Total investment real estate holdings represent approximately 8% and 9% of the total assets of the Company, net of accumulated depreciation of $594,043 and $593,877 at year-end 2007 and 2006 respectively.
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.
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. 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 2007, 2006, and 2005, the Company issued $19,765,000, $5,359,000, and $24,576,000, respectively, in new mortgage loans.
The 2006 investment income results reflected a slight decrease over 2005 results. This is primarily related to real estate income reverting to a level that more closely matches Management expectations. Significant investments have been made in real estate that doesn’t provide consistent earnings. Over the life of the investment, however, Management expects these investments to provide favorable returns when real estate is sold and recognized as realized gains.
In recent periods, management focus has been placed on promoting and growing TPA services to unaffiliated life insurance companies. The Company receives monthly fees based on policy in force counts and certain other activity indicators, such as number of premium collections performed, or services performed. For the years ended 2007, 2006 and 2005, the Company received $1,781,173, $1,811,151 and $1,170,824 for this work, respectively. These TPA revenue fees are included in the line item “other income” on the Company’s consolidated statements of operations. No new TPA contracts were entered into during 2007. However, the Company intends to continue to pursue other TPA arrangements, through an alliance with Fiserv to insurance companies seeking business process outsourcing solutions. Fiserv is responsible for the marketing and sales function for the alliance, as well as providing the data center operations. UTG staffs the administration effort. Management believes this alliance with Fiserv positions the Company to generate additional revenues by utilizing the Company’s current excess capacity and administrative services. Fiserv (NASDAQ: FISV) is an independent, full-service provider of integrated data processing and information management systems to the financial industry, headquartered in Brookfield, Wisconsin. Management believes this area is a growing market and the Company is well positioned to serve this market.
Commissions and amortization of deferred policy acquisition costs decreased significantly in 2007 compared to 2006 due to the acquisition of ACAP. The subsidiaries of ACAP have reinsurance agreements in place with outside companies that drive the majority of this number. Excluding the results of the acquired companies, this line item was comparable to 2006. This line item was also comparable in 2006 to 2005. 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.
The Company had a net income of $2,142,619, $3,869,720 and $1,260,223 in 2007, 2006 and 2005 respectively. The decrease in net income in 2007 is primarily related to a decrease in realized investment gains as compared to 2006. The increase in net income in 2006 is primarily related to the significant increase in realized investment gains from the sale of certain common stock holdings and the sale of real estate holdings. The net income in 2005 was mainly attributable to the gain from the sale of the common stock of BNL during the second quarter of 2005. The Companies acquired in 2006 have generally performed as anticipated by management during 2007.
At December 31, 2007, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets or shareholders' equity. The Company has identified securities it may sell and classified them as "investments held for sale". Investments held for sale are carried at market, with changes in market value charged directly to shareholders' equity. To provide additional flexibility and liquidity, the Company has categorized almost all fixed maturity investments acquired in recent periods as available for sale.
Cost of insurance acquired decreased $4,471,138 in 2007 compared to 2006. When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. In 2007 and 2006, amortization decreased the asset by $4,282,715 and $2,850,725, respectively. No impairments of this asset were recorded for the periods presented.
Total shareholders' equity increased 8% in 2007 compared to 2006. This increase is primarily due to the current year net income of approximately $2,143,000 and by an unrealized gain in value of approximately $1,332,000 on investments held. The increase in value of investments held relates primarily to a drop in interest rates in the marketplace during the last half of the year. Additionally, the Company received approximately $446,000 from the issuance of additional shares of common stock under the Employee and Director Stock Purchase Plan, and repurchased approximately $193,000 of its common stock in the open market during the current year.
Each year, the NAIC calculates financial ratio results (commonly referred to as IRIS ratios) for each insurance company. These ratios compare key financial data pertaining to the statutory balance sheet and income statement. The results are then compared to pre-established normal ranges determined by the NAIC. Results outside the range typically require explanation to the domiciliary insurance department. At year-end 2007, UG had one ratio outside the normal range and AC and TI had 2 and 4 items, respectively, outside of the normal range. All variances reported were anticipated by management. These ratios are discussed in more detail in the Regulatory Environment discussion included in this Item 7.
Net cash provided by (used in) financing activities was $ (2,409,736), $6,205,830 and $1,901,266 for 2007, 2006 and 2005, respectively. Cash used in financing activities during 2007 was mostly the result of debt reduction. The acquisition of Acap Corporation accounted for a majority of the activity in this area during 2006.
