UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
Commission File No. 0-16867
UTG, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 20-2907892
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5250 SOUTH SIXTH STREET
P.O. BOX 5147
SPRINGFIELD, IL 62705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (217) 241-6300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of
July 29,October 31, 2005, was 3,940,893.3,904,250.
UTG, INC. AND SUBSIDIARIES
(The "Company")
TABLE OF CONTENTSPART 1. FINANCIAL INFORMATION................................................3
Item 1. Financial Statements...............................................3
Consolidated Balance Sheets as of JuneSeptember 30, 2005 and
December 31, 2004.....32004.....................................................3
Consolidated Statements of Operations for the three and sixnine months
ended JuneSeptember 30, 2005 and 2004..........................................42004.....................................4
Consolidated Statement of Changes in Shareholders' Equity for
the sixnine months ended JuneSeptember 30, 2005............................................52005..............................5
Consolidated Statements of Cash Flows for the sixnine months ended
JuneSeptember 30, 2005 and 2004................................................62004...........................................6
Notes to Consolidated Financial Statements................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........17
ITEM 4. CONTROLS AND PROCEDURES...........................................18
PART II. OTHER INFORMATION..................................................19
ITEM 1. LEGAL PROCEEDINGS.................................................19
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS..........................19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............19
ITEM 5. OTHER INFORMATION.................................................20INFORMATION.................................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................208-K..................................19
SIGNATURES....................................................................20
EXHIBIT INDEX, FOLLOWED BY EXHIBITS...........................................23EXHIBITS...........................................22
PARTPart 1. FINANCIAL INFORMATIONFinancial Information.
Item 1. Financial Statements
UNITED TRUST GROUP,Statements.
UTG, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
June--------------------------------------------------------------------------------
September 30, December 31,
ASSETS 2005 2004*
------------------ ---------------------------------- ----------------
Investments:
Fixed maturities at amortized cost
(market $9,637,615$9,415,946 and $12,097,708) $ 9,577,5679,417,840 $ 11,973,415
Investments held for sale:
Fixed maturities, at market (cost $134,519,452$129,966,717 and $147,217,453) 135,438,744128,908,971 148,193,887
Equity securities, at market (cost $14,184,971 and $15,216,214) 23,623,21423,128,846 24,399,172 23,623,214
Mortgage loans on real estate at amortized cost 32,129,36740,395,453 20,722,415 -
Investment real estate, at cost, net of accumulated depreciation 28,590,89942,420,321 28,192,081
Policy loans 12,769,29612,694,761 12,844,748
Short-term investments 39,85441,246 39,489
------------------ ------------------
242,168,941---------------- ----------------
257,007,438 246,365,207
Cash and cash equivalents 17,135,7243,808,753 11,859,472
Securities of affiliate 4,000,000 4,000,000
Accrued investment income 1,623,8481,725,470 1,678,393
Reinsurance receivables:
Future policy benefits 32,086,77931,909,632 32,422,529
Policy claims and other benefits 3,823,3063,995,225 3,959,569
Cost of insurance acquired 11,818,67611,185,370 12,747,532
Deferred policy acquisition costs 1,552,3141,465,839 1,685,263
Property and equipment, net of accumulated depreciation 2,061,3072,001,404 2,172,636
Income taxes receivable, current 168,998113,001 181,683
Other assets 617,818410,393 795,800
------------------ ---------------------------------- ----------------
Total assets $ 317,057,711317,622,525 $ 317,868,084
================== ================================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 235,422,105235,682,286 $ 235,592,973
Policy claims and benefits payable 1,829,0321,572,250 1,879,566
Other policyholder funds 1,264,2941,267,730 1,323,668
Dividend and endowment accumulations 12,575,88612,571,551 12,526,390
Deferred income taxes 8,410,3567,730,081 8,561,010
Other liabilities 5,755,6844,311,991 7,405,434
------------------ ---------------------------------- ----------------
Total liabilities 265,257,357263,135,889 267,289,041
------------------ ---------------------------------- ----------------
Minority interests in consolidated subsidiaries 6,156,95411,497,390 6,127,938
------------------ ---------------------------------- ----------------
Shareholders' equity:
Common stock - no par value, stated value $.001 and $.02 per share
Authorized 7,000,000 shares - 3,947,0033,909,444 and 3,965,533 shares issued
after deducting treasury shares of 246,239283,798 and 227,709 78,9473,909 79,315
Additional paid-in capital 42,478,75942,285,198 42,590,820
Accumulated deficit (3,113,488)(4,361,904) (4,897,572)
Accumulated other comprehensive income 6,199,1825,062,043 6,678,542
------------------ ---------------------------------- ----------------
Total shareholders' equity 45,643,40042,989,246 44,451,105
------------------ ---------------------------------- ----------------
Total liabilities and shareholders' equity $ 317,057,711317,622,525 $ 317,868,084
================== ================================== ================
* Balance sheet audited at December 31, 2004.
See accompanying notes.
