The following table shows a breakout of property, net of accumulated depreciation, occupied by the Company and held for investment.
Total investment real estate holdings represent approximately 13% of the total assets of the Company, net of accumulated depreciation of $ 4,444,729 and $ 2,872,199 at year-end 2005 and 2004 respectively.
Residential development property is primarily a located just outside Dallas, Texas and is a development of upscale summer and vacation homes and condominiums with a target market of the Dallas, Texas community. The project is projected to take five to seven years for complete build-out. The property contains additional amenities such as a marina, an equestrian center, hiking trails, a teen center and restaurant.
The purpose of this section is to discuss and analyze the Company's consolidated results of operations, financial condition and liquidity and capital resources for the three years ended December 31, 2005. This analysis should be read in conjunction with the consolidated financial statements and related notes, which appear elsewhere in this Form 10-K. The Company reports financial results on a consolidated basis. The consolidated financial statements include the accounts of UTG and its subsidiaries at December 31, 2005.
The Company's primary source of new business production comes from internal conservation efforts. 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. 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 (a single premium, child term policy). The Company is currently working on a level term and decreasing term product to be introduced in 2006. 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 looking at other types of products to compliment the existing offerings.
Realized investment gains, net of realized losses, were $ 1,431,936, $ (20,648) and $ 485,436 in 2005, 2004 and 2003, respectively. The net realized gains in 2005 were primarily the result of the sale of 2,216,776 shares of common stock owned of BNL Financial Corporation ("BNL"). These shares represented approximately 10.57% of the then current outstanding shares of BNL and represent all shares owned by UG. The shares were reacquired by the issuing entity for an agreed upon sales price of $ 2,300,000. During 2004, the Company sold several of its collateralized mortgage obligation bonds and realized a nominal net loss on these securities. The sale followed and analysis of bond holdings and was done to reduce exposure to interest rate and extension risk within the portfolio. The primary source for the 2003 gain is from the sale of two investments. The Company sold one common stock holding, realizing a gain of $ 165,262 and one real estate holding, realizing a gain of $ 211,352.
In recent periods, management focus has been placed on promoting and growing TPA services to 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 2005, which should provide approximately $ 750,000 additional annual revenues. For the years ended 2005, 2004 and 2003, the Company received $ 1,170,824, $ 719,053, and $ 571,298 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 to insurance companies seeking business process outsourcing solutions. Fiserv is responsible for the marketing and sales function for the alliance, as well as providing the datacenter operations. UTG staffs 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 17% in 2005 compared to 2004 and increased 10% in 2004 compared to 2003. 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 2005, 2004 and 2003 has been approximately 95.8%, 94.6% and 94.9%, 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. A significant portion of the remaining balance of this asset will be amortized over the next four years. The impact of the decrease in amortization expense will have a positive impact on future earnings.
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 few of years; however, because of the Company's conservative investment philosophy the Company has avoided such significant losses.
At December 31, 2005, 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.
The following table summarizes the Company's fixed maturities distribution at December 31, 2005 and 2004 by ratings category as issued by Standard and Poor's, a leading ratings analyst.
Total investment real estate holdings represent approximately 13% and 9% of the total assets of the Company, net of accumulated depreciation, at year-end 2005 and 2004 respectively. The Company has made several investments in real estate in recent years. Expected returns on these investments exceed those available in fixed income securities. However, these returns may not always be as steady or predictable.
Cost of insurance acquired decreased 17% in 2005 compared to 2004. 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 2005 and 2004 amortization decreased the asset by $ 2,193,085 and $ 1,869,135, 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.
Total liabilities increased approximately 1% in 2005 compared to 2004. Policy liabilities and accruals, which represented 95% and 94% of total liabilities at year end 2005 and 2004, respectively, decreased slightly during the current year. The decrease is attributable to a decrease in the outstanding policy benefit claims at the end of the year.
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 2005, UG had two ratios outside the normal range. These ratios are discussed in more detail in the Regulatory Environment discussion included in this Item 7.
Cash used in operating activities was $ (290,936), $ (45,950) and $ (933,048) in 2005, 2004 and 2003, respectively. Reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows.
Cash provided by (used in) investing activities was $ (1,265,715), $ 3,776,714 and $ (15,846,714) for 2005, 2004 and 2003, respectively. The most significant aspect of cash provided by (used in) investing activities is the fixed maturity transactions. Fixed maturities account for 14%, 82% and 82% of the total cost of investments acquired in 2005, 2004 and 2003, respectively. The decrease in 2005, compared to 2004 and 2003, reflects the Company's emphasis in the mortgage loan and real estate markets during 2005. These investments accounted for 76% of the total cost of investments acquired in 2005.
Policyholder contract deposits decreased 6% in 2005 compared to 2004 and 5% in 2004 compared to 2003. The decrease in policyholder contract deposits relates to the declining in force business of the Company. Management anticipates continued moderate declines in contract deposits. Policyholder contract withdrawals have decreased 14% in 2005 compared to 2004 and increased 2% in 2004 compared to 2003. 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. UG 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, 2005, the Company had no outstanding borrowings attributable to this LOC. During 2005, the Company had $1,500,000 in borrowings against this line, which were repaid during the year. During 2004 and 2003, the Company had no borrowings against this LOC.
During 2002, UTG and Fiserv formed an alliance between their respective organizations to provide third party administration (TPA) services 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 operations processing service for the Company. The Company will staff the administration effort. To facilitate the alliance, the Company has converted part of its existing business and all TPA clients to "ID3", a software system owned by Fiserv to administer an array of life, health and annuity products in the insurance industry. 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. In addition, the Company entered into a five-year contract with Fiserv for services related to their purchase of the "ID3" software system. Under the contract, the Company is required to pay $ 12,000 per month in software maintenance costs and a monthly fee for offsite data center costs, based on the number and type of policies being administered the ID3 software system through mid-2007.
UTG is a holding company that has no day-to-day operations of its own. Funds required to meet its expenses, generally costs associated with maintaining the Company in good standing with states in which it does business, are primarily provided by its subsidiaries. On a parent only basis, UTG's cash flow is dependent on management fees received from its insurance subsidiary and earnings received on cash balances. On December 31, 2005, substantially all of the consolidated shareholders equity represents net assets of its subsidiary. The Company's insurance subsidiary has maintained adequate statutory capital and surplus and has not used surplus relief or financial reinsurance. The payment of cash dividends to shareholders is not legally restricted. However, the state insurance department regulates insurance company dividend payments where the company is domiciled.
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, 2005 UG statutory shareholders' equity was $ 25,645,716. At December 31, 2005, UG statutory gain from operations was $ 5,113,557. 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. There were no dividends paid during 2005.
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 to 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 effected only a change in UTG's legal domicile and certain other changes of a legal nature. It did not result in any change in UTG's business, management, fiscal year, assets or liabilities or location of its principal facilities. At the 2005 annual meeting of shareholders, the shareholders approved the reincorporation merger to be effective July 1, 2005.
Report of Kerber, Eck & Braeckel LLP, Independent Registered Public Accounting Firm for the years ended December 31, 2004, 2003....................................................32
We have also audited Schedules II, IV and V as of December 31, 2004, of UTG, Inc. and subsidiaries and Schedules II, IV and V for each of the two years in the period then ended. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.
UTG, INC. CONSOLIDATED BALANCE SHEETS As of December 31, 2005 and 2004
2005 2004 --------------- --------------- Investments: Fixed maturities held to maturity, at amortized cost (market $7,500,291 and $12,097,788) $ 7,513,064 $ 11,973,415 Investments held for sale: Fixed maturities, at market (cost $127,000,657 and $147,217,453) 125,075,626 148,193,887 Equity securities, at market (cost $15,098,815 and $15,216,214) 24,574,259 24,399,172 Mortgage loans on real estate at amortized cost 36,781,293 20,722,415 Investment real estate, at cost, net of accumulated depreciation 42,587,982 28,192,081 Policy loans 12,644,838 12,844,748 Short-term investments 42,116 39,489 --------------- --------------- 249,219,178 246,365,207
Shareholders' equity: Common stock - no par value, stated value $.001 and $.02 per share. Authorized 7,000,000 shares - 3,901,800 and 3,965,533 shares issued and outstanding after deducting treasury shares of 303,442 and 227,709 3,902 79,315 Additional paid-in capital 42,295,661 42,590,820 Accumulated deficit (3,637,349) (4,897,572) Accumulated other comprehensive income 4,655,238 6,678,542 --------------- --------------- Total shareholders' equity 43,317,452 44,451,105 --------------- --------------- Total liabilities and shareholders' equity $ 318,831,501 $ 317,868,084 =============== ===============
UTG, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three Years Ended December 31, 2005
Basic income (loss) per share from continuing operations and net income (loss) $ 0.32 $ (0.07)$ (1.67) =============== ================ ================
Basic weighted average shares outstanding 3,938,781 3,986,731 3,839,947 =============== ================ ================
UTG, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three Years Ended December 31, 2005
Additional paid-in capital Balance, beginning of year $ 42,590,820 $ 42,672,189 $ 42,976,344 Issued during year 151,200 167,071 185,574 Treasury shares acquired (521,817) (297,991) (181,817) Change in stated value 75,458 0 0 Reclassification under FAS 150 0 49,551 0 Retired during year 0 0 (258,361) Cumulative change in accounting principal 0 0 (49,551) ------------ ------------ ----------- Balance, end of year $ 42,295,661 $ 42,590,820 $ 42,672,189 ============ ============ ===========
Retained earnings (accumulated deficit) Balance, beginning of year $ (4,897,572) $ (4,621,955) $ 1,774,535 Net income (loss) 1,260,223 $ 1,260,223 (275,617) $ (275,617) (6,396,490) $ (6,396,490) ------------ ------------ ----------- Balance, end of year $ (3,637,349) $ (4,897,572) $ (4,621,955) ============ ============ ===========
Total shareholders' equity, end of year $ 43,317,452 $ 44,451,105 $ 39,696,639 ============ ============ ===========
2005 2004 2003 --------------- --------------- --------------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net income (loss) $ 1,260,223 $ (275,617) $ (6,396,490) Adjustments to reconcile net income (loss) to net cash used in operating activities net of changes in assets and liabilities resulting from the sales and purchases of subsidiaries: Amortization/accretion of fixed maturities 606,914 604,608 978,307 Realized investment (gains) losses, net (1,459,959) 20,648 (485,436) Amortization of deferred policy acquisition costs 278,899 442,380 400,844 Amortization of cost of insurance acquired 2,193,085 1,869,135 6,695,328 Depreciation 2,206,023 1,617,116 1,052,964 Minority interest 480,982 205,394 (222,561) Charges for mortality and administration of universal life and annuity products (9,097,858) (9,281,555) (9,083,778) Interest credited to account balances 5,251,303 5,332,145 5,478,488 Policy acquisition costs deferred (8,000) (5,000) (61,000) Change in accrued investment income 139,421 283,159 491,288 Change in reinsurance receivables 455,527 527,926 (100,703) Change in policy liabilities and accruals 1,017,812 1,073,108 3,163,696 Change in income taxes payable 157,111 (924,815) (2,877,425) Change in other assets and liabilities, net (3,772,419) (1,534,582) 33,430 --------------- --------------- --------------- Net cash used in operating activities (290,936) (45,950) (933,048) --------------- --------------- ---------------
Cash flows from financing activities: Policyholder contract deposits 8,481,796 9,015,637 9,505,436 Policyholder contract withdrawals (6,209,958) (7,215,183) (7,067,658) Payments of principal on notes payable (1,500,000) (4,564,776) (705,499) Proceeds from line of credit 1,500,000 2,275,000 0 Issuance of common stock 151,320 167,360 195,906 Purchase of treasury stock (521,892) (299,057) (441,144) --------------- --------------- --------------- Net cash provided by (used in) financing activities 1,901,266 (621,019) 1,487,041 --------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 344,615 3,109,745 (15,292,721) Cash and cash equivalents at beginning of year 11,859,472 8,749,727 24,042,448 --------------- --------------- --------------- Cash and cash equivalents at end of year $ 12,204,087 $ 11,859,472 $ 8,749,727 =============== =============== ===============
A. ORGANIZATION - At December 31, 2005, the significant majority-owned subsidiaries of UTG, Inc were as depicted on the following organizational chart.
E. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Registrant and its majority-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.
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 $ 913,896 and $ 899,126 as of December 31, 2005 and 2004, respectively.
2006 11,000 244,000 233,000 2007 9,000 219,000 210,000 2008 8,000 206,000 198,000 2009 6,000 180,000 174,000 2010 5,000 99,000 94,000
O. EARNINGS PER SHARE - Earnings per share (EPS) are reported under Statement of Financial Accounting Standards Number 128. The objective of both basic EPS and diluted EPS is to measure the performance of an entity over the reporting period. Basic EPS is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator also is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares.
R. PARTICIPATING INSURANCE - Participating business represents 19% and 20% of the ordinary life insurance in force at December 31, 2005 and 2004, respectively. Premium income from participating business represents 21%, 22%, and 23% of total premiums for the years ended December 31, 2005, 2004 and 2003, respectively. The amount of dividends to be paid is determined annually by the insurance subsidiary's Board of Directors. Earnings allocable to participating policyholders are based on legal requirements that vary by state.
Until 1984, the insurance company was taxed under the provisions of the Life Insurance Company Income Tax Act of 1959 as amended by the Tax Equity and Fiscal Responsibility Act of 1982. These laws were superseded by the Deficit Reduction Act of 1984. All of these laws are based primarily upon statutory results with certain special deductions and other items available only to life insurance companies. Under the provision of the pre-1984 life insurance company income tax regulations, a portion of "gain from operations" of a life insurance company was not subject to current taxation but was accumulated, for tax purposes, in a special tax memorandum account designated as "policyholders' surplus account". Federal income taxes will become payable on this account at the then current tax rate when and if distributions to shareholders, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income maintained in the "shareholders surplus account". At December 31, 2005, the balances of the shareholders' surplus account and the untaxed balance for UG were $ 25,383,321 and $ 4,363,821, respectively.
UG ------------- 2018 901,108 2019 2,565,645 ------------- TOTAL $ 3,466,753 =============
The Company has established a deferred tax asset of $ 1,213,364 for its operating loss carry-forwards and has established no allowance in the current or prior years.
UG has a net operating loss carry-forward of $ 3,466,753 at December 31, 2005. UG must average taxable income of approximately $ 435,326 over the next 15 years to fully realize its net operating loss carry-forward. Management believes future earnings of UG will be sufficient to fully utilize the net operating loss carry-forwards. Therefore, management has established no allowance for potential uncollectible of its loss carry-forwards in the current year.
