The following table shows a breakout of property, net of accumulated depreciation, occupied by the Company.
The Company owns an office complex in Springfield, Illinois, which houses the primary insurance operations. The office buildings in this complex contain 57,000 square feet of office and warehouse space, and are carried at $1,594,537. The facilities occupied by the Company are adequate relative to the Company's present operations.
Premiums and policy fee revenues, net of reinsurance premiums and policy fees, decreased 8% when comparing 2008 to 2007. The Company writes very little new business. Unless the Company acquires a block of in-force business as it did in December 2006, management expects premium revenue to continue to decline on the existing block of business at a rate consistent with prior experience. The Company’s average persistency rate for all policies in force for 2008 and 2007 was approximately 95.8% and 96.1%, respectively. Persistency is a measure of insurance in force retained in relation to the previous year.
Net investment income increased 4% when comparing 2008 to 2007. The overall gross investment yields for 2008 and 2007, are 6.35% and 6.02%, respectively. Significant investments have been made in real estate and equity securities that do not contribute to current year investment earnings, which decreases investment yield. However, Management expects these investments to significantly impact earnings positively as investments are sold and income is recognized in realized gains over the life of the investment. The increase from 2007 to 2008 is primarily due to higher common stock dividends, mortgage interest, and rental income from a real estate investment. The stock dividends should be expected to decrease during 2009, as approximately 40% of the dividends were from one investment that was subsequently sold in December of 2008. Due to the decline of the economy and credit crunch, new mortgage loan issues slowed significantly in 2008, and as such this line item is also expected to decline in 2009. These increases were offset by a decrease in bond interest. This decrease is primarily related to the Company holding fewer fixed maturity investments and carrying higher cash balances earning lower rates of interest compared to a year ago. As the bursting of the housing bubble ripples through the global economy, Management has taken steps to avoid catastrophic future losses. As part of this portfolio evaluation process, certain investments were subsequently sold, particularly during the third and fourth quarters of 2008. This has resulted in a higher cash balance earning extremely low rates of interest which will have an immediate impact on income. This should be expected going forward until re-deploying this cash in investments deemed fairly priced and reasonably safe by Management. Until the middle of 2007, the marketplace had seen an increase in yields on fixed maturity investments, which resulted in an increase in investment earnings on the fixed maturity portfolio during this time as holdings matured and were re-invested. Additionally, since 2004, the Company began lengthening the bond portfolio. Generally, longer term investments carry a higher yield than shorter term investments in the marketplace. The Company also continued 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. During 2008 and 2007, the Company issued $5,242,000 and $19,765,000, respectively, in new mortgage loans.
Realized investment gains, net of realized losses, were $2,362,578 and $5,467,207 in 2008 and 2007, respectively. During 2008, approximately $5,353,000 in realized gains was the result of common stock sales. These gains are mostly the result of three investments. For diversification purposes, in September, 28% of the Company’s investment in CSI common stock was sold for a gain of approximately $3,059,000. During 2008, amid growing global economic distress, the Company established a defensive posture in exchange traded funds. These investments resulted in gains of approximately $2,946,000. At the end of the year, SFF Production, an energy investment, was also sold resulting in realized gains of approximately $1,701,000. With 2008 experiencing one of the largest financial crises in our nation’s history, Management has refused to sit on the sidelines hoping for a recovery and spent a significant amount of time analyzing the Company’s investment holdings and reducing risk. As a result of this, certain investments that were deemed too risky, primarily those in financial institutions were sold, predominantly at losses. Those losses consisted of approximately $3,100,000 on common stocks and $3,000,000 on fixed maturity investments. Also included in these losses is an approximate $540,000 loss resulting from writing down a bond investment in Lehman Brothers to $0.
With the continued turmoil in financial markets and general decline of the 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 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.
There are a number of significant risks and uncertainties inherent in the process of monitoring impairments and determining if impairment is other-than-temporary. These risks and uncertainties related to management’s assessment of other than temporary declines in value include but are not limited to: The risk that Company's assessment of an issuer's ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer; The risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated; The risk that fraudulent information could be provided to the Company's investment professionals who determine the fair value estimates.