UNITED TRUST GROUP,UTG, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30, JuneSeptember 30, JuneSeptember 30,
2005 2004 2005 2004
--------------- ---------------- --------------- ----------------
Revenues:
Premiums and policy fees $ 4,316,7613,997,169 $ 4,513,1504,171,717 $ 8,521,72112,518,890 $ 9,134,10813,305,825
Reinsurance premiums and policy fees (795,524) (841,483) (1,487,789) (1,588,296)(607,827) (782,045) (2,095,616) (2,370,341)
Net investment income 2,356,705 2,734,854 4,789,964 4,565,9312,587,341 2,865,198 7,377,305 7,431,129
Realized investment gains (losses), net 2,195,958 (619) 2,177,900 (92,754)32,223 24,000 1,274,504 (68,754)
Other income 280,753 201,301 549,590 421,561281,299 150,432 830,889 571,993
--------------- ---------------- --------------- ----------------
8,354,653 6,607,203 14,551,386 12,440,5506,290,205 6,429,302 19,905,972 18,869,852
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 3,634,033 5,474,567 8,504,080 10,347,6454,737,004 4,440,973 13,241,084 14,788,618
Reinsurance benefits and claims (365,406) (1,091,949) (669,702) (1,358,912)(448,984) (467,371) (1,118,686) (1,826,283)
Annuity 268,183 288,938 518,251 569,633273,958 272,237 792,209 841,870
Dividends to policyholders 240,920 251,736 516,927 536,968207,974 221,174 724,901 758,142
Commissions and amortization of deferred
policy acquisition costs (75,815) 39,322 (58,444) 64,738(58,377) 76,234 (116,821) 140,972
Amortization of cost of insurance acquired 463,293 466,550 928,856 934,418633,306 468,444 1,562,162 1,402,862
Operating expenses 1,622,680 1,432,013 2,879,564 2,829,4611,309,983 1,319,472 4,189,547 4,148,933
Interest expense 0 24,709 13 50,3431,602 27,110 1,615 77,453
--------------- ---------------- --------------- ----------------
5,787,888 6,885,886 12,619,545 13,974,2946,656,466 6,358,273 19,276,011 20,332,567
Gain (loss) before income taxes, minority interest
and equity in earnings of investees 2,566,765 (278,683) 1,931,841 (1,533,744)(366,261) 71,029 629,961 (1,462,715)
Income tax credit (expense) (212,657) 489,652 (118,754) 611,16093,900 168,114 (24,854) 779,274
Minority interest in (income) loss of
consolidated subsidiaries (23,456) (144,128) (29,003) 115,230(40,436) (97,879) (69,439) 17,351
--------------- ---------------- --------------- ----------------
Net income (loss) $ 2,330,652 (312,797)$ 66,841141,264 $ 1,784,084535,668 $ (807,354)(666,090)
=============== ================ =============== ================
Basic income (loss) per share from continuing
operations and net income (loss) $ 0.59 (0.08)$ 0.020.04 $ 0.450.14 $ (0.20)(0.17)
=============== ================ =============== ================
Diluted income (loss) per share from continuing
operations and net income (loss) $ 0.59 (0.08)$ 0.020.04 $ 0.450.14 $ (0.20)(0.17)
=============== ================ =============== ================
Basic weighted average shares outstanding 3,952,164 3,980,811 3,956,368 3,983,3583,931,388 3,978,944 3,947,950 3,992,858
=============== ================ =============== ================
Diluted weighted average shares outstanding 3,952,164 3,980,811 3,956,368 3,983,3583,931,388 3,978,944 3,947,950 3,992,858
=============== ================ =============== ================
See accompanying notes.
UNITED TRUST GROUP,UTG, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the sixnine months ended JuneSeptember 30, 2005 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Common stock
Balance, beginning of year $ 79,315
Change in stated value (75,350)
Issued during year 0
Retired common shares 0
Purchase treasury shares (368)
------------------(56)
----------------
Balance, end of period 78,947
------------------3,909
----------------
Additional paid-in capital
Balance, beginning of year 42,590,820
Change in stated value 75,350
Issued during year 0
Retired common shares 0
Purchase treasury shares (112,061)
------------------(380,972)
----------------
Balance, end of period 42,478,759
------------------42,285,198
----------------
Accumulated deficit
Balance, beginning of year (4,897,572)
Net income 1,784,084535,668 $ 1,784,084
------------------ ------------------535,668
---------------- ----------------
Balance, end of period (3,113,488)
------------------(4,361,904)
----------------
Accumulated other comprehensive income
Balance, beginning of year 6,678,542
Other comprehensive income
Unrealized holding loss on securities net of
minority interest and reclassification adjustment (479,360) (479,360)
------------------ ------------------(1,616,499) (1,616,499)
---------------- ----------------
Comprehensive income $ 1,304,724
==================(1,080,831)
================
Balance, end of period 6,199,182
------------------5,062,043
----------------
Total shareholders' equity, end of period $ 45,643,400
==================42,989,246
================
See accompanying notes.
