The Company has reduced its holdings in these investments with a corresponding reduction in market exposure. Management still believes its trading activities remain a viable and integral part of its overall investment strategy in the current economy. Management is currently reviewing alternatives on how to better manage its exposure to such radical market shifts.
During 2009, the Company also contributed a portion of the investment portfolio to professionally managed trading accounts as another way to combat the current low rate environment. The accounts were established to generate a fair return while reducing risk. Securities designated as trading are reported at fair value with gains or losses resulting from changes in fair value recognized in net investment income. During 2010, approximately 21%, or $5,131,000, of investment income was due to this trading portfolio, yielding approximately 12.8% after fees. During 2011, the trading portfolio had negative earnings to investment income of approximately $2,300,000. Volatility should be expected, as well as possible losses. Management’s target return on these accounts is 6% to 8%.
AC is a Texas domiciled insurance company, which requires notification within two business days to the insurance commissioner following the declaration of any ordinary dividend and at least ten calendar days prior to payment of such dividend. Ordinary dividends are defined as the greater of: a) prior year statutory earnings from operations or b) 10% of statutory surplus. At December 31, 2011, AC statutory earnings from operations were $874,660. At December 31, 2011, AC statutory surplus was $6,625,808. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. AC paid ordinary dividends of $600,000 and $728,130 during 2011 and 2010, respectively. No extraordinary dividends were paid during the two year period.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of UTG, Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
PARTICIPATING INSURANCE - Participating business represents 10% of life insurance in force at December 31, 2011 and 2010. Premium income from participating business represents 18% and 16% of total premiums for the years ended December 31, 2011 and 2010, respectively. The amount of dividends to be paid is determined annually by the insurance subsidiary's Board of Directors. Earnings allocable to participating policyholders are based on legal requirements that vary by state.
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 2008 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 fair value of investments with sustained gross unrealized losses at December 31, 2011 and 2010 are as follows:
INVESTMENTS ON DEPOSIT - At December 31, 2011, investments carried at approximately $9,231,000 were on deposit with various state insurance departments.