Property occupied Amount % of Total Home Office $ 1,637,573 4%
Investment real estate Commercial 30,421,541 69% Residential development 12,166,441 27% 42,587,982 96%
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 $ 1,637,573. The facilities occupied by the Company are adequate relative to the Company's present operations.
1. 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.
Deferred acquisition costs (DAC) and cost of insurance acquired reflect our expectations about the future experience of the existing business in-force. The primary assumptions regarding future experience that can affect the carrying value of DAC and cost of insurance acquired balances include mortality, interest spreads and policy lapse rates. Significant changes in these assumptions can impact amortization of DAC and cost of insurance acquired in both the current and future periods, which is reflected in earnings.
Premiums and policy fee revenues, net of reinsurance premiums and policy fees, decreased 3% when comparing 2005 to 2004 and 6% from 2004 to 2003. The Company writes very little new business. Unless the Company acquires a block of in-force business, management expects premium revenue to continue to decline at a rate consistent with prior experience. The Company's average persistency rate for all policies in force for 2005, 2004 and 2003 was approximately 95.8%, 94.6%, and 94.9%, respectively. Persistency is a measure of insurance in force retained in relation to the previous year.
Net investment income increased 6% when comparing 2005 to 2004 and decreased 1% when comparing 2004 to 2003. The overall gross investment yields for 2005, 2004 and 2003, are 6.77%, 6.06% and 5.73%, respectively. While there has been a significant increase in the national prime rate during the last several months, from 4.00% to 6.75%, this has not been the driving factor in the stability of the Company's overall net investment income. Interest rates on long-term bonds available in the marketplace have not experienced a similar increase. During 2004, management began to lengthen the Company's portfolio while maintaining a conservative investment philosophy. As such, following an analysis of current holdings during the first half of 2004, the Company liquidated approximately $ 64,444,000 of its bond portfolio in order to limit its interest rate and extension risk. In addition, there were $ 13,322,000 in bonds that matured or were called during the first nine months of 2004. The result of these transactions caused an excess of cash invested in short-term money market funds during the first nine months of 2004. Although this hurt investment earnings in the short run, the Company has not had to write off any investment losses due to excessive risk.
During 2005, the Company increased its investment in mortgage loans through its relationship with First Southern National Bank. The availability of these mortgage loan investments has offset the balance that would have been placed in fixed income securities. The balance of mortgage loan investments increased from approximately $ 20,722,000 at December 31, 2004 to $ 42,588,000 at December 31, 2005. This has allowed the Company to obtain higher yields than available in the bond market, lengthen the overall portfolio average life and still maintain a conservative investment portfolio. During 2005, the Company issued $ 24,576,000 in new mortgage loans. These loans have an average loan to value rate of approximately 50% and an average yield of 6.87%.
During 2005, the Company saw an improvement in the performance of it's' real estate investments over 2004. Gross income from the Company's real estate holdings improved more than $ 2,138,000 in comparing 2005 to 2004. The improvement in real estate investment income is principally due to a higher occupancy lease rate resulting in increased earnings in Hampshire Plaza.
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 lower them 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.
In summary, the Company's basis for future revenue growth is expected come from three primary sources, expansion of the TPA revenues, conservation of business currently in force and the maximization of investment earnings. Management has placed a significant emphasis on the development of these revenue sources and products offered to enhance these opportunities.
