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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. 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 . OnJanuary 4, 2022 , FTFC acquiredRoyalty Capital Life Insurance Company ("RCLIC") fromRoyalty Capital Corporation ("Royalty") in exchange for 722,644 shares of FTFC's Class A common stock issued to unrelated parties. Royalty was dissolved immediately after FTFC acquired RCLIC. OnMarch 1, 2022 , theMissouri Department of Commerce and Insurance approved FTFC's contribution and merger of RCLIC into FBLIC.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition, results of operations and liquidity and capital resources is based on our consolidated financial statements that have been prepared in accordance 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. 33 -------------------------------------------------------------------------------- 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, 2021 . The Company considers its most critical accounting estimates to be those applied to investments in fixed maturities securities, mortgage loans on real estate, deferred policy acquisition costs, value of insurance business acquired and future policy benefits. There have been no material changes to the Company's critical accounting policies and estimates sinceDecember 31, 2021 .
Recent Accounting Pronouncements
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial
Instruments
InJune 2016 , theFinancial Accounting Standards Board ("FASB") issued updated guidance (Accounting Standards Update 2016-13) for the accounting for credit losses for financial instruments. The updated guidance applies a new credit loss model (current expected credit losses or CECL) for determining credit-related impairments for financial instruments measured at amortized cost (e.g. reinsurance recoverables, including structured settlements that are recorded as part of reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected. The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security's amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.
The updated guidance was effective for reporting periods beginning after
recently changed and the delayed effective date is now for reporting periods
beginning after
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.
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. 34 -------------------------------------------------------------------------------- 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.
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.
Troubled Debt Restructurings and Vintage Disclosures
InMarch 2022 , the FASB issued amendments (Accounting Standards Update 2022-2) for the accounting of troubled debt restructuring and disclosures. The amendments introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulties. The amendments promulgate that an entity must apply specific loan refinancing and restructuring guidance to determine whether a modification results in a new loan or the continuation of an existing loan. The amendments also require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. The amendments in this guidance are effective for fiscal years beginning afterDecember 15, 2022 , including interim periods and should be applied prospectively. The adoption of this guidance should not have a material effect on the Company's results of operations, financial position or liquidity. 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, 2022 and 2021 and as ofSeptember 30, 2022 andDecember 31, 2021 for additional information regarding segment information.
The following is a discussion and analysis of our financial condition, results
of operations and liquidity and capital resources.
35 --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Consolidated Condensed Results of Operations for the Three Months Ended
(Unaudited)
Three Months Ended September 30, Amount Change
2022 2021 2022 less 2021
Premiums $ 9,210,601 $ 8,323,522 $ 887,079
Net investment income 6,494,679 5,757,862 736,817
Net realized investment gains (28,752 ) 320,735 (349,487 )
Service fees 1,219,038 12,245 1,206,793
Other income 114,799 13,793 101,006
Total revenues 17,010,365 14,428,157 2,582,208
Benefits and claims 10,103,720 9,228,117 875,603
Expenses 4,208,921 3,854,074 354,847
Total benefits, claims and expenses 14,312,641 13,082,191 1,230,450
Income before federal income tax expense 2,697,724 1,345,966 1,351,758
Federal income tax expense 657,514 278,632 378,882
Net income $ 2,040,210 $ 1,067,334 $ 972,876
Net income per common share
Class A common stock $ 0.2154 $ 0.1220 $ 0.0934
Class B common stock $ 0.1831 $ 0.1037 $ 0.0794