The net realized gains in 2007 are primarily the result of three sales. In May 2007, the Company sold its 50% interest in Harbor Village Partners LP, realizing a loss of approximately $643,000. Management determined the project was not performing as desired and that it was in the Company’s best long-term interest to divest of its equity investment. As part of the sale, UG is entitled to receive a 10% profit share of future earnings of the development project up to $1,400,000. This future potential was not considered in the current calculation of loss on the sale. Should any future profits be received by the Company from this project, they will be recorded as income in the period received. In June 2007, the Company completed the sale of a real estate holding identified as Drs. Hospital. The Company reported a gain on the sale of approximately $2,600,000. In December of 2007, the Company sold its 50% interest in Boone Parklands, LLC that was acquired in April of 2007. The Company realized a gain of approximately $3,800,000 from the sale.
Benefits, claims and settlement expenses net of reinsurance benefits and claims, increased $366,319 from 2007 to 2008. The increase relates primarily to changes in the Company’s death claim experience. Death claims were approximately $875,000 more in 2008 as compared to 2007. There is no single event that caused the mortality variances. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by management.
Commissions and amortization of deferred policy acquisition costs slightly increased from 2007 to 2008 mostly as a result of lower commissions offset due to a reinsurance agreement in TI that paid out during April of 2008. The subsidiaries of ACAP have reinsurance agreements in place with outside companies that drive the majority of this number. The most significant factor in the continuing decrease is attributable to the Company paying fewer commissions since the Company writes very little new business and renewal premiums on existing business continue to decline. 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 of the decrease 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.
Net amortization of cost of insurance acquired decreased 6% in 2008 compared to 2007. 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 profits 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 profits 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 7% of the balance, 12% on approximately 50% 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 2008 and 2007 has been approximately 95.8% and 96.1%, respectively. The Company monitors these projections to determine the adequacy of present values assigned to future profits. No impairments were recorded in the periods reported.
Operating expenses decreased 10% in 2008 compared to 2007. The decrease reflects Management’s significant emphasis on expense monitoring and cost containment. Maintaining administrative efficiencies directly impacts net income. In early 2009, five positions were eliminated, four as a result of lay-offs due to the decline of the economy. This will result in savings of approximately $180,000.
Interest expense decreased approximately $485,000 during 2008 compared to 2007. This decrease is the result of a lower outstanding balance of debt and paying a variable rate of interest on the majority of this balance which has gone from 6.92% at year-end 2007 to 4.02% at year-end 2008. The Company prepaid principal due in 2009 during 2008. The next required principal payment is due December of 2010. The Company anticipates aggressively repaying the current debt.
At December 31, 2008, 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 all fixed maturity investments as “investments held for sale”.
At December 31, 2008, the Company held fixed maturity securities with a carrying value of $577,082 that were guaranteed by two different third parties. The Standard and Poor's credit ratings ranged from AAA to AA- with and without the guarantees. The Company had no significant concentration in a guarantor either directly or indirectly as of December 31, 2008.
The following table summarizes the Company's fixed maturities distribution at December 31, 2008 and 2007 by ratings category as issued by Standard and Poor's, a leading ratings analyst.
Deferred policy acquisition costs decreased 20% in 2008 compared to 2007. 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, $9,000 in interest accretion and $196,058 in amortization in 2008, and had $0 in policy acquisition costs deferred, $9,000 in interest accretion and $188,360 in amortization in 2007.
Cost of insurance acquired decreased $4,043,107 in 2008 compared to 2007. 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 2008 and 2007, amortization decreased the asset by $4,043,107 and $4,282,715, respectively. No impairments of this asset were recorded for the periods presented
At December 31, 2008, the Company has outstanding notes payable of $15,616,766 as compared to $19,914,346 a year ago. Approximately $10,500,000 of this debt is related to the acquisition of Acap Corporation and the majority remaining is attributable to borrowings of a subsidiary, Lexington, relating to a real estate investment. The Company has three lines of credit available for operating liquidity or acquisitions of additional lines of business. There are no outstanding balances on any of these lines of credit as of the balance sheet date. The Company's long-term debt is discussed in more detail in Note 11 to the consolidated financial statements.
