Total investment real estate holdings represent approximately 8% of the total assets of the Company net of accumulated depreciation of $ 1,729,001 and $ 460,170 at year-end 2003 and 2002 respectively. 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 $ 1,889,038. Currently, the facilities occupied by the Company are adequate relative to the Company's present operations.
The following selected historical consolidated financial data should be read in conjunction with "
4. Other factors affecting the performance of the Company, including, but not limited to, market conduct claims, insurance industry insolvencies, insurance regulatory initiatives and developments, stock market performance, an unfavorable outcome in pending litigation, and investment performance.
General We have identified the accounting policies below as critical to the understanding of our results of operations and our financial position. The application of these critical accounting policies in preparing our financial statement requires management to use significant judgments and estimates concerning future results or other developments including the likelihood, timing or amount of one or more future transactions or amounts. Actual results may differ from these estimates under different assumptions or conditions. On an on-going basis, we evaluate our estimates, assumptions and judgments based upon historical experience and various other information that we believe to be reasonable under the circumstances. For a detailed discussion of other significant accounting policies, see Note 1.
Investments We regularly monitor our investment portfolio to ensure that investments that may be other than temporarily impaired are identified in a timely manner and properly valued, and that any impairments are charged against earnings in the proper period.
Premiums and policy fee revenues, net of reinsurance premiums and policy fees, decreased 5% when comparing 2003 to 2002 and 8% from 2002 to 2001. The Company currently writes little new business. Unless the Company acquires a block of in-force business or marketing significantly increases on traditional 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 2003, 2002 and 2001 was approximately 94.9%, 93.6%, and 91.6%, respectively. Persistency is a measure of insurance in force retained in relation to the previous year.
New business production decreased steadily and significantly over the last several years. The Company has not placed an emphasis on new business production in recent years. Costs associated with supporting new business can be significant. In recent years, the insurance industry as a whole has experienced a decline in the total number of agents who sell insurance products; therefore competition has intensified for top producing sales agents. The relatively small size of the Company, and the resulting limitations, has made it challenging to compete in this area.
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. The Company has recently designed the "Horizon" annuity product as well as the "Legacy" life product which are both to be used in marketing efforts by FSNB. The introduction of these new products is currently not expected to produce significant premium writings. The Company is currently looking at other types of products to compliment the existing offerings. Among these being considered is a child product and term life insurance.
Benefits, claims and settlement expenses net of reinsurance benefits and claims, increased $ 1,631,372 from 2002 to 2003 and increased $ 84,561 from 2001 to 2002. The 2003 increase is primarily related to increases 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 typically have a significant impact on variances in this line item. Direct (prior to reinsurance) death claims were approximately $ 2,752,000 less in 2003 than in 2002 and approximately $ 1,812,000 greater in 2002 than in 2001. 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 $ 980,000 during the year 2003 compared to the same period in 2002 and decreased approximately $ 2,000,000 during the year 2002 compared to the same period in 2001. 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.
Amortization of cost of insurance acquired increased 12% in 2003 compared to 2002 and decreased 4% in 2002 compared to 2001. 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 2003, 2002 and 2001 has been approximately 94.9%, 93.6% and 91.6%, respectively. Based on the projected future profits and persistency of the insurance in-force, the Company wrote off an additional $ 5,000,000 of cost of insurance acquired during 2003. This write-off is primarily the result of continued tightening of interest rate spreads of the Company. The Company will continue to analyze these projections to determine the adequacy of present values assigned to future cash flows.
Interest expense declined 38% comparing 2003 to 2002 and declined 19% comparing 2002 to 2001. The Company repaid $ 705,499, $ 1,405,395 and $ 1,302,495 in outside debt in 2003, 2002 and 2001 respectively, through operating cash flows and dividends received from its subsidiary UG. In April 2001, the Company issued $ 3,885,996 in new debt to purchase common stock owned primarily by James E. Melville and Larry E. Ryherd, two former Officers and Directors of the Company and their respective families. These notes bear interest at the fixed rate of 7% per annum (paid quarterly) with payments of principal to be made in five equal installments, the first principal payment of which, in the amount of $ 777,199, was made on March 31, 2002. At December 31, 2003, UTG had $ 2,289,776 in notes payable remaining, all of which were incurred in the April 2001 stock purchase transaction with Mr. Ryherd and Mr. Melville. Principal payments of $ 763,259 were due annually over the next three-year period ending in April of 2006 with the next principal payment scheduled due in April of 2004. Subsequent to year-end 2003, the Company paid the remaining balance of these notes with a draw on its line of credit with Southwest Bank of St. Louis. The line of credit bears interest at the rate of 0.25% in excess of the Southwest Bank of St. Louis' prime rate. This action will further reduce interest expense in future periods as the current rate on the line of credit is 4.25% compared to the fixed rate of 7% on the notes paid. The Company has aggressively pursued the repayment of its existing debt in recent periods. With the current interest rate environment, management believes it is in the Company's best long-term interest to reduce or eliminate its debt with any excess funds available to do so.
Management believes overall sources available are more than adequate to service this debt. These sources include current cash balances of UTG, expected future operating cash flows and payment of dividends from the Company's life subsidiary.
