Investment real estate Commercial 27,386,294 91% Residential development 805,787 3% 28,192,081 94%
Commercial property mainly consists of North Plaza, Hampshire Plaza and Hampshire Plaza Garage. See Item 1, "Business" for additional information regarding descriptions and operating results of these properties.
2. Changes in the federal income tax laws and regulations which may affect the relative tax advantages of the Company's products.
Deferred acquisition costs (DAC) and cost ofinsurance acquired reflect our expectations about the future experience of the existing business in-force. The primary assumptions regarding future experience that can affect the carrying value of DAC and cost of insurance acquired balances include mortality, interest spreads and policy lapse rates. Significant changes in these assumptions can impact amortization of DAC and cost of insurance acquired in both the current and future periods, which is reflected in earnings.
The Company's primary source of new business production comes from the conservation effort implemented several years ago. This effort was an attempt to improve the persistency rate of insurance company's policies. Several of the customer service representatives of the Company are also licensed insurance agents, allowing them to offer other products within the Company's portfolio to existing customers. Additionally, stronger efforts have been made in policy retention through more personal contact with the customer including telephone calls to discuss alternatives and reasons for a customer's request to surrender their policy. Previously, the Company's agency force was primarily responsible for conservation efforts. With the decline in the number of agents, their ability to reach these customers diminished, making conservation efforts difficult. The conservation efforts described above have been generally positive. Management will continue to monitor these efforts and make adjustments as seen appropriate to enhance the future success of the program. In 2003, the Company replaced its original universal life product with a new universal life contract referred to as "the Legacy". This product was designed for use with several distribution channels including the Company's own internal agents, bank agent/employees and through personally producing general agents "PPGA". In addition, the Company has introduced other new and updated products in recent periods including the Horizon Annuity and Kid Kare (as single premium, child term policy). The company is currently working on development of a level term and decreasing term product. Management has no current plans to increase marketing efforts. New product development is anticipated to be utilized in conservation efforts and sales to existing customers. Such sales are not expected to be material.
The Company has considered the feasibility of a marketing opportunity with First Southern National Bank (FSNB) an affiliate of UTG's largest shareholder, Chairman and CEO, Mr. Jesse T. Correll. Management has considered various products including annuity type products, mortgage protection products and existing insurance products, as potential products that could be marketed to banking customers. This marketing opportunity has potential and is believed to be a viable niche. This potential is in the very early states of consideration. Management will proceed cautiously and may even determine not to proceed. The introduction of new products is not expected to produce significant premium writings. The Company is currently looking at other types of products to compliment the existing offerings.
The Company performs administrative work as a third party administrator (TPA) for unaffiliated life insurance companies. The Company receives monthly fees based on policy in force counts and certain other activity indicators, such as number of premium collections performed, or services performed. The Company entered into a new contract mid-year 2004, which should provide approximately $ 360,000 additional annual revenues. For the years ended 2004, 2003 and 2002, the Company received $ 719,053, $ 571,298, and $ 521,782 for this work, respectively. These TPA revenue fees are included in the line item "other income" on the Company's consolidated statements of operations. The Company intends to continue to pursue other TPA arrangements, through an alliance with Fiserv (Fiserv) to insurance companies seeking business process outsourcing solutions. Fiserv will be responsible for the marketing and sales function for the alliance, as well as providing the datacenter operations. UTG will staff the administration effort. Management believes this alliance with Fiserv positions the Company to generate additional revenues by utilizing the Company's current excess capacity and administrative services. Fiserv is a unit of Fiserv, Inc. (Nasdaq: FISV) which is an independent, full-service provider of integrated data processing and information management systems to the financial industry, headquartered in Brookfield, Wisconsin. Management believes this area is a growing market and the Company is well positioned to serve this market.