Total shareholders' equity decreased 5% in 2008 compared to 2007. This decrease is primarily due to an unrealized loss in value of approximately $3,039,000 on investments held. Additionally, the Company repurchased approximately $124,000 of its common stock in the open market during the current year.
Cash provided by investing activities was $25,952,559 and $10,873,952 for 2008 and 2007, respectively. Equity investments sold increased $25,501,863, as the Company evaluated its investment equity portfolio. Cash provided by investing activities was significantly impacted during 2007 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 35% and 28% of the total cost of investments acquired in 2008 and 2007, respectively. During 2008, Management began to focus on the preservation of capital as the nation is experiencing one of the largest financial crises in its history. This is reflected in investment sales exceeding purchases by approximately $26,000,000.
Policyholder contract deposits decreased 23% in 2008 compared to 2007. Management anticipates continued moderate declines in contract deposits. Policyholder contract withdrawals have decreased 33% in 2008 compared to 2007. 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.
UTG, Inc. borrowed funds in order to complete the Acap Corporation acquisition from First Tennessee Bank National Association through execution of an $18,000,000 promissory note. To secure the note, UTG, Inc. has pledged 100% of the common stock of its subsidiary, UG. At the time of closing on December 8, 2006, UTG, Inc. borrowed $15,700,278 on the promissory note. The remaining available balance was able to be drawn on at any time during the year and a portion of it was used in the purchase of the stock put option shares of Acap Corporation as they were presented to UTG, Inc. for purchase under the stock put option agreement entered into during 2006 as part of the acquisition. The promissory note carries a variable rate of interest based on the 3 month LIBOR rate plus 180 basis points. The initial rate was 7.15%. Interest is payable quarterly. Principal is payable annually beginning at the end of the second year in five installments of $3,600,000. The loan matures on December 7, 2012. During the year ended December 31, 2007, UTG borrowed $1,994,176 and repaid $3,450,005 on the note. During 2008, UTG paid an additional $3,049,995 in principal, leaving a balance outstanding at December 31, 2008 of $10,494,454. No additional borrowings on this note are anticipated.
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, 2008 UG statutory shareholders' equity was $27,483,161. At December 31, 2008, UG statutory net income was $4,825,058. 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 ordinary dividends of $3,000,000 to UTG during 2008. UG paid ordinary dividends of $3,000,000 to UTG during 2007.
AC and TI are Texas domiciled insurance companies, 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 or b) 10% of statutory capital and surplus. At December 31, 2008 AC and TI statutory shareholders' equity was $7,345,919 and $2,565,614, respectively. At December 31, 2008, AC and TI statutory net income was $1,164,325 and $48,944, respectively. 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 to ACAP of $0 and $500,000 in 2008 and 2007, respectively. TI paid AC ordinary dividends of $0 and $250,000 in 2008 and 2007, respectively.
At year-end 2008, UG had one ratio outside the normal range. AC had three ratios outside the normal range. TI had two ratios outside the normal range. Each of the ratios outside the normal range was anticipated by Management. UG’s ratio relates to the Company’s affiliated investments. The Company has made investments in real estate projects, which have been consolidated into these financial statements through limited liability companies. The limited liability companies were created to provide additional risk protection to the Company. While this negatively impacts this ratio, the Company believes that this structure is in the best interest of the Company and these investments will have a positive long-term impact on the Company. Additionally, the newly acquired Acap Corporation is a subsidiary of UG. AC’s ratios outside the normal range relate to change in premium and change in capital and surplus. TI’s ratios outside the normal range related to the change in premium and change in reserving. AC and TI, like UG, have not actively marketed life products in the past several years. Management currently places little emphasis on new business production, believing resources could be better utilized in other ways. Current sales primarily represent sales to existing customers through additional insurance needs or conservation efforts. The sale of the A&H line of business at the end of 2006 had a significant role in these also.
The Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 163, Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60 Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. That diversity results in inconsistencies in the recognition and measurement of claim liabilities because of differing views about when a loss has been incurred under FASB Statement No. 5, Accounting for Contingencies. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. The Company does not believe the adoption will have a material impact on its consolidated financial condition or results of operations.
The FASB also issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133 this Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not believe the adoption will have a material impact on its consolidated financial condition or results of operations.
The FASB also issued Statement No. 160, Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51. This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company does not believe the adoption will have a material impact on its consolidated financial condition or results of operations.
The FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). The Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Statement was effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company chose not to elect the fair value option - therefore, SFAS No. 159 did not impact its consolidated financial position, results of operations or cash flows.
Registered Public Accounting Firm for the years ended December 31, 2008 and 2007……..…....
The management of UTG, Inc. (“UTG”) is responsible for establishing and maintaining adequate internal control over financial reporting. UTG’s internal control system is designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles.
The Company is considered a non-accelerated filer thus, the registered public accounting firm, which audited the financial statements included in the annual report, is not required to issue an attestation report on management’s assessment of internal control over financial reporting for December, 31 2008. The Securities and Exchange Commission is currently reviewing whether or not an attestation report will be required in the future. If the SEC makes no changes, the Company will be required to have an audit performed as of December 31, 2009.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of UTG, Inc. and subsidiaries as of December 31, 2008 and 2007, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to examine management’s assertion about the effectiveness of UTG, Inc.’s internal control over financial reporting as of December 31, 2008 included in the accompanying Report of Management on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.
UTG, Inc. and its subsidiaries are collectively referred to as (“The Company”). The Company’s significant accounting policies, consistently applied in the preparation of the accompanying consolidated financial statements, are summarized as follows.
BASIS OF PRESENTATION - The financial statements of UTG, Inc., and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America.
Investments held for sale - at fair value. Unrealized gains and losses deemed temporary, net of deferred income taxes, are credited or charged, as appropriate, directly to accumulated other comprehensive income or loss (a component of stockholders’ equity). Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Operations, using the constant yield method over the period to maturity. Net realized gains and losses on sales of held for sale securities, and unrealized losses considered to be other than temporary, are credited or charged to net realized investment gains (losses) in the Consolidated Statements of Operations.
Real estate - investment real estate at cost less allowance for depreciation and, as appropriate, provisions for possible losses. Accumulated depreciation on investment real estate was $1,962,109 and $594,043 as of December 31, 2008 and 2007, respectively.
Unrealized gains and losses on investments carried at market value are recognized in other comprehensive income on the specific identification basis.
FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method. These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on the life insurance subsidiary’s experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations. The Company makes these assumptions at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 2% to 6% for life insurance and 2.5% to 9.25% for annuities. Benefit reserves for traditional life insurance policies include certain deferred profits on limited-payment policies that are being recognized in income over the policy term. Policy benefit claims are charged to expense in the period that the claims are incurred. Current mortality rate assumptions are based on 1975-80 select and ultimate tables. Withdrawal rate assumptions are based upon Linton B or Linton C, which are industry standard actuarial tables for forecasting assumed policy lapse rates.
INCOME TAXES - Income taxes are reported under Statement of Financial Accounting Standards Number 109 and Interpretation Number 48, “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.
TREASURY SHARES - The Company holds 400,315 and 384,813 shares of common stock as treasury shares with a cost basis of $2,970,533 and $2,846,517 at December 31, 2008 and 2007, respectively.
AC and TI are Texas domiciled insurance companies, 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 or b) 10% of statutory capital and surplus. At December 31, 2008 AC and TI statutory shareholders' equity was $7,345,919 and $2,565,614, respectively. At December 31, 2008, AC and TI statutory net income was $1,164,325 and $48,944, respectively. 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 $0 and $500,000 during 2008 and 2007 respectively. TI paid ordinary dividends of $0 and $250,000 during 2008 and 2007 respectively.
At December 31, 2008 and 2007, respectively, the Company had gross deferred tax assets of $2,352,740 and $2,818,386 net of valuation allowances of $529,521 and $404,872, and gross deferred tax liabilities of $17,046,534 and $19,320,421, resulting from temporary differences primarily related to the life insurance subsidiaries. The valuation allowance in the current period was from ACAP and its consolidated subsidiaries that for tax purposes generated a net operating loss of $1,648,710 and $1,156,777 during 2008 and 2007 respectively. The Company established a deferred tax asset of $529,521 and $404,872 in 2008 and 2007 respectively relating to the operating loss carry forwards. In 2008 and 2007 the Company established an offsetting allowance of $529,521 and $404,872 respectively for the losses. The allowance was established as a result of uncertainty in the Company’s ability to utilize the loss carryforward which is dependent on generating sufficient taxable income prior to expiration of the loss carry forward. The Company has not experienced any reductions of deferred tax assets due to the lapse of applicable statute of limitations. The 2008 net operating loss expires in 2028. The 2007 net operating loss expires in 2027.
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 2005 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.
ACAP and its consolidated subsidiaries for tax purposes generated a net operating loss during 2008 of $645,932. The Company has established a deferred tax asset of $226,076 relating to this operating loss carryforward and has established an offsetting allowance of $226,076.
NET INVESTMENT INCOME - The following table reflects net investment income by type of investment:
The fair value of investments with sustained gross unrealized losses at December 31, 2008 and 2007 are as follows:
The amortized cost and estimated market value of debt securities at December 31, 2008, 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.
INVESTMENTS ON DEPOSIT - At December 31, 2008, investments carried at approximately $9,912,000 were on deposit with various state insurance departments.
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 $27,483,000 and $30,131,000 at December 31, 2008 and 2007, respectively. UG reported a statutory operating income before taxes (exclusive of inter-company dividends) of approximately $4,825,000 and $4,662,000 for 2008 and 2007, respectively. AC's total statutory shareholders' equity was approximately $7,346,000 and $8,166,000 at December 31, 2008 and 2007. AC reported a statutory operating income before taxes (exclusive of inter-company dividends) of approximately $1,164,000 and $999,000 for 2008 and 2007 respectively. TI's total statutory shareholders' equity was approximately $2,565,000 and $2,432,000 at December 31, 2008.and 2007, respectively. TI reported a statutory operating income before taxes (exclusive of inter-company dividends) of approximately $48,944 and $290,000 for 2008 and 2007 respectively.
On June 7, 2000, UG assumed an already existing coinsurance agreement, dated January 1, 1992, between Lancaster Life Reinsurance Company (LLRC), an Arizona corporation and Investors Heritage Life Insurance Company (IHL), a corporation organized under the laws of the Commonwealth of Kentucky. Under the terms of the agreement, LLRC agreed to assume from IHL a 90% quota share of new issues of credit life and accident and health policies that have been written on or after January 1, 1992 through various branches of the First Southern National Bank. The maximum amount of credit life insurance that can be assumed on any one individual’s life is $15,000. UG assumed all the rights and obligations formerly held by LLRC as the reinsurer in the agreement. LLRC liquidated its charter immediately following the transfer. At December 31, 2008, the IHL agreement has insurance in-force of approximately $1,685,000, with reserves being held on that amount of approximately $23,000.
During 1998, AC closed a coinsurance transaction with Universal Life Insurance Company (“Universal”). Pursuant to the coinsurance agreement, AC coinsured 100% of the individual life insurance policies of Universal in force at January 1, 1998. At December 31, 2008, the Universal agreement has insurance in-force of approximately $14,309,000, with reserves being held on that amount of approximately $4,975,000.
The Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned in 2008 and 2007 were as follows:
The insurance industry has experienced a number of civil jury verdicts which have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances. In the normal course of business the Company is involved from time to time in various legal actions and other state and federal proceedings. There were no proceedings pending or threatened as of December 31, 2008.
UG currently has an unresolved dispute with one of its outside reinsurers. The issue relates to reinsurance premiums. The reinsurer claims UG owes for years 2005 through 2007 in the amount of $987,000. In early 2008, the reinsurer billed UG for these amounts, providing no information or explanation. The related treaty was originally with another outside reinsurer and was acquired by the current reinsurer in a reinsurance block acquisition. The treaty is a yearly renewable term (“YRT”) cession based treaty. UG maintains it has no liability relating to the back billed premium. UG has initiated arbitration according to the treaty to bring resolution to this matter. Final resolution is not anticipated until sometime mid 2009. UG has established a contingent liability of $500,000 relating to this matter to cover costs including legal and arbitration costs.
As part of the acquisition of ACAP on December 8, 2006, UTG loaned $3,357,000 to ACAP. ACAP used the proceeds for the repayment of existing debt with an unaffiliated financial institution and to retire all of its outstanding preferred stock. The terms of the inter-company loan mirror the interest rate and repayment requirements of the debt with First Tennessee Bank National Association. No payments were made on the loan in 2008. At December 31, 2008, the interest due of $224,084 was added to the balance. As of December 31, 2008, the balance of the loan is $3,259,084.
Effective January 1, 2007, UTG entered into administrative services and cost sharing agreements with its subsidiaries, UG, AC and TI. Under these arrangements, each company pays its proportionate share of expenses of the entire group, based on an allocation formula. During 2008, UG, AC and TI paid $3,717,696, $3,065,476 and $779,980, respectively. During 2007, UG, AC and TI paid $3,919,684, $3,314,176 and $859,918, respectively.
The purchase price of shares repurchased under the stock restriction and buy-sell agreement shall be computed, on a per share basis, equal to the sum of (i) the original purchase price(s) paid to acquire such shares from the Holding Company at the time they were sold pursuant to the Plan and (ii) the consolidated statutory net earnings (loss) per share of such shares during the period from the end of the month next preceding the month in which such shares were acquired pursuant to the plan, to the end of the month next preceding the month in which the closing sale of such shares to UTG occurs. The consolidated statutory net earnings per Share shall be computed as the net income of the Holding Company and its subsidiaries on a consolidated basis in accordance with statutory accounting principles applicable to insurance companies, as computed by the Holding Company, except that earnings of insurance companies or block of business acquired after the original plan date, November 1, 2002, shall be adjusted to reflect the amortization of intangibles established at the time of acquisition in accordance with generally accepted accounting principles (GAAP), less any dividends paid to shareholders. The calculation of net earnings per Share shall be performed on a monthly basis using the number of common shares of the Holding Company outstanding as of the end of the reporting period. The purchase price for any Shares purchased hereunder shall be paid in cash within 60 days from the date of purchase subject to the receipt of any required regulatory approvals as provided in the Agreement.
In accordance with Statement of Financial Accounting Standards No. 128, the computation of diluted earnings per share is the same as basic earnings per share for the years ending December 31, 2008 and 2007, as there were no outstanding securities, options or other offers that give the right to receive or acquire common shares of UTG.
At December 31, 2008 and 2007, the Company had $15,616,766 and $19,914,346, respectively, of long-term debt outstanding.
At December 31, 2006, Harbor Village Partners ('HVP"), a then 50% owned affiliate of the Company, had $8,000,000 of debt through various borrowings. In May 2007, the Company sold its interest in HVP to an outside third party. As a result of this sale, HVP is no longer a consolidated subsidiary of the Company. Further, the previous outstanding debt of HVP is no longer reflected in the financial statements of UTG, nor does UTG have any responsibility for this debt.
On February 7, 2007, HPG Acquisitions ("HPG"), a 74% owned affiliate of the Company, borrowed funds from First National Bank of Midland, through execution of a $373,862 promissory note. The note is secured by real estate owned by the HPG. The note bears interest at a fixed rate of 5%. The first payment was due January 15, 2008. There will be 119 regular payments of $3,965 followed by one irregular last payment estimated at $32,424. HPG made repayments of $47,585 during 2008 and $3,965 during 2007. The outstanding principal balance on this debt was $322,312 and $369,897 at December 31, 2008 and December 31, 2007, respectively.