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 they are permitted to make, and the amount of funds that may be used for any one type of investment. In light of these statutes and regulations, and the Company's business and investment strategy, the Company generally seeks to invest in United States government and government agency securities and other high quality low risk investments. Many insurance companies have suffered significant losses in their investment portfolios in the last couple of years; however, because of the Company's conservative investment philosophy our Company has so far largely avoided such significant losses. Management continues to shorten the length of the Company's portfolio which has limited investment earnings in the short run. The Company has not written off any investment losses in these turbulent economic times.
At December 31, 2003, 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 2003 and 2002 as available for sale. It was determined it would be in the Company's best financial interest to classify these new purchases as available for sale to provide additional liquidity and flexibility.
Rating % of Portfolio ---------------------- 2003 2002 ---------- ---------- Investment Grade AAA 82% 65% AA 1% 3% A 12% 24% BBB 4% 6% Below investment grade 1% 2% ---------- ---------- 100% 100% ========== ==========
In the past few years the Company has 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 2003, 2002 and 2001 the Company issued approximately $ 11,405,000, $ 6,920,000 and $ 4,535,000 respectively, in new mortgage loans. These new loans were originated through FSNB and funded by the Company through participation agreements with FSNB. FSNB services 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 $ 63,214, $ 70,140 and $ 79,730 in servicing fees and $ 13,821, $ 35,127 and $ 22,626 in origination fees to FSNB during 2003, 2002 and 2001, respectively.
Total investment real estate holdings represent approximately 8% and 7% of the total assets of the Company, net of accumulated depreciation, at year-end 2003 and 2002 respectively. Total investment real estate is separated into two categories: Commercial 97% and Residential Development 3%.
Total shareholders' equity decreased 17% in 2003 compared to 2002. This is primarily due to a loss during the year of $ (6,396,490) and a decrease in unrealized gains on investments in the current year of $ (1,205,544). In addition shareholders' equity increased by $ 195,905 from an employee and director stock purchase plan which was approved and implemented in 2002; however, this was offset by purchases of treasury shares and retirements totaling $ (441,143). During the current year's financial statement preparation, the Company determined the amount of reinsurance premiums paid to reinsurers was insufficient in the current year as well as prior years. It was determined that, in total, $903,325 in due premium was owed the Company's reinsurers, of which $729,321 related to years prior to 2003.
The Company has three principal needs for cash - the insurance companies' contractual obligations to policyholders, the payment of operating expenses and the servicing of its long-term debt. Cash and cash equivalents as a percentage of total assets were 3% and 8% as of December 31, 2003 and 2002, respectively. Fixed maturities as a percentage of total invested assets were 68% and 72% as of December 31, 2003 and 2002, respectively.
Net cash provided by (used in) financing activities was $ 1,487,041, $ (473,692) and $ (1,091,769) for 2003, 2002 and 2001, respectively. The Company continues to pay down its outstanding debt. Such payments are included within this category. In addition, in 2001 the Board of Directors of the Company authorized a repurchase program of UTG's common stock and the purchase of stock is still pursued as it becomes available. In addition, in 2002 this category includes payments made to former FCC shareholders for shares they owned prior to the merger of FCC into UTG.
At December 31, 2003, UTG had $ 2,289,776 in notes payable, all remaining debt is owed to two former officers and directors of the Company and their respective families as a result of an April 2001 stock purchase transaction. These notes bear interest at the fixed rate of 7% per annum (paid quarterly), with three remaining principal payments of $ 763,259 due annually. The next principal payment due date was April of 2004. Subsequent to year-end 2003, the Company paid the remaining balance of these notes with a draw on its line of credit with Southwest Bank of St. Louis. The line of credit will bear interest at the rate of 0.25% in excess of the Southwest Bank of St. Louis' prime rate. Management believes overall sources available are more than adequate to service this debt. These sources include current cash balances of UTG, expected future operating cash flows and payment of dividends from the Company's life subsidiary.
On April 1, 2002, UTG was extended a $ 5,000,000 line of credit (LOC) from an unaffiliated third party, Southwest Bank of St. Louis. The LOC expired one-year from the date of issue and was renewed for an additional one-year term. As collateral for any draws under the line of credit, the former FCC, which has now merged into UTG, pledged 100% of the common stock of its insurance subsidiary UG. Borrowings under the LOC will bear interest at the rate of 0.25% in excess of Southwest Bank of St. Louis' prime rate. At December 31, 2003, the Company had no outstanding borrowings attributable to this LOC. During 2002 the Company had total borrowings of $ 400,000 on this LOC which were all repaid during the year. Draws on this LOC were used to retire the remaining subordinated debt, as described in note 11 to the consolidated financial statements and incorporated herein by this reference. Subsequent to year-end 2003, the Company made a draw on this LOC to repay the remaining balance of debt owed to two former Officers and Directors of the Company and their respective families.
Upon receiving the necessary regulatory approvals, the merger of 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.
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, 2003 UG statutory shareholders' equity was $ 13,008,198. At December 31, 2003, UG statutory loss from operations was $ (1,461,177). Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. UG paid ordinary dividends of $ 600,000 to UTG in 2003.
