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 two years ended December 31, 2009. This analysis should be read in conjunction with the consolidated financial statements and related notes, which appear elsewhere in this report. The Company reports financial results on a consolidated basis. The consolidated financial statements include the accounts of UTG and its subsidiaries at December 31, 2009.
Prevailing interest rate levels, which may affect the ability of the Company to sell its products, the market value of the Company's investments and the lapse ratio of the Company's policies, notwithstanding product design features intended to enhance persistency of the Company's products.
The Company accounts for its investments in debt and equity securities under SFAS No. 115 (see FASB Codification 320-10 section 5, 15, 25, 30, 35, 45, 50, and 55. And 942-10 section 50), Accounting for Certain Investments in Debt and Equity Securities. The Company has classified all of its investments as available-for-sale with the exception of certain securities classified as trading securities. Available-for-sale investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets for available-for-sale securities. Trading securities are carried at fair value with unrealized gains and losses reported in income in the Consolidated Statements of Operations. 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 investments are computed using the specific identification method and are reported in the Consolidated Statements of Operations.
The Company's investments are generally managed to match related insurance and policyholder liabilities. The comparison of investment return with insurance or investment product crediting rates establishes an interest spread. The Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted interest spreads, ranging from 1% to 2%. Interest crediting rates on adjustable rate policies have been reduced to their guaranteed minimum rates, and as such, cannot be lowered any further. Policy interest crediting rate changes and expense load changes become effective on an individual policy basis on the next policy anniversary. Therefore, it takes a full year from the time the change was determined for the full impact of such change to be realized. If interest rates decline in the future, the Company won’t be able to lower rates and both net investment income and net income will be impacted negatively.
Net amortization of cost of insurance acquired increased 3% in 2009 compared to 2008. 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 Company utilizes 12% discount rate on the remaining business. 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 2009 and 2008 has been approximately 96.1% and 95.8%, 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. During 2009, a block of business of UG fully amortized. Future normal amortization will be significantly lower than recent historic periods due to this block.
At December 31, 2009, the Company held a fixed maturity security with a carrying value of $10,000 that was guaranteed by a third party. The security did not have a credit rating. The Company had no significant concentration in a guarantor either directly or indirectly as of December 31, 2009.
Mortgage loan investments represent 14% and 9% of total assets of the Company at year-end 2009 and 2008, respectively. A significant portion of the Company’s mortgage loan investments result from opportunities available through FSNB, an affiliate of Mr. Jesse T. Correll. Mr. Correll is the CEO and Chairman of the Board of Directors of UTG, and directly and indirectly through affiliates, its largest shareholder. FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market. During 2009 and 2008 the Company issued or purchased approximately $36,221,000 and $5,242,000 in new mortgage loans, respectively. These new loans were funded by the Company through participation agreements with FSNB. FSNB services all the mortgage loans of the Company. The majority of this amount was in the form of loans purchased at a discount from failed banks. The Company pays FSNB 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 $74,153 and $93,572 in servicing fees and $384,931 and $19,283 in origination fees to FSNB during 2009 and 2008, respectively.
As part of the investment portfolio restructuring, a portion of the Company’s funds has been dedicated to an experienced team of market professionals with the goal of grinding out a reasonable return, primarily through cash flows, with lower overall volatility and reduced risk. The portfolio contains exchange traded equities and options and has been classified as trading securities on the balance sheet.
Policy loans remained consistent for the periods presented. Industry experience for policy loans indicates that few policy loans are ever repaid by the policyholder other than through termination of the policy. Policy loans are systematically reviewed to ensure that no individual policy loan exceeds the underlying cash value of the policy.
Cost of insurance acquired decreased approximately $8,900,000 in 2009 compared to 2008. 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 2009 and 2008, amortization decreased the asset by $4,176,539 and $4,043,107, respectively. The additional decrease of approximately $4,700,000 was due to the sale of a subsidiary, Texas Imperial Life Insurance Company. No impairments of this asset were recorded for the periods presented.
At December 31, 2009, the Company has outstanding notes payable of $14,402,889 as compared to $15,616,766 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 two 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.
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 2009, UG had three ratios outside the normal range and AC had two items outside of the normal range. All variances reported were anticipated by Management. These ratios are discussed in more detail in the Regulatory Environment discussion included in this Item 7.
The Company has three principal needs for cash - the insurance companies’ contractual obligations to policyholders, the payment of operating expenses and servicing its outstanding debt. Cash and cash equivalents as a percentage of total assets were 9% as of December 31, 2009 and 2008. Fixed maturities as a percentage of total invested assets were 47% and 58% as of December 31, 2009 and 2008, respectively.