Benefits, claims and settlement expenses net of reinsurance benefits and claims, decreased $ 889,364 from 2004 to 2005 and decreased $ 2,307,898 from 2003 to 2004. The significant fluctuation between the three years relates primarily to changes in the Company's policyholder reserves, or future policy benefits. Reserves are calculated on an individual policy basis and generally increase over the life of the policy as a result of additional premium payments and acknowledgement of increased risk as the insured continues to age. Fluctuations in death claim experience from year to year also typically have a significant impact on variances in this line item. Death claims were approximately $1,339,000 less in 2005 as compared to 2004. 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. Policy surrender benefits decreased approximately $ 245,000 during the year 2005 compared to the same period in 2004 and $ 546,000 during the year 2004 compared to the same period in 2003. As discussed above, stronger efforts have been made in policy retention through more personal contact with customers including telephone calls to discuss alternatives and reasons for a request to surrender their policy. The short-term impact of such fewer policy surrenders is negligible since a reserve for future policy benefits payable is held which is, at a minimum, equal to and generally greater than the cash surrender value of a policy. Therefore, a decline in current period surrenders results in an overall increase in the policy benefits number in the current period. The benefit of fewer policy surrenders is primarily received over a longer time period through the retention of the Company's asset base.
Commissions and amortization of deferred policy acquisition costs decreased significantly in 2005 compared to 2004 and decreased 1% in 2004 compared to 2003. 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 any of the three periods reported.
Operating expenses increased 4% in 2005 compared to 2004 and decreased 30% in 2004 compared to 2003. The increase in expenses during 2005 is due primarily to an increase in information technology costs and additional personnel costs associated with the increase in TPA work. Excluding these expense items, expenses declined due to reductions made in the normal course of business, as the Company continually monitors expenditures looking for savings opportunities. During 2003, the Company paid $ 1,950,000 in settlement of a lawsuit. Management places significant emphasis on expense monitoring and cost containment. Maintaining administrative efficiencies directly impacts net income.
Interest expense declined 100% comparing 2005 to 2004 and 52% comparing 2004 to 2003. The Company repaid $ 2,289,776 and $ 705,499 in outside debt in 2004 and 2003 respectively, through operating cash flows and dividends received from its subsidiary UG. At December 31, 2005 and 2004, UTG had no debt outstanding. During 2005, UG borrowed against its line of credit for a short period to provide additional operating liquidity. The line was repaid during 2005.
During the current year, the Company invested more of its funds in mortgage loans. This is the result of increased mortgage 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 2005, 2004 and 2003 the Company issued approximately $ 24,576,000, $ 2,627,000 and $ 11,405,000 respectively, in new mortgage loans. These new loans were originated through FSNB and funded by the Company through participation agreements with FSNB. FSNB services all of the Company's mortgage loans including the loans covered by these participation agreements. 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 $ 76,970, $ 45,468 and $ 63,214 in servicing fees and $ 112,109, $ 0 and $ 13,821 in origination fees to FSNB during 2005, 2004 and 2003, respectively. The Company anticipates these opportunities to continue to be available and will pursue those investments that provide attractive yields.
The Company had no outstanding notes payable as of December 31, 2005 and 2004, respectively. The Company has two lines of credit available for operating liquidity or acquisitions of additional lines of business. The Company's long-term debt is discussed in more detail in Note 11 to the consolidated financial statements.
Total shareholders' equity decreased 11% in 2005 compared to 2004. This is primarily due to significant decreases in the unrealized market value of the Company's fixed income securities available for sale. Unrealized gains decreased by $ 2,023,304 during 2005. This decrease in unrealized gains is partially offset by the income from operations during the year of $ 1,260,223. Other factors that impacted shareholders' equity included issuance of shares from an employee and director stock purchase plan which was approved and implemented in 2002 of $ 151,320 and treasury shares purchased and retirements totaling $ (597,167) during 2005.
The Company has two principal needs for cash - the insurance company's contractual obligations to policyholders and the payment of operating expenses. Cash and cash equivalents as a percentage of total assets were 4% and 4% as of December 31, 2005 and 2004, respectively. Fixed maturities as a percentage of total invested assets were 42% and 50% as of December 31, 2005 and 2004, respectively.
Net cash provided by (used in) financing activities was $ 1,901,266, $ (621,019) and $ 1,487,041 for 2005, 2004 and 2003, respectively. The Company paid off the remaining balance of its outstanding debt in 2004. Such payments are included within this category. In addition, in 2001 the Board of Directors of the Company authorized a repurchase program of UTG's common stock and the purchase of stock is still pursued as it becomes available.
Currently, UG, the insurance subsidiary, is subject to government regulation in each of the states in which it conducts 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.
The insurance regulatory framework continues to be scrutinized by various states, the federal government and the National Association of Insurance Commissioners (NAIC). The NAIC is an association whose membership consists of the insurance commissioners or their designees of the various states. The NAIC has no direct regulatory authority over insurance companies. However, its primary purpose is to provide a more consistent method of regulation and reporting from state to state. This is accomplished through the issuance of model regulations, which can be adopted by individual states unmodified, modified to meet the state's own needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes, which require registration and periodic reporting by insurance companies controlled by other corporations licensed to transact business within their respective jurisdictions. The insurance subsidiary is subject to such legislation and registered as controlled insurers in those jurisdictions in which such registration is required. Statutes vary from state to state but typically require periodic disclosure, concerning the corporation that controls the registered insurers and all subsidiaries of such corporation. In addition, prior notice to, or approval by, the state insurance commission of material inter-corporate transfers of assets, reinsurance agreements, management agreements (see Note 9 to the consolidated financial statements), and payment of dividends (see Note 2 to the consolidated financial statements) in excess of specified amounts by the insurance subsidiary, within the holding company system, are required.
At year-end 2005, UG had two ratios outside the normal range. Each of the ratios outside the normal range was anticipated by Management, based upon the operating results of the Company. The first ratio was slightly outside the normal range, as it relates to net investment income. As discussed in previous sections of this report, investment income has been hindered by declining interest rates in recent years and the average life of the investment portfolio. The Company feels with the change in interest rate environment and repositioning of the investment portfolio, this ratio will be corrected. Also, realized gains are not included in this calculation, which would have had a positive impact on this ratio. The second ratio outside the normal range 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.
At December 31, 2005, UG has a ratio that is in excess of 4, which is 400% of the authorized control level; accordingly, UG meets the RBC requirements.
On July 30, 2002, President Bush signed into law the "SARBANES-OXLEY" Act of 2002 ("the Act"). This Law, enacted in response to several high-profile business failures, was developed to provide meaningful reforms that protect the public interest and restore confidence in the reporting practices of publicly traded companies. The implications of the Act to public companies, (which includes UTG) are vast, widespread, and evolving. The Company has implemented requirements affecting the current reporting period, and is continually monitoring, evaluating, and planning implementation of requirements that will need to be taken into account in future reporting periods. As part of the implementing these requirements, the Company has developed a compliance plan, which includes documentation, evaluation and testing of key financial reporting controls.
The Financial Accounting Standards Board ("FASB") issued Statement No. 154, Accounting for Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement changes the requirements for the accounting for and reporting of a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. While this pronouncement has no immediate impact, the Company will account for all future changes and error corrections in accordance with the requirements of Statement No. 154.
Report of Brown Smith Wallace LLC, Independent Registered Public Accounting Firm for the year ended December 31, 2005..........................................................31
Report of Brown Smith Wallace LLC Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheet of UTG, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
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, 2005, and the consolidated results of their operations and their consolidated cash flows for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
We have also audited Schedule I as of December 31, 2005, and Schedules II, IV and V as of December 31, 2005, of UTG, Inc. and subsidiaries and Schedules II, IV and V for the year then ended. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.