Net amortization of cost of insurance acquired increased 10% in 2004 compared to 2003 and decreased 12% in 2003 compared to 2002. Cost of insurance acquired is established when an insurance company is acquired. The Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. Cost of insurance acquired is comprised of individual life insurance products including whole life, interest sensitive whole life and universal life insurance products. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates utilized in the amortization calculation are 9% on approximately 25% of the balance and 15% on the remaining balance. The interest rates vary due to risk analysis performed at the time of acquisition on the business acquired. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force. Persistency is a measure of insurance in force retained in relation to the previous year. The Company's average persistency rate for all policies in force for 2004, 2003 and 2002 has been approximately 94.6%, 94.9% and 93.6%, respectively. Based on the projected future profits of the insurance in-force during 2003, the Company wrote off an additional $ 5,000,000 of cost of insurance acquired. This write-off is primarily the result of continued tightening of interest rate spreads of the Company. The Company continues to analyze these projections to determine the adequacy of present values assigned to future cash flows.
Operating expenses decreased 30% in 2004 compared to 2003 and increased 29% in 2003 compared to 2002. During 2003, the Company paid $ 1,950,000 in settlement of a lawsuit. In addition, the Company maintained a $ 75,000 accrual during 2004 to cover expected future costs regarding this matter. Additional expense reductions have been made in the normal course of business, as the Company continually monitors expenditures looking for savings opportunities. These expense reductions have been partially offset by increased operating costs of approximately $ 285,000 attributable to the Company's conversion of its existing business and TPA clients to "ID3", a software system owned by Fiserv and utilized by the Company. Conversion costs to date include fees for initial licensing, consultation, and training.
Investments are the largest asset group of the Company. The Company's insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments it is permitted to make, and the amount of funds that may be used for any one type of investment. In light of these statutes and regulations, and the Company's business and investment strategy, the Company generally seeks to invest in United States government and government agency securities and other high quality low risk investments. Many insurance companies have suffered significant losses in their investment portfolios in the last couple of years; however, because of the Company's conservative investment philosophy the Company has so far largely avoided such significant losses. The Company has not written off any investment losses in these turbulent economic times.
At December 31, 2004, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets or shareholders' equity. The Company has identified securities it may sell and classified them as "investments held for sale". Investments held for sale are carried at market, with changes in market value charged directly to shareholders' equity. To provide additional flexibility and liquidity, the Company has categorized almost all fixed maturity investments acquired in recent periods as available for sale.
Deferred policy acquisition costs decreased 21% in 2004 compared to 2003. 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 $ 5,000 in policy acquisition costs deferred, $ 10,000 in interest accretion and $ 447,380 in amortization in 2004, and had $ 61,000 in policy acquisition costs deferred, $ 17,000 in interest accretion and $ 417,844 in amortization in 2003.
Cost of insurance acquired decreased 13% in 2004 compared to 2003. When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. In 2004 and 2003 amortization decreased the asset by $ 1,869,135 and $ 1,695,328, respectively. In 2003, the balance was reduced by an additional $ 5,000,000 as a direct charge-off of unamortized asset over the projected future profits. Also, the balance was reduced $ 8,409,722 in 2002 as a result of the valuation adjustment attributable to the acquisition of the minority positions of FCC through its merger with and into UTG.
Total shareholders' equity increased 12% in 2004 compared to 2003. This is primarily due to significant increases in the unrealized gains on the Company's equity investments. Unrealized gains increased by $ 5,112,145 during 2004. This increase in unrealized gains is partially offset by the net loss from operations during the year of $ (275,617). Other factors that impacted shareholders' equity included issuance of shares from an employee and director stock purchase plan which was approved and implemented in 2002 of $ 167,360 and treasury shares purchased and retirements totaling $ (299,057).
The Company's current and merged insurance subsidiaries are assessed contributions by life and health guaranty associations in almost all states to indemnify policyholders of failed companies. In several states the company may reduce premium taxes paid to recover a portion of assessments paid to the states' guaranty fund association. This right of "offset" may come under review by the various states, and the company cannot predict whether and to what extent legislative initiatives may affect this right to offset. In addition, some state guaranty associations have adjusted the basis by which they assess the cost of insolvencies to individual companies. The Company believes that its reserve for future guaranty fund assessments is sufficient to provide for assessments related to known insolvencies. This reserve is based upon management's current expectation of the availability of this right of offset, known insolvencies and state guaranty fund assessment bases. However, changes in the basis whereby assessments are charged to individual companies and changes in the availability of the right to offset assessments against premium tax payments could materially affect the Company's results.