UNITED TRUST GROUP,UTG, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
Six----------------------------------------------------------------------------------------------------------------
Nine Months Ended
JuneSeptember 30, JuneSeptember 30,
2005 2004
--------------- ---------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ 1,784,084535,668 $ (807,354)(666,090)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization/accretion of fixed maturities 355,026 291,407500,567 422,964
Realized investment (gains) losses, net (2,177,900) 92,754(1,274,504) 68,754
Policy acquisition costs deferred (14,000) (9,000)(21,000) (3,000)
Amortization of deferred policy acquisition costs 146,949 149,690240,424 251,035
Amortization of cost of insurance acquired 928,856 934,4181,562,162 1,402,862
Depreciation 1,039,090 599,8851,564,800 1,148,302
Minority interest 29,016 955,9135,369,452 1,053,783
Change in accrued investment income 54,545 257,808(47,077) 188,279
Change in reinsurance receivables 472,013 231,415477,241 489,352
Change in policy liabilities and accruals 345,217 891,705724,964 1,023,914
Charges for mortality and administration of
universal life and annuity products (4,577,979) (4,703,525)(6,844,673) (7,003,228)
Interest credited to account balances 2,673,277 2,710,7463,979,380 4,044,649
Change in income taxes payable 1,088,737 (611,928)1,563,107 (889,413)
Change in other assets and liabilities, net (1,470,358) (796,845)(2,706,626) 490,453
--------------- ---------------
Net cash provided by operating activities 676,573 187,0895,623,885 2,022,616
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 17,699,090 47,830,85223,120,537 64,444,104
Fixed maturities matured 2,800,406 10,627,2442,932,302 13,322,714
Equity securities 2,300,000 025,570
Mortgage loans 2,459,517 6,712,9214,436,316 7,880,037
Real estate 0 87,141216,052 207,010
Policy loans 1,811,434 1,434,5542,531,059 2,047,253
--------------- ---------------
Total proceeds from investments sold and matured 27,070,447 66,692,71235,536,266 87,926,688
Cost of investments acquired:
Fixed maturities held for sale (5,268,921) (48,702,180)(6,260,171) (64,159,619)
Fixed maturities (493,359) (1,387,595)(1,387,598)
Equity securities 0 (8,033,053)
Mortgage loans (13,892,440) (1,176,737)(25,406,670) (2,626,540)
Real estate (2,276,634) (3,817,178)(16,175,252) (4,784,262)
Policy loans (1,735,982) (1,210,886)(2,381,072) (1,810,024)
Short-term (234) (214)(1,434) (322)
--------------- ---------------
Total cost of investments acquired (23,667,570) (64,327,843)(50,717,958) (82,801,418)
Purchase of property and equipment (18,974) (9,977)(23,433) (13,342)
--------------- ---------------
Net cash provided by (used in) investing activities 3,383,903 2,354,892(15,205,125) 5,111,928
Cash flows from financing activities:
Policyholder contract deposits 4,431,978 4,735,1166,529,533 6,926,298
Policyholder contract withdrawals (3,103,773) (3,645,819)(4,617,984) (5,325,686)
Proceeds from line of credit 01,500,000 2,275,000
Purchase of treasury stock (112,429) (67,058)(381,028) (240,319)
Payments of principal on notes payable 0 (2,289,776)(1,500,000) (4,564,776)
--------------- ---------------
Net cash provided by (used in) financing activities 1,215,776 1,007,4631,530,521 (929,483)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 5,276,252 3,549,444(8,050,719) 6,205,061
Cash and cash equivalents at beginning of period 11,859,472 8,749,727
--------------- ---------------
Cash and cash equivalents at end of period $ 17,135,7243,808,753 $ 12,299,17114,954,788
=============== ===============
See accompanying notes.
UNITED TRUST GROUP,UTG, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by United
Trust Group,UTG,
Inc. ("UTG") and its consolidated subsidiaries ("Company") pursuant to the rules
and regulations of the Securities and Exchange Commission. Although the Company
believes the disclosures are adequate to make the information presented not be
misleading, it is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
presented in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the year ended December 31, 2004.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary for a
fair presentation of the results of operations for the periods presented.
Operating results for interim periods are not necessarily indicative of
operating results to be expected for the year or of the Company's future
financial condition.
This document at times will refer to the Registrant's largest shareholder, Mr.
Jesse T. Correll and certain companies controlled by Mr. Correll. Mr. Correll
holds a majority ownership of First Southern Funding LLC, a Kentucky
corporation, ("FSF") and First Southern Bancorp, Inc. ("FSBI"), a financial
services holding company that owns 100% of First Southern National Bank
("FSNB"), which operates in the State of Kentucky. Mr. Correll is Chief
Executive Officer and Chairman of the Board of Directors of UTG and is currently
UTG's largest shareholder through his ownership control of FSF, FSBI and
affiliates. At JuneSeptember 30, 2005, Mr. Correll owns or controls directly and
indirectly approximately 66% of UTG's outstanding stock.
At JuneSeptember 30, 2005, consolidated subsidiaries of United Trust Group,UTG, Inc. were as depicted
on the following organizational chart.
EffectiveOn July 1, 2005, United Trust Group, Inc wasInc., an Illinois corporation, merged with
and into its wholly-owned subsidiary, UTG, Inc. (See Note 10).(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.
2. INVESTMENTS
As of JuneSeptember 30, 2005 and December 31, 2004, fixed maturities and fixed
maturities held for sale represented 58%54% and 65%, respectively, of total
invested assets. As prescribed by the various state insurance department
statutes and regulations, the insurance companies'company's investment portfolio is
required to be invested in investment grade securities to provide ample
protection for policyholders. In light of these statutes and regulations, and
the Company's business and investment strategy, the Company generally seeks to
invest in United States government and government agency securities and other
high quality low risk investments. As of JuneSeptember 30, 2005, 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
investments held for sale are carried at market, with changes in market value
directly charged to shareholders' equity. To provide additional flexibility and
liquidity, the Company has categorized almost all fixed maturity investments
acquired since 2000 as available for sale.
3. NOTES PAYABLE
At JuneSeptember 30, 2005 and December 31, 2004, the Company had no long-term debt
outstanding.
On November 15, 2001, UTG was extended a $ 3,300,000 line of credit ("LOC") from
the First National Bank of Tennessee ("FNBT") located in Livingston, Tennessee.
The LOC was for a one-year term from the date of issue. Upon maturity the
Company had renewed the LOC for additional terms until June 1, 2005. The
interest rate on the LOC was 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. The Company had no borrowings attributable to
this LOC during 2005. In order to provide greater operational flexibility, this
LOC was transferred to the Company's wholly-owned insurance subsidiary upon the
June 1, 2005 maturity.
On June 1, 2005, UG, a subsidiary of the Company, was extended a $ 3,300,000
line of credit from the FNBT. The LOC was for a one-year term from the date of
issue. The interest rate on the LOC was 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 the quarter ended September 30,
2005, UG had borrowings from the LOC of $ 1,500,000 and repayments of
$ 1,500,000. At JuneSeptember 30, 2005, the Company had no outstanding borrowings
attributable to this LOC.