Policyholder contract deposits decreased 8% in 2007 compared to 2006 and 6% in 2006 compared to 2005. The decrease in policyholder contract deposits relates to the declining in force business of the Company. Management anticipates continued moderate declines in contract deposits. Policyholder contract withdrawals have increased 8% in 2007 compared to 2006 and 3% in 2006 compared to 2005. The change in policyholder contract withdrawals is not attributable to any one significant event. Factors that influence policyholder contract withdrawals are fluctuation of interest rates, competition and other economic factors.
UTG, Inc. borrowed funds in order to complete the Acap Corporation acquisition from First Tennessee Bank National Association through execution of an $18,000,000 promissory note. To secure the note, UTG, Inc. has pledged 100% of the common stock of its subsidiary, UG. At the time of closing on December 8, 2006, UTG, Inc. borrowed $15,700,278 on the promissory note. The remaining available balance was able to be drawn on at any time during the year and a portion of it was used in the purchase of the stock put option shares of Acap Corporation as they were presented to UTG, Inc. for purchase under the stock put option agreement entered into during 2006 as part of the acquisition. The promissory note carries a variable rate of interest based on the 3 month LIBOR rate plus 180 basis points. The initial rate was 7.15%. Interest is payable quarterly. Principal is payable annually beginning at the end of the second year in five installments of $3,600,000. The loan matures on December 7, 2012. During the year ended December 31, 2007, UTG borrowed $1,994,176 and has repaid $3,450,005 on the note, leaving a balance outstanding at December 31, 2007 of $13,544,449. No additional borrowings on this note are anticipated.
UG has a $3,300,000 line of credit (LOC) available from the First National Bank of Tennessee. The LOC is for a one-year term from the date of issue. The interest rate on the LOC is variable and indexed to be the lowest of the U.S. prime rates as published in the Wall Street Journal, with any interest rate adjustments to be made monthly. At December 31, 2007, the Company had no outstanding borrowings attributable to this LOC. During 2007, 2006, and 2005, the Company had $5,800,000, $2,000,000, and $1,500,000 in borrowings against this line, respectively, which were repaid during each year.
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, 2007 UG statutory shareholders' equity was $30,130,717. At December 31, 2007, UG statutory net income was $4,661,648. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. UG paid ordinary dividends of $3,000,000 to UTG during 2007. UG paid an ordinary dividend of $5,100,000 during 2006. There were no dividends paid during 2005.
AC and TI are Texas domiciled insurance companies, which requires eleven days prior notification to the insurance commissioner for the payment of an ordinary dividend. Ordinary dividends are defined as the greater of: a) prior year statutory earnings or b) 10% of statutory capital and surplus. At December 31, 2007 AC and TI statutory shareholders' equity was $8,165,775 and $2,432,191, respectively. At December 31, 2007, AC and TI statutory net income was $999,329 and $289,642, respectively. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. AC paid ordinary dividends to ACAP of $500,000 and $605,000 in 2007 and 2006, respectively. TI paid AC ordinary dividends of $250,000 and $0 in 2007 and 2006, respectively.
At year-end 2007, UG had one ratio outside the normal range. AC had two ratios outside the normal range. TI had four ratios outside the normal range. Each of the ratios outside the normal range was anticipated by Management. UG’s ratio relates to the Company’s affiliated investments. The Company has made investments in real estate projects, which have been consolidated into these financial statements through limited liability companies. The limited liability companies were created to provide additional risk protection to the Company. While this negatively impacts this ratio, the Company believes that this structure is in the best interest of the Company and these investments will have a positive long-term impact on the Company. Additionally, the newly acquired Acap Corporation is a subsidiary of UG. AC’s ratios outside the normal range relate to a change in premium and product mix. AC, like UG, has not actively marketed life products in the past several years. Management currently places little emphasis on new business production, believing resources could be better utilized in other ways. Current sales primarily represent sales to existing customers through additional insurance needs or conservation efforts. The sale of the A&H line of business at the end of 2006 had a significant role in these two ratios. TI’s ratios relate to the net change in capital and surplus, gross change in capital and surplus, surplus relief, and change in premium. The repayment of outstanding surplus relief of $330,842 in 2007 accounts for three of the ratio variances. The change in premium is the result of the sale of TI’s A & H line of business at the end of 2006.
The FASB also issued Statement No. 160, Non-controlling Interests in Consolidated Financial Statements-an amendment of ARB No. 51. This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning after January 01, 2008. Management is currently researching what effect if any that this statement will have on future reporting.
