Although stock markets around the world have rallied sharply from an oversold position on increased liquidity and a perceived improvement in the general economy, Management continues to view the Company’s investment portfolio with utmost priority. Significant time has been spent internally researching the Company’s risk and communicating with outside investment advisors about the current investment environment and ways to ensure preservation of capital and mitigate any losses. Management has put extensive efforts into evaluating the investment holdings. Additionally, members of the Company’s board of directors and investment committee have been solicited for advice and provided with information. Management has reviewed the Company’s entire portfolio on a security level basis to be sure all understand our holdings, potential risks and underlying credit supporting the investments. Management intends to continue its close monitoring of its bond holdings and other investments for additional deterioration or market condition changes. Future events may result in Management’s determination that certain current investment holdings may need to be sold which could result in gains or losses in future periods. Such future events could also result in other than temporary declines in value that could result in future period impairment losses.
Operating expenses decreased about 2.6% in 2009 compared to 2008. The decrease reflects Management’s significant emphasis on expense monitoring and cost containment. Maintaining administrative efficiencies directly impacts net income.
During the Company’s fourth fiscal quarter, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
NATURE OF OPERATIONS - UTG is an insurance holding company, which sells individual life insurance products through its insurance subsidiaries. The Company's principal market is the mid-western United States. The Company’s dominant business is individual life insurance which includes the servicing of existing insurance business in force, the solicitation of new individual life insurance and the acquisition of other companies in the insurance business.
INCOME TAXES - Income taxes are reported under Statement of Financial Accounting Standards Number 109 and Interpretation Number 48 (see FASB Codification 740-10 Section 50.), “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement number 109”. Deferred income taxes are recorded to reflect the tax consequences on future periods of differences between the tax bases of assets and liabilities and their financial reporting amounts at the end of each such period. The principal assets and liabilities giving rise to such differences are deferred policy acquisition costs, differences in tax basis of invested assets, cost of insurance acquired, future policy benefits, and gains on the sale of subsidiaries.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform to the 2009 presentation. Such reclassifications had no effect on previously reported net income or shareholders' equity.
The Company classifies interest and penalties on underpayment of income taxes as income tax expense. No interest or penalties were included in the reported income taxes for the years presented. Tax years 2006 to current remain subject to examination. The Company has no agreements of extension of the review period currently in effect. The Company is not aware of any potential or proposed changes to any of its tax filings.
The Company regularly reviews its investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary. Based on an evaluation of the issues, including, but not limited to, intentions to sell or ability to hold the fixed maturity and equity securities with unrealized losses for a period of time sufficient for them to recover; the length of time and amount of the unrealized loss; and the credit ratings of the issuers of the investments, the Company held three investments and one investment as other-than-temporarily impaired at December 31, 2009 and 2008, respectively. The other-than-temporary impairment during 2008 was due to an investment in Lehman Brothers that was written down to $0 due to bankruptcy. The other-than-temporary impairments during 2009 were due to changes in expected future cash flows of investments in bonds backed by trust preferred securities of banks. The other-than-temporary impairments are detailed below:
As part of the Texas Imperial Life Insurance Company sale, The Company remains contingently liable for certain costs pending the outcome of an ongoing race-based audit on Texas Imperial Life Insurance Company by the Texas Department of Insurance. Under the agreement, the Company is responsible for 100% of the first $50,000 of costs, $90% of the next $50,000, 75% of the third $50,000 and 50% of costs above $150,000. Management has conservatively estimated the Company’s exposure and other costs at $50,000 based on information provided to date from the examination team and has established a contingent liability in its financial statements of this amount.
On February 20, 2003, UG purchased $4,000,000 of a trust preferred security offering issued by FSBI. The security has a mandatory redemption after 30 years with a call provision after 5 years. The security pays a quarterly dividend at a fixed rate of 6.515%. The Company received $264,219 and $264,942 of dividends in 2009 and 2008, respectively. On March 30, 2009, UG purchased $1,000,000 of FSBI common stock. The sale and transfer of this security are restricted by the provisions of a stock restriction and buy-sell agreement.
UG from time to time acquires mortgage loans through participation agreements with FSNB. FSNB services UG's mortgage loans including those covered by the participation agreements. UG pays a .25% servicing fee on these loans and a onetime fee at loanorigination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $74,153 and $93,572 in servicing fees and $384,931 and $19,283 in origination fees to FSNB during 2009 and 2008, respectively.
In accordance with Statement of Financial Accounting Standards No. 128, (ASC 260, “Earnings per share”) the computation of diluted earnings per share is the same as basic earnings per share for the years ending December 31, 2009 and 2008, as there were no outstanding securities, options or other offers that give the right to receive or acquire common shares of UTG.