On April 1, 2002, UTG was extended a $ 5,000,000 line of credit from Southwest
Bank of St. Louis. The LOC expired one-year from the date of issue and has been
renewed for additional terms. As collateral for any draws under the line of
credit, UTG pledged 100% of the common stock of its insurance subsidiary, UG.
Borrowings under the LOC bear interest at the rate of .25% in excess of
Southwest Bank of St. Louis' prime rate. At JuneSeptember 30, 2005, the Company had
no outstanding borrowings attributable to this LOC.
4. CAPITAL STOCK TRANSACTIONS
A. Employee and Director Stock Purchase Program
On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002,
the shareholders of UTG approved, the United Trust Group, Inc. Employee and
Director Stock Purchase Plan. The plan's purpose is to encourage ownership of
UTG stock by eligible directors and employees of UTG and its subsidiaries by
providing them with an opportunity to invest in shares of UTG common stock. The
plan is administered by the Board of Directors of UTG. A total of 400,000 shares
of common stock may be purchased under the plan, subject to appropriate
adjustment for stock dividends, stock splits or similar recapitalizations
resulting in a change in shares of UTG. The plan is not intended to qualify as
an "employee stock purchase plan" under Section 423 of the Internal Revenue
Code.
During 2004 and 2003, the Board of Directors of UTG approved offerings under the
plan to qualified individuals. For the years ended December 31, 2004 and 2003,
four individuals purchased 14,440 and eight individuals purchased 58,891 shares
of UTG common stock, respectively. Each participant under the plan executed a
"stock restriction and buy-sell agreement", which among other things provides
UTG with a right of first refusal on any future sales of the shares acquired by
the participant under this plan.
The purchase price of shares repurchased under the stock restriction and
buy-sell agreement shall be computed, on a per share basis, equal to the sum of
(i) the original purchase price paid to acquire such shares from UTG and (ii)
the consolidated statutory net earnings (loss) per share of such shares during
the period from the end of the month next preceding the month in which such
shares were acquired pursuant to the plan, to the end of the month next
preceding the month in which the sale of such shares to UTG occurs. At
JuneSeptember 30, 2005, UTG had 89,877 shares outstanding that were issued under
this program with a value of $ 12.3112.83 per share pursuant to the above formula.
B. Stock Repurchase Program
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 repurchased shares. Repurchased shares are available for future issuance for
general corporate purposes. Through July 30,October 31, 2005, UTG has spent $ ,283,5731,542,482
in the acquisition of 197,182233,825 shares under this program.
C. Earnings Per Share Calculations
Earnings per share are based on the weighted average number of common shares
outstanding during each period, retroactively adjusted to give effect to all
stock splits, in accordance with Statement of Financial Accounting Standards No.
128. At JuneSeptember 30, 2005, diluted earnings per share were the same as basic
earnings per share since the UTG had no dilutive instruments outstanding.
5. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts which
have been returned against life and health insurers in the jurisdictions in
which the Company does business involving the insurers' sales practices, alleged
agent misconduct, failure to properly supervise agents, and other matters. Some
of the lawsuits have resulted in the award of substantial judgments against the
insurer, including material amounts of punitive damages. In some states, juries
have substantial discretion in awarding punitive damages in these circumstances.
The Company cannot predict the effect that these lawsuits may have on the
Company in the future.
Under the insurance guaranty fund laws in most states, insurance companies doing
business in a participating state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent or failed insurance companies.
Although the Company cannot predict the amount of any future assessments, most
insurance guaranty fund laws currently provide that an assessment may be excused
or deferred if it would threaten an insurer's financial strength. Mandatory
assessments may be partially recovered through a reduction in future premium tax
in some states. The Company does not believe such assessments will be materially
different from amounts already provided for in the financial statements, though
the Company has no control over such assessments.
On June 10, 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 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. To facilitate the alliance, the Company plans to convert
its existing business and 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 is a unit of Fiserv, Inc. (Nasdaq: FISV) which is an
independent, full-service provider of integrated data processing and information
management systems to the financial industry, headquartered in Brookfield,
Wisconsin. The Company began the conversion of its existing insurance business
to the "ID3" software system in February 2004. Also as part of this alliance, a
liability exists which is contingent on the completion of future TPA
arrangements. The balance remaining of this contingent liability was $ 115,000
on JuneSeptember 30, 2005.
Also during June 2002, the Company entered into a five-year contract with Fiserv
for services related to its purchase of the "ID3" software system. Under the
contract, the Company is required to pay a minimum of $ 12,000 per month in
software maintenance costs and $ 5,000 per month in offsite data center costs
for a five-year period from the date of the signing.
In the normal course of business the Company is involved from time to time in
various legal actions and other state and federal proceedings. There were no
proceedings pending or threatened as of JuneSeptember 30, 2005.
6. OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $ 131,615 and $ 50,34377,453 in interest expense
during the first sixnine months of 2005 and 2004, respectively. The Company paid
no$ 1,755 and $ 100,000 in federal income tax during the first sixnine months of 2005
and 2004, respectively.
7. CONCENTRATION OF CREDIT RISK
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 UTG, and its
largest shareholder, Chairman and CEO, Jesse Correll. The Company holds
approximately $ 11,386,0006,900 for which there are no pledges or guarantees outside FDIC
insurance 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.