The Company's investments are predominantly in fixed maturity investments such as bonds and mortgage loans, which provide sufficient return to cover future obligations. The Company carries all of its fixed maturity holdings as held for sale which are reported in the financial statements at their market value.
Cash provided by (used in) operating activities was $(4,248,484) and $1,195,231 in 2009 and 2008, respectively. Reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows.
Net cash used in financing activities was $ (1,159,521) and $(4,898,383) for 2009 and 2008, respectively. Cash used in financing activities during both years was mostly the result of debt reduction.
Net policyholder contract deposits decreased by almost $1,000,000 in 2009 compared to 2008. Management anticipates continued moderate declines in contract deposits. Policyholder contract withdrawals increased by 50% in 2009 compared to 2008. 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.
AC is a Texas domiciled insurance company, which requires eleven days prior notification to the insurance commissioner for the payment of an ordinary dividend. Ordinary dividends are defined as the greater of: a) prior year statutory earnings or b) 10% of statutory capital and surplus. At December 31, 2009, AC statutory shareholders' equity was $9,781,305. At December 31, 2009, AC statutory net income was $4,070,586. 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 during 2008 and 2009.
Currently, the insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including the power to: (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus; and (x) regulate the type and amount of permitted investments. Insurance regulation is concerned primarily with the protection of policyholders. The Company cannot predict the impact of any future proposals, regulations or market conduct investigations. UG is domiciled in the state of Ohio. AC is domiciled in the state of Texas.
Each year, the NAIC calculates financial ratio results (commonly referred to as IRIS ratios) for each company. These ratios measure various statutory balance sheet and income statement financial information. 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 December 31, 2009, UG has a ratio of approximately 3.9, which is 390% of the authorized control level. AC’s ratio is approximately 9.3, which is 930% of the authorized control level. Accordingly, both companies meet the RBC requirements.
In December 2009, FASB issued ASU 2009-17,Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASU 2009-17 also requires additional disclosures about an enterprise's involvement in variable interest entities. ASU 2009-17 is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009. The Company does not expect the adoption of ASU 2009-17 to have a material impact on its consolidated financial statements.
In August 2009, FASB issued ASU 2009-05, Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value, which provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of liabilities. ASU 2009-05 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value. ASU 2009-05 is effective for the first reporting (including interim periods) beginning after issuance. The adoption of ASU 2009-05 did not have a material impact on the Company's consolidated financial statements.
In September 2006, FASB issued ASC 820-10, Fair Value Measurements and disclosures. In February 2008, the FASB provided a one year deferral for implementation of the standard for non-recurring, non-financial assets and liabilities. The adoption of this partially deferred portion of ASC 820-10 did not have an impact on the Company's consolidated financial statements.
We have audited the accompanying consolidated balance sheets of UTG, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2008 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We have also audited Schedule I as of December 31, 2009, and the Schedules II, IV and V as of December 31, 2009 and 2008, of UTG, Inc. and subsidiaries and Schedules II, IV and V for the years then ended. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.
ORGANIZATION - At December 31, 2009, the significant majority-owned subsidiaries of UTG were as depicted on the following organizational chart.
UTG 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.
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 $3,257,916 and $1,962,109 as of December 31, 2009 and 2008, respectively.
Benefit reserves for universal life insurance and interest sensitive life insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims in excess of related policy account balances. Interest crediting rates for universal life and interest sensitive products range from 4.0% to 5.5% as of December 31, 2009 and 2008.
POLICY AND CONTRACT CLAIMS - Policy and contract claims include provisions for reported claims in process of settlement, valued in accordance with the terms of the policies and contracts, as well as provisions for claims incurred and unreported based on prior experience of the Company. Incurred but not reported claims were $1,309,068 and $1,312,848 as of December 31, 2009 and 2008, respectively.
Amortization of deferred policy acquisition is included on commissions and amortization of deferred policy acquisition costs on the consolidated statements of operations.
PROPERTY AND EQUIPMENT - Company-occupied property, data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of $2,934,312 and $2,896,107 at December 31, 2009 and 2008, 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 $168,553 and $214,245 for the years ended December 31, 2009 and 2008, respectively.
TREASURY SHARES - The Company holds 410,838 and 400,315 shares of common stock as treasury shares with a cost basis of $3,051,170 and $2,970,533 at December 31, 2009 and 2008, respectively.
PARTICIPATING INSURANCE - Participating business represents 9% of life insurance in force at December 31, 2009 and 2008. Premium income from participating business represents 24% and 37% of total premiums for the years ended December 31, 2009 and 2008, 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.
IMPAIRMENT OF LONG LIVED ASSETS - The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. During the course of 2009 there was an other-than-temorary impairment recognized of $2,007,173 in fixed maturity investments that are backed by trust preferred securities of banks.