Consolidated Condensed Results of Operations for the Nine Months Ended September
30, 2022 and 2021
(Unaudited)
Nine Months Ended September 30, Amount Change
2022 2021 2022 less 2021
Premiums $ 26,353,521 $ 23,182,831 $ 3,170,690
Net investment income 19,382,791 17,979,206 1,403,585
Net realized investment gains 1,060,340 491,098 569,242
Service fees 1,606,433 191,833 1,414,600
Other income 179,071 73,134 105,937
Total revenues 48,582,156 41,918,102 6,664,054
Benefits and claims 30,489,219 27,295,385 3,193,834
Expenses 12,491,636 12,209,049 282,587
Total benefits, claims and expenses 42,980,855 39,504,434 3,476,421
Income before federal income tax expense 5,601,301 2,413,668 3,187,633
Federal income tax expense 1,190,341 585,943 604,398
Net income $ 4,410,960 $ 1,827,725 $ 2,583,235
Net income per common share
Class A common stock $ 0.4658 $ 0.2089 $ 0.2569
Class B common stock $ 0.3959 $ 0.1776 $ 0.2183
36
-------------------------------------------------------------------------------- Consolidated Condensed Financial Position as ofSeptember 30, 2022 andDecember 31, 2021 (Unaudited) Amount Change September 30, 2022 December 31, 2021 2022 to 2021 Investment assets$ 419,523,065 $ 434,120,334 $ (14,597,269 ) Assets held in trust under coinsurance agreement 92,791,781 106,210,246 (13,418,465 ) Other assets 126,901,011 119,428,354 7,472,657 Total assets$ 639,215,857 $ 659,758,934 $ (20,543,077 ) Policy liabilities$ 485,938,063 $ 464,853,615 $ 21,084,448 Funds withheld under coinsurance agreement 92,720,718 106,586,633 (13,865,915 ) Deferred federal income taxes 2,022,935 8,966,303 (6,943,368 ) Other liabilities 10,460,607 10,957,832 (497,225 ) Total liabilities 591,142,323 591,364,383 (222,060 ) Shareholders' equity 48,073,534 68,394,551 (20,321,017 ) Total liabilities and shareholders' equity$ 639,215,857 $
659,758,934
Shareholders' equity per common share Class A common stock$ 5.0763 $ 7.8186$ (2.7423 ) Class B common stock$ 4.3148 $ 6.6458$ (2.3310 )
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, 2022 and 2021 are summarized as follows: (Unaudited) Three Months Ended September 30, Amount Change 2022 2021 2022 less 2021 Premiums$ 9,210,601 $ 8,323,522 $ 887,079 Net investment income 6,494,679 5,757,862 736,817 Net realized investment gains (losses) (28,752 ) 320,735 (349,487 ) Service fees 1,219,038 12,245 1,206,793 Other income 114,799 13,793 101,006 Total revenues$ 17,010,365 $ 14,428,157 $ 2,582,208
The
30, 2022
37
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Premiums Our premiums for the three months endedSeptember 30, 2022 and 2021 are summarized as follows: (Unaudited) Three Months Ended September 30, Amount Change 2022 2021 2022 less 2021 Ordinary life first year $ 688,950 $ 521,628$ 167,322 Ordinary life renewal 1,394,403 1,031,007 363,396 Final expense first year 1,030,205 1,508,894 (478,689 ) Final expense renewal 6,097,043 5,261,993 835,050 Total premiums$ 9,210,601 $ 8,323,522 $ 887,079 The$887,079 increase in premiums for the three months endedSeptember 30, 2022 is primarily due to a$835,050 increase in final expense renewal premiums,$363,396 increase in ordinary life renewal premiums and$167,322 increase in ordinary life first year premiums that exceeded a$478,689 decrease in final expense first year premiums. The increase in final expense renewal premiums reflects the persistency of prior years' final expense production. The increase in ordinary life renewal premiums and ordinary life first year premiums primarily reflects ordinary dollar denominated life insurance policies sold in the international market by TAI. The decrease in final expense first year premiums reflects tightening of underwriting guidelines. Net Investment Income
The major components of our net investment income for the three months ended
(Unaudited)
Three Months Ended September 30, Amount Change
2022 2021 2022 less 2021
Fixed maturity securities $ 1,658,282 $ 1,755,811 $ (97,529 )
Equity securities 129,367 19,582 109,785
Other long-term investments 1,224,369 1,151,057 73,312
Mortgage loans 4,455,501 3,517,394 938,107
Policy loans 50,274 40,461 9,813
Short-term and other investments 22,023 20,854 1,169
Gross investment income 7,539,816 6,505,159 1,034,657
Investment expenses (1,045,137 ) (747,297 ) 297,840
Net investment income $ 6,494,679 $ 5,757,862 $ 736,817
The $1,034,657 increase in gross investment income for the three months ended
September 30, 2022 is primarily due to a $938,107 increase in mortgage loans and
$109,785 increase in equity securities. In twelve months since September 30,
2021 , our investments in mortgage loans increased approximately $44.4 million .
