Changes in policyholder reserves, or future policy benefits, also impact this line item. Reserves are calculated on an individual policy basis and generally increase over the life of the policy as a result of additional premium payments and acknowledgement of increased risk as the insured continues to age. The short-term impact of policy surrenders is negligible since a reserve for future policy benefits payable is held which is, at a minimum, equal to and generally greater than the cash surrender value of a policy. The benefit of fewer policy surrenders is primarily received over a longer time period through the retention of the Company’s asset base.
Commissions and amortization of deferred policy acquisition costs decreased $882,163 from 2009 to 2010. The 2010 results were more in line with what management would consider normal for this line item. During 2009, this line item was impacted as a result of lower commissions offset from a reinsurance agreement in AC caused by lower profits on the block of business due to bond sales. The AC agreement is a financial reinsurance agreement. The earnings on the block of business covered by this agreement are utilized to re-pay the original borrowed amount. The commission allowance reported each period from this agreement represents the net earnings on the identified policies covered by the agreement in each reporting period. Results from this agreement included in this line item were approximately $(674,816) and $107,000 for the years 2010 and 2009, respectively. As financial reinsurance, all financial results relating to this block of business are utilized to repay the outstanding borrowed amount from the reinsurer. Securities are specifically identified and segregated in a trust account relative to this arrangement. Should a gain or loss occur on one of these identified securities in the trust account, the results are included in the calculation of the current period financial results of the treaty with the reinsurer. While the agreement may result in variances in this line item, this arrangement has no material impact on net income. The overall impact to net income was $21,000 and $19,000 for the years 2010 and 2009, respectively. A liability for the original ceding commission was established at the origination of the agreement and is amortized through this line item as earnings on the block of business are realized. Most of the Company’s agent agreements contained vesting provisions, which provide for continued compensation payments to agents upon their termination subject to certain minimums and often limited to a specific period of time. Another factor affecting this line item is attributable to normal amortization of the deferred policy acquisition costs asset. The Company reviews the recoverability of the asset based on current trends and known events compared to the assumptions used in the establishment of the original asset. No impairments were recorded in the periods reported.
Deferred policy acquisition costs decreased 14% in 2010 compared to 2009. Deferred policy acquisition costs, which vary with, and are primarily related to producing new business, are referred to as DAC. DAC consists primarily of commissions and certain costs of policy issuance and underwriting, net of fees charged to the policy in excess of ultimate fees charged. To the extent these costs are recoverable from future profits, the Company defers these costs and amortizes them with interest in relation to the present value of expected gross profits from the contracts, discounted using the interest rate credited by the policy. The Company had $0 in policy acquisition costs deferred, $6,000 in interest accretion and $97,029 in amortization in 2010, and had $0 in policy acquisition costs deferred, $8,000 in interest accretion and $173,944 in amortization in 2009.
In November 2007, the Company became a member of the Federal Home Loan Bank (FHLB). This membership allows the Company access to additional credit up to a maximum of 50% of the total assets of UG. To be a member of the FHLB, UG was required to purchase shares of common stock of FHLB. Borrowing capacity is based on 50 times each dollar of stock acquired in FHLB above the "base membership" amount. UG's current line of credit with the FHLB is $15,000,000. During 2010, UG had borrowings of $2,000,000 against this line of credit at a rate of 0.25% at December 31, 2010. During 2009, UG had borrowings of $2,000,000 and repayments of $2,000,000. At December 31, 2010 and 2009, the outstanding principal balance on this debt was $2,000,000 and $0, respectively. This outstanding principal balance was repaid in full on January 7, 2011.
TREASURY SHARES - The Company holds 446,929 and 410,838 shares of common stock as treasury shares with a cost basis of $3,400,844 and $3,051,170 at December 31, 2010 and 2009, respectively.
AC is a Texas domiciled insurance company, which requires eleven days prior notification to the insurance commissioner for the payment of an ordinary 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, 2010, AC statutory earnings from operations were $2,024,641. At December 31, 2010 AC, statutory surplus was $8,434,448. 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 $728,130 and $0 during 2010 and 2009, respectively.
The Company's insurance subsidiaries are domiciled in Ohio and Texas. The insurance subsidiaries prepare their statutory-based financial statements in accordance with accounting practices prescribed or permitted by the respective insurance department. These principles differ significantly from accounting principles generally accepted in the United States of America. "Prescribed" statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, from company to company within a state, and may change in the future. UG's total statutory shareholders' equity was approximately $30,443,000 and $27,350,000 at December 31, 2010 and 2009, respectively. UG reported a statutory net income (exclusive of inter-company dividends) of approximately $4,796,000 and $204,000 for 2010 and 2009, respectively. AC's total statutory shareholders' equity was approximately $10,934,000 and $9,781,000 at December 31, 2010 and 2009, respectively. AC reported a statutory net income (exclusive of inter-company dividends) of approximately $964,000 and $4,071,000 for 2010 and 2009 respectively.
On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002, the shareholders of UTG approved, the UTG, Inc. Employee and Director Stock Purchase Plan. The plan’s purpose was to encourage ownership of UTG stock by eligible directors and employees of UTG and its subsidiaries by providing them with an opportunity to invest in shares of UTG common stock. The plan was administered by the Board of Directors of UTG. A total of 400,000 shares of common stock could have been purchased under the plan, subject to appropriate adjustment for stock dividends, stock splits or similar recapitalizations resulting in a change in shares of UTG. The plan was not intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.