We have audited the accompanying consolidated balance sheet of UTG, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UTG, Inc. and subsidiaries as of December 31, 2004, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
Cash and cash equivalents 12,204,087 11,859,472 Securities of affiliate 4,000,000 4,000,000 Accrued investment income 1,538,972 1,678,393 Reinsurance receivables: Future policy benefits 31,908,738 32,422,529 Policy claims and other benefits 4,017,833 3,959,569 Cost of insurance acquired 10,554,447 12,747,532 Deferred policy acquisition costs 1,414,364 1,685,263 Property and equipment, net of accumulated depreciation 1,921,841 2,172,636 Income taxes receivable, current 150,447 181,683 Other assets 1,901,594 795,800 --------------- --------------- Total assets $ 318,831,501 $ 317,868,084 =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits $ 234,959,085 $ 235,592,973 Policy claims and benefits payable 1,950,037 1,879,566 Other policyholder funds 1,217,857 1,323,668 Dividend and endowment accumulations 12,638,713 12,526,390 Deferred income taxes 8,100,615 8,561,010 Other liabilities 4,738,809 7,405,434 --------------- --------------- Total liabilities 263,605,116 267,289,041 Minority interests in consolidated subsidiaries 11,908,933 6,127,938
Premiums and policy fees $ 16,399,080 $ 17,275,708 $ 18,121,018 Reinsurance premiums and policy fees (2,672,397) (3,135,279) (3,097,980) Net investment income 11,051,226 10,420,886 10,270,500 Realized investment gains (losses), net 1,431,936 (20,648) 485,436 Other income 1,261,495 926,212 709,384 --------------- ---------------- ---------------- 27,471,340 25,466,879 26,488,358
Net income (loss) $ 1,260,223 $ (275,617)$ (6,396,490) =============== ================ ================
Diluted weighted average shares outstanding 3,938,781 3,986,731 3,839,947 =============== ================ ================
Common stock Balance, beginning of year $ 79,315 $ 80,008 $ 70,726 Issued during year 120 289 10,331 Treasury shares acquired (75) (1,066) (532) Change in stated value (75,458) 0 0 Reclassification under FAS 150 0 84 0 Retired during year 0 0 (433) Cumulative change in accounting principal 0 0 (84) ------------ ------------ ----------- Balance, end of year $ 3,902 $ 79,315 $ 80,008 ============ ============ ===========
Accumulated other comprehensive income Balance, beginning of year $ 6,678,542 $ 1,566,397 $ 2,771,941 Other comprehensive income (loss) Unrealized holding gain (loss) on securities net of minority interest and reclassification adjustment and taxes (2,023,304) (2,023,304) 5,112,145 5,112,145 (1,205,544) (1,205,544) ------------ ------------- ------------ ----------- ----------- ------------ Comprehensive income (loss) $ (763,081) $ 4,836,528 $ (7,602,034) ============ =========== ============ Balance, end of year $ 4,655,238 $ 6,678,542 $ 1,566,397 ============ ============ ===========
UTG, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Years Ended December 31, 2005
Cash flows from investing activities: Proceeds from investments sold and matured: Fixed maturities held for sale 26,182,897 70,893,152 73,314,066 Fixed maturities matured 5,816,061 16,098,477 36,065,715 Equity securities 3,182,055 25,569 167,734 Mortgage loans 10,050,792 8,620,093 8,494,201 Real estate 876,594 314,157 1,096,759 Policy loans 3,803,491 2,757,989 2,619,463 Short-term 425,000 350,000 350,000 --------------- --------------- --------------- Total proceeds from investments sold and matured 50,336,890 99,059,437 122,107,938 Cost of investments acquired: Fixed maturities held for sale (6,496,673) (76,377,916) (108,410,675) Fixed maturities (1,474,140) (1,513,700) (4,283,413) Equity securities (1,606,543) (8,033,052) (7,089,857) Mortgage loans (26,109,670) (2,626,540) (11,405,342) Real estate (11,883,777) (3,981,568) (3,722,406) Policy loans (3,603,581) (2,376,338) (2,499,358) Short-term (428,221) (353,061) (7,001) --------------- --------------- --------------- Total cost of investments acquired (51,602,605) (95,262,175) (137,418,052) Purchase of property and equipment 0 (20,548) (536,600) --------------- --------------- --------------- Net cash provided by (used in) investing activities (1,265,715) 3,776,714 (15,846,714) --------------- --------------- ---------------
B. NATURE OF OPERATIONS - UTG, Inc., is an insurance holding company, which sells individual life insurance products through its subsidiary. The Company's principal market is the mid-western United States. The Company's dominant business is individual life insurance which includes the servicing of existing insurance business in force, the solicitation of new individual life insurance and the acquisition of other companies in the insurance business.