2005 2004 2003 ----------------- --------------- ----------------- Net income (loss) $ 1,260,223 $ (275,617)$ (6,396,490) Federal income tax provision (24,254) 105,098 263,992 Loss (gain) of subsidiaries (1,155,680) 803,662 6,723,981 ----------------- --------------- ----------------- Taxable income $ 80,289 $ 633,143 $ 591,483 ================= =============== =================
2005 2004 ---------------- --------------- Investments $ 4,721,575 $ 5,289,610 Cost of insurance acquired 3,694,056 4,461,636 Deferred policy acquisition costs 495,027 589,842 Management/consulting fees (275,434) (289,876) Future policy benefits (671,161) (646,374) Gain on sale of subsidiary 2,312,483 2,312,483 Net operating loss carry forward (1,213,364) (2,123,037) Federal tax DAC (962,565) (1,033,272) ---------------- --------------- Deferred tax liability $ 8,100,615 $ 8,561,010 ================ ===============
Carrying Value ---------------------------------------- 2005 2004 --------------- -------------- Investments held for sale: Fixed maturities U.S. Government, government agencies and authorities $ 25,221,548 $ 41,632,843 State, municipalities and political subdivisions 173,743 177,444 Collateralized mortgage obligations 72,306,120 79,643,440 All other corporate bonds 27,374,215 26,740,160 --------------- -------------- $ 125,075,626 $ 148,193,887 =============== ==============
Below Investment Grade Investments 2005 2004 ----------------------------- -------------- ------------ Public Utilities $ 0 $ 0 CMO 11,449 15,764 Corporate 1,081,660 2,123,028 ------------- ------------ Total $ 1,093,109 $ 2,138,792 ============= ============
Securities of affiliate $ 4,000,000 $ 0 $ 0 $ 4,000,000 ============== ============= =============== ==============
Cost or Gross Gross Estimated Amortized Unrealized Unrealized Market 2004 Cost Gains Losses Value ------------------------------------ -------------- ------------- ------------ ------------- Investments held for sale: Fixed maturities U.S. Government and govt. agencies and authorities $ 41,377,077 $ 384,193 $ (128,427) $ 41,632,843 States, municipalities and political subdivisions 162,025 15,419 0 177,444 Collateralized mortgage obligations 79,634,753 459,508 (450,821) 79,643,440 Public utilities 0 0 0 0 All other corporate bonds 26,043,598 792,693 (96,131) 26,740,160 -------------- ------------- --------------- -------------- 147,217,453 1,651,813 (675,379) 148,193,887 Equity securities 15,216,214 10,214,201 (1,031,243) 24,399,172 -------------- ------------- --------------- -------------- Total $ 162,433,667 $ 11,866,014 $(1,706,622) $ 172,593,059 ============== ============= =============== ==============
Fixed maturities held to maturity: U.S. Government and govt. agencies and authorities $ 7,801,268 $ 43,237 $ (40,910) $ 7,803,595 States, municipalities and political subdivisions 2,448,293 116,815 0 2,565,108 Collateralized mortgage obligations 58,453 661 (1,343) 57,771 Public utilities 0 0 0 0 All other corporate bonds 1,665,401 26,833 (20,920) 1,671,314 -------------- ------------- --------------- -------------- Total $ 11,973,415 $ 187,546 $ (63,173) $ 12,097,788 ============== ============= =============== ==============
An analysis of sales, maturities and principal repayments of the Company's fixed maturities portfolio for the years ended December 31, 2005, 2004 and 2003 is as follows:
The carrying amount in the financial statements approximates fair value because of the relatively short period of time between the origination of the instruments and their expected realization.
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 $ 25,645,716 and $ 21,860,401 at December 31, 2005 and 2004, respectively. UG reported a statutory operating income (loss) before taxes (exclusive of inter-company dividends) of approximately $ 5,114,000, $ (762,000) and $ (1,461,000) for 2005, 2004 and 2003, respectively.
As is customary in the insurance industry, UG cedes insurance to, and assumes insurance from, other insurance companies under reinsurance agreements. Reinsurance agreements are intended to limit a life insurer's maximum loss on a large or unusually hazardous risk or to obtain a greater diversification of risk. The ceding insurance company remains primarily liable with respect to ceded insurance should any reinsurer be unable to meet the obligations assumed by it. However, it is the practice of insurers to reduce their exposure to loss to the extent that they have been reinsured with other insurance companies. The Company sets a limit on the amount of insurance retained on the life of any one person. The Company will not retain more than $ 125,000, including accidental death benefits, on any one life. At December 31, 2005, the Company had gross insurance in force of $ 3.421 billion of which approximately $ 484 million was ceded to reinsurers.