Registered Public Accounting Firm for the years ended December 31, 2007 and 2006
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
The Company’s significant accounting policies, consistently applied in the preparation of the accompanying consolidated financial statements, are summarized as follows.
NATURE OF OPERATIONS - UTG, Inc., is an insurance holding company, which sells individual life insurance products through its insurance subsidiaries. The Company's principal market is the mid-western United States and Texas. 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.
BASIS OF PRESENTATION - The financial statements of UTG, Inc., and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America which differ from statutory accounting practices permitted by insurance regulatory authorities.
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.
INCOME TAXES - Income taxes are reported under Statement of Financial Accounting Standards Number 109. Deferred income taxes are recorded to reflect the tax consequences on future periods of differences between the tax bases of assets and liabilities and their financial reporting amounts at the end of each such period.
PARTICIPATING INSURANCE - Participating business represents 9% and 8% of life insurance in force at December 31, 2007 and 2006, respectively. Premium income from participating business represents 42%, 33%, and 21% of total premiums for the years ended December 31, 2007, 2006 and 2005, respectively. The amount of dividends to be paid is determined annually by the insurance subsidiary's Board of Directors. Earnings allocable to participating policyholders are based on legal requirements that vary by state.
AC and TI are Texas domiciled insurance companies, which requires eleven days prior notification to the insurance commissioner for the payment of an ordinary dividend. Ordinary dividends are defined as the greater of: a) prior year statutory earnings or b) 10% of statutory capital and surplus. At December 31, 2007 AC and TI statutory shareholders' equity was $8,165,775 and $2,432,191, respectively. At December 31, 2007, AC and TI statutory net income was $999,329 and $289,642, respectively. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. AC paid ordinary dividends of $500,000 in 2007. TI paid ordinary dividends of $250,000 during 2007.
The companies of the group file separate federal income tax returns except for Acap Corporation, AC, TI and Imperial Plan, which file a consolidated life/non-life federal income tax return.
ACAP and its consolidated subsidiaries for tax purposes generated a net operating loss during 2007 of $1,156,777. The Company has established a deferred tax asset of $404,872 relating to this operating loss carryforward and has established an offsetting allowance of $404,872.
The fair value of investments with sustained gross unrealized losses at December 31, 2007 and 2006 are as follows:
The unrealized losses of fixed maturity investments were primarily caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. The Company regularly reviews its investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary. Based on an evaluation of the issues, including, but not limited to, intentions to sell or ability to hold the fixed maturity and equity securities with unrealized losses for a period of time sufficient for them to recover; the length of time and amount of the unrealized loss; and the credit ratings of the issuers of the investments, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2007 and 2006.
An analysis of sales, maturities and principal repayments of the Company's fixed maturities portfolio for the years ended December 31, 2007, 2006 and 2005 is as follows:
INVESTMENTS ON DEPOSIT - At December 31, 2007, investments carried at approximately $9,217,000 were on deposit with various state insurance departments.
The financial statements include various estimated fair value information at December 31, 2007 and 2006, 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.
As is customary in the insurance industry, the insurance subsidiaries cede insurance to, and assume 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, 2007, the Company had gross insurance in force of $2.155 billion of which approximately $561 million was ceded to reinsurers.
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. The PALIC agreement accounts for approximately 66% of UG’s reinsurance reserve credit, as of December 31, 2007.
On September 30, 1998, UG entered into a coinsurance agreement with The Independent Order of Vikings, (IOV) an Illinois fraternal benefit society. Under the terms of the agreement, UG agreed to assume, on a coinsurance basis, 25% of the reserves and liabilities arising from all in-force insurance contracts issued by the IOV to its members. At December 31, 2007, the IOV insurance in-force assumed by UG was approximately $1,656,000, with reserves being held on that amount of approximately $388,000.
On June 7, 2000, UG assumed an already existing coinsurance agreement, dated January 1, 1992, between Lancaster Life Reinsurance Company (LLRC), an Arizona corporation and Investors Heritage Life Insurance Company (IHL), a corporation organized under the laws of the Commonwealth of Kentucky. Under the terms of the agreement, LLRC agreed to assume from IHL a 90% quota share of new issues of credit life and accident and health policies that have been written on or after January 1, 1992 through various branches of the First Southern National Bank. The maximum amount of credit life insurance that can be assumed on any one individual’s life is $15,000. UG assumed all the rights and obligations formerly held by LLRC as the reinsurer in the agreement. LLRC liquidated its charter immediately following the transfer. At December 31, 2007, the IHL agreement has insurance in-force of approximately $2,134,000, with reserves being held on that amount of approximately $31,000.
