In December 2006, the Company completed an acquisition transaction whereby it acquired a controlling interest in Acap Corporation, which owns two life insurance subsidiaries. The acquisition resulted in an increase of approximately $90,000,000 in invested assets, $160,000,000 in total assets and 200,000 additional policies to administer. The acquisition had a material impact on many of the balance sheet and income statement line items. The income statement at year end 2006 was not materially impacted by the acquisition. The following analysis and discussion considers the overall changes when comparing 2007 results to 2006 and the impact of the new entities to the Company. The administration of the acquired entities was moved to the Company’s current operating site in Springfield, Illinois during December 2006. The Company believes this acquisition is a good fit with its existing administration and operations. Significant expense savings were realized as a result of the combining of operations compared to costs of the two entities operating separately. These savings come through the advantage of economies of scale of the combined operations of the existing and acquired entities including a larger base over which to spread fixed costs. See note 15 for additional information relating to this acquisition.
Net investment income increased 53% when comparing 2007 to 2006 and decreased 1% when comparing 2006 to 2005. Excluding the acquired companies, net investment income increased 10% when comparing 2007 to 2006. The overall gross investment yields for 2007, 2006 and 2005, are 6.02%, 6.42% and 6.77%, respectively. Significant investments have been made in real estate that does not contribute to current year investment earnings, which decreases investment yield. However, Management expects these investments to significantly impact earnings positively as real estate is sold and income is recognized in realized gains over the life of the investment. In recent periods, the marketplace has seen an increase in yields on fixed maturity investments. This has resulted in an increase in investment earnings on the fixed maturity portfolio as current holdings mature and are re-invested. Additionally, since 2004, the Company has begun lengthening the bond portfolio. Generally, longer term investments carry a higher yield than shorter term investments in the marketplace. The Company continues to leverage its affiliation with FSNB through the investment in mortgage loans. Mortgage loans provide a more attractive investment yield than generally found in the bond market. The Company is able to acquire these loans utilizing FSNB personnel and expertise. A portion of the mortgage loan portfolio contains floating interest rates that has further enhanced earnings in recent periods as interest rates have crept higher. With the current state of the U.S. economy and general interest rate cuts in early 2008, management anticipates yields of its floating rate investments to decline during 2008.
The following table summarizes the Company's fixed maturities distribution at December 31, 2007 and 2006 by ratings category as issued by Standard and Poor's, a leading ratings analyst.
Cash provided by (used in) investing activities was $10,873,952, $(8,061,870) and $(1,265,715) for 2007, 2006 and 2005, respectively. Fixed maturity investments sold increased $50,808,546, as the Company identified better opportunities to allocate investment assets. Cash provided by investing activities was significantly impacted by the sale of real estate by Boone Parklands, LLC, which resulted in proceeds of approximately $15,750,000. A significant aspect of cash provided by (used in) investing activities is the fixed maturity transactions. Fixed maturities account for 28%, 51% and 14% of the total cost of investments acquired in 2007, 2006 and 2005, respectively. During 2007, Management significantly increased purchases in equity securities, mortgage loans, and real estate as favorable opportunities presented themselves. These acquisitions accounted for 65% of the total cost of investments acquired in 2007. The decrease in fixed maturity investments over the three years reflects the Company’s emphasis in the mortgage loan and real estate markets.
We have audited the accompanying consolidated balance sheets of UTG, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years ended December 31, 2007, 2006, and 2005. UTG, Inc’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
CASH EQUIVALENTS - The Company considers certificates of deposit and other short-term instruments with an original purchased maturity of three months or less cash equivalents.
POLICY AND CONTRACT CLAIMS - Policy and contract claims include provisions for reported claims in process of settlement, valued in accordance with the terms of the policies and contracts, as well as provisions for claims incurred and unreported based on prior experience of the Company. Incurred but not reported claims were $1,232,848 and $1,242,950 as of December 31, 2007 and 2006, respectively.
TREASURY SHARES - The Company holds 384,813 and 360,888 shares of common stock as treasury shares with a cost basis of $2,846,517 and $2,632,910 at December 31, 2007 and 2006, respectively.
At December 31, 2007, substantially all of consolidated shareholders' equity represents net assets of UTG’s subsidiaries. The payment of cash dividends to shareholders by UTG is not legally restricted. However, the state insurance department regulates insurance company dividend payments where the company is domiciled. UG, AC and TI’s dividend limitations are described below.
On July 13, 2006, UG paid a cash dividend of $4,400,000 to UTG, Inc. An additional dividend of $700,000 was paid by UG to UTG, Inc. on December 21, 2006. On July 13, 2007, UG paid a cash dividend of $3,000,000 to UTG, Inc. AC paid cash dividends to its parent, ACAP, of $500,000 and $605,000 in 2007 and 2006, respectively. TI paid cash dividends to AC of $250,000 and $0 in 2007 and 2006, respectively. These dividends were comprised entirely of ordinary dividends. No regulatory approvals were required prior to the payment of these dividends.
In addition, the Company loaned ACAP $3,357,000, which was required to retire certain indebtedness of ACAP and to redeem all of ACAP’s outstanding preferred stock at the closing of the Agreement.