Currently, the Company is utilizing reinsurance agreements with Optimum Re Insurance Company, (Optimum) and Swiss Re Life and Health America Incorporated (SWISS RE). Optimum and SWISS RE currently hold an "A" (Excellent), and "A+" (Superior) rating, respectively, from A.M. Best, an industry rating company. The reinsurance agreements were effective December 1, 1993, and covered most new business of the Company. The agreements are a yearly renewable term (YRT) treaty where the Company cedes amounts above its retention limit of $ 100,000 with a minimum cession of $ 25,000.
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, 2005, the IOV insurance in-force assumed by UG was approximately $ 1,694,000, with reserves being held on that amount of approximately $ 393,000.
On June 1, 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, 2005, the IHL agreement has insurance in-force of approximately $ 2,328,000, with reserves being held on that amount of approximately $ 34,000.
On June 10, 2002 UTG and Fiserv formed an alliance between their respective organizations to provide third party administration (TPA) services 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 operations processing service for the Company. The Company will staff the administration effort. To facilitate the alliance, the Company plans to convert its existing business and TPA clients to "ID3", a software system owned by Fiserv to administer an array of life, health and annuity products in the insurance industry. 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.
On April 25, 2003 the Company entered into an agreement with Fiserv for the conversion of the two TPA client companies to the "ID3" system. The conversion was successfully completed in December 2003 utilizing Company personnel with onsite training and guidance provided by Fiserv. During 2004, the Company began the conversion of the remaining insurance business to the "ID3" software system and successfully completed the first phase of this project. The remaining blocks of business will be completed during 2006.
At the March 2003 Board of Directors meeting, the Appalachian Life Insurance Company (APPL) and UG Boards reaffirmed the merger of APPL with and into UG and approved the final merger documents. Upon receiving the necessary regulatory approvals, the merger of Abraham Lincoln Insurance Company (ABE) and APPL with and into UG was consummated effective July 1, 2003. ABE and APPL were each 100% owned subsidiaries of UG prior to the merger. Management of the Company believes the completion of the mergers will provide the Company with additional cost savings. These cost savings result from streamlining the Company's operations and organizational structure from three life insurance subsidiaries to one life insurance subsidiary, UG. Thus, the Company will further improve administrative efficiency.
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 $ 5,054,918, $ 5,625,451 and $ 5,906,406 to UTG in 2005, 2004 and 2003, respectively, under this arrangement.
During 2005 and 2004, the Board of Directors of UTG approved offerings under the plan to qualified individuals. For the years ended December 31, 2005 and 2004, two individuals purchased 12,000 and four individuals purchased 14,440 shares of UTG common stock, respectively. Each participant under the plan executed a "stock restriction and buy-sell agreement", which among other things provides UTG with a right of first refusal on any future sales of the shares acquired by the participant under this plan.
On June 5, 2001, the Board of Directors of UTG authorized the repurchase in the open market or in privately negotiated transactions of up to $ 1 million of UTG's common stock. On June 16, 2004, an additional $ 1 million was authorized for repurchasing shares. Repurchased shares are available for future issuance for general corporate purposes. This program can be terminated at any time. Open market purchases are generally limited to a maximum per share price of $8.00. Through February 1, 2006, UTG has spent $ 1,659,562 in the acquisition of 249,089 shares under this program.
For the year ended December 31, 2005 ---------------- ----- ------------------ ---- ----------------- Income(Loss) Shares Per-Share (Numerator) (Denominator) Amount ---------------- ------------------ ----------------- Basic EPS Income available to common shareholders $ 1,260,223 3,938,781 $ 0.32 =================
For the year ended December 31, 2004 ------------------ --- ------------------ ---- ----------------- Income (Loss) Shares Per-Share (Numerator) (Denominator) Amount ------------------ ------------------ ----------------- Basic EPS Income available to common shareholders $ (275,617) 3,986,731 $ (0.07) =================
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, 2005, 2004 and 2003, since any assumed conversion, exercise, or contingent issuance of securities would have an anti-dilutive effect on earnings per share.