8. COMPREHENSIVE INCOME
Tax
Before-Tax (Expense) Net of Tax
JuneSeptember 30, 2005 Amount or Benefit Amount
---------------------------------------------- ---------------- ----------------- ---------------
Unrealized holding loss during
period $ (696,746)(2,495,765) $ 243,861872,518 $ (452,885)(1,622,247)
Less: reclassification adjustment
for losses realized in net income 40,731 14,256 26,4758,843 (3,095) 5,748
---------------- ----------------- ---------------
Net unrealized loss (737,477) 258,117 (479,360)(2,486,922) 870,423 (1,616,499)
---------------- ----------------- ---------------
Other comprehensive income $ (737,477)(2,486,922) $ 258,117870,423 $ (479,360)(1,616,499)
================ ================= ===============
9. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has not issued any new
pronouncements duringStatement No. 154,
Accounting for Changes and Error Corrections - a replacement of APB Opinion No.
20 and FASB Statement No. 3. The statement changes the first or second quarters of 2005.
10. SUBSEQUENT EVENT
On July 1, 2005, United Trust Group, Inc. (UTG), an Illinois corporation, merged
with and into its wholly-owned subsidiary, UTG, Inc. (UTG, Inc), a Delaware
corporation,requirements for the
purposeaccounting for and reporting of effecting a change in accounting principle. It also
applies to changes required by an accounting pronouncement in the Company's stateunusual
instance that the pronouncement does not include specific transition provisions.
The statement is effective for accounting changes and corrections of incorporation from Illinoiserrors made
in fiscal years beginning after December 15, 2005. The Company will account for
all future changes and error corrections in accordance with the requirements of
Statement No. 154.
10.RECLASSIFICATIONS
Certain prior year amounts have been reclassified to Delaware. The merger was effected pursuantconform 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 UTG, Inc. The merger was
approved by the holders of two-thirds of the outstanding shares of common stock
of UTG at the 2005
annual meeting of shareholderspresentation. Such reclassifications had no effect on June 15, 2005, and by the
sole stockholder of UTG, Inc. on June 15, 2005.previously reported net
income or shareholders' equity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's consolidated
financial condition, changes in financial position and results of operations for
the three months and sixnine months ended JuneSeptember 30, 2005, as compared to the
same period of 2004, of UTG and its subsidiaries. This discussion and analysis
supplements Management's Discussion and Analysis in Form 10-K for the year ended
December 31, 2004, and should be read in conjunction with the interim financial
statements and notes that appear elsewhere in this report. The Company reports
financial results on a consolidated basis. The consolidated financial statements
include the accounts of UTG and its subsidiaries at JuneSeptember 30, 2005.
Cautionary Statement Regarding Forward-Looking Statements
Any forward-looking statement contained herein or in any other oral or written
statement by the Company or any of its officers, directors or employees is
qualified by the fact that actual results of the Company may differ materially
from any such statement due to the following important factors, among other
risks and uncertainties inherent in the Company's business:
1. Prevailing interest rate levels, which may affect the ability of the
Company to sell its products, the market value of the Company's
investments and the lapse ratio of the Company's policies,
notwithstanding product design features intended to enhance
persistency of the Company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the Company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for the Company's products.
4. 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.
Update on Critical Accounting Policies
In our Form 10-K for the year ended December 31, 2004, we identified the
accounting policies that are critical to the understanding of our results of
operations and our financial position. They relate to deferred acquisition costs
(DAC), cost of insurance acquired, assumptions and judgments utilized in
determining if declines in fair values of investments are other-than-temporary,
and valuation methods for investments that are not actively traded.
We believe that these policies were applied in a consistent manner during the
first sixnine months of 2005.
Results of Operations
(a) Revenues
The Company experienced a nominal decrease in premiums and policy fee revenues,
net of reinsurance premiums and policy fees, when comparing the first sixnine
months of 2005 to the same period in 2004. The Company currently writes little
new business. Unless the Company acquires a block of in-force business or
significantly increases its marketing, management expects premium revenue to
continue to decline at a similar rate, which is consistent with prior
experience.
The Company's primary source of new business production comes from the
conservation effort implemented several years ago. This effort was an attempt to
improve the persistency rate of the insurance company's policies. Several of the
customer service representatives of the Company are also licensed insurance
agents, allowing them to offer other products within the Company's portfolio to
existing customers. Additionally, stronger efforts have been made in policy
retention through more personal contact with the customer including telephone
calls to discuss alternatives and reasons for a customer's request to surrender
their policy. Previously, the Company's agency force was primarily responsible
for conservation efforts. With the decline in the number of agents, their
ability to reach these customers diminished, making conservation efforts
difficult. The conservation efforts described above have been generally
positive. Management will continue to monitor these efforts and make adjustments
as seen appropriate to enhance the future success of the program. In 2003, the
Company replaced its original universal life product with a new universal life
contract referred to as "the Legacy". This product was designed for use with
several distribution channels including the Company's own internal agents, bank
agent/employees and through personally producing general agents "PPGA". In
addition, the Company has introduced other new and updated products in recent
periods including the Horizon Annuity and Kid Kare (a single premium, child term
policy). The company is currently working on development of a level term and
decreasing term product. Management has no current plans to increase marketing
efforts. New product development is anticipated to be utilized in conservation
efforts and sales to existing customers. Such sales are not expected to be
material.
The Company has considered the feasibility of a marketing opportunity with First
Southern National Bank (FSNB) an affiliate of UTG's largest shareholder,
Chairman and CEO, Mr. Jesse T. Correll. Management has considered various
products including annuity type products, mortgage protection products and
existing insurance products, as potential products that could be marketed to
banking customers. This marketing opportunity has potential and is believed to
be a viable niche. The Company has designed an annuity product ("Horizon") as
well as two life products ("Legacy" and "Kid Kare") which are to be used in
marketing efforts by FSNB. The introduction of these new products is currently
not expected to produce significant premium writings. The Company is currently
looking at other products to compliment the existing offerings.