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 $ 4,444,729 and $ 2,491,205 as of December 31, 2005 and 2004, respectively.
H. REINSURANCE - In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts. The Company retains a maximum of $ 125,000 of coverage per individual life.
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% for the years ended December 31, 2005, 2004 and 2003, respectively.
2005 2004 2003 ---------------- ----------------- ---------------- Cost of insurance acquired, beginning of year $ 12,747,532 $ 14,616,667 $ 21,311,995 Interest accretion 3,739,918 4,002,245 4,370,526 Amortization (5,933,003) (5,871,380) (6,065,854) ---------------- ----------------- ---------------- Net amortization (2,193,085) (1,869,135) (1,695,328) Impairment loss 0 0 (5,000,000) ---------------- ----------------- ---------------- Cost of insurance acquired, end of year $ 10,554,447 $ 12,747,532 $ 14,616,667 ================ ================= ================
For universal life insurance and interest sensitive life insurance products, acquisition costs are being amortized generally in proportion to the present value of expected gross profits from surrender charges and investment, mortality, and expense margins. Under SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," the Company makes certain assumptions regarding the mortality, persistency, expenses, and interest rates it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from initial assumptions. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. The following table summarizes deferred policy acquisition costs and related data for the years shown.
2005 2004 2003 ---------------- ----------------- ---------------- Deferred, beginning of year $ 1,685,263 $ 2,122,643 $ 2,462,487
---------------- ----------------- ---------------- Change for the year (270,899) (437,380) (339,844) ---------------- ----------------- ----------------
Deferred, end of year $ 1,414,364 $ 1,685,263 $ 2,122,643 ================ ================= ================
M. PROPERTY AND EQUIPMENT - Company-occupied property, data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of $ 6,587,036 and $ 6,336,241 at December 31, 2005 and 2004, 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 $ 250,795, $ 298,021, and $ 149,664 for the years ended December 31, 2005, 2004, and 2003, respectively.
S. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform to the 2005 presentation. Such reclassifications had no effect on previously reported net income or shareholders' equity.
U. 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 aset 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. In the opinion of management, no such impairment existed at December 31, 2005.
At December 31, 2005, substantially all of consolidated shareholders' equity represents net assets of UTG's subsidiaries. The payment of cash dividends to shareholders by UTG is not legally restricted. However, the state insurance department regulates insurance company dividend payments where the company is domiciled. UG's dividend limitations are described below.
Ohio domiciled insurance companies require 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. For the year ended December 31, 2005, UG had a statutory gain from operations of $ 5,113,557. At December 31, 2005, UG's statutory capital and surplus amounted to $ 25,645,716. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. In 2005 and 2004, UG paid $ 0 and $ 2,275,000, of which $ 974,180 was considered to be an extraordinary dividend, respectively, to UTG.