The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The risk-based capital (RBC) formula measures the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that will supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the insurance company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Insurance companies below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The levels and ratios are as follows: Ratio of Total Adjusted Capital to Authorized Control Level RBC Regulatory Event (Less Than or Equal to)
The State of Florida began an investigation of industrial life insurance policies in the fall of 1999 regarding policies with race-based premiums. This investigation has quickly spread to other states and to other types of small face amount policies and was expanded to consider the fairness of premiums for all small policies including policies which did not have race-based premiums. The NAIC historically has defined a "small face amount policy" as one with a face amount of $ 15,000 or less. Under current reviews, some states have increased this amount to policies of $ 25,000 or less. These states are attempting to force insurers to refund "excess premiums" to insureds or beneficiaries of insureds. The Company's insurance subsidiary has no race-based premium products, but do have policies with face amounts under the above-scrutinized limitations. The outcome of this issue could be dramatic on the insurance industry as a whole as well as the Company itself. The Company will continue to monitor developments regarding this matter to determine to what extent, if any, the Company may be exposed.
On October 26, 2001, President Bush signed into law the "USA PATRIOT" Act of 2001 ("the Patriot Act"). This Law, enacted in response to the terrorist attacks of September 11, 2001, strengthens our Nation's ability to combat terrorism and prevent and detect money-laundering activities. Under Section 352 of the Patriot Act, financial institutions (definition includes insurance companies) are required to develop an anti-money laundering program. The practices and procedures implemented under the program should reflect the risks of money laundering given the entity's products, methods of distribution, contact with customers and forms of customer payment and deposits. In addition, Section 326 of the Patriot Act creates minimum standards for financial institutions regarding the identity of their customers in connection with the purchase of a policy or contract of insurance. The Company has instituted an anti-money laundering program to comply with Section 352, and has communicated this program throughout the organization. The Company implemented a preliminary database program in order to facilitate compliance with Section 326. In addition, all new business applications are regularly screened through the Medical Information Bureau. The Company regularly updates the information provided by the Office of Foreign Asset Control, U.S. Treasury Department in order to remain in compliance with the Patriot Act and will continue to monitor this issue as changes and new proposals are made.
The Financial Accounting Standards Board (FASB) has issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. Statement No. 150 was issued to address how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer must classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) which may have previously been classified as equity. Examples of such a financial instrument would be shares that are mandatorily redeemable which include an unconditional obligation requiring the issuer to redeem them by transferring its assets at a specified date or upon an event that is certain to occur, or a financial instrument other than an outstanding share that, at inception, includes an obligation to repurchase the issuer's equity shares and that requires or may require the issuer to settle the obligation by transferring assets.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UNITED TRUST GROUP, INC. and subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
We have also audited Schedule I as of December 31, 2003, and Schedules II, IV and V as of December 31, 2003 and 2002, of UNITED TRUST GROUP, INC. and subsidiaries and Schedules II, IV and V for each of the three 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.
Cash and cash equivalents 8,749,727 24,042,448 Securities of affiliate 4,000,000 0 Accrued investment income 1,961,552 2,452,840 Reinsurance receivables: Future policy benefits 32,789,725 33,039,036 Policy claims and other benefits 4,120,299 3,770,285 Cost of insurance acquired 14,616,667 21,311,995 Deferred policy acquisition costs 2,122,643 2,462,487 Property and equipment, net of accumulated depreciation 2,450,109 2,203,408 Income taxes receivable, current 212,197 245,132 Other assets 354,292 574,263 --------------- -------------- Total assets $ 311,557,133 $ 320,493,939 =============== ==============
Shareholders' equity: Common stock - no par value, stated value $.02 per share. Authorized 7,000,000 shares - 4,004,666 and 3,536,311 shares issued and outstanding after deducting treasury shares of 174,136 and 147,607 80,008 70,726 Additional paid-in capital 42,672,189 42,976,344 Retained earnings (4,621,955) 1,774,535 Accumulated other comprehensive income 1,566,397 2,771,941 --------------- -------------- Total shareholders' equity 39,696,639 47,593,546 --------------- -------------- Total liabilities and shareholders' equity $ 311,557,133 $ 320,493,939 =============== ==============
Income (loss) before income taxes and minority interest (9,318,544) 2,249,743 4,139,885 Income tax benefit (expense) 2,699,493 (479,355) (1,181,133) Minority interest in (income) loss of consolidated subsidiaries 222,561 (431,593) (650,656) --------------- ---------------- ----------------
Diluted income (loss) per share from continuing operations and net income (loss) $ (1.67) $ 0.33 $ 0.62 =============== ================ ================
UNITED TRUST GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Years Ended December 31, 2003
2002 2001 2003 (Restated) (Restated) -------------- -------------- --------------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net income (loss) $ (6,396,490) $ 1,338,795 $ 2,308,096 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities net of changes in assets and liabilities resulting from the sales and purchases of subsidiaries: Amortization/accretion of fixed maturities 978,307 513,308 150,579 Realized investment gains, net (485,436) (13,634) (436,840) Amortization of deferred policy acquisition costs 400,844 714,432 1,007,577 Amortization of cost of insurance acquired 6,695,328 1,515,450 1,572,920 Amortization of costs in excess of net assets purchased 0 0 90,000 Depreciation 1,052,964 835,538 494,441 Minority interest (222,561) 431,593 650,656 Charges for mortality and administration of universal life and annuity products (9,083,778) (8,660,548) (9,344,711) Interest credited to account balances 5,478,488 5,468,318 5,749,098 Policy acquisition costs deferred (61,000) (69,000) (141,000) Change in accrued investment income 491,288 550,020 479,176 Change in reinsurance receivables (100,703) 1,010,146 1,175,305 Change in policy liabilities and accruals 3,163,696 (2,279,449) (2,721,245) Change in income taxes payable (2,877,425) 413,476 1,090,064 Change in other assets and liabilities, net 33,430 (1,301,411) (596,260) -------------- -------------- --------------- Net cash provided by (used in) operating activities (933,048) 467,034 1,527,856 -------------- -------------- ---------------
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, 2003, 2002 and 2001, respectively.
