Changes in the federal income tax laws and regulations which may affect the relative tax advantages of the Company's products.
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 to the consolidated financial statements.
The Company accounts for its investments in debt and equity securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company has classified all of its investments as available-for-sale. These investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets for available-for-sale securities. Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Operations, using the constant yield method over the period to maturity. Net realized gains and losses on investments are computed using the specific identification method and are reported in the Consolidated Statements of Operations.
The provision for deferred income taxes is based on the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized by applying enacted statutory tax rates to temporary differences between amounts reported in the Consolidated Financial Statements and the tax bases of existing assets and liabilities. A valuation allowance is recognized for the portion of deferred tax assets that, in management's judgment, is not likely to be realized. The effect on deferred income taxes of a change in tax rates or laws is recognized in income tax expense in the period that includes the enactment date.
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 2008 and 2007, the Company received $1,810,775 and $1,781,173 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 2008. However, the Company intends to continue to pursue other TPA arrangements, through an alliance with Stone River to insurance companies seeking business process outsourcing solutions. Stone River 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 Stone River positions the Company to generate additional revenues by utilizing the Company’s current excess capacity and administrative services. Stone River 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.
The Company had a net income of $653,754 and $2,142,619 in 2008 and 2007 respectively. The decrease in net income in 2008 is primarily related to a decrease in realized investment gains as compared to 2007. The Companies acquired in 2006 have generally performed as anticipated by management during 2007 and 2008.
Mortgage loan investments represent 9% and 10% of total assets of the Company at year-end 2008 and 2007, respectively. The Company’s mortgage loan investments result from opportunities available through FSNB, an affiliate of Mr. Jesse T. Correll. Mr. Correll is the CEO and Chairman of the Board of Directors of UTG, and directly and indirectly through affiliates, its largest shareholder. FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market. During 2008 and 2007 the Company issued approximately $5,242,000 and $19,765,000 in new mortgage loans, respectively. These new loans were originated through FSNB and funded by the Company through participation agreements with FSNB. FSNB services all the mortgage loans of the Company. 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 $93,572 and $85,612 in servicing fees and $19,283 and $54,281 in origination fees to FSNB during 2008 and 2007, respectively.
Total investment real estate holdings represent approximately 9% and 8% of the total assets of the Company, net of accumulated depreciation, at year-end 2008 and 2007 respectively. The Company has made several investments in real estate in recent years. Expected returns on these investments exceed those available in fixed income securities. However, these returns may not always be as steady or predictable.
Cash and cash equivalents increased significantly, by approximately $22,249,000, or 125%, comparing 2008 to 2007. As already discussed, Management has taken the current economic crisis very seriously refusing to sit on the sidelines and not using hope as an investment strategy. As Management put extensive efforts into evaluating each investment holding, many were sold with the cash received not immediately reinvested.
Equity securities decreased approximately $2,042,000 during 2008. The decrease is attributable to Management’s ongoing portfolio evaluation process amidst the current steep economic downturn and credit crisis. Many financial institution common stock holdings were subsequently sold as a result of this, with not all of the proceeds being reinvested.
Total liabilities decreased 3% in 2008 compared to 2007. This decrease is attributable primarily to a decrease in the total future policy benefits held. As policies in force terminate, the corresponding reserve liability held for those policies is released.
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 2008, UG had one ratio outside the normal range and AC and TI had 3 and 2 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.
The Company has three principal needs for cash - the insurance company’s contractual obligations to policyholders, the payment of operating expenses and servicing its outstanding debt. Cash and cash equivalents as a percentage of total assets were 9% and 4% as of December 31, 2008 and 2007, respectively. Fixed maturities as a percentage of total invested assets were 58% and 60% as of December 31, 2008 and 2007, respectively.
Cash provided by operating activities was $1,195,231 and $809,699 in 2008 and 2007, respectively. Reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows.
Net cash used in financing activities was $ (4,898,383) and $(2,409,736) for 2008 and 2007, respectively. Cash used in financing activities during 2008 was mostly the result of debt reduction.
