Net amortization of cost of insurance acquired increased 50% in 2007 compared to 2006 and increased 30% in 2006 compared to 2005. The significant increase in 2007 is the result of the acquisition of the insurance subsidiaries in December 2006. 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 7% of the balance, 12% on approximately 50% 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 2007, 2006 and 2005 has been approximately 96.1%, 95.9% and 95.8%, respectively. The Company monitors these projections to determine the adequacy of present values assigned to future cash flows. No impairments were recorded in any of the three periods reported.
Equity securities increased approximately $16,373,000 during 2007. The increase is attributable to UG and AC purchasing financial institution and oil and gas investments that Management believes will provide the Company with favorable long term returns.
During 2002, UTG and Fiserv formed an alliance between their respective organizations to provide third party administration (TPA) services to insurance companies seeking business process outsourcing solutions. Fiserv 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 Fiserv to administer an array of life, health and annuity products in the insurance industry. 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. In addition, the Company entered into a five-year contract with Fiserv 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UTG, Inc. and subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for the years ended December 31, 2007, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America.
Life insurance company taxation is based primarily upon statutory results with certain special deductions and other items available only to life insurance companies. Income tax expense consists of the following components:
The Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned in 2007, 2006 and 2005 were as follows: