Total investment real estate holdings represent approximately 9% and 13% of the total assets of the Company, net of accumulated depreciation, at year-end 2006 and 2005 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.
Cost of insurance acquired reflects a significant increase in 2006 compared to 2005. This increase is the result of $ 25,104,437 being added from the Acap Corporation acquisition. 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. Excluding the increase to the asset from the acquisition, this line item declined 27% in 2006 as the result of normal amortization of the asset. In 2006, 2005 and 2004 amortization decreased the asset by $ 2,850,725, $ 2,193,085 and $ 1,869,135, respectively. No impairments of this asset were recorded for the periods presented.
Total shareholders' equity increased 4% in compared to 2005. This increase is primarily due to the current year net income of the Company. Partially offsetting this increase is a decline in unrealized gains relating to common stock holdings sold during 2006. Additionally, the Company purchased treasury shares totaling $ 482,030 during the current year.
Net cash provided by (used in) financing activities was $ 6,205,830, $ 1,901,266 and $ (621,019) for 2006, 2005 and 2004, respectively. The acquisition of Acap Corporation accounted for a majority of the activity in this area during 2006.
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.
We have also audited Schedule I as of December 31, 2006, and Schedules II, IV and V as of December 31, 2006 and 2005, 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.
A. ORGANIZATION - At December 31, 2006, the significant majority-owned subsidiaries of UTG, Inc were as depicted on the following organizational chart.
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, 2006, the Company had gross insurance in force of $ 2.270 billion of which approximately $ 591 million was ceded to reinsurers.
All reinsurance for TI is with a single, unaffiliated reinsurer, Hannover Life Reassurance (Ireland) Limited ("Hannover"), secured by a trust account containing letters of credit totaling $1,009,981, granted in favor of TI. TI administers the reinsurance policies, for which it receives an expense allowance from Hannover. The aggregate reduction in surplus of termination of this reinsurance agreement, by either party, as of December 31, 2005 is $699,667. Hannover currently holds an “A” (Excellent) rating by A.M. Best. At December 31, 2006, the Hannover agreement has insurance in-force of approximately $ 25,913,000, with reserves being held on that amount of approximately $ 502,000.
On February 21, 2006, a partnership investment of HVP was extended a $ 1,000,000 promissory note from First Southern National Bank. The note is due October 31, 2008. Borrowings under the note bear interest at the rate of one percent in excess of the prime rate as published in the Wall Street Journal. At December 31, 2006, the Company had $ 1,000,000 outstanding borrowings attributable to this note.
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 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.