Net investment income increased 5%decreased less than 1% when comparing the first sixnine
months of 2005 to the same period in 2004. While there has been a significant
increase in the national prime rate during the last year,several months, from 4.00%
to 6.25%6.75%, this has not been the driving factor in the increase instability of the Company's
overall net investment income. Interest rates on long-term bonds available in
the marketplace have not experienced a similar increase. Management has begunDuring 2004, management
began to lengthen the Company's portfolio while maintaining a conservative
investment philosophy. As such, following an analysis of current holdings during
the first half of 2004, the Company liquidated approximately $ 38,212,00064,444,000 of its collateralized mortgage
obligation
bond portfolio in order to limit its interest rate and extension risk. In
addition, there were $ 20,246,00013,322,000 in bonds that matured or were called during
the first sixnine months of 2004. The result of these transactions caused an excess
of cash invested in short-term money market funds during the first sixnine months
of 2004. The Company reinvested this cash over the next nine months
primarily in governmental bonds at lower yields. Although this hurt investment earnings in the short run, the Company
has not had to write off any investment losses due to excessive risk.
In response to the interest rate environment in the bond market, the Company
increased its investment in mortgage loans. The balance of mortgage loan
investments increased from approximately $ 21,180,00020,722,000 at June 30,December 31, 2004 to
$ 32,129,00040,395,000 at JuneSeptember 30, 2005. 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
2005, the Company issued $ 13,892,44025,406,670 in new mortgage loans. These loans have an
average loan to value rate of 43%50% and an average yield of 5.88%6.26%.
More significant than the change in bond income was the performance of the
Company's real estate investments during the first sixnine months of 2005 compared
to 2004. Net income from the Company's primary real estate holding improved more
than $ 400,000367,000 in comparing the first sixnine months of 2005 to 2004. The
improvement in real estate investment income is principally due to a higher
occupancy lease rate resulting in increased earnings in Hampshire Plaza.
Net investment income decreased 10% when comparing the third quarter results
from 2005 to the same period in 2004. The decrease in the third quarter net
investment income, when comparing 2005 with the same period in 2004, is the
result of sales of timber in 2004 with little activity in 2005. Also, while
significant improvements in the income from the Company's primary real estate
holding have occurred in 2005, most of this increase is attributable to the
first six months of the year.
The Company's investments are generally managed to match related insurance and
policyholder liabilities. The comparison of investment return with insurance or
investment product crediting rates establishes an interest spread. The Company
monitors investment yields, and when necessary adjusts credited interest rates
on its insurance products to preserve targeted interest spreads, ranging from 1%
to 2%. The Company has lowered all rate-adjustable products to their guaranteed
minimums. The guaranteed minimum crediting rates on these products range from 3%
to 5.5%. If interest rates continuewere to decline, the Company won't be able to lower
rates, and both net investment income and net income will be impacted
negatively.
The Company realized investment gains of $ 2,177,9001,274,504 in the first sixnine months of
2005 compared to net realized investment losses of $ 92,75468,754 for the same period
in 2004. The net realized gains in 2005 were primarily the result of the sale of
2,216,776 shares of common stock owned of BNL Financial Corporation ("BNL").
These shares represented approximately 10.57% of the then current outstanding
shares of BNL and represent all shares owned by UG. The shares were reacquired
by the issuing entity for an agreed upon sales price of $ 2,300,000. The net
realized loss in 2004 is primarily comprised of $ 93,969 in net realized losses
from the disposal of the collateralized mortgage obligations previously
discussed. A quarterly comparison shows realized investment gains of $ 32,223
for the quarterly period ended September 30, 2005, and $ 24,000 for the same
period in 2004. The net realized gain during the third quarter of 2005 is
primarily attributable to the gain from the sale of one parcel real estate.
Other income increased 45% when comparing the first sixnine months of 2005 to the
same period in 2004. Other income increased 87% when comparing the third quarter
of 2005 to the same period in 2004. The majority of the revenue in this line
item comes from the Company performing administrative work as a third party
administrator ("TPA") for unaffiliated life insurance companies, and as such,
receives monthly fees based on policy in force counts and certain other activity
indicators such as number of premium collections performed.policy applications processed and agent administration.
During the first sixnine months of 2005 and 2004, the Company received $ 452,844693,818
and $ 274,760444,364 respectively, for this work. These TPA revenue fees are included
in the line item "other income" on the Company's consolidated statements of
operations. During the second quarter of 2004, the Company reached an agreement
with an insurance provider that provides approximately $ 300,000 in gross annual
revenue for these services. The agreement began during the third quarter of
2004. In addition, Company will begin providing additional administrative
services for this insurance provider on November 1, 2005 that will increase the
annual revenue by approximately $ 300,000. The Company intends to continue to
pursue other TPA arrangements through its alliance with Fiserv Life Insurance
Solutions (Fiserv LIS), to provide TPA services to insurance companies seeking
business process outsourcing solutions. Fiserv LIS is responsible for the
marketing and sales function for the alliance, as well as providing the data
center operations. UTG will staff the administration effort. Management believes
this alliance with Fiserv LIS positions the Company to generate additional
revenues by utilizing the Company's current excess capacity, administrative
services, and implementation of the new Fiserv LIS "ID3" software system. In
addition, due to ongoing regulatory changes and the fact the Company is
repositioning itself for future growth,growth; the Company believes implementation of
the "ID3" software system is critical in order to proceed in the Company's new
direction of TPA services. Fiserv LIS is a unit of Fiserv, Inc. (Nasdaq: FISV)
which is an independent, full-service provider of integrated data processing and
information management systems to the financial industry, headquartered in
Brookfield, Wisconsin.
