $ 89 $ - $ 89
Cost at sale date - - -
Net realized gains $ 89 $ - $ 89
Investment real estate:
Sale proceeds $ 818,018 $ 682,945 $ 135,073
Carrying value at sale date 528,178 649,249 (121,071 )
Net realized gains $ 289,840 $ 33,696 $ 256,144
Mortgage loans on real estate:
Sale proceeds $ 78,319,365 $ 45,252,139 $ 33,067,226
Carrying value at sale date 78,279,351 45,144,039 33,135,312
Net realized gains $ 40,014 $ 108,100 $ (68,086 )
Preferred stock securities
available-for-sale:
Sale proceeds $ - $ 50,000 $ (50,000 )
Carrying value at sale date - 49,945 (49,945 )
Net realized gains $ - $ 55 $ (55 )
Equity securities, changes in fair
value $ 35,558 $
(18,767 )
Net realized investment gains$ 491,098 $ 552,842 $ (61,744 ) 48
--------------------------------------------------------------------------------
Service Fees The$150,725 increase in service fees for the nine months endedSeptember 30, 2021 is primarily due to an increase in fees fromTrinity 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 nine months ended
and 2020 are summarized as follows:
(Unaudited)
Nine Months Ended September 30, Amount Change
2021 2020 2021 less 2020
Benefits and claims
Increase in future policy benefits $ 8,639,474 $ 8,103,379 $ 536,095
Death benefits 8,108,650 6,695,141 1,413,509
Surrenders 834,545 881,365 (46,820 )
Interest credited to policyholders 9,487,050 9,191,808 295,242
Dividend, endowment and
supplementary life contract benefits 225,666 223,202 2,464
Total benefits and claims 27,295,385 25,094,895 2,200,490
Expenses
Policy acquisition costs deferred (9,325,731 ) (8,134,182 ) (1,191,549 ) Amortization of deferred policy acquisition costs 5,206,030 3,665,161 1,540,869 Amortization of value of insurance business acquired 210,350 227,328 (16,978 ) Commissions 9,172,274 7,766,710 1,405,564 Other underwriting, insurance and acquisition expenses 6,946,126 7,285,760 (339,634 ) Total expenses 12,209,049 10,810,777 1,398,272
Total benefits, claims and expenses
The
months ended
Benefits and Claims
The
?$1,413,509 increase in death benefits is primarily due to approximately$2,051,000 of increased final expense benefits that exceeded a$638,000 decrease in ordinary life benefits.
?
number of life policies in force and the aging of existing life policies.
?
increase of approximately
policyholders' account balances in the consolidated statement of financial
position (increased deposits and interest credited in excess of withdrawals)
since September 30, 2020 .
49
--------------------------------------------------------------------------------
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 insurance and annuity contracts. For the nine months endedSeptember 30, 2021 and 2020, capitalized costs were$9,325,731 and$8,134,182 , respectively. Amortization of deferred policy acquisition costs for the nine months endedSeptember 30, 2021 and 2020 were$5,206,030 and$3,665,161 , respectively. The$1,191,549 increase in the 2021 acquisition costs deferred primarily relates to increased first year final expense premiums and annuity production and deferral of increased eligible commissions. There was an$1,540,869 increase in the 2021 amortization of deferred acquisition costs due to 2021 surrenders and withdrawal activity and the impact of mortality.
Amortization of Value of Insurance Business Acquired
The cost of acquiring insurance business is amortized over the emerging profit of the related policies using the same assumptions that were used in computing liabilities for future policy benefits. Amortization of the value of insurance business acquired was$210,350 and$227,328 for the nine months endedSeptember 30, 2021 and 2020, respectively, representing a$16,978 decrease. Commissions Our commissions for the nine months endedSeptember 30, 2021 and 2020 are summarized as follows: (Unaudited) Nine Months Ended September 30, Amount Change 2021 2020 2021 less 2020 Annuity$ 749,448 $ 470,682 $ 278,766 Ordinary life first year 1,426,788 1,183,716 243,072 Ordinary life renewal 208,935 105,211 103,724 Final expense first year 5,370,868 4,782,514 588,354 Final expense renewal 1,416,235 1,224,587 191,648 Total commissions$ 9,172,274 $ 7,766,710 $ 1,405,564 The$1,405,564 increase in commissions for the nine months endedSeptember 30, 2021 is primarily due to a$588,354 increase in final expense first year commissions,$278,766 increase in annuity commissions and a$243,072 increase in ordinary life first year premiums that corresponded to a$484,647 increase in final expense first year premiums,$8,724,496 increase in retained annuity deposits and a$225,653 increase in ordinary life first year premiums.
Other Underwriting, Insurance and Acquisition Expenses
The$339,634 decrease in other underwriting, insurance and acquisition expenses for the nine months endedSeptember 30, 2021 was primarily related to a decrease in the Company's Chief Executive Officer bonus that exceeded increased legal fees related to acquisition activities and increased third party administration fees primarily related to maintaining increased number of policies in force and increased service requests to the third party administrator. 50 --------------------------------------------------------------------------------
Federal Income Taxes FTFC filed its 2020 consolidated federal income tax return with TLIC, FBLIC and TMC onOctober 13, 2021 . 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 nine months ended
expense was
expense was
and 2020, respectively.
Net Income Per Common Share Basic and Diluted
For the nine months endedSeptember 30, 2021 and 2020, the net income allocated to the Class B shareholders is the total net income less shareholders' cash dividends 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 nine months endedSeptember 30, 2021 , the net income allocated to the Class A shareholders of$1,809,769 is the total net income$1,827,725 less the net income allocated to the Class B shareholders$17,956 . For the nine months endedSeptember 30, 2020 , the net income allocated to the Class A shareholders$2,086,030 is the total net income$2,102,909 less the net income allocated to the Class B shareholders$16,879 . The weighted average outstanding common shares basic for the nine months endedSeptember 30, 2021 and 2020 were 8,661,696 for Class A shares and 101,102 for Class B shares. The weighted average Class A shares reflect the retrospective adjustment for the impacts of the 10% stock dividend declared by the Company onNovember 12, 2020 and issued to holders of Class A common stock shares of the Company as ofNovember 12, 2020 . Business Segments The Company has a life insurance segment, consisting of the life insurance operations of TLIC, FBLIC and TAI and an annuity segment, consisting of the annuity operations of TLIC, FBLIC and TAI and a corporate segment. Results for the parent company and the operations of TMC, after elimination of intercompany amounts, are allocated to the corporate segment. The revenues and income before federal income taxes from our business segments for the nine months endedSeptember 30, 2021 and 2020 are summarized as follows: (Unaudited) Nine Months Ended September 30, Amount Change 2021 2020 2021 less 2020 Revenues: Life insurance operations$ 26,468,275 $ 23,044,336 $ 3,423,939 Annuity operations 14,957,409 15,078,907 (121,498 ) Corporate operations 492,418 474,011 18,407 Total$ 41,918,102 $ 38,597,254 $ 3,320,848 Income (loss) before income taxes: Life insurance operations$ 808,447 $ (194,993 ) $ 1,003,440 Annuity operations 1,645,473 2,506,220 (860,747 ) Corporate operations (40,252 ) 380,355 (420,607 ) Total$ 2,413,668 $ 2,691,582 $ (277,914 ) 51
-------------------------------------------------------------------------------- The increases and decreases of revenues and profitability from our business segments for the nine months endedSeptember 30, 2021 and 2020 are summarized as follows: Life Insurance Annuity Corporate Operations Operations Operations Total Revenues Premiums$ 3,211,090 $ - $ -$ 3,211,090 Net invesment income 144,454 (14,194 ) (46,145 ) 84,115 Net realized investment gains 14,251 (75,995 ) - (61,744 ) Service fees and other income 54,144 (31,309 ) 64,552 87,387 Total revenue 3,423,939 (121,498 ) 18,407 3,320,848 Benefits and claims Increase in future policy benefits 536,095 - - 536,095 Death benefits 1,413,509 - - 1,413,509 Surrenders (46,820 ) - - (46,820 ) Interest credited to policyholders - 295,242 - 295,242 Dividend, endowment and supplementary life contract benefits 2,464 - - 2,464 Total benefits and claims 1,905,248 295,242 - 2,200,490 Expenses Policy acquisition costs deferred net of amortization (223,334 ) 572,654 - 349,320 Amortization of value of insurance business acquired (8,489 ) (8,489 ) - (16,978 ) Commissions 1,126,798 278,766 - 1,405,564 Other underwriting, insurance and acquisition expenses (379,724 ) (398,924 ) 439,014 (339,634 ) Total expenses 515,251 444,007 439,014 1,398,272 Total benefits, claims and expenses 2,420,499 739,249 439,014 3,598,762 Income (loss) before federal income taxes (benefits)$ 1,003,440 $ (860,747 )
Radnor official says cattle are part of a tax dodge at the former Ardrossan estate [The Philadelphia Inquirer]
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