At December 31, 1992, AC entered into a reinsurance agreement with Canada Life Assurance Company (“the Canada Life agreement”) that fully reinsured virtually all of its traditional life insurance policies. The reinsurer’s obligations under the Canada Life agreement were secured by assets withheld by AC representing policy loans and deferred and uncollected premiums related to the reinsured policies. AC continues to administer the reinsured policies, for which it receives an expense allowance from the reinsurer. At December 31, 2007, the Canada Life agreement has insurance in-force of approximately $80,785,000, with reserves being held on that amount of approximately $40,519,000.
In June 2002, the Company entered into a five-year contract with Fiserv for services related to its purchase of the “ID3” software system. The contract was amended during 2006 for a five year period ended 2011. Under the contract, the Company is required to pay $8,333 per month in software maintenance costs and a minimum charge of $14,000 per month in offsite data center costs, for a five-year period ending in 2011.
On December 31, 2006, the Company entered into a 100% coinsurance agreement whereby the insurance subsidiaries, AC and TI, ceded all of their A&H business to an unaffiliated third party. As part of the agreement, AC and TI remain contingently liable for claims incurred prior to the effective date of the agreement, for a period of one year. At the end of the one year period, an accounting of these claims shall be produced. Any difference in the actual claims to the claim reserve liability transferred shall be refunded to / paid by AC and TI. As of December 31, 2007, AC owes $93,384 and TI owes $902 to the unaffiliated third party. The amounts have been included in each company’s current year financial statements. During 2007 the policies coinsured under these agreements were assumption reinsured by Reserve National, thus releasing the Company form any further contingent liability under these policies.
On July 1, 2005, United Trust Group, Inc., an Illinois corporation, merged with and into its wholly-owned subsidiary, UTG, Inc. (UTG), a Delaware corporation, for the purpose of effecting a change in the Company’s state of incorporation from Illinois to Delaware. The merger was effected pursuant to that certain Agreement and Plan of Merger dated as of April 4, 2005, which was approved by the boards of directors of both UTG and United Trust Group, Inc. The merger was approved by the holders of two-thirds of the outstanding shares of common stock of United Trust Group, Inc. at the 2005 annual meeting of shareholders on June 15, 2005, and by the sole stockholder of UTG, Inc. on June 15, 2005.
As part of the acquisition of ACAP on December 8, 2006, UTG loaned $3,357,000 to ACAP. ACAP used the proceeds for the repayment of existing debt with an unaffiliated financial institution and to retire all of its outstanding preferred stock. The terms of the inter-company loan mirror the interest rate and repayment requirements of the debt with First Tennessee Bank National Association. During 2007, ACAP made a payment reducing the principal on the loan and paid interest of $227,685. As of December 31, 2007, the balance of the loan is $3,035,000.
During June 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 total 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. During 2006, UG entered into an additional lease agreement for a 27.5% interest in a second plane with Bandyco, LLC. The lease term is for a period of five years at a total cost of $166,913. 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 January 1, 1993, UTG entered an agreement with UG pursuant to which UTG provided management services necessary for UG to carry on its business. UG paid $5,875,133 and $5,054,918 to UTG in 2006 and 2005, respectively, under this arrangement.
Effective January 1, 2007, UTG entered into administrative services and cost sharing agreements with its subsidiaries, UG, AC and TI. Under these arrangements, each company pays its proportionate share of expenses of the entire group, based on an allocation formula. During 2007, UG, AC and TI paid $3,919,684, $3,314,176 and $859,918, respectively.
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 loanorigination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $85,612, $93,288 and $76,970 in servicing fees and $54,281, $23,214 and $112,109 in origination fees to FSNB during 2007, 2006 and 2005, 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 $30,327, $85,576 and $63,318 in 2007, 2006 and 2005, 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 $249,209, $173,863 and $160,272 in 2007, 2006 and 2005, respectively, which included salaries and other benefits.
On June 5, 2001, the Board of Directors of UTG authorized the repurchase in the open market or in privately negotiated transactions of up to $1 million of UTG's common stock. On June 16, 2004, an additional $1 million was authorized for repurchasing shares. On April 18, 2006, an additional $1 million was authorized for repurchasing shares. Repurchased shares are available for future issuance for general corporate purposes. This program can be terminated at any time. Open market purchases are generally limited to a maximum per share price of $8.00. Through March 1, 2008, UTG has spent $2,668,776 in the acquisition of 386,796 shares under this program.