The increase in equity securities gross investment income is primarily due to an
increase in joint venture net income.
The
30, 2022
38 --------------------------------------------------------------------------------
Net Realized Investment Gains (Losses)
Our net realized investment gains (losses) result from sales of fixed maturity securities available-for-sale, investment real estate and mortgage loans on real estate plus changes in fair value of equity securities.
Our net realized investment gains for the three months ended
and 2021 are summarized as follows:
(Unaudited)
Three Months Ended September 30, Amount Change
2022 2021 2022 less 2021
Fixed maturity securities
available-for-sale:
Sale proceeds $ 10,939,070 $ 2,981,658 $ 7,957,412
Amortized cost at sale date 11,044,643 2,959,726 8,084,917
Net realized gains (losses) $ (105,573 ) $ 21,932 $ (127,505 )
Investment real estate:
Sale proceeds $ 150,709 $ 742,078 $ (591,369 )
Carrying value at sale date 94,842 458,587 (363,745 )
Net realized gains $ 55,867 $ 283,491 $ (227,624 )
Mortgage loans on real estate:
Sale proceeds $ - $ 25,158,102 $ (25,158,102 )
Carrying value at sale date - 25,156,758 (25,156,758 )
Net realized gains $ - $
1,344
Equity securities, changes in fair value $ 20,954 $
13,968 $ 6,986
Net realized investment gains (losses) $ (28,752 )
Service Fees
The
2022
39
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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 2021 are summarized as follows:
(Unaudited)
Three Months Ended September 30, Amount Change
2022 2021 2022 less 2021
Benefits and claims
Increase in future policy benefits $ 3,742,861 $ 3,437,541 $ 305,320
Death benefits 2,814,594 2,315,438 499,156
Surrenders 311,577 112,980 198,597
Interest credited to policyholders 3,155,921 3,279,558 (123,637 )
Dividend, endowment and supplementary
life contract benefits 78,767 82,600 (3,833 )
Total benefits and claims 10,103,720 9,228,117 875,603
Expenses
Policy acquisition costs deferred (3,498,984 ) (3,142,259 ) (356,725 )
Amortization of deferred policy
acquisition costs 1,956,596 1,683,068 273,528
Amortization of value of insurance
business acquired 65,039 67,030 (1,991 )
Commissions 3,338,553 3,161,051 177,502
Other underwriting, insurance and
acquisition expenses 2,347,717 2,085,184 262,533
Total expenses 4,208,921 3,854,074 354,847
Total benefits, claims and expenses
The
months ended
Benefits and Claims
The
?
of increased final expense benefits that exceeded$47,000 of decreased ordinary life benefits.
?
number of life policies in force and the aging of existing life policies.
?$198,597 increase in surrenders is based upon policyholder election. 40
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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, 2022 and 2021, capitalized costs were$3,498,984 and$3,142,259 , respectively. Amortization of deferred policy acquisition costs for the three months endedSeptember 30, 2022 and 2021 were$1,956,596 and$1,683,068 , respectively. The$356,725 increase in the 2022 acquisition costs deferred primarily relates to increased ordinary life first year and annuity production and deferral of increased eligible commissions. There was a$273,528 increase in the 2022 amortization of deferred acquisition costs due to 2022 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$65,039 and$67,030 for the three months endedSeptember 30, 2022 and 2021, respectively, representing a$1,991 decrease. Commissions Our commissions for the three months endedSeptember 30, 2022 and 2021 are summarized as follows: (Unaudited) Three Months Ended September 30, Amount Change 2022 2021 2022 less 2021 Annuity $ 663,507 $ 202,611$ 460,896 Ordinary life first year 723,128 574,792 148,336 Ordinary life renewal 125,493 80,333 45,160 Final expense first year 1,237,562 1,795,193 (557,631 ) Final expense renewal 588,863 508,122 80,741 Total commissions$ 3,338,553 $ 3,161,051 $ 177,502 The$177,502 increase in commissions for the three months endedSeptember 30, 2022 is primarily due to a$460,896 increase in annuity commissions (corresponding to$13,775,677 of increase annuity deposits retained) and a$148,336 increase in ordinary life first year commissions (corresponding to$167,322 increased ordinary life first year premiums) that exceeded a$557,631 decrease in final expense first year commissions (corresponding to$478,689 decreased final expense first year premiums). 41 --------------------------------------------------------------------------------
Other Underwriting, Insurance and Acquisition Expenses
The$262,533 increase in underwriting, insurance and acquisition expenses for the three months endedSeptember 30, 2022 was primarily related to increased legal fees and increased third party administration fees primarily related to maintaining increased number of policies in force, increased service requests to the third party administrator and the conversion of RCLIC. Federal Income Taxes FTFC filed its 2021 consolidated federal income tax return with TLIC, FBLIC and TMC onOctober 12, 2022 . 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, 2022 and 2021, current income tax expense was$335,246 and$1,670 , respectively. For the three months endedSeptember 30, 2022 and 2021, deferred federal income tax expense was$322,268 and$276,962 , respectively.