Each year, the NAIC calculates financial ratio results (commonly referred to as IRIS ratios) for each insurance company. These ratios compare key financial data pertaining to the statutory balance sheet and income statement. The results are then compared to pre-established normal ranges determined by the NAIC. Results outside the range typically require explanation to the domiciliary insurance department. At year-end 2004, UG had four ratios outside the normal range. These ratios are discussed in more detail in the Regulatory Environment discussion included in this Item 7.
The Company has two principal needs for cash - the insurance companies' contractual obligations to policyholders and the payment of operating expenses. Cash and cash equivalents as a percentage of total assets were 4% and 3% as of December 31, 2004 and 2003, respectively. Fixed maturities as a percentage of total invested assets were 50% and 68% as of December 31, 2004 and 2003, respectively.
Cash provided by (used in) operating activities was $ (45,950), $ (933,048) and $ 467,034 in 2004, 2003 and 2002, respectively. Reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows. The net cash provided by operating activities plus policyholder contract deposits less policyholder contract withdrawals equaled $ 1,754,504 in 2004, $ 1,504,703 in 2003 and $ 2,798,799 in 2002. Management utilizes this measurement of cash flows as an indicator of the performance of the Company's insurance operations.
Net cash provided by (used in) financing activities was $ (621,019), $ 1,487,041 and $ (473,692) for 2004, 2003 and 2002, respectively. The Company paid off the remaining balance of its outstanding debt in 2004. Such payments are included within this category. In addition, in 2001 the Board of Directors of the Company authorized a repurchase program of UTG's common stock and the purchase of stock is still pursued as it becomes available. In addition, in 2002 this category includes payments made to former FCC shareholders for shares they owned prior to the merger of FCC into UTG.
Policyholder contract deposits decreased 5% in 2004 compared to 2003 and 8% in 2003 compared to 2002. The decrease in policyholder contract deposits relates to the declining in force business of the Company. New premium production of interest sensitive type policies has been negligible in recent periods. Management anticipates continued moderate declines in contract deposits. Policyholder contract withdrawals have increased 2% in 2004 compared to 2003 and decreased 11% in 2003 compared to 2002. The change in policyholder contract withdrawals is not attributable to any one significant event. Factors that influence policyholder contract withdrawals are fluctuation of interest rates, competition and other economic factors.
The Company has two lines of credit available for future use. The Company has a $ 3,300,000 line of credit (LOC) available from the First National Bank of the Cumberlands (FNBC) located in Livingston, Tennessee. The interest rate on the LOC is variable and indexed to be the lowest of the U.S. prime rates as published in the Wall Street Journal, with any interest rate adjustments to be made monthly. At December 31, 2004, the Company had no outstanding borrowings attributable to this LOC. During 2004 and 2003, the Company had no borrowings against this LOC. During 2002 the Company had total borrowings of $ 1,600,000 on this LOC, which were all repaid during the year.
On November 20, 1998, FSF and affiliates acquired 929,904 shares of common stock of UTG from UTG and certain UTG shareholders. As consideration for the shares, FSF paid UTG $ 10,999,995 and certain shareholders of UTG $ 999,990 in cash. Included in the stock acquisition agreement was an earnings covenant whereby UTG warrants UTG and its subsidiaries and affiliates would have future earnings of at least $ 30,000,000 for a five-year period beginning January 1, 1998. Such earnings were computed based on statutory results excluding inter-company activities such as inter-company dividends plus realized and unrealized gains and losses on real estate, mortgage loans and unaffiliated common stocks. At the end of the covenant period, an adjustment was to be made equal to the difference between the then market value and statutory carrying value of real estate still owned that existed at the beginning of the covenant period. If UTG did not meet the covenant requirements, any shortfall would first be reduced by the actual average tax rate for UTG for the period, and then will be further reduced by one-half of the percentage, if any, representing UTG's ownership percentage of the insurance company subsidiaries. This result would then be reduced by $ 250,000. The remaining amount would be paid by UTG in the form of UTG common stock valued at $ 15.00 per share with a maximum number of shares to be issued of 500,000. However, there was to be no limit to the number of shares transferred to the extent that there are legal fees, settlements, damage payments or other losses as a result of certain legal action taken. The price and number of shares was adjusted for any applicable stock splits, stock dividends or other recapitalizations. For the five-year period starting January 1, 1998 and ending December 31, 2003, the Company had total earnings of $ 17,011,307 applicable to this covenant. Therefore, UTG did not meet the earnings requirements stipulated, and during 2003, UTG was required to issue 500,000 additional shares to FSF or its assigns.