AC is a Texas domiciled insurance company, which requires eleven days prior notification to the insurance commissioner for the payment of an ordinary dividend. Ordinary dividends are defined as the greater of: a) prior year statutory earnings or b) 10% of statutory capital and surplus. At December 31, 2009 AC, statutory shareholders' equity was $9,781,305. At December 31, 2009, AC statutory net income was $4,070,586. 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 during 2009 and 2008.
The companies of the group file separate federal income tax returns except for ACAP, AC, TI, and Imperial Plan, which file a consolidated life/non-life federal income tax return.
UG for tax purposes generated a net operating loss during 2009 of $421,488. The Company has established a deferred tax asset of $147,521 relating to this operating loss carryforward and has established an offsetting allowance of $147,521.
The following table summarizes the major components that comprise the deferred tax liability as reflected in the balance sheets:
The following table reflects net realized investment gains (losses) by type of investment:
The following table summarizes the Company's fixed maturity holdings and investments available for sale by major classifications:
The amortized cost and estimated market values of investments in securities including investments available for sale are as follows:
As of December 31, 2009, the Company had eight fixed maturity investments and two equity investments with unrealized losses less than 12 months, and nine fixed maturity investments and three equity investments with unrealized losses greater than 12 months. As of December 31, 2008, the Company had 29 fixed maturity investments and four equity investments with unrealized losses less than 12 months, and 31 fixed maturity investments and two equity investments with unrealized losses greater than 12 months.
The amortized cost and estimated market value of debt securities at December 31, 2009, 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.
An analysis of sales, maturities and principal repayments of the Company's fixed maturities portfolio for the years ended December 31, 2009 and 2008 is as follows:
INVESTMENTS ON DEPOSIT - At December 31, 2009, investments carried at approximately $6,153,000 were on deposit with various state insurance departments.
Fair value SFAS 157 (ASC 820, “Fair Value measurements and disclosures”) established a hierarchical disclosure framework based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. ASC 820 defines the input levels as follows:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. U.S. treasuries are in Level 1 and valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access. Equity securities that are actively traded and exchange listed in the U.S. are also included in Level 1. Equity security valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.
Level 2 - Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets consist of fixed income investments valued based on quoted prices for identical or similar assets in markets that are not active and investments carried as equity securities that do not have an actively traded market that are valued based on their audited GAAP book value.
Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in earnings. Trading securities include exchange traded equities and exchange traded equity options.
Currently, UG 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" (Excellent) rating, respectively, from A.M. Best, an industry rating company. The reinsurance agreements were effective December 1, 1993, and covered most new business of UG. 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, (IOV) an Illinois fraternal benefit society. 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, 2009, the IOV insurance in-force assumed by UG was approximately $1,631,000, with reserves being held on that amount of approximately $377,000.
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, 2009, the IHL agreement has insurance in-force of approximately $1,073,000, with reserves being held on that amount of approximately $13,000.
At December 31, 1992, AC entered into a reinsurance agreement with Canada Life Assurance Company (“the Canada Life agreement”) that fully reinsured virtually all of its traditional life insurance policies. The reinsurer’s obligations under the Canada Life agreement were secured by assets withheld by AC representing policy loans and deferred and uncollected premiums related to the reinsured policies. AC continues to administer the reinsured policies, for which it receives an expense allowance from the reinsurer. At December 31, 2009, the Canada Life agreement has insurance in-force of approximately $63,368,000, with reserves being held on that amount of approximately $36,835,000. As of December 31, 2009, there remains $970,556 in profits to be generated under this treaty. Should future experience under the treaty match the experience of recent years, which cannot reliably be predicted to occur, it is expected to take until the middle of 2012 to generate the remaining profits. However, regarding the uncertainty as to when the specified level may be reached, it should be noted that the experience has been erratic from year to year and the number of policies in force that are covered by the treaty diminishes each year.
The Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned in 2009 and 2008 were as follows:
The Company reimbursed expenses incurred by employees of FSNB relating to travel and other costs incurred on behalf of or relating to the Company. The Company paid $22,521 and $41,819 in 2009 and 2008, respectively to FSNB in reimbursement of such costs. In addition, the Company began reimbursing FSNB a portion of salaries and pension costs for Mr. Correll, Mr. Ditto and a third employee. The reimbursement was approved by the UTG Board of Directors and totaled $332,766 and $261,777 in 2009 and 2008, respectively, which included salaries and other benefits.
UG paid no cash dividends in 2009. On June 30, 2008, UG paid a cash dividend of $1,000,000 to UTG. An additional dividend of $2,000,000 was paid to UTG on December 18, 2008. These dividends were comprised entirely of ordinary dividends. No regulatory approvals were required prior to the payment of these dividends.