Net Income Per Common Share Basic
For the three months endedSeptember 30, 2022 , the net income allocated to the Class B shareholders is the total net income multiplied by the right to receive dividends at 85% for Class B shares (85,937) as of the reporting date divided by the allocated total shares (9,470,277) of Class A shares (9,384,340) and Class B shares (85,937) as of the reporting date. For the three months endedSeptember 30, 2021 , the net income allocated to the Class B shareholders is the total net income multiplied by the right to receive dividends at 85% for Class B shares (85,937) as of the reporting date divided by the allocated total shares (8,747,633) of Class A shares (8,661,696) and Class B shares (85,937) as of the reporting date. For the three months endedSeptember 30, 2022 , the net income allocated to the Class A shareholders of$2,021,696 is the total net income$2,040,210 less the net income allocated to the Class B shareholders$18,514 . For the three months endedSeptember 30, 2021 , the net income allocated to the Class A shareholders$1,056,848 is the total net income$1,067,334 less the net income allocated to the Class B shareholders$10,486 . The weighted average outstanding common shares basic for the three months endedSeptember 30, 2022 and 2021 were 9,384,340 and 8,661,696 for Class A shares, respectively and 101,102 for Class B shares. Business Segments
The Company has a life insurance segment, consisting of the life insurance
operations of TLIC, FBLIC and TAI, an annuity segment, consisting of the annuity
operations of TLIC, FBLIC and TAI and a corporate segment. Results for the
parent company and the operations of TMC, after elimination of intercompany
amounts, are allocated to the corporate segment.
The revenues and income before federal income taxes from our business segments for the three months endedSeptember 30, 2022 and 2021 are summarized as follows: (Unaudited) Three Months Ended September 30, Amount Change 2022 2021 2022 less 2021 Revenues: Life insurance operations$ 10,821,435 $ 9,378,925 $ 1,442,510 Annuity operations 5,511,290 4,961,512 549,778 Corporate operations 677,640 87,720 589,920 Total$ 17,010,365 $ 14,428,157 $ 2,582,208 Income (loss) before federal income taxes: Life insurance operations$ 1,408,655 $ 1,157,216 $ 251,439 Annuity operations 1,041,579 154,215 887,364 Corporate operations 247,490 34,535 212,955 Total$ 2,697,724 $ 1,345,966 $ 1,351,758 42
-------------------------------------------------------------------------------- The increases and decreases of revenues and profitability from our business segments for the three months endedSeptember 30, 2022 and 2021 are summarized as follows: Life Insurance Annuity Corporate Operations Operations Operations Total Revenues Premiums$ 887,079 $ - $ -$ 887,079 Net invesment income 460,811 199,864 76,142 736,817 Net realized investment losses (75,838 ) (273,649 ) - (349,487 ) Service fees and other income 170,458 623,563 513,778 1,307,799 Total revenue 1,442,510 549,778 589,920 2,582,208 Benefits and claims Increase in future policy benefits 305,320 - - 305,320 Death benefits 499,156 - - 499,156 Surrenders 198,597 - - 198,597 Interest credited to policyholders - (123,637 ) - (123,637 ) Dividend, endowment and supplementary life contract benefits (3,833 ) - - (3,833 ) Total benefits and claims 999,240 (123,637 ) - 875,603 Expenses Policy acquisition costs deferred net of amortization 634,067 (717,264 ) - (83,197 ) Amortization of value of insurance business acquired (995 ) (996 ) - (1,991 ) Commissions (283,394 ) 460,896 - 177,502 Other underwriting, insurance and acquisition expenses (157,847 ) 43,415 376,965 262,533 Total expenses 191,831 (213,949 ) 376,965 354,847 Total benefits, claims and expenses 1,191,071 (337,586 ) 376,965 1,230,450 Income before federal income tax expense$ 251,439 $ 887,364 $ 212,955 $ 1,351,758