On November 15, 2001, UTG was extended a $ 3,300,000 line of credit ("LOC") from the First National Bank of Tennessee ("FNBT") located in Livingston, Tennessee. The LOC was for a one-year term from the date of issue. Upon maturity the Company had renewed the LOC for additional terms until June 1, 2005. The interest rate on the LOC was 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. The Company had no borrowings attributable to this LOC during 2005. In order to provide greater operational flexibility, this LOC was transferred to the Company's wholly-owned insurance subsidiary, UG, upon the June 1, 2005 maturity.
On April 1, 2002, UTG was extended a $ 5,000,000 line of credit from Southwest Bank of St. Louis. The LOC expired one-year from the date of issue and was renewed for additional terms. As collateral for any draws under the line of credit, UTG pledged 100% of the common stock of its insurance subsidiary, UG. Borrowings under the LOC bear interest at the rate of .25% in excess of Southwest Bank of St. Louis' prime rate. At December 31, 2005 and 2004, the Company had no outstanding borrowings attributable to this LOC. The Company had no borrowings attributable to this LOC during 2005.
On a cash basis, the Company paid $ 13, $ 77,453, and $ 162,179 in interest expense for the years 2005, 2004 and 2003, respectively. The Company paid $ 0, $ 110,000, and $ 175,000 in federal income tax for 2005, 2004 and 2003, respectively.
Before-Tax (Expense) Net of Tax 2005 Amount or Benefit Amount ----------------------------------------- ----------------- ------------------- -----------------
Unrealized holding gains during period $ (5,315,754) $ 1,860,514 $ (3,455,240) Less: reclassification adjustment for gains realized in net income 2,202,978 (771,042) 1,431,936 ----------------- ------------------- ----------------- Net unrealized gains (3,112,775) 1,089,471 (2,023,304) ----------------- ------------------- ----------------- Other comprehensive income $ (3,112,775) $ 1,089,471 $ (2,023,304) ================= =================== =================
Before-Tax (Expense) Net of Tax 2004 Amount or Benefit Amount ----------------------------------------- ----------------- ------------------- -----------------
Unrealized holding gains during period $ (1,941,662) $ 679,582 $ (1,262,080) Less: reclassification adjustment for gains realized in net income 86,979 (30,443) 56,536 ----------------- ------------------- ----------------- Net unrealized gains (1,854,683) 649,139 (1,205,544) ----------------- ------------------- ----------------- Other comprehensive income $ (1,854,683) $ 649,139 $ (1,205,544) ================= =================== =================
Premiums and policy fees, net $ 3,512,695 $ 3,521,237 $ 3,389,342 $ 3,303,409 Net investment income 2,433,259 2,356,705 2,587,341 3,673,921 Total revenues 6,196,733 7,419,034 5,354,586 8,500,987 Policy benefits including dividends 5,091,826 3,777,730 4,769,952 4,236,835 Commissions and amortization of DAC and COI 482,934 387,478 574,929 733,477 Operating expenses 1,256,884 1,622,680 1,309,983 1,325,404 Operating income (634,924) 1,631,146 (1,301,880) 594,776 Net income (546,568) 1,395,033 (1,248,416) 390,473 Basic earnings per share (0.14) 0.35 (0.32) 0.09 Diluted earnings per share (0.14) 0.35 (0.32) 0.09
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 (loss) (1,255,061) (278,683) 71,029 594,776 Net income (loss) (874,195) 66,841 141,264 390,473 Basic earnings (loss) per share (0.22) 0.02 0.04 0.09 Diluted earnings (loss) per share (0.22) 0.02 0.04 0.09