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 $ 920,656 and $ 908,006 as of December 31, 2003 and 2002, respectively.
2003 2002 2001 ---------------- ----------------- ---------------- Cost of insurance acquired, beginning of year $ 21,311,995 $ 31,237,167 $ 32,810,087 Interest accretion 4,370,526 4,570,678 4,777,576 Amortization (6,065,854) (6,086,128) (6,350,496) ---------------- ----------------- ---------------- Net amortization (1,695,328) (1,515,450) (1,572,920) Impairment loss (5,000,000) 0 0 Revaluation adjustment from UTG/FCC merger 0 (8,409,722) 0 ---------------- ----------------- ---------------- Cost of insurance acquired, end of year $ 14,616,667 $ 21,311,995 $ 31,237,167 ================ ================= ================
2004 4,140,000 6,034,000 1,894,000 2005 3,875,000 6,084,000 2,209,000 2006 3,560,000 6,422,000 2,862,000 2007 3,145,000 5,994,000 2,849,000 2008 $ 2,730,000 $ 5,256,000 $ 2,526,000
Net amortization of deferred policy acquisition costs $ 400,844 $ 714,432 $ 1,007,577 Commissions (88,905) 71,429 255,397 ------------- ------------- --------------- Total $ 311,939 $ 785,861 $ 1,262,974 ============= ============= ===============
N. PROPERTY AND EQUIPMENT - Company-occupied property, data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of $ 6,038,220 and $ 5,748,321 at December 31, 2003 and 2002, 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 $ 149,664, $ 280,148, and $ 316,900 for the years ended December 31, 2003, 2002, and 2001, respectively.
Q. TREASURY SHARES - The Company holds 174,136 and 147,607 shares of common stock as treasury shares with a cost basis of $ 1,376,039 and $ 1,193,690 at December 31, 2003 and 2002, respectively.
At December 31, 2003, 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.
2003 2002 2001 ---------------- ----------------- ---------------- Current tax expense $ 197,732 $ 7,893 $ 53,539 Deferred tax (benefit) expense (2,897,225) 471,462 1,127,594 ---------------- ----------------- ---------------- $ (2,699,493) $ 479,355 $ 1,181,133 ================ ================= ================
UG ------------- 2019 $ 965,080 2021 1,806 2022 5,078 2023 2,756,219 ------------- TOTAL $ 3,728,183 =============
The Company has established a deferred tax asset of $ 1,304,864 for its operating loss carryforwards and has established no allowance in the current or prior years.
UG has a net operating loss carryforward of $ 3,728,183 at December 31, 2003. UG must average taxable income of approximately $ 186,409 over the next 20 years to fully realize its net operating loss carryforward, as UG's operating loss carryforward does not expire until the year 2023. Management believes future earnings of both UTG and UG will be sufficient to fully utilize their respective net operating loss carryforwards. Therefore, management has established no allowance for potential uncollectibility of its loss carryforwards in the current year.
2003 2002 2001 --------------- --------------- ---------------- Tax computed at statutory rate $ (3,183,594) $ 728,618 $ 1,421,240 Changes in taxes due to: Cost in excess of net assets purchased 0 0 31,500 Current year expense previously deducted 175,000 0 0 Tax reserve adjustment 150,831 123,512 0 Benefit of prior losses 0 (309,710) (159,456) Other 158,270 (63,065) (112,151) --------------- --------------- ---------------- Income tax expense (benefit) $ (2,699,493) $ 479,355 $ 1,181,133 =============== =============== ================
Carrying Value ---------------------------------------- 2003 2002 --------------- -------------- Investments held for sale: Fixed maturities U.S. Government, government agencies and authorities $ 31,347,586 $ 27,646,891 State, municipalities and political subdivisions 177,963 212,015 Collateralized mortgage obligations 89,117,375 66,820,749 All other corporate bonds 18,747,458 14,024,863 --------------- -------------- $ 139,390,382 $ 108,704,518 =============== ==============
Equity securities Banks, trust and insurance companies $ 1,517,159 $ 1,209,756 Industrial and miscellaneous 7,845,006 3,674,114 --------------- -------------- $ 9,362,165 $ 4,883,870 =============== ==============
Below Investment Grade Investments 2003 2002 ----------------------------- -------------- ------------ Public Utilities $ 1,001,673 $ 1,274,374 CMO 24,984 40,146 Corporate 1,818,673 1,370,622 ------------- ------------ Total $ 2,845,330 $ 2,685,142 ============= ============
Cost or Gross Gross Estimated Amortized Unrealized Unrealized Market 2003 Cost Gains Losses Value ------------------------------------ -------------- ------------- --------------- -------------- Investments held for sale: Fixed maturities U.S. Government and govt. agencies and authorities $ 30,850,682 $ 642,756 $ (145,852) $ 31,347,586 States, municipalities and political subdivisions 160,271 17,692 0 177,963 Collateralized mortgage obligations 90,353,657 429,542 (1,665,824) 89,117,375 Public utilities 0 0 0 0 All other corporate bonds 17,883,937 886,396 (22,875) 18,747,458 -------------- ------------- --------------- -------------- 139,248,547 1,976,386 (1,834,551) 139,390,382 Equity securities 7,209,443 2,152,722 0 9,362,165 -------------- ------------- --------------- -------------- Total $ 146,457,990 $ 4,129,708 $ (1,834,551) $ 148,752,757 ============== ============= =============== ==============