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, 2022 and 2021 are summarized as follows: (Unaudited) Nine Months Ended September 30, Amount Change 2022 2021 2022 less 2021 Premiums$ 26,353,521 $ 23,182,831 $ 3,170,690 Net investment income 19,382,791 17,979,206 1,403,585 Net realized investment gains 1,060,340 491,098 569,242 Service fees 1,606,433 191,833 1,414,600 Other income 179,071 73,134 105,937 Total revenues$ 48,582,156 $ 41,918,102 $ 6,664,054
The
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Premiums Our premiums for the nine months endedSeptember 30, 2022 and 2021 are summarized as follows: (Unaudited) Nine Months Ended September 30, Amount Change 2022 2021 2022 less 2021 Ordinary life first year$ 1,792,973 $ 1,300,290 $ 492,683 Ordinary life renewal 3,543,838 2,667,323 876,515 Final expense first year 3,381,679 4,505,903 (1,124,224 ) Final expense renewal 17,635,031 14,709,315 2,925,716 Total premiums$ 26,353,521 $ 23,182,831 $ 3,170,690 The$3,170,690 increase in premiums for the nine months endedSeptember 30, 2022 is primarily due to the$2,925,716 increase in final expense renewal premiums,$876,515 increase in ordinary life renewal premiums and$492,683 increase in ordinary life first year premiums that exceeded a$1,124,224 decrease in final expense first year premiums. The increase in final expense renewal premiums reflects the persistency of prior years' final expense production. The increase in ordinary life renewal premiums and ordinary life first year premiums primarily reflects ordinary dollar denominated life insurance policies sold in the international market by TAI. The decrease in final expense first year premiums reflects tightening of underwriting guidelines. Net Investment Income
The major components of our net investment income for the nine months ended
(Unaudited)
Nine Months Ended September 30, Amount Change
2022 2021 2022 less 2021
Fixed maturity securities $ 5,328,969 $ 5,179,201 $ 149,768
Equity securities 242,466 62,986 179,480
Other long-term investments 3,747,549 3,656,131 91,418
Mortgage loans 12,336,734 10,743,701 1,593,033
Policy loans 142,351 118,036 24,315
Short-term and other investments 68,729 65,227 3,502
Gross investment income 21,866,798 19,825,282 2,041,516
Investment expenses (2,484,007 ) (1,846,076 ) 637,931
Net investment income $ 19,382,791 $ 17,979,206 $ 1,403,585
The $2,041,516 increase in gross investment income for the nine months ended
September 30, 2022 is primarily due to a $1,593,033 increase in mortgage loans,
$179,480 increase in equity securities and a $149,768 increase in fixed maturity
securities. In twelve months since September 30, 2021 , our investments in
mortgage loans increased approximately $44.4 million . The increase in equity
securities gross investment income is primarily due to an increase in joint
venture net income. The increase in fixed maturity securities is due to higher
gross effective yields on securities held in the portfolio.
The
30, 2022
44 --------------------------------------------------------------------------------
Net Realized Investment Gains Our net realized investment gains result from sales of fixed maturity securities available-for-sale, equity securities, investment real estate and mortgage loans on real estate plus changes in fair value of equity securities.