(b) Expenses
Life benefits, claims and settlement expenses net of reinsurance benefits and
claims, decreased 12%6% in the first sixnine months of 2005 compared to the same
period in 2004. These expenses increased 8% for the third quarter of 2005
compared to the same period in 2004. Policy claims decreased $ 1,844,0001,838,000 for the
first sixnine months of 2005 compared to the same period in 2004. Policy claims
vary from year to year and therefore, fluctuations in mortality are to be
expected and are not considered unusual by management. Policy surrenders
decreased when comparing the first sixnine months of 2005 to the same period in
2004. Consequently, the change in reserves decreased due to a leveling of
surrenders, reduction in premiums and decreased interest crediting rates.
Overall, reserves continue to increase on in-force policies as the age of the
insured increases.
Commissions and amortization of deferred policy acquisition costs decreased
$ 128,744134,611 and $ 257,793 for the first sixthree and nine months of 2005 compared to the
same period in 2004.2004, respectively. The most significant factor in the 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. Commissions paid will continue to decline as terminated agents discontinue theirthe Company
discontinued its association with the
Company.most of its agency force. Depending upon the
nature of the contract that the agent has with the Company, the agent may become
vested,vested; a process which allows them to continue to receive commissions for a
certain period even after the agent has discontinued his association with the
Company. Over time, fewer and fewer agents have remained vested, further
reducing the commissions payable by the Company. 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 either of the periods
reported.
Operating expenses increased slightly in the first sixnine months of 2005 compared
to the same period in 2004. The increase in expenses is due primarily to an
increase in information technology costs.costs and additional personnel costs
associated with the increase in TPA revenues. Excluding these expense items,
expenses declined due to reductions made in the normal course of business, as
the Company simplifies its organizational structure and continually monitors
expenditures looking for savings opportunities. Operating expenses decreased
slightly in the third quarter of 2005 compared to the same period in 2004.
Interest expense decreased 100%98% in the first sixnine months of 2005 compared to the
same period in 2004. The Company repaid all outside debt in 2004, through
operating cash flows and dividends received from its subsidiary UG. At
JuneSeptember 30, 2005, UTG had no debt outstanding. The Company paid $ 1,602 in
interest during the third quarter of 2005 due to utilization of its LOC.
(c) Net income
The Company had a net gainincome of $ 1,784,084535,668 in the first sixnine months of 2005
compared to a net loss of $ 807,354666,090 for the same period in 2004. The net gainincome
in 2005 was mainly attributable to the gain from the sale of the common stock of
BNL during the second quarter of 2005. The net loss in 2004 was mainly
attributable to the decrease in investment income and premium income.
Financial Condition
The financial condition of the Company has improveddeclined since December 31, 2004.
Total shareholders' equity increaseddecreased approximately $ 1,192,0001,462,000 as of
JuneSeptember 30, 2005 compared to December 31, 2004. The increasedecrease is attributable
to the gain
from operations, as described above. This offset the decline in market value of equity and bond investments of approximately
$ 479,000,1,616,000, net of deferred taxes, that was included in the accumulated other
comprehensive income. This decline was partially offset by the gain from
operations described above. The Company purchased treasury shares in the amount
of $ 112,429,381,028, which decreased shareholders' equity.
Investments represent approximately 76%81% and 78% of total assets at JuneSeptember 30,
2005 and December 31, 2004, respectively. Accordingly, investments are the
largest asset group of the Company. The Company's insurance subsidiary is
regulated by insurance statutes and regulations as to the type of investments
that it is permitted to make and the amount of funds that may be used for any
one type of investment. In light of these statutes and regulations, the majority
of the Company's investment portfolio is invested in high quality, low risk
investments.
As of JuneSeptember 30, 2005, 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 since 2000 as available for sale.
Liquidity and Capital Resources
The Company has two principal needs for cash - the insurance company's
contractual obligations to policyholders and the payment of operating expenses.
Cash and cash equivalents as a percentage of total assets were approximately 5%1%
and 4% as of JuneSeptember 30, 2005, and December 31, 2004, respectively. Fixed
maturities as a percentage of total assets were approximately 46%44% and 50% as of
JuneSeptember 30, 2005 and December 31, 2004, respectively.
Net cash provided by operating activities was $ 676,5735,623,885 and $ 187,0892,022,616 for
the sixnine months ending JuneSeptember 30, 2005 and 2004, respectively.
Sources of operating cash flows of the Company, as with most insurance entities,
is comprised primarily of premiums received on life insurance products and
income earned on investments. Uses of operating cash flows consist primarily of
payments of benefits to policyholders and beneficiaries and operating expenses.
Premiums received have shown a steady decline historically, as the Company has
not actively marketed new products in several years. Premiums received have
shown a steady decline historically, as the Company has not actively marketed
new products in several years. Sources of operating cashflowscash
flows increased approximately $ 2,100,0001,970,000 in 2005 compared to 2004, with
investment gains representing almost all of the increase. See discussion under
results of operations - revenues for a more detailed discussion of the changes
in premiums and investment income.
The decline in operating cash sources has historically been offset by declines
in policy benefits payments. Cash payments for death claims represent the
largest component of uses of cash within policy benefits. The decline in
operating cash sources has historically been offset by declines in policy
benefits payments. Cash payments for death claims represent the largest
component of uses of cash within policy benefits. Uses of operating cashflowscash flows declined approximately
$ 1,300,0001,060,000 in 2005 compared to 2004. This decline is the result of a decrease
in policy benefit payments. See discussion under results of operations -
expenses for a more detailed discussion of changes in operating expenses and
policy benefits.