Cost or Gross Gross Estimated Amortized Unrealized Unrealized Market 2002 Cost Gains Losses Value ------------------------------------ -------------- ------------- --------------- -------------- Investments held for sale: Fixed maturities U.S. Government and govt. agencies and authorities $ 26,271,281 $ 1,375,610 $ 0 $ 27,646,891 States, municipalities and political subdivisions 193,619 18,396 0 212,015 Collateralized mortgage obligations 65,603,941 1,225,986 (9,178) 66,820,749 Public utilities 0 0 0 0 All other corporate bonds 13,176,046 869,187 (20,370) 14,024,863 -------------- ------------- --------------- -------------- 105,244,887 3,489,179 (29,548) 108,704,518 Equity securities 4,122,887 1,795,527 (1,034,544) 4,883,870 -------------- ------------- --------------- -------------- Total $ 109,367,774 $ 5,284,706 $ (1,064,092) $ 113,588,388 ============== ============= =============== ==============
The amortized cost and estimated market value of debt securities at December 31, 2003, 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.
Fixed Maturities Held for Sale Estimated Amortized Market December 31, 2003 Cost Value ------------------------------------ -------------- -------------- Due in one year or less $ 7,944,561 $ 8,014,172 Due after one year through five years 21,649,875 22,790,642 Due after five years through ten years 19,300,454 19,468,193 Due after ten years 0 0 Collateralized mortgage obligations 90,353,657 89,117,375 -------------- -------------- Total $ 139,248,547 $ 139,390,382 ============== ==============
Estimated Fixed Maturities Held to Maturity Amortized Market December 31, 2003 Cost Value ------------------------------------ -------------- -------------- Due in one year or less $ 14,164,102 $ 14,409,129 Due after one year through five years 10,059,846 10,462,358 Due after five years through ten years 963,865 1,030,640 Due after ten years 1,458,892 1,459,917 Collateralized mortgage obligations 77,802 78,233 -------------- -------------- Total $ 26,724,507 $ 27,440,277 ============== ==============
C. INVESTMENTS ON DEPOSIT - At December 31, 2003, investments carried at approximately $ 6,952,000 were on deposit with various state insurance departments.
The financial statements include various estimated fair value information at December 31, 2003 and 2002, as required by Statement of Financial Accounting Standards 107, Disclosure about Fair Value of Financial Instruments (SFAS 107). Such information, which pertains to the Company's financial instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value of the Company.
2003 2002 ------------------------------------------------------------------------- Estimated Estimated Carrying Fair Carrying Fair Assets Amount Value Amount Value -------------- -------------- --------------- --------------- Fixed maturities $ 26,724,507 $ 27,440,277 $ 58,327,663 $ 60,517,065 Fixed maturities held for sale 139,390,382 139,390,382 108,704,518 108,704,518 Equity securities 9,362,165 9,362,165 4,883,870 4,883,870 Securities of affiliate 4,000,000 4,000,000 0 0 Mortgage loans on real estate 26,715,968 26,853,183 23,804,827 23,895,111 Investment in real estate 24,725,824 24,725,824 20,946,987 20,946,987 Policy loans 13,226,399 13,226,399 13,346,504 13,346,504 Short-term investments 34,677 34,677 377,676 377,676
As is customary in the insurance industry, the insurance subsidiary of the Company 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, 2003, the Company had gross insurance in force of $ 2.290 billion of which approximately $ 580 million was ceded to reinsurers.
Currently, the Company is utilizing reinsurance agreements with Business Mens' Assurance Company, (BMA) and Swiss Re Life and Health America Incorporated (SWISS RE). BMA 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 cover all 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.
UG entered a coinsurance agreement with Park Avenue Life Insurance Company (PALIC) as of September 30, 1996. Under the terms of the agreement, UG ceded to PALIC substantially all of its paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life insurance policies. PALIC and its ultimate parent The Guardian Life Insurance Company of America (Guardian), currently hold an "A" (Excellent), and "A+" (Superior) rating, respectively, from A.M. Best, an industry rating company. The agreement with PALIC accounts for approximately 65% of the reinsurance reserve credit, as of December 31, 2003.
On June 1, 2000, UG assumed an already existing coinsurance agreement, dated January 1, 1992, between Lancaster Life Reinsurance Company, an Arizona corporation (LLRC) and Investors Heritage Life Insurance Company, a corporation organized under the laws of the Commonwealth of Kentucky (IHL). 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, 2003, IHL has insurance in-force of approximately $ 2,924,000, with reserves being held on that amount of approximately $ 35,000.
The Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned in 2003, 2002 and 2001 was as follows:
Shown in thousands --------------------------------------------------------- 2003 2002 2001 Premiums Premiums Premiums Earned Earned Earned ---------------- ---------------- ---------------- Direct $ 18,087 $ 18,597 $ 20,333 Assumed 34 96 111 Ceded (2,896) (2,701) (3,172) ---------------- ---------------- ---------------- Net premiums $ 15,225 $ 15,992 $ 17,272 ================ ================ ================
The State of Florida began an investigation of industrial life insurance policies in the fall of 1999 regarding policies with race-based premiums. This investigation has quickly spread to other states and to other types of small face amount policies and was expanded to consider the fairness of premiums for all small policies including policies which did not have race-based premiums. The NAIC historically has defined a "small face amount policy" as one with a face amount of $ 15,000 or less. Under current reviews, some states have increased this amount to policies of $ 25,000 or less. These states are attempting to force insurers to refund "excess premiums" to insureds or beneficiaries of insureds. The Company's insurance subsidiary has no race-based premium products, but does have policies with face amounts under the above-scrutinized limitations. The outcome of this issue could be dramatic on the insurance industry as a whole as well as the Company itself. The Company will continue to monitor developments regarding this matter to determine to what extent, if any, the Company may be exposed.
In June 2002, the Company entered into a five-year contract with Fiserv LIS 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 $ 5,000 per month in offsite data center costs for a five-year period from the date of the signing.
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 began in May 2003 and was successfully completed in December 2003. The conversion was performed utilizing Company personnel with onsite training and guidance provided by Fiserv. The Company will begin the conversion of the remaining insurance business to the "ID3" software system in 2004.
UTG and its subsidiaries, both current and former, are named as defendants in a number of legal actions arising as a part of the ordinary course of business relating primarily to claims made under insurance policies. Those actions have been considered in establishing the Company's liabilities. Management is of the opinion that the settlement of those actions will not have a material adverse effect on the Company's financial position or results of operations.
On June 18, 2003, UG entered into a lease agreement with Bandyco, LLC, an affiliated entity, for a one-sixth interest in an aircraft. Bandyco, LLC is affiliated with Ward F. Correll, who is a director of the Company. The lease term is for a period of five years at a cost of $ 523,831. The Company is responsible for its share of annual non-operational costs, in addition to the operational costs as are billable for specific use.
On November 15, 2002, North Plaza acquired 229 acres of timberland from Millard V. Oakley, a Director of UTG at the time, for a total purchase price of $ 54,811. The land acquired was adjacent to land already owned by North Plaza. The purchase price was consistent with other recent similar land acquisitions made by North Plaza.
On May 21, 2002, at a special meeting of shareholders, the shareholders of FCC, then an 82% owned subsidiary of UTG, voted on and approved that certain Agreement and Plan of Reorganization and related Plan of Merger, each dated as of June 5, 2001, between UTG, and FCC (collectively, the "Merger Agreement"), and the merger contemplated thereby in which FCC would be merged with and into UTG, with UTG being the surviving corporation of the merger. The merger became effective on June 12, 2002. Pursuant to the terms and conditions of the Merger Agreement, each share of FCC stock outstanding at the effective time of the merger (other than shares held by UTG or shares held in treasury by FCC or by any of its subsidiaries) was at such time automatically converted into the right to receive $ 250 in cash per share ($ 2,480,000 in the aggregate).
On April 12, 2001, UTG completed the purchase of 22,500 shares of UTG common stock and 544 shares of FCC common stock from James E. Melville and family pursuant to the Melville Purchase Agreement in exchange for five year promissory notes of UTG in the aggregate principal amount of $ 288,800. On April 12, 2001, UTG also completed the purchase from another family member of Mr. Melville of an additional 100 shares of UTG for a total cash payment of $ 800. The purchase for cash by UTG of an additional 39 shares of FCC common stock owned by Mr. Melville at a purchase price of $ 200.00 per share was consummated on June 27, 2001. Mr. Melville was a former Director of UTG, FCC and the three insurance subsidiaries of UTG; he resigned from those boards on February 13, 2001.
On April 12, 2001, UTG also completed the purchase of 559,440 shares of UTG common stock from Larry E. Ryherd and family pursuant to the Ryherd Purchase Agreement for cash payments totaling $ 948,026 and a five year promissory note of UTG in the principal amount of $ 3,527,494. The purchase by UTG of the remaining 3,775 shares of UTG common stock to be purchased for cash at $ 8.00 per share pursuant to the Ryherd Purchase Agreement along with an additional 570 shares from certain parties to the Ryherd Purchase Agreement was completed on June 20, 2001. The promissory notes of UTG received by certain of the sellers pursuant to the Melville Purchase Agreement and the Ryherd Purchase Agreement bear interest at a rate of 7% per annum (paid quarterly) with payments of principal to be made in five equal annual installments, the first such payment of principal to be due on the first anniversary of the closing.
On April 12, 2001, UTG also purchased in a separate transaction 10,891 shares of UTG common stock from Robert E. Cook, at a price of $ 8.00 per share. At the closing, Mr. Cook received $ 17,426 in cash and a five year promissory note of UTG (substantially similar to the promissory notes issued pursuant to the Melville and Ryherd Purchase Agreements described above) in the principal amount of $ 69,702. Mr. Cook was a Director of UTG and FCC who resigned his position on January 8, 2001. Mr. Cook proposed the stock purchase to Jesse T. Correll who agreed to purchase Mr. Cook's stock on substantially the same terms as the purchases of the stock held by Messrs. Melville and Ryherd as described above.
