Net investment income decreased 3% when comparing 1999 to 1998 and increased 1% when comparing 1998 to 1997. The decrease in net investment income in 1999 is due to the decline of the national prime rate during September and October of 1998. During September and October of 1998, the national prime rate declined three quarters of one percent (.75%). This decline reduced the yields on investments available in the marketplace in which the Company invests primarily fixed maturities. The interest rate environment improved later in 1999. The national prime rate rose a total of three-quarters of one percent (.75%) in the second half of 1999. Changes in the national prime rate may impact net investment income in the future. Approximately 13% of the total fixed maturity portfolio will mature within the next year, with another 53% maturing in the next two to five years. The Company has recently begun looking at the mortgage loan market for possible investments, due to the affiliation with First Southern Funding and its affiliates ("FSF"). FSF is the largest shareholder of UTG. The affiliation with FSF provides additional resources in the mortgage loan market. FSF is in the banking industry and has experience and expertise in underwriting commercial and residential mortgage loans. The Company believes it can issue or acquire loans, which will provide attractive yields while maintaining high quality and low risk.
The overall investment yields for 1999, 1998 and 1997, are 6.45%, 6.69% and 6.71%, respectively. Cash generated from the sales of universal life insurance products, has been invested primarily in fixed maturities.
P. 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.
S. PARTICIPATING INSURANCE - Participating business represents 31% and 34% of the ordinary life insurance in force at December 31, 1999 and 1998, respectively. Premium income from participating business represents 29%, 39%, and 50% of total premiums for the years ended December 31, 1999, 1998 and 1997, respectively. The amount of dividends to be paid is determined annually by the respective insurance subsidiary's Board of Directors. Earnings allocable to participating policyholders are based on legal requirements that vary by state.
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, 1999, UG had a statutory gain from operations of $3,535,018. At December 31, 1999, UG's statutory capital and surplus amounted to $15,022,234. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation.
Shareholders' Untaxed Company Surplus Balance - ---------------------- ----------------- -------------- ABE $ 5,006,121 $ 1,149,693 APPL 6,555,209 1,525,367 UG 34,165,563 4,363,821
By insurance statute, the majority of the Company's investment portfolio is invested in investment grade securities to provide ample protection for policyholders. The Company does not invest in so-called "junk bonds" or derivative investments.
The following table summarizes by category securities held that are below investment grade at amortized cost:
One of the Company's insurance subsidiaries (UG) entered into a coinsurance agreement with First International Life Insurance Company ("FILIC") as of September 30, 1996. The transaction resulted in no gain or loss in the GAAP financial statements. The transaction was entered into to increase the statutory surplus position of UG. The ceding commission received was equal to the value reflected on this block of business in the Cost of Insurance Acquired asset. The ceding commission reduced this asset. Under the terms of the agreement, UG ceded to FILIC substantially all of its paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life insurance policies. A.M. Best assigned FILIC a Financial Performance Rating (FPR) of 7 (Strong) on a scale of 1 to 9. A.M. Best assigned a Best's Rating of A++ (Superior) to The Guardian Life Insurance Company of America ("Guardian"), parent of FILIC, based on the consolidated financial condition and operating performance of the company and its life/health subsidiaries. During 1997, FILIC changed its name to Park Avenue Life Insurance Company ("PALIC"). The agreement with PALIC accounts for approximately 64% of the reinsurance receivables as of December 31, 1999.