UG is an Ohio domiciled insurance company, which requires five 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 or b) 10% of statutory capital and surplus. At December 31, 2004 UG statutory shareholders' equity was $ 21,860,401. At December 31, 2004, UG statutory loss from operations was $ (762,152). Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. UG paid a dividend of $ 2,275,000 to UTG in 2004, of which $ 974,180 was considered to be an extraordinary dividend.
In March 2005, UTG's Board of Directors adopted a proposal to change the state of incorporation of UTG from Illinois to Delaware by merging UTG with and into a wholly-owned Delaware subsidiary (the "reincorporation merger"). The Board of Directors and management of UTG believe that reincorporation in Delaware would be beneficial to the Company because Delaware corporate law is more comprehensive, widely used and extensively interpreted than other state corporate laws, including Illinois corporate law. The reincorporation merger would effect only a change in UTG's legal domicile and certain other changes of a legal nature. It would not result in any change in UTG's business, management, fiscal year, assets or liabilities or location of its principal facilities. The Board of Directors intends to submit the reincorporation proposal to its shareholders for approval at the 2005 annual meeting of shareholders to be held on June 15, 2005. If approved by shareholders, UTG expects that the reincorporation merger would be effected as soon as reasonably practicable following the annual meeting.
Most states also have insurance holding company statutes, which require registration and periodic reporting by insurance companies controlled by other corporations licensed to transact business within their respective jurisdictions. The insurance subsidiary is subject to such legislation and registered as controlled insurers in those jurisdictions in which such registration is required. Statutes vary from state to state but typically require periodic disclosure, concerning the corporation that controls the registered insurers and all subsidiaries of such corporation. In addition, prior notice to, or approval by, the state insurance commission of material intercorporate transfers of assets, reinsurance agreements, management agreements (see Note 9 to the consolidated financial statements), and payment of dividends (see Note 2 to the consolidated financial statements) in excess of specified amounts by the insurance subsidiary, within the holding company system, are required.
Each year, the NAIC calculates financial ratio results (commonly referred to as IRIS ratios) for each company. These ratios compare various financial information, pertaining to the statutory balance sheet and income statement. The results are then compared to pre-established normal ranges determined by the NAIC. Results outside the range typically require explanation to the domiciliary insurance department.
The Financial Accounting Standards Board ("FASB") has issued Statement No. 152, Accounting for Real Estate Time-Sharing Transactions. Statement No. 152 amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. Statement No. 152 also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. The adoption of Statement 152 does not currently affect the Company's financial position or results of operations, since the Company has no real estate interests that meet the provisions of this statement.
The Financial Accounting Standards Board ("FASB") has issued Statement No. 123 (revised 2004), Share Based Payment. Statement No. 123 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company's will account for all future share based payments in accordance with the requirements of Statement No. 123.