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, 2008 and 2007, the Company had no outstanding borrowings attributable to this LOC. During 2008 and 2007, the Company had $0 and $5,800,000 in borrowings against this line, respectively, which were repaid during each year.
In November 2007, UG became a member of the FHLB. This membership will allow 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, UG 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 2008 and 2007, the Company had borrowings and repayments of $4,000,000 and $5,443,350, respectively. At December 31, 2008 and 2007, the Company had no outstanding borrowings attributable to this LOC.
During 2002, UTG and Stone River formed an alliance between their respective organizations to provide third party administration (TPA) services to insurance companies seeking business process outsourcing solutions. Stone River will be responsible for the marketing and sales function for the alliance, as well as providing the operations processing service for the Company. The Company will staff the administration effort. To facilitate the alliance, the Company has converted part of its existing business and all TPA clients to “ID3”, a software system owned by Stone River to administer an array of life, health and annuity products in the insurance industry. Stone River is an independent, full-service provider of integrated data processing and information management systems to the financial industry, headquartered in Brookfield, Wisconsin. In addition, the Company entered into a five-year contract with Stone River for services related to their purchase of the “ID3” software system. Under the contract, the Company is required to pay $8,333 per month in software maintenance costs and a monthly fee for offsite data center costs, based on the number and type of policies being administered the ID3 software system through mid-2011.
UTG is a holding company that has no day-to-day operations of its own. Funds required to meet its expenses, generally costs associated with maintaining the Company in good standing with states in which it does business, and the servicing of its debt are primarily provided by its subsidiaries. On a parent only basis, UTG's cash flow is dependent on management fees received from its insurance subsidiaries, stockholder dividends from its subsidiaries and earnings received on cash balances. On December 31, 2008, substantially all of the consolidated shareholders equity represents net assets of its subsidiaries. The Company's insurance subsidiaries have maintained adequate statutory capital and surplus. 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.
Currently, the insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including the power to: (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus; and (x) regulate the type and amount of permitted investments. Insurance regulation is concerned primarily with the protection of policyholders. The Company cannot predict the impact of any future proposals, regulations or market conduct investigations. UG is domiciled in the state of Ohio. AC and TI are both domiciled in the state of Texas.
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 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:
At December 31, 2008, UG has a ratio that is in excess of 4.6, which is 460% of the authorized control level. AC and TI have ratios in excess of 10.4 and 20.0, which is 1040% and 2000% of the authorized control level, respectively. Accordingly, all three companies meet the RBC requirements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financials statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of UTG’s internal controls over financial reporting as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), in Internal Control-Integrated Framework. Based on our assessment we concluded that, as of December 31, 2008 UTG’s internal control over financial reporting is effective.
We have audited the accompanying consolidated balance sheets of UTG, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for years then ended. UTG, Inc’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
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 consolidated financial statements are free of material misstatement. 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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.
We have also audited Schedule I as of December 31, 2008, and the Schedules II, IV and V as of December 31, 2008 and 2007, of UTG, Inc. and subsidiaries and Schedules II, IV and V for the years then ended. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.
provided by operating activities net of changes in assets and liabilities
ORGANIZATION - At December 31, 2008, the significant majority-owned subsidiaries of UTG, Inc were as depicted on the following organizational chart.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Registrant and its majority-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.
Mortgage loans on real estate - at unpaid balances, adjusted for amortization of premium or discount, less allowance for possible losses.
CASH EQUIVALENTS - The Company considers certificates of deposit and other short-term instruments with an original purchased maturity of three months or less to be cash equivalents.
Benefit reserves for universal life insurance and interest sensitive life insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims in excess of related policy account balances. Interest crediting rates for universal life and interest sensitive products range from 4.0% to 5.5% as of December 31, 2008 and 2007.
POLICY AND CONTRACT CLAIMS - Policy and contract claims include provisions for reported claims in process of settlement, valued in accordance with the terms of the policies and contracts, as well as provisions for claims incurred and unreported based on prior experience of the Company. Incurred but not reported claims were $1,312,848 and $1,232,848 as of December 31, 2008 and 2007, respectively.
COST OF INSURANCE ACQUIRED - 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 profits from the acquired policies. The Company utilized 9% discount rate on approximately 14% of the business, 12% discount rate on approximately 83% of the business and 15% discount rate on approximately 3% of the business. 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 7% of the balance, 12% on approximately 50% of the balance and 15% on 43% of the balance. The interest rates vary due to differences in the blocks of business. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.
PROPERTY AND EQUIPMENT - Company-occupied property, data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of $2,896,107 and $2,681,009 at December 31, 2008 and 2007, 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 $214,245 and $258,298 for the years ended December 31, 2008 and 2007, respectively.
EARNINGS PER SHARE - Earnings per share (EPS) are reported under Statement of Financial Accounting Standards Number 128. The objective of both basic EPS and diluted EPS is to measure the performance of an entity over the reporting period. Basic EPS is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator also is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares.
PARTICIPATING INSURANCE - Participating business represents 9% and 9% of life insurance in force at December 31, 2008 and 2007, respectively. Premium income from participating business represents 37% and 42% of total premiums for the years ended December 31, 2008 and 2007, 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.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform to the 2008 presentation. Such reclassifications had no effect on previously reported net income or shareholders' equity.
IMPAIRMENT OF LONG LIVED ASSETS - The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long lived assets may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. In the opinion of management, no such impairment existed at December 31, 2008.
At December 31, 2008, 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, AC and TI’s dividend limitations are described below.
Ohio domiciled insurance companies require five days prior notification to the insurance commissioner for the payment of an ordinary dividend. Ordinary dividends are defined as the greater of: a) prior year statutory earnings or b) 10% of statutory capital and surplus. For the year ended December 31, 2008, UG had a statutory gain from operations of $4,825,058. At December 31, 2008, UG's statutory capital and surplus amounted to $27,483,161. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. UG paid a dividend of $3,000,000 to UTG in 2007 and again in 2008. None of the dividends paid were considered to be an extraordinary dividend.
Until 1984, insurance companies were taxed under the provisions of the Life Insurance Company Income Tax Act of 1959 as amended by the Tax Equity and Fiscal Responsibility Act of 1982. These laws were superseded by the Deficit Reduction Act of 1984. All of these laws are based primarily upon statutory results with certain special deductions and other items available only to life insurance companies. Under the provision of the pre-1984 life insurance company income tax regulations, a portion of “gain from operations” of a life insurance company was not subject to current taxation but was accumulated, for tax purposes, in a special tax memorandum account designated as “policyholders’ surplus account”. Federal income taxes will become payable on this account at the then current tax rate when and if distributions to shareholders, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income maintained in the “shareholders surplus account”. As part of the American Jobs Creation Act of 2004, Congress authorized a limited opportunity for life insurance companies to recognize the balance in the “policyholders’ surplus account” and not pay any federal income tax. This window of opportunity expired December 31, 2006. During 2006, each of the insurance subsidiaries took advantage of this opportunity. As of December 31, 2006, none of the insurance subsidiaries had a balance remaining in the “policyholders’ surplus account”.
In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109" ("Interpretation 48"), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The recognition threshold is based on a determination of whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
The Company does not have any unrecognized tax benefits resulting from tax positions taken that is believed by management to be potentially challenged and disallowed by taxing authorities.
The amortized cost and estimated market values of investments in securities including investments held for sale are as follows:
The Company held one fixed maturity investment of $4,781,639 at December 31, 2008 and did not hold any fixed maturity investments at December 31, 2007 that exceeded 10% of shareholder’s equity. The Company held two equity investments totaling $12,157,539 and two equity investments totaling $18,611,018 that exceeded 10% of shareholder’s equity at December 31, 2008 and 2007, respectively.
The unrealized losses of fixed maturity investments were primarily due to financial market participants perception of increased risks associated with the current market environment, resulting in higher interest rates. 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 unrealized losses of equity investments were primarily caused by normal market fluctuations in publicly traded securities. 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 held one investment as other-than-temporarily impaired and did not consider any other investments to be other-than-temporarily impaired at December 31, 2008 and 2007, respectively.