At the June 2009 Board of Directors meeting, this program was terminated. At the time of termination, the Company had 104,666 shares of common stock outstanding under the program. During the third quarter 2009, the outstanding shares under the program were eliminated through either a cash payment or the issuance of additional shares of common stock at the option of the participant. In exchange, the stock agreement was terminated and all rights under the agreement ended. The Company repurchased 384 shares at a total cost of $6,259 and issued 65,699 additional shares of common stock of the Company to complete this exchange.
The original issue price of shares at the time this program began was established at $12.00 per share. At June 30, 2009, UTG had 104,941 shares outstanding that were issued under this program with a value of $16.30 per share pursuant to the above formula.
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 $1,000,000 was authorized for repurchasing shares. On April 18, 2006, an additional $1,000,000 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 March 1, 2010, UTG has spent $2,868,099 in the acquisition of 412,154 shares under this program.
At December 31, 2009 and 2008, the Company had $14,402,889 and $15,616,766, respectively, of long-term debt outstanding.
On June 1, 2005, UG was extended a $3,300,000 line of credit from the First National Bank of Tennessee. The LOC is for a one-year term from the date of issue. 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. During 2009 and 2008, UG had borrowings and repayments from the LOC of $0. At December 31, 2009, and 2008 the Company had no outstanding borrowings attributable to this LOC. This LOC was determined to be no longer needed and was discontinued during 2009.
In November 2007, the Company became a member of the Federal Home Loan Bank (FHLB). This membership allows the Company access to additional credit up to a maximum of 50% of the total assets of UG. To be a member of the FHLB, the Company was required to purchase shares of common stock of FHLB. Borrowing capacity is based on 50 times each dollar of stock acquired in FHLB above the "base membership" amount. The Company's current LOC with the FHLB is $15,000,000. During 2009, the Company had borrowings of $2,000,000 and repayments of $2,000,000. During 2008, the Company had borrowings of $4,000,000 and repayments of $4,000,000. At December 31, 2009 and December 31, 2008, the Company had no outstanding borrowings attributable to this LOC.
In January 2007, UG became a 51% owner of the newly formed RLF Lexington Properties LLC ("Lexington"). The entity was formed to hold, for investment purposes, certain investment real estate acquired. As part of the purchase price of the real estate owned by Lexington, the seller provided financing through the issuance of five promissory notes of $1,200,000 each totaling $6,000,000. The notes bear interest at the fixed rate of 5%. The notes came due beginning on January 5, 2008, and each January 5 thereafter until 2012 when the final note is repaid. At December 31, 2009 and December 31, 2008 the outstanding balance was $3,600,000 and $4,800,000, respectively.
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 $44,125. HPG made repayments of $11,185 during 2009 and $47,585 during 2008. The outstanding principal balance on this debt was $311,127 and $322,312 at December 31, 2009 and December 31, 2008, respectively.
The Company also assumes insurance risks of other companies. Reinsurance assumed represented 1.1% of life insurance in force at December 31, 2009 and reinsurance assumed represented 1.2% of premium income for 2009.
In February 2010, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-09, Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements, which amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-09 is effective upon issuance. The adoption of ASU 2010-09 did not have a material impact on the Company's consolidated financial statements.
In June 2009, FASB issued Accounting Standards Codification ("ASC") 105, Generally Accepted Accounting Principles, which establishes the Codification as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. All guidance contained in the Codification carries an equal level of authority. Following this statement, FASB will not issue new standards in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve only to: (1) update the Codification; (2) provide background information about the guidance; and (3) provide the bases for conclusions on the change(s) in the Codification. ASC 105 was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all existing non-SEC accounting and reporting standards. The adoption of ASC 105 did not have an impact on the Company's consolidated financial statements.
In June 2009, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 111, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities. SAB No. 111 clarifies the SEC's position related to other-than-temporary impairments of debt and equity securities and was issued in order to make the relevant interpretive SEC guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB No. 111 did not have an impact on the Company's consolidated financial statements.
In April 2009, FASB issued amendments to ASC 825-10, Financial Instruments, which require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. The amendments are effective for interim periods ending after June 15, 2009. The adoption of these amendments did not have an impact on the Company's consolidated financial statements.
In June 2008, FASB issued amendments to ASC 260-10,Earnings Per Share, which requires unvested share based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. These amendments were effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years and require retrospective application. The adoption of these amendments did not have an impact on the Company's consolidated financial statements.
In 2009 and 2008, the Company established a deferred tax liability of $78,862 and $927,904 respectively, for the unrealized gains based on the applicable United States statutory rate of 35%.