UNITED TRUST GROUP, INC. CONSOLIDATED BALANCE SHEETS As of December 31, 2004 and 2003
UNITED TRUST GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three Years Ended December 31, 2004
Benefits, claims and settlement expenses: Life 18,942,272 22,175,842 20,393,044 Reinsurance benefits and claims (2,268,869) (3,194,541) (3,043,115) Annuity 1,111,998 1,122,707 1,151,973 Dividends to policyholders 980,306 966,668 984,346 Commissions and amortization of deferred policy acquisition costs 309,776 311,939 785,861 Amortization of cost of insurance acquired 1,869,135 6,695,328 1,515,450 Operating expenses 5,312,747 7,566,780 5,876,456 Interest expense 77,453 162,179 263,441 --------------- ---------------- ---------------- 26,334,818 35,806,902 27,927,456 --------------- ---------------- ----------------
Net income (loss) $ (275,617) $ (6,396,490)$ 1,338,795 =============== ================ ================
Diluted income (loss) per share from continuing operations and net income (loss) $ (0.07) $ (1.67)$ 0.33 =============== ================ ================
Diluted weighted average shares outstanding 3,986,731 3,839,947 4,005,424 =============== ================ ================
UNITED TRUST GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three Years Ended December 31, 2004
Common stock Balance, beginning of year $ 80,008 $ 70,726 $ 70,996 Issued during year 289 10,331 1,177 Treasury shares acquired (1,066) (532) (1,447) Reclassification under FAS 150 84 0 0 Retired during year 0 (433) 0 Cumulative change in accounting principal 0 (84) 0 ------------ ----------- ----------- Balance, end of year $ 79,315 $ 80,008 $ 70,726 ============ =========== ===========
Accumulated other comprehensive income Balance, beginning of year $ 1,566,397 $ 2,771,941 $ 908,744 Other comprehensive income (loss) Unrealized holding gain (loss) on securities net of minority interest and reclassification adjustment and taxes 5,112,145 5,112,145 (1,205,544) (1,205,544) 1,863,197 1,863,197 ------------ ----------- ----------- ------------ ----------- ----------- Comprehensive income (loss) $ 4,836,528 $ (7,602,034) $ 3,201,992 =========== ============ =========== Balance, end of year $ 6,678,542 $ 1,566,397 $ 2,771,941 ============ =========== ===========
Total shareholders' equity, end of year $ 44,451,105 $ 39,696,639 $ 47,593,546 ============ =========== ===========
Cash flows from investing activities: Proceeds from investments sold and matured: Fixed maturities held for sale 70,893,152 73,314,066 29,748,521 Fixed maturities matured 16,098,477 36,065,715 19,957,888 Equity securities 25,569 167,734 0 Mortgage loans 8,620,093 8,494,201 6,472,013 Real estate 314,157 1,096,759 1,179,931 Policy loans 2,757,989 2,619,463 3,112,687 Short-term 350,000 350,000 203,706 --------------- --------------- -------------- Total proceeds from investments sold and matured 99,059,437 122,107,938 60,674,746 Cost of investments acquired: Fixed maturities held for sale (76,377,916) (108,410,675) (37,341,428) Fixed maturities (1,513,700) (4,283,413) (3,973,623) Equity securities (8,033,052) (7,089,857) (185,075) Mortgage loans (2,626,540) (11,405,342) (6,889,945) Real estate (3,981,568) (3,722,406) (1,575,713) Policy loans (2,376,338) (2,499,358) (2,850,735) Short-term (353,061) (7,001) 0 --------------- --------------- -------------- Total cost of investments acquired (95,262,175) (137,418,052) (52,816,519) Purchase of property and equipment (20,548) (536,600) (24,439) --------------- --------------- -------------- Net cash provided by (used in) investing activities 3,776,714 (15,846,714) 7,833,788 --------------- --------------- --------------
Cash flows from financing activities: Policyholder contract deposits 9,015,637 9,505,436 10,291,519 Policyholder contract withdrawals (7,215,183) (7,067,658) (7,959,754) Payments of principal on notes payable (4,564,776) (705,499) (3,405,395) Proceeds from line of credit 2,275,000 0 2,000,000 Payments from FCC merger 0 0 (1,586,500) Issuance of common stock 167,360 195,906 706,691 Purchase of treasury stock (299,057) (441,144) (520,253) --------------- --------------- -------------- Net cash provided by (used in) financing activities (621,019) 1,487,041 (473,692) --------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents 3,109,745 (15,292,721) 7,827,130 Cash and cash equivalents at beginning of year 8,749,727 24,042,448 16,215,318 --------------- --------------- -------------- Cash and cash equivalents at end of year $ 11,859,472 $ 8,749,727 $ 24,042,448 =============== =============== ==============
A. ORGANIZATION - At December 31, 2004, the significant majority-owned subsidiaries of UNITED TRUST GROUP, INC., were as depicted on the following organizational chart.
J. 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 $ 899,126 and $ 920,656 as of December 31, 2004 and 2003, respectively.
Cost of insurance acquired was tested for impairment as part of the regular reporting process. Due to a decline in projected future cash flows from the business and lower current investment yields, a revision of the estimated fair value of the cost of insurance acquired was considered necessary in 2003. This revision resulted in a $ 5,000,000 impairment loss. The fair value of the cost of insurance acquired was estimated using the expected present value of future cash flows. The impairment loss is included in the consolidated statements of operations under the caption of amortization of cost of insurance acquired.