Our net realized investment gains for the nine months ended
and 2021 are summarized as follows:
(Unaudited)
Nine Months Ended September 30, Amount Change
2022 2021 2022 less 2021
Fixed maturity securities
available-for-sale:
Sale proceeds $ 52,005,427 $ 6,949,876 $ 45,055,551
Amortized cost at sale date 50,972,933 6,824,279 44,148,654
Net realized gains $ 1,032,494 $ 125,597 $ 906,897
Equity securities sold:
Sale proceeds $ - $ 89 $ (89 )
Cost at sale date 8,000 - 8,000
Net realized gains (losses) $ (8,000 ) $ 89 $ (8,089 )
Investment real estate:
Sale proceeds $ 200,080 $ 818,018 $ (617,938 )
Carrying value at sale date 147,909 528,178 (380,269 )
Net realized gains $ 52,171 $ 289,840 $ (237,669 )
Mortgage loans on real estate:
Sale proceeds $ - $ 78,319,365 $ (78,319,365 )
Carrying value at sale date - 78,279,351 (78,279,351 )
Net realized gains $ - $
40,014
Equity securities, changes in fair value$ (16,325 ) $
35,558
Net realized investment gains$ 1,060,340 $ 491,098 $ 569,242 Service Fees
The
2022
45
--------------------------------------------------------------------------------
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 2021 are summarized as follows:
(Unaudited)
Nine Months Ended September 30, Amount Change
2022 2021 2022 less 2021
Benefits and claims
Increase in future policy benefits $ 9,919,696 $ 8,639,474 $ 1,280,222
Death benefits 9,706,037 8,108,650 1,597,387
Surrenders 1,065,392 834,545 230,847
Interest credited to policyholders 9,562,478 9,487,050 75,428
Dividend, endowment and supplementary
life contract benefits 235,616 225,666 9,950
Total benefits and claims 30,489,219 27,295,385 3,193,834
Expenses
Policy acquisition costs deferred (9,760,703 ) (9,325,731 ) (434,972 ) Amortization of deferred policy acquisition costs 5,410,934 5,206,030 204,904 Amortization of value of insurance business acquired 204,003 210,350 (6,347 ) Commissions 9,074,186 9,172,274 (98,088 ) Other underwriting, insurance and acquisition expenses 7,563,216 6,946,126 617,090 Total expenses 12,491,636 12,209,049 282,587
Total benefits, claims and expenses
The
months ended
Benefits and Claims
The
?
ordinary life benefits. ?$1,280,222 increase in future policy benefits is primarily due to the
increased number of life policies in force and the aging of existing life
policies. ?$230,847 increase in surrenders is based upon policyholder election. 46
--------------------------------------------------------------------------------
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, 2022 and 2021, capitalized costs were$9,760,703 and$9,325,731 , respectively. Amortization of deferred policy acquisition costs for the nine months endedSeptember 30, 2022 and 2021 were$5,410,934 and$5,206,030 , respectively. The$434,972 increase in the 2022 acquisition costs deferred primarily relates to increased ordinary life first year and annuity production and deferral of increased eligible commissions and expenses. There was an$204,904 increase in the 2022 amortization of deferred acquisition costs due to 2022 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$204,003 and$210,350 for the nine months endedSeptember 30, 2022 and 2021, respectively, representing a$6,347 decrease. Commissions Our commissions for the nine months endedSeptember 30, 2022 and 2021 are summarized as follows: (Unaudited) Nine Months Ended September 30, Amount Change 2022 2021 2022 less 2021 Annuity$ 1,127,824 $ 749,448 $ 378,376 Ordinary life first year 1,873,131 1,426,788 446,343 Ordinary life renewal 320,286 208,935 111,351 Final expense first year 4,050,491 5,370,868 (1,320,377 ) Final expense renewal 1,702,454 1,416,235 286,219 Total commissions$ 9,074,186 $ 9,172,274 $ (98,088 ) The$98,088 decrease in commissions for the nine months endedSeptember 30, 2022 is primarily due to a$1,320,377 decrease in final expense first year commissions (corresponding to$1,124,224 decreased final expense first year premiums) that exceed a$446,343 increase in ordinary life first year commissions (corresponding to$492,683 of increased ordinary life first year premiums),$378,376 increase in annuity commissions (corresponding to$13,200,453 of increase annuity deposits retained),$286,219 increase in final expense renewal commissions (corresponding to$2,925,716 increased final expense renewal premiums) and a$111,351 increase in ordinary life renewal commissions (corresponding to$876,515 increased ordinary life renewal premiums).
Other Underwriting, Insurance and Acquisition Expenses
The$617,090 increase in other underwriting, insurance and acquisition expenses for the nine months endedSeptember 30, 2022 was primarily related to increased legal fees and increased third party administration fees primarily related to maintaining increased number of policies in force, increased service requests to the third party administrator and the conversion of RCLIC. 47 --------------------------------------------------------------------------------
Federal Income Taxes FTFC filed its 2021 consolidated federal income tax return with TLIC, FBLIC and TMC onOctober 12, 2022 . 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 2021, respectively.