Effective January 1, 2008, the Company adopted SFAS 157 which requires enhanced disclosures of assets and liabilities carried at fair value. SFAS 157 established a hierarchical disclosure framework based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. SFAS 157 defines the input levels as follows:
Level 3 - Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. The Company does not have any Level 3 financial assets or liabilities.
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, 2008, the Company had gross insurance in force of $2.037 billion of which approximately $491 million was ceded to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The Company monitors the solvency of its reinsurers in seeking to minimize the risk of loss in the event of a failure by one of the parties. The primary reinsurers of the Company are large, well capitalized entities.
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 65% of UG’s reinsurance reserve credit, as of December 31, 2008.
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, 2008, the IOV insurance in-force assumed by UG was approximately $1,637,000, with reserves being held on that amount of approximately $382,000.
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, 2008, the Canada Life agreement has insurance in-force of approximately $73,639,000, with reserves being held on that amount of approximately $38,523,000.
During 1997, AC acquired 100% of the policies in force of World Service Life Insurance Company through a combination of assumption reinsurance and coinsurance. While 91.42% of the acquired policies are coinsured under the Canada Life agreement, AC did not coinsure the balance of the policies. AC retains the administration of the reinsured policies, for which it receives an expense allowance from the reinsurer. Canada Life currently holds an "A+" (Superior) rating from A.M. Best.
The treaty with Canada Life provides that AC is entitled to 85% of the profits (calculated pursuant to a formula contained in the treaty) beginning when the accumulated profits under the treaty reach a specified level. As of December 31, 2008, there remains $473,304 in profits to be generated before AC is entitled to 85% of the profits. Should future experience under the treaty match the experience of recent years, which cannot reliably be predicted to occur, the accumulated profits would reach the specified level towards the end of 2009. However, regarding the uncertainty as to when the specified level may be reached, it should be noted that the experience has been erratic from year to year and the number of policies in force that are covered by the treaty diminishes each year.
All reinsurance for TI was with a single, unaffiliated reinsurer, Hannover Life Reassurance (Ireland) Limited ("Hannover"), secured by a trust account containing letters of credit. TI administered the reinsurance policies, for which it received an expense allowance from Hannover. The Hannover treaty provided that TI could recapture the treaty without a charge to surplus under statutory accounting beginning when the accumulated profits (calculated pursuant to a formula contained in the treaty) reached a specified level. As of December 31, 2007, there remained $91,168 in profits to be generated before TI could recapture the treaty without a surplus charge. During early 2008, $91,168 was repaid through profits generated on the block of business covered by the agreement and the treaty was recaptured April of 2008. At December 31, 2008, there is no outstanding money on the surplus aid.
On December 31, 2006, AC and TI entered into 100% coinsurance agreements whereby each company ceded all of its A&H business to an unaffiliated reinsurer, Reserve National Insurance Company (Reserve National). As part of the agreement, the Company remained 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, on December 31, 2007, an accounting of these claims was produced. Any difference in the actual claims to the claim reserve liability transferred will be refunded to / paid by the Company. At December 31, 2007, AC owed $93,384 and TI owed $902 to the unaffiliated third party. The amounts were included in each company’s 2007 financial statements. Reserve National currently holds an “A-“ (Excellent) rating by A.M. Best. During 2007, the policies coinsured under these agreements were assumption reinsured by Reserve National, thus releasing the Company from any further contingent liability under these policies. During March of 2008, AC paid $93,384 and TI paid $902 to the unaffiliated third party.
On June 10, 2002 UTG and Stone River formed an alliance between their respective organizations to provide third party administration (TPA) services to insurance companies seeking business process outsourcing solutions. Stone River is responsible for the marketing and sales function for the alliance, as well as providing the operations processing service for the Company. The Company will staff the administration effort. Stone River is an independent, full-service provider of integrated data processing and information management systems to the financial industry, headquartered in Brookfield, Wisconsin.