In accordance with Statement of Financial Accounting Standards No. 128, the computation of diluted earnings per share is the same as basic earnings per share for the years ending December 31, 2007, 2006 and 2005, as there were no outstanding securities, options or other offers that give the right to receive or acquire common shares of UTG.
On December 8, 2006, UTG borrowed funds from First Tennessee Bank National Association through execution of an $18,000,000 promissory note. The note is secured by the pledge of 100% of the common stock of UG. The promissory note carries a variable rate of interest based on the 3 month LIBOR rate plus 180 basis points. The initial rate was 7.15%. Interest is payable quarterly. Principal is payable annually beginning at the end of the second year in five installments of $3,600,000. The loan matures on December 7, 2012. The Company borrowed $1,994,176 and has made principal payments of $3,450,005 during 2007. The funds borrowed during 2007 were used to acquire ACAP shares subject to the put options as they were presented to UTG during the year. At December 31, 2007, the outstanding principal balance on this debt was $13,544,449.
On June 1, 2005, UG was extended a $3,300,000 line of credit from the First National Bank of Tennessee. The LOC is for a one-year term from the date of issue. The interest rate on the LOC is variable and indexed to be the lowest of the U.S. prime rates as published in the Wall Street Journal, with any interest rate adjustments to be made monthly. During 2007 and 2006, UG had borrowings and repayments from the LOC of $3,300,000 and $2,500,000, respectively. At December 31, 2007, and 2006 the Company had no outstanding borrowings attributable to this LOC.
In November 2007, the Company became a member of the FHLB. This membership allows the Company access to additional credit up to a maximum of 50% of the total assets of UG. To be a member of the FHLB, the Company was required to purchase shares of common stock of FHLB. Borrowing capacity is based on 50 times each dollar of stock acquired in FHLB above the “base membership” amount. The Company’s current LOC with the FHLB is $15,000,000. During 2007, the Company had borrowings of $5,443,350 and repayments of $5,443,350. At December 31, 2007, the Company had no outstanding borrowings attributable to this LOC.
AC and TI each have a line of credit in place through Frost National Bank for $210,000 and $160,000, respectively. These lines have been in place since 2004. The lines are for one year terms, interest payable quarterly at a floating interest rate which is the Lender’s prime rate. Principal is due upon maturity. The lines matured during the second quarter of 2007. Management has determined these lines are no longer needed, therefore, upon maturity in 2007, these lines were not renewed. Neither of the lines have had any activity during 2007.
The consolidated scheduled principal reductions on the notes payable for the next five years are as follows:
On a cash basis, the Company paid $1,271,847, $1,469 and $13 in interest expense for the years 2007, 2006 and 2005, respectively. The Company paid $407,247, $503,214 and $0 in federal income tax for 2007, 2006 and 2005, respectively.
Because UTG serves primarily individuals located in four states, the ability of our customers to pay their insurance premiums is impacted by the economic conditions in these areas. As of December 31, 2007, approximately 60% of our total direct premium was collected from Illinois, Ohio, Texas and West Virginia. Thus, results of operations are heavily dependent upon the strength of these economies.
The Financial Accounting Standards Board (“FASB”) issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments - An amendment of FASB Statements No. 133 and 140. The Statement improves the financial reporting by eliminating the exemption from applying Statement No. 133 to interest in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instrument. The Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company will account for all qualifying financial instruments in accordance with the requirements of Statement No. 155, should this apply.
The FASB also issued Statement No. 157, Fair Value Measurements. The Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Statement does not require any new fair value measurements; however applies under other pronouncements that require or permit fair value measurements. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company will adjust all fair value measurements in accordance with the requirements of Statement No. 157, should this apply.
Pursuant to the terms of a stock purchase agreement, on December 8, 2006, the Company completed an agreement to purchase a majority of the issued and outstanding common stock of Acap Corporation (“ACAP”). ACAP is a Delaware corporation which owns 100% of the issued and outstanding stock of American Capitol Insurance Company (AC), a Texas life insurance company, which in turn owns 100% of the issued and outstanding stock of Texas Imperial Life Insurance Company (TI) and Imperial Plan, Inc (IP).
At the closing of the Agreement, the Company purchased a total of 1,843 shares of common stock of ACAP for an aggregate purchase price of $17,593,278.
The following table summarizes certain unaudited operating results of UTG as though the acquisition of ACAP had taken place on January 1, 2006 and 2005 respectively.
In 2007, 2006 and 2005, the Company established a deferred tax liability of $2,389,697, $1,541,623 and $2,970,111 respectively, for the unrealized gains based on the applicable United States statutory rate of 35%.