Net Income Per Common Share Basic
For the nine months endedSeptember 30, 2022 , the net income allocated to the Class B shareholders is the total net income multiplied by the right to receive dividends at 85% for Class B shares (85,937) as of the reporting date divided by the allocated total shares (9,470,277) of Class A shares (9,384,340) and Class B shares (85,937) as of the reporting date. For the nine months endedSeptember 30, 2021 , the net income allocated to the Class B shareholders is the total net income multiplied by the right to receive dividends at 85% for Class B shares (85,937) as of the reporting date divided by the allocated total shares (8,747,633) of Class A shares (8,661,696) and Class B shares (85,937) as of the reporting date. For the nine months endedSeptember 30, 2022 , the net income allocated to the Class A shareholders of$4,370,933 is the total net income$4,410,960 less the net income allocated to the Class B shareholders$40,027 . For the nine months endedSeptember 30, 2021 , the net income allocated to the Class A shareholders$1,809,769 is the total net income$1,827,725 less the net income allocated to the Class B shareholders$17,956 . The weighted average outstanding common shares basic for the nine months endedSeptember 30, 2022 and 2021 were 9,384,340 and 8,661,696 for Class A shares, respectively and 101,102 for Class B shares. Business Segments The Company has a life insurance segment, consisting of the life insurance operations of TLIC, FBLIC and TAI and an annuity segment, consisting of the annuity operations of TLIC, FBLIC and TAI and a corporate segment. Results for the parent company and the operations of TMC, after elimination of intercompany amounts, are allocated to the corporate segment. The revenues and income before federal income taxes from our business segments for the nine months endedSeptember 30, 2022 and 2021 are summarized as follows: (Unaudited) Nine Months Ended September 30, Amount Change 2022 2021 2022 less 2021 Revenues: Life insurance operations$ 31,031,373 $ 26,432,451 $ 4,598,922 Annuity operations 16,223,377 14,993,233 1,230,144 Corporate operations 1,327,406 492,418 834,988 Total$ 48,582,156 $ 41,918,102 $ 6,664,054 Income (loss) before income taxes: Life insurance operations$ 2,581,520 $ 1,703,870 $ 877,650 Annuity operations 2,137,960 750,050 1,387,910 Corporate operations 881,821 (40,252 ) 922,073 Total$ 5,601,301 $ 2,413,668 $ 3,187,633 48
-------------------------------------------------------------------------------- The increases and decreases of revenues and profitability from our business segments for the nine months endedSeptember 30, 2022 and 2021 are summarized as follows: Life Insurance Annuity Corporate Operations Operations Operations Total Revenues Premiums$ 3,170,690 $ - $ -$ 3,170,690 Net invesment income 1,130,356 126,487 146,742 1,403,585 Net realized investment gains (losses) 132,357 444,885 (8,000 ) 569,242 Service fees and other income 165,519 658,772 696,246 1,520,537 Total revenue 4,598,922 1,230,144 834,988 6,664,054 Benefits and claims Increase in future policy benefits 1,280,222 - - 1,280,222 Death benefits 1,597,387 - - 1,597,387 Surrenders 230,847 - - 230,847 Interest credited to policyholders - 75,428 - 75,428 Dividend, endowment and supplementary life contract benefits 9,950 - - 9,950 Total benefits and claims 3,118,406 75,428 - 3,193,834 Expenses Policy acquisition costs deferred net of amortization 784,371 (1,014,439 ) - (230,068 ) Amortization of value of insurance business acquired (3,173 ) (3,174 ) - (6,347 ) Commissions (476,464 ) 378,376 - (98,088 ) Other underwriting, insurance and acquisition expenses 298,132 406,043 (87,085 ) 617,090 Total expenses 602,866 (233,194 ) (87,085 ) 282,587 Total benefits, claims and expenses 3,721,272 (157,766 ) (87,085 ) 3,476,421 Income before federal income taxes (benefits)$ 877,650 $ 1,387,910 $
922,073
VOYA RETIREMENT INSURANCE & ANNUITY CO – 10-Q – Management's Narrative Analysis of the Results of Operations and Financial Condition (Dollar amounts in millions, unless otherwise stated)
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