During 2001, FCC paid a majority of the general operating expenses of the affiliated group. FCC then received management, service fees and reimbursements from the various affiliates. Beginning in January 2002, and in anticipation of the merger of FCC, UTG began paying a majority of the general operating expenses of the affiliated group. Following the FCC merger in June 2002, UTG also assumed the rights and obligations of the management and service fees agreements with the various affiliates originally held by FCC.
ABE paid fees to FCC pursuant to a cost sharing and management fee agreement. FCC provided management services for ABE to carry on its business. The agreement required ABE to pay a percentage of the actual expenses incurred by FCC 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 $ 188,494 and $332,673 in 2002 and 2001, respectively under this agreement. ABE paid fees of $ 165,269 and $ 170,729 in 2003 and 2002, respectively, to UTG under this agreement.
APPL had a management fee agreement with FCC whereby FCC provided certain administrative duties, primarily data processing and investment advice. APPL paid fees of $ 222,000 and $ 444,000 during 2002 and 2001, respectively under this agreement. APPL paid fees of $ 222,000 and $ 222,000 to UTG during 2003 and 2002, respectively, under this agreement.
During 2003 and 2002, the Board of Directors of UTG approved offerings under the plan to qualified individuals. For the years ended December 31, 2003 and 2002, eight individual purchased 58,891 and three individuals purchased 16,546 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.
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. At December 31, 2003, UTG had 75,437 shares outstanding that were issued under this program with a value of $ 11.63 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. Repurchased shares are available for future issuance for general corporate purposes. Through February 20, 2004, UTG has spent $ 846,901 in the acquisition of 121,255 shares under this program.
In April 2001, UTG completed the purchase of 22,500 shares of UTG common stock and 544 shares of First Commonwealth Corporation common stock from James E. Melville and family pursuant to the Melville Purchase Agreement in exchange for five year promissory notes of UTG in the aggregate principal amount of $ 288,800. During 2002, UTG made principal reductions totaling $ 115,520 on the Melville notes.
In April 2001, UTG completed the purchase of 559,440 shares of UTG common stock from Larry E. Ryherd and family pursuant to the Ryherd Purchase Agreement in exchange for cash and a five-year promissory note of UTG in the principal amount of $ 3,527,494. During 2003 and 2002, UTG made principal reductions of $ 705,499 and $ 705,499, respectively, on the Ryherd note.
In April 2001, UTG also purchased in a separate transaction 10,891 shares of UTG common stock from Robert E. Cook, a former director, for cash and a five-year promissory note of UTG in the principal amount of $ 69,702. During 2002, UTG repaid this note in full.
On November 20, 1998, FSF and affiliates acquired 929,904 shares of common stock of UTG from UTG and certain UTG shareholders. As consideration for the shares, FSF paid UTG $ 10,999,995 and certain shareholders of UTG $ 999,990 in cash. Included in the stock acquisition agreement is an earnings covenant whereby UTG warrants UTG and its subsidiaries and affiliates will have future earnings of at least $ 30,000,000 for a five-year period beginning January 1, 1998. Such earnings are computed based on statutory results excluding inter-company activities such as inter-company dividends plus realized and unrealized gains and losses on real estate, mortgage loans and unaffiliated common stocks. At the end of the covenant period, an adjustment is to be made equal to the difference between the then market value and statutory carrying value of real estate still owned that existed at the beginning of the covenant period. Should UTG not meet the covenant requirements, any shortfall will first be reduced by the actual average tax rate for UTG for the period, and then will be further reduced by one-half of the percentage, if any, representing UTG's ownership percentage of the insurance company subsidiary. This result will then be reduced by $ 250,000. The remaining amount will be paid by UTG in the form of UTG common stock valued at $ 15.00 per share with a maximum number of shares to be issued of 500,000. However, there shall be no limit to the number of shares transferred to the extent that there are legal fees, settlements, damage payments or other losses as a result of certain legal action taken. The price and number of shares shall be adjusted for any applicable stock splits, stock dividends or other recapitalizations. For the five-year period starting January 1, 1998 and ending December 31, 2002, the Company had total earnings of $ 17,011,307 applicable to this covenant. Therefore, UTG did not meet the earnings requirements stipulated, and during 2003, UTG was required to issue 500,000 additional shares to FSF or its assigns.
2003 2002 2001 EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------------- --------------- ------------- ---------------- ------------- --------------- Outstanding at beginning of Period 0 $ 15.00 0 $ 15.00 19,108 $ 15.00 Granted 0 0.00 0 0.00 0 0.00 Exercised 0 0.00 0 0.00 0 0.00 Forfeited 0 15.00 0 15.00 19,108 15.00 ------------- --------------- ------------- ---------------- ------------- --------------- Outstanding at end of period 0 $ 15.00 0 $ 15.00 0 $ 15.00 ============= =============== ============= ================ ============= ===============
Diluted EPS Income available to common shareholders and $ assumed conversions 1,338,795 4,005,424 $ 0.33 =============== ================== =================
Income Shares Per-Share (Numerator) (Denominator) Amount --------------- ------------------ ----------------- Basic EPS Income available to common shareholders $ 2,308,096 3,733,432 $ 0.62 =================
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 year ending December 31, 2003, since the Company had a loss from continuing operation for the year presented, and any assumed conversion, exercise, or contingent issuance of securities would have an antidilutive effect on earnings per share. At December 31, 2002, UTG had an obligation to issue to FSF or its assigns 500,000 shares of UTG common stock, as the result of a failed earnings covenant (See note 10D to the consolidated financial statements above). As such, the computation of diluted earnings per share differs from basic earnings per share for the year ending December 31, 2002. UTG had no stock options outstanding for the year ended December 31, 2001. As such, the computation of diluted earnings per share is the same as basic earnings per share at December 31, 2001.