Interest accretion 10,000 17,000 55,000 Amortization charged to income (452,380) (417,844) (769,432) ---------------- ----------------- ---------------- Net amortization
2005 12,000 280,000 268,000 2006 10,000 245,000 235,000 2007 9,000 219,000 210,000 2008 7,000 207,000 200,000 2009 6,000 180,000 174,000
M. PROPERTY AND EQUIPMENT - Company-occupied property, data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of $ 6,336,241 and $ 6,038,220 at December 31, 2004 and 2003, respectively. Depreciation is computed on a straight-line basis for financial reporting purposes using estimated useful lives of three to thirty years. Depreciation expense was $ 298,021, $ 149,664, and $ 280,148 for the years ended December 31, 2004, 2003, and 2002, respectively.
P. TREASURY SHARES - The Company holds 227,709 and 174,136 shares of common stock as treasury shares with a cost basis of $ 1,675,097 and $ 1,376,039 at December 31, 2004 and 2003, respectively.
T. USE OF ESTIMATES - In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The life insurance company and the non-insurance companies of the group file separate federal income tax returns.
2004 2003 2002 --------------- ---------------- --------------- Current tax expense $ 147,358 $ 197,732 $ 7,893 Deferred tax (benefit) expense (945,074) (2,897,225) 471,462 ---------------- ----------------- ---------------- $ (797,716) $ (2,699,493) $ 479,355 ================ ================= ================
The Company has established a deferred tax asset of $ 2,123,037 for its operating loss carryforwards and has established no allowance in the current or prior years.
2004 2003 2002 --------------- --------------- ---------------- Net income (loss) $ (275,617)$ (6,396,490)$ 1,338,795 Federal income tax provision 105,098 263,992 327,472 Loss (gain) of subsidiaries 803,662 6,723,981 (700,226) --------------- --------------- ---------------- Taxable income $ 633,143 $ 591,483 $ 966,041 =============== =============== ================
Fixed maturities held to maturity: U.S. Government, government agencies and authorities $ 7,801,268 $ 10,676,106 State, municipalities and political subdivisions 2,448,293 6,342,369 Collateralized mortgage obligations 58,453 77,802 Public utilities 0 5,397,880 All other corporate bonds 1,665,401 4,230,350 --------------- -------------- $ 11,973,415 $ 26,724,507 =============== ==============
Below Investment Grade Investments 2004 2003 ----------------------------- -------------- ------------ Public Utilities $ 0 $ 1,001,673 CMO 15,764 24,984 Corporate 2,123,028 1,818,673 ------------- ------------ Total $ 2,138,792 $ 2,845,330 ============= ============
The amortized cost and estimated market value of debt securities at December 31, 2004, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Fixed Maturities Held to Maturity Amortized Market December 31, 2004 Cost Value --------------------------------------------- -------------- -------------- Due in one year or less $ 5,041,510 $ 5,075,216 Due after one year through five years 5,504,794 5,534,706 Due after five years through ten years 751,410 771,845 Due after ten years 617,248 658,250 Collateralized mortgage obligations 58,453 57,771 -------------- -------------- Total $ 11,973,415 $ 12,097,788 ============== ==============
C. INVESTMENTS ON DEPOSIT - At December 31, 2004, investments carried at approximately $ 5,939,498 were on deposit with various state insurance departments.
The financial statements include various estimated fair value information at December 31, 2004 and 2003, as required by Statement of Financial Accounting Standards 107, Disclosure about Fair Value of Financial Instruments (SFAS 107). Such information, which pertains to the Company's financial instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value of the Company.
The Company's insurance subsidiary is domiciled in Ohio and prepares its statutory-based financial statements in accordance with accounting practices prescribed or permitted by the Ohio 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 $ 21,860,401 and $ 13,008,198 at December 31, 2004 and 2003, respectively. The Company's life insurance subsidiary reported a statutory operating income (loss) before taxes (exclusive of intercompany dividends) of approximately $ (762,000), $ (1,461,000) and $ 2,700,000 for 2004, 2003 and 2002, respectively.