In June 2002, the Company entered into a five-year contract with Stone River 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. During the first quarter of 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 December 31, 2007, North Plaza was liquidated, with its assets and liabilities transferred into its 100% owned parent company, UG.
On February 20, 2003, UG purchased $4,000,000 of a trust preferred security offering issued by FSBI. The security has a mandatory redemption after 30 years with a call provision after 5 years. The security pays a quarterly dividend at a fixed rate of 6.515%. The Company received $264,942 and $264,219 of dividends in 2008 and 2007, respectively.
Respective domiciliary insurance departments have approved the agreements of the insurance companies and it is Management's opinion that where applicable, costs have been allocated fairly and such allocations are based upon accounting principles generally accepted in the United States of America.
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 $93,572 and $85,612 in servicing fees and $19,283 and $54,281 in origination fees to FSNB during 2008 and 2007, respectively.
On June 30, 2008, UG paid a cash dividend of $1,000,000 to UTG, Inc. An additional dividend of $2,000,000 was paid by UG to UTG, Inc. on December 18, 2008. On July 13, 2007, UG paid a cash dividend of $3,000,000 to UTG, Inc. AC paid cash dividends to its parent, ACAP, of $0 and $500,000 in 2008 and 2007, respectively. TI paid cash dividends to AC of $0 and $250,000 in 2008 and 2007, respectively. These dividends were comprised entirely of ordinary dividends. No regulatory approvals were required prior to the payment of these dividends.
The original issue price of shares at the time this program began was established at $12.00 per share. Through March 1, 2009, UTG had 109,319 shares outstanding that were issued under this program. At December 31, 2008, shares under this program have a value of $16.76 per share pursuant to the above formula.
On June 5, 2001, the Board of Directors of UTG authorized the repurchase in the open market or in privately negotiated transactions of up to $1 million of UTG's common stock. On June 16, 2004, an additional $1 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, 2009, UTG has spent $2,776,934 in the acquisition of 400,315 shares under this program.
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 made principal payments of $3,049,995 during 2008. The Company borrowed $1,994,176 and 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, 2008, the outstanding principal balance on this debt was $10,494,454.
In addition to the above promissory note, First Tennessee Bank National Association also provided UTG, Inc. with a $5,000,000 revolving credit note. This note is for a one-year term and may be renewed by consent of both parties. The credit note is to provide operating liquidity for UTG, Inc. and replaces a previous line of credit provided by Southwest Bank. Interest bears the same terms as the above promissory note. The collateral held on the above note also secures this credit note. UTG, Inc. has no borrowings against this note at this time.
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 2008 and 2007, UG had borrowings and repayments from the LOC of $0 and $3,300,000, respectively. At December 31, 2008, and 2007 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 2008, the Company had borrowings of $4,000,000 and repayments of $4,000,000. During 2007, the Company had borrowings of $5,443,350 and repayments of $5,443,350. At December 31, 2008, the Company had no outstanding borrowings attributable to this LOC.
In January 2007, UG became a 51% owner of the newly formed RLF Lexington Properties LLC ("Lexington"). The entity was formed to hold, for investment purposes, certain investment real estate acquired. As part of the purchase price of the real estate owned by Lexington, the seller provided financing through the issuance of five promissory notes of $1,200,000 each totaling $6,000,000. The notes bear interest at the fixed rate of 5%. The notes came due beginning on January 5, 2008, and each January 5 thereafter until 2012 when the final note is repaid. At December 31, 2008 the outstanding balance was $4,800,000.
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. The Company’s cash and cash equivalents are on deposit with various domestic financial institutions. At times, bank deposits may be in excess of federally insured 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.
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, 2008, approximately 59% 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 FASB 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. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February of 2008, the FASB issued FASB Staff position 157-2 which delays the effective date of SFAS 157 for non-financial assets and liabilities which are not measured at fair value on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008. Adoption of SFAS 157 did not have a material impact on its consolidated financial position, results from operation, or cash flow.