2005 2004 2003 ---------------- ----------------- ---------------- Current tax expense $ 21,368 $ 147,358 $ 197,732 Deferred tax (benefit) expense 137,040 (945,074) (2,897,225) ---------------- ----------------- ---------------- $ 158,408 $ (797,716) $ (2,699,493) ================ ================= ================
The Company's life insurance subsidiary has net operating loss carry-forwards for federal income tax purposes expiring as follows:
2005 2004 2003 --------------- --------------- ---------------- Tax computed at statutory rate $ 664,865 $ (303,779) $ (3,183,594) Changes in taxes due to: Current year expense previously deducted 0 0 175,000 Tax reserve adjustment 0 (202,225) 150,831 Utilization of capital loss carryforward (327,467) 0 0 Dividend received deduction (188,988) (161,114) 0 Tax deferred acquisition costs 0 (134,324) 0 Minority interest (168,344) 0 0 Small company deduction 211,474 0 0 Other (33,132) 3,726 158,270 --------------- --------------- ---------------- Income tax expense (benefit) $ 158,408 $ (797,716) $ (2,699,493) =============== =============== ================
Equity securities Banks, trusts and insurance companies $ 4,609,529 $ 4,692,661 Industrial and miscellaneous 19,964,730 19,706,511 --------------- -------------- $ 24,574,259 $ 24,399,172 =============== ==============
Fixed maturities held to maturity: U.S. Government, government agencies and authorities $ 6,014,103 $ 7,801,268 State, municipalities and political subdivisions 1,453,227 2,448,293 Collateralized mortgage obligations 45,734 58,453 Public utilities 0 0 All other corporate bonds 0 1,665,401 --------------- -------------- $ 7,513,064 $ 11,973,415 =============== ==============
Cost or Gross Gross Estimated Amortized Unrealized Unrealized Market 2005 Cost Gains Losses Value ------------------------------------ -------------- ------------- --------------- -------------- Investments held for sale: Fixed maturities U.S. Government and govt. agencies and authorities $ 25,660,210 $ 90,648 $ (529,310) $ 25,221,548 States, municipalities and political subdivisions 163,886 9,857 0 173,743 Collateralized mortgage obligations 74,086,345 15,004 (1,795,229) 72,306,120 Public utilities 0 0 0 0 All other corporate bonds 27,090,216 474,346 (190,347) 27,374,215 -------------- ------------- --------------- -------------- 127,000,657 589,855 (2,514,886) 125,075,626 Equity securities 15,098,815 9,475,444 0 24,574,259 -------------- ------------- --------------- -------------- Total $ 142,099,472 $ 10,065,299 $ (2,514,886) $ 149,649,885 ============== ============= =============== ==============
Fixed maturities held to maturity: U.S. Government and govt. agencies and authorities $ 6,014,103 $ 5,174 $ (58,943) $ 5,960,334 States, municipalities and political subdivisions 1,453,227 41,700 0 1,494,927 Collateralized mortgage obligations 45,734 390 (1,094) 45,030 Public utilities 0 0 0 0 All other corporate bonds 0 0 0 0 -------------- ------------- --------------- -------------- Total $ 7,513,064 $ 47,264 $ (60,037) $ 7,500,291 ============== ============= =============== ==============
The amortized cost and estimated market value of debt securities at December 31, 2005, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated Fixed Maturities Held for Sale Amortized Market December 31, 2005 Cost Value --------------------------------------------- -------------- -------------- Due in one year or less $ 10,383,204 $ 10,343,228 Due after one year through five years 31,651,404 31,693,708 Due after five years through ten years 6,944,931 6,843,315 Due after ten years 9,113,226 8,987,741 Collateralized mortgage obligations 68,907,892 67,207,634 -------------- -------------- Total $ 127,000,657 $ 125,075,626 ============== ==============
Estimated Fixed Maturities Held to Maturity Amortized Market December 31, 2005 Cost Value --------------------------------------------- -------------- -------------- Due in one year or less $ 3,059,728 $ 3,041,104 Due after one year through five years 2,411,040 2,415,254 Due after five years through ten years 1,670,879 1,658,601 Due after ten years 325,775 340,403 Collateralized mortgage obligations 45,642 44,929 -------------- -------------- Total $ 7,513,064 $ 7,500,291 ============== ==============
Cost or Gross Gross Proceeds Amortized Realized Realized From Year ended December 31, 2005 Cost Gains Losses Sale ------------------------------------- --------------- ------------- --------------- --------------- Scheduled principal repayments, Calls and tenders: Held for sale $ 15,114,740 $ 9,682 $ 0 $ 15,124,442 Held to maturity 5,801,888 2,300 (9,125) 5,795,062 Sales: Held for sale 11,124,418 15,077 (60,022) 11,079,473 Held to maturity 0 0 0 0 --------------- ------------- --------------- --------------- Total $ 32,041,046 $ 27,059 $ (69,147) $ 31,998,958 =============== ============= =============== ===============
Cost or Gross Gross Proceeds Amortized Realized Realized From Year ended December 31, 2004 Cost Gains Losses Sale ------------------------------------- --------------- ------------- --------------- --------------- Scheduled principal repayments, Calls and tenders: Held for sale $ 25,119,862 $ 8,062 $ (2,098) $ 25,125,826 Held to maturity 16,099,278 0 (801) 16,098,477 Sales: Held for sale 45,840,981 278,896 (352,551) 45,767,326 Held to maturity 0 0 (0) 0 --------------- ------------- --------------- --------------- Total $ 87,060,121 $ 286,958 $ (355,450) $ 86,991,629 =============== ============= =============== ===============
Annually, the Company completes an analysis of sales of securities held to maturity to further assess the issuer's creditworthiness of fixed maturity holdings. Based on this analysis, during 2003, certain issues were sold that had been classified as held to maturity. The Company considers these transactions rare and non recurring.