In addition to the above reinsurance agreements, the Company entered into reinsurance agreements with Optimum Re Insurance Company (Optimum) during 2004 to provide reinsurance on new products released for sale in 2004. The agreements are yearly renewable term (YRT) treaties where the Company cedes amounts above its retention limit of $100,000 with a minimum cession of $25,000 as has been a Company practice for the last several years with its reinsurers. Also, effective January 1, 2005, Optimum became the reinsurer of 100% of the accidental death benefits (ADB) in force of the Company. Previously, Generali provided this coverage. This coverage is renewable annually at the Company's option. Optimum specializes in reinsurance agreements with small to mid-size carriers such as the Company. Optimum currently holds an "A-" (Excellent) rating from A.M. Best.
UG entered a coinsurance agreement with Park Avenue Life Insurance Company (PALIC) as of September 30, 1996. Under the terms of the agreement, UG ceded to PALIC substantially all of its paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life insurance policies. PALIC and its ultimate parent The Guardian Life Insurance Company of America (Guardian), currently hold an "A" (Excellent), and "A+" (Superior) rating, respectively, from A.M. Best, an industry rating company. The PALIC agreement accounts for approximately 68% of the reinsurance reserve credit, as of December 31, 2004.
On September 30, 1998, UG entered into a coinsurance agreement with The Independent Order of Vikings, an Illinois fraternal benefit society (IOV). Under the terms of the agreement, UG agreed to assume, on a coinsurance basis, 25% of the reserves and liabilities arising from all in-force insurance contracts issued by the IOV to its members. At December 31, 2004, the IOV insurance in-force was approximately $ 1,686,000, with reserves being held on that amount of approximately $ 393,000.
The Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned in 2004, 2003 and 2002 was as follows:
Shown in thousands ----------------------------------------------------- 2004 2003 2002 Premiums Premiums Premiums Earned Earned Earned ---------------- ---------------- ---------------- Direct $ 17,238 $ 18,087 $ 18,597 Assumed 38 34 96 Ceded (3,036) (2,896) (2,701) ---------------- ---------------- ---------------- Net premiums $ 14,240 $ 15,225 $ 15,992 ================ ================ ================
In June 2002, the Company entered into a five-year contract with Fiserv for services related to its purchase of the "ID3" software system. Under the contract, the Company is required to pay $ 12,000 per month in software maintenance costs and $ 5,000 per month in offsite data center costs for a five-year period from the date of the signing.
On September 1, 2004, UTG contributed the common stock of its wholly-owned subsidiary, North Plaza, to its life insurance subsidiary, UG. The contribution, which received prior approval by the regulatory authorities, increased the capital of the life insurance subsidiary by $ 7,857,794.
On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002, the shareholders of UTG approved, the United Trust Group, Inc. Employee and Director Stock Purchase Plan (See Note 10.A. to the consolidated financial statements).
On January 1, 1993, UTG entered an agreement with UG pursuant to which UTG provided management services necessary for UG to carry on its business. UG paid $ 5,625,451, $ 5,906,406 and $ 3,025,194 to UTG in 2004, 2003 and 2002, respectively, under this arrangement.
Since the Company's affiliation with FSF, UG has acquired mortgage loans through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. UG pays a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $ 45,468, $ 63,214 and $ 70,140 in servicing fees and $ 0, $ 13,821 and $ 35,127 in origination fees to FSNB during 2004, 2003 and 2002, respectively.
The Company reimbursed expenses incurred by Mr. Jesse T. Correll and Mr. Randall L. Attkisson relating to travel and other costs incurred on behalf of or relating to the Company. The Company paid $ 50,098, $ 20,238 and $ 74,621 in 2004, 2003 and 2002, respectively to First Southern Bancorp, Inc. in reimbursement of such costs. In addition, beginning in 2001, the Company began reimbursing FSBI a portion of salaries and pension costs for Mr. Correll and Mr. Attkisson. The reimbursement was approved by the UTG Board of Directors and totaled $ 160,440, $ 151,440 and $ 169,651 in 2004, 2003 and 2002, respectively, which included salaries and other benefits.