The other notes payable were incurred in April 2001 to facilitate the repurchase of common stock owned primarily by James E. Melville and Larry E. Ryherd, two former Officers and Directors of UTG, and members of their respective families. These notes bear interest at the fixed rate of 7% per annum (paid quarterly) with payments of principal to be made in five equal installments, the first principal payment in the amount of $ 777,199, was made on March 31, 2002. In December 2002 an advance principal payment of $ 113,522 was made on these notes. An additional principal payment of $ 705,499 was made during 2003. Subsequent to the current reporting period, in January 2004, UTG paid the remaining principal balance on these notes.
On April 1, 2002, UTG was extended a $ 5,000,000 line of credit (LOC) from an unaffiliated third party, Southwest Bank of St. Louis. The LOC expired one-year from the date of issue and was renewed for an additional one-year term. As collateral for any draws under the line of credit, the former FCC, which has now merged into UTG, pledged 100% of the common stock of its insurance subsidiary, UG. Borrowings under the LOC will bear interest at the rate of 0.25% in excess of Southwest Bank of St. Louis' prime rate. At December 31, 2003, the Company had no outstanding borrowings attributable to this LOC. During 2002 the Company had total borrowings of $ 400,000 on this LOC which were all repaid during the year. Draws on this LOC were used to retire the remaining subordinated debt, as described in note 11A above. Subsequent to the current reporting period, in January 2004, UTG drew on this LOC to repay the outstanding principal balances on the other notes payable.
As of December 31, 2003, the Company has $ 450,250 that has not been disbursed to former minority shareholders of FCC in connection with FCC's merger with and into UTG. The total consideration to be paid by the Company to the former minority shareholders as a result of the merger is $ 2,480,000 (see note 15 to the consolidated financial statements).
At December 31, 2002, the Company sold $ 115,000 in fixed maturity investments for which the cash had not yet been received. The receivable for these securities is included in the line item "Other assets" on the consolidated balance sheet.
In April 2001, the Company issued $ 3,885,996 in new debt in exchange for the acquisition of UTG and FCC common stock from two former officers and directors of the Company and their respective families.
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, 2003 these accounts have no balances 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) has issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities and Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
Tax Before-Tax (Expense) Net of Tax 2003 Amount or Benefit Amount ---------------------------------------------- ---------------- ----------------- ---------------
Unrealized holding losses during period $ (1,941,662) $ 679,582 $ (1,262,080) Less: reclassification adjustment for losses realized in net income 86,979 (30,443) 56,536 ---------------- ----------------- ---------------
Other comprehensive deficit $ (1,854,683) $ 649,139 $ (1,205,544) ================ ================= ===============
Unrealized holding gains during period $ 2,868,146 $ $ 1,864,295 (1,003,851) Less: reclassification adjustment for gains realized in net income (1,689) 591 (1,098) ---------------- ----------------- ---------------
In 2003, 2002 and 2001, the Company established a deferred tax liability of $ 803,095, $ 1,170,197 and $ 385,432, respectively, for the unrealized gains based on the applicable United States statutory rate of 35%.
Effect Effect Effect on Net on Basic on Diluted Income EPS EPS -------------------- --------------------- --------------------
2002 $ (160,823) $ (0.05) $ (0.04) 2001 (131,477) (0.04) (0.04)
Premiums and policy fees, net $ 4,276,861 $ 4,388,284 $ 3,725,823 $ 3,440,609 Net investment income 3,396,613 3,383,548 3,294,038 3,440,603 Total revenues 7,882,176 7,994,915 7,211,394 7,088,714 Policy benefits including dividends 4,835,106 4,609,999 5,110,590 4,930,553 Commissions and amortization of DAC and COI 688,618 578,688 501,283 532,722 Operating expenses 1,530,433 1,649,134 1,441,502 1,255,387 Operating income 755,809 1,095,700 86,789 311,445 Net income (loss) 477,034 722,679 327,499 (188,417) Basic earnings (loss) per share 0.14 0.21 0.08 (0.05)
Premiums and policy fees, net $ 4,554,451 $ 4,768,808 $ 4,137,361 $ 3,680,319 Net investment income 4,014,425 3,931,677 3,557,702 3,642,455 Total revenues 8,428,235 9,005,351 7,963,274 7,916,195 Policy benefits including dividends 4,937,725 5,193,310 4,586,257 4,807,794 Commissions and amortization of DAC and COI 929,415 621,810 511,470 773,199 Operating expenses 1,514,115 1,768,758 1,573,817 1,629,001 Operating income 1,008,366 1,323,667 1,183,712 624,140 Net income 343,858 975,292 645,873 343,073 Basic earnings per share 0.08 0.27 0.18 0.09