C. INVESTMENTS ON DEPOSIT - At December 31, 2005, investments carried at approximately $ 4,417,460 were on deposit with various state insurance departments.
In addition to the above reinsurance agreements, the Company entered into reinsurance agreements with Optimum Re Insurance Company (Optimum) during 2004 to provide reinsurance on new products released for sale in 2004. The agreements are yearly renewable term (YRT) treaties where the Company cedes amounts above its retention limit of $100,000 with a minimum cession of $25,000 as has been a Company practice for the last several years with its reinsurers. Also, effective January 1, 2005, Optimum became the reinsurer of 100% of the accidental death benefits (ADB) in force of the Company. This coverage is renewable annually at the Company's option. Optimum specializes in reinsurance agreements with small to mid-size carriers such as the Company. Optimum currently holds an "A" (Excellent) rating from A.M. Best.
UG entered into a coinsurance agreement with Park Avenue Life Insurance Company (PALIC) effective September 30, 1996. Under the terms of the agreement, UG ceded to PALIC substantially all of its then in-force paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life insurance policies. PALIC and its ultimate parent The Guardian Life Insurance Company of America (Guardian), currently hold an "A" (Excellent), and "A+" (Superior) rating, respectively, from A.M. Best, an industry rating company. The PALIC agreement accounts for approximately 68% of the reinsurance reserve credit, as of December 31, 2005.
In June 2002, the Company entered into a five-year contract with Fiserv for services related to its purchase of the "ID3" software system. Under the contract, the Company is required to pay $ 12,000 per month in software maintenance costs and a per-policy charge in offsite data center costs, with a minimum of $ 12,000 per month, for a five-year period from the date of the agreement.
On February 20, 2003, UG purchased $ 4,000,000 of a trust preferred security offering issued by FSBI. The security has a mandatory redemption after 30 years with a call provision after 5 years. The security pays a quarterly dividend at a fixed rate of 6.515%. The Company received $ 264,219, $ 264,842 and $ 226,104 of dividends in 2005, 2004 and 2003, respectively.
Prior to its merger, ABE paid fees to UTG pursuant to a cost sharing and management fee agreement. UTG provided management services for ABE to carry on its business. The agreement required ABE to pay a percentage of the actual expenses incurred by UTG based on certain activity indicators of ABE business to the business of all the insurance company subsidiaries plus a management fee based on a percentage of the actual expenses allocated to ABE. ABE paid fees of $ 165,269 in 2003 to UTG under this agreement.
Prior to its merger, APPL had a management fee agreement with UTG whereby UTG provided certain administrative duties, primarily data processing and investment advice. APPL paid fees of $ 222,000 to UTG during 2003 under this agreement.
UG from time to time acquires mortgage loans through participation agreements with FSNB. FSNB services UG's mortgage loans including those covered by the participation agreements. UG pays a .25% servicing fee on these loans and a one time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $77,597, $ 45,468 and $ 63,214 in servicing fees and $ 112,109, $ 0 and $ 13,821 in origination fees to FSNB during 2005, 2004 and 2003, respectively.