On November 20, 1998, FSF and affiliates acquired 929,904 shares of common stock of UTG from UTG and certain UTG shareholders. As consideration for the shares, FSF paid UTG $ 10,999,995 and certain shareholders of UTG $ 999,990 in cash. Included in the stock acquisition agreement was an earnings covenant whereby UTG warranted UTG and its subsidiaries and affiliates would have future earnings of at least $ 30,000,000 for a five-year period beginning January 1, 1998. Such earnings were computed based on statutory results excluding inter-company activities such as inter-company dividends plus realized and unrealized gains and losses on real estate, mortgage loans and unaffiliated common stocks. At the end of the covenant period, an adjustment was to be made equal to the difference between the then market value and statutory carrying value of real estate still owned that existed at the beginning of the covenant period. If UTG did not meet the covenant requirements, any shortfall would first be reduced by the actual average tax rate for UTG for the period, and then would be further reduced by one-half of the percentage, if any, representing UTG's ownership percentage of the insurance company subsidiaries. This result would then be reduced by $ 250,000. The remaining amount would be paid by UTG in the form of UTG common stock valued at $ 15.00 per share with a maximum number of shares to be issued of 500,000. However, there was to be no limit to the number of shares transferred to the extent that there were legal fees, settlements, damage payments or other losses as a result of certain legal action taken. The price and number of shares was adjusted for any applicable stock splits, stock dividends or other recapitalizations. For the five-year period starting January 1, 1998 and ending December 31, 2003, the Company had total earnings of $ 17,011,307 applicable to this covenant. Therefore, UTG did not meet the earnings requirements stipulated, and during 2003, UTG was required to issue 500,000 additional shares to FSF or its assigns.
Diluted EPS Income available to common shareholders and $ assumed conversions (6,396,490) 3,839,947 $ (1.67) ================== ================== =================
For the year ended December 31, 2002 --------------- ------ ------------------ ---- ----------------- Income Shares Per-Share (Numerator) (Denominator) Amount --------------- ------------------ ----------------- Basic EPS Income available to common shareholders $ 1,338,795 3,505,424 $ 0.38 =================
At December 31, 2004, the Company had no long-term debt outstanding. At December 31, 2003, the Company had $ 2,289,776 in long-term debt outstanding.
The Financial Accounting Standards Board ("FASB") has issued Statement No. 123 (revised 2004), Share Based Payment. Statement No. 123 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company will account for all future share based payments in accordance with the requirements of Statement No. 123.
The following table summarizes certain unaudited operating results of UTG as though the merger transaction had taken place at the beginning of the reporting periods ending on December 31, 2002.
December 31, -------------------- Total revenues $ 30,064,644 Total benefits and other expenses $ 27,927,456 Operating income $ 2,137,188 Net Income $ 1,394,218 Basic earnings per share $ 0.40 Diluted earnings per share $ 0.35
Tax Before-Tax (Expense) Net of Tax 2004 Amount or Benefit Amount ------------------------------------------ ---------------- ------------------- ---------------
Tax Before-Tax (Expense) Net of Tax 2003 Amount or Benefit Amount ------------------------------------------ ---------------- ------------------- ---------------
Unrealized holding losses during period $ (1,941,662) $ 679,582 $ (1,262,080) Less: reclassification adjustment for losses realized in net income 86,979 (30,443) 56,536 ---------------- ------------------- ---------------
Net unrealized losses (1,854,683) 649,139 (1,205,544) ---------------- ------------------- --------------- Other comprehensive deficit $ (1,854,683) $ 649,139 $ (1,205,544) ================ =================== ===============
Tax Before-Tax (Expense) Net of Tax 2002 Amount or Benefit Amount ------------------------------------------ ---------------- ------------------- ---------------
Premiums and policy fees, net $ 3,874,145 $ 3,671,667 $ 3,389,672 $ 3,204,945 Net investment income 1,831,077 2,734,854 2,865,198 2,989,757 Total revenues 5,833,347 6,607,203 6,429,302 6,597,027 Policy benefits including dividends 5,172,042 4,923,292 4,467,013 4,203,360 Commissions and amortization of DAC and COI 493,284 505,872 544,678 635,077 Operating expenses 1,397,448 1,432,013 1,319,472 1,163,814 Operating income (1,255,061) (278,683) 71,029 594,776 Net income (874,195) 66,841 141,264 390,473 Basic earnings per share (0.22) 0.02 0.04 0.09 Diluted earnings per share (0.22) 0.02 0.04 0.09
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