The Company reimbursed expenses incurred by Mr. Jesse T. Correll and Mr. Randall L. Attkisson relating to travel and other costs incurred on behalf of or relating to the Company. The Company paid $ 68,318, $ 50,098 and $ 20,238 in 2005, 2004 and 2003, respectively to First Southern Bancorp, Inc. in reimbursement of such costs. In addition, beginning in 2001, the Company began reimbursing FSBI a portion of salaries and pension costs for Mr. Correll and Mr. Attkisson. The reimbursement was approved by the UTG Board of Directors and totaled $ 160,272, $ 160,440 and $ 160,440 in 2005, 2004 and 2003, respectively, which included salaries and other benefits.
On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002, the shareholders of UTG approved, the UTG, Inc. Employee and Director Stock Purchase Plan. The plan's purpose is to encourage ownership of UTG stock by eligible directors and employees of UTG and its subsidiaries by providing them with an opportunity to invest in shares of UTG common stock. The plan is administered by the Board of Directors of UTG. A total of 400,000 shares of common stock may be purchased under the plan, subject to appropriate adjustment for stock dividends, stock splits or similar recapitalizations resulting in a change in shares of UTG. The plan is not intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code.
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 paid to acquire such shares from UTG 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 sale of such shares to UTG occurs. The original issue price of shares at the time this program began was established at $12.00 per share. At December 31, 2005, UTG had 101,877 shares outstanding that were issued under this program with a value of $ 12.93 per share pursuant to the above formula.
Diluted EPS Income available to common shareholders and $ assumed conversions 1,260,223 3,938,781 $ 0.32 ================ ================== =================
Diluted EPS Income available to common shareholders and $ assumed conversions (275,617) 3,986,731 $ (0.07) ================== ================== =================
For the year ended December 31, 2003 --------------- ------ ------------------ ---- ----------------- Income Shares Per-Share (Numerator) (Denominator) Amount --------------- ------------------ ----------------- Basic EPS Income available to common shareholders $ (6,396,490) 3,839,947 $ (1.67) =================
At December 31, 2005 and 2004, the Company had no long-term debt outstanding.
At December 31, 2005 and 2004, the Company acquired $ 283,173 in equity investments and $ 2,990,928 in fixed maturity investments, respectively, for which the cash had not yet been paid. The payable for these securities is included in the line item "Other liabilities" on the consolidated balance sheet.
The Company maintains cash balances in financial institutions that at times may exceed federally insured limits. The Company maintains its primary operating cash accounts with First Southern National Bank, an affiliate of the largest shareholder of UTG, Mr. Jesse T. Correll, the Company's CEO and Chairman. In aggregate at December 31, 2005, these accounts hold approximately $6,404,000 for which there are no pledges or guarantees outside FDIC insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
The Financial Accounting Standards Board ("FASB") issued Statement No. 154, Accounting for Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statement changes the requirements for the accounting for and reporting of a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will account for all future changes and error corrections in accordance with the requirements of Statement No. 154.
Before-Tax (Expense) Net of Tax 2003 Amount or Benefit Amount ----------------------------------------- ----------------- ------------------- -----------------
Premiums and policy fees, net $ 3,883,003 $ 4,093,239 $ 3,686,584 $ 3,360,212 Net investment income 2,888,444 3,231,542 2,462,813 1,687,701 Total revenues 7,185,509 7,811,693 6,498,785 4,992,371 Policy benefits including dividends 5,520,920 4,931,443 5,516,224 5,102,089 Commissions and amortization of DAC and COI 544,139 441,914 513,488 5,507,726 Operating expenses 1,169,139 3,500,807 1,451,973 1,444,861 Operating income (90,406) (1,102,433) (1,023,300) (7,102,405) Net income (loss) (494,124) (669,492) (464,142) (4,768,732) Basic earnings (loss) per share (0.14) (0.17) (0.12) (1.24) Diluted earnings (loss) per share (0.12) (0.17) (0.12) (1.24)