Future policy benefits are primarily long-term in nature and therefore, the
Company's investments are predominantly in long-term fixed maturity investments
such as bonds and mortgage loans which provide sufficient return to cover these
obligations. The Company has the ability and intent to hold these investments to
maturity; consequently, the Company's investment in fixed maturities held to
maturity is reported in the financial statements at their amortized cost.
Many of the Company's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to cover
the Company's unamortized deferred policy acquisition costs with respect to the
policy being surrendered.
Net cash used in investing activities was $ (15,205,125) for the nine-month
period ending September 30, 2005. Net cash provided by investing activities was
$ 3,383,903 and $ 2,354,8925,111,928 for the six-month periodsnine-month period ending JuneSeptember 30, 2005 and 2004, respectively.2004. The most
significant aspect of cash provided by or used in investing activities is the
fixed maturity transactions. The Company had fixed maturities in the amount of
$ 17,699,09023,120,537 and $ 47,830,85264,444,104 that sold and matured in the first sixnine months of
2005 and 2004, respectively. This is in addition to the $ 2,800,4062,932,302 and
$ 10,627,24413,322,714 of the held to maturity securities that matured in the first sixnine
months of 2005 and 2004, respectively. In addition, the Company purchased
$ 5,762,2806,753,530 and $ 50,089,77565,547,217 of fixed maturities in 2005 and 2004, respectively.
Also, the investment in mortgage loans increased from $ 1,176,7372,626,540 in the first
sixnine months of 2004 to $ 13,892,44025,406,670 in the same period of 2005. The Company
invested $ 16,175,252 in real estate during the first nine months of 2005,
compared to $ 2,626,540 for the same period of 2004.
Net cash provided by financing activities was $ 1,215,776 and $ 1,007,4631,530,521 for the sixnine month
periodsperiod ending JuneSeptember 30, 2005 and 2004, respectively.2005. Net cash used in financing activities was
$ (929,483) for the nine month period ending September 30, 2004. Policyholder
contract deposits decreased 6% in the first sixnine months of 2005 compared to the
same period in 2004. Policyholder contract withdrawals decreased 15%13% in the
first sixnine months of 2005 compared to the same period in 2004.
At JuneSeptember 30, 2005 and 2004, the Company had no short-term debt outstanding, compared to
$ 2,275,000 outstanding at June 30, 2004.outstanding.
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, are primarily
provided by its subsidiaries. On a parent only basis, UTG's cash flow is
dependent on management fees received from its subsidiaries and earnings
received on cash balances. At JuneSeptember 30, 2005, substantially all of the
consolidated shareholders equity represents net assets of its subsidiaries. The
Company's insurance subsidiary has maintained adequate statutory capital and
surplus and has not used surplus relief or financial reinsurance, which have
come under scrutiny by many state insurance departments. The payment of cash
dividends to shareholders is not legally restricted. However, the state
insurance department regulates insurance company dividend payments where the
company is domiciled.
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,
2004 UG's total statutory capital and surplus amounted to $ 21,860,401. At
December 31, 2004, UG had a statutory loss from operations of $ 762,152.
Extraordinary dividends (amounts in excess of ordinary dividend limitations)
require prior approval of the insurance commissioner and are not restricted to a
specific calculation.
Management believes the overall sources of liquidity available will be
sufficient to satisfy the Company's financial obligations.
Regulatory Environment
In March 2005, UTG's Board of Directors adopted a proposal to change the state
of incorporation of UTG from Illinois to Delaware by merging UTG with and into a
wholly-owned Delaware subsidiary (the "reincorporation merger"). The Board of
Directors and management of UTG believe that reincorporation into Delaware would
be beneficial to the Company because Delaware corporate law is more
comprehensive, widely used and extensively interpreted than other state
corporate laws, including Illinois corporate law. The reincorporation merger
will effect only a change in UTG's legal domicile and certain other changes of a
legal nature. It will not result in any change in UTG's business, management,
fiscal year, assets or liabilities or location of its principal facilities. At
the 2005 annual meeting of shareholders, the shareholders approved the
reincorporation merger to be effective July 1, 2005.
Accounting Developments
The Financial Accounting Standards Board ("FASB") hasissued Statement No. 154,
Accounting for Changes and Error Corrections - a replacement of APB Opinion No.
20 and FASB Statement No. 3. The statement changes the requirements for the
accounting for and reporting of a change in accounting principle. It also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not issued any new
pronouncements duringinclude specific transition provisions.
The statement is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. The Company will account for
all future changes and error corrections in accordance with the first six monthsrequirements of
2005.Statement No. 154.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk relates, broadly, to changes in the value of financial instruments
that arise from adverse movements in interest rates, equity prices and foreign
exchange rates. The Company is exposed principally to changes in interest rates,
which affect the market prices of its fixed maturities available for sale and
its variable rate debt outstanding. The Company's exposure to equity prices and
foreign currency exchange rates is immaterial. The information presented below
is in U.S. dollars, the Company's reporting currency.
Interest rate risk
The Company's exposure to interest rate changes results from a significant
holding of fixed maturity investments and mortgage loans on real estate, all of
which comprised approximately 73%70% of the investment portfolio as of
JuneSeptember 30, 2005. These investments are mainly exposed to changes in treasury
rates. The fixed maturities investments include U.S. government bonds,
securities issued by government agencies, mortgage-backed bonds and corporate
bonds. Approximately 77%79% of the fixed maturities owned at JuneSeptember 30, 2005 are
instruments of the United States government or are backed by U.S. government
agencies or private corporations carrying the implied full faith and credit
backing of the U.S. government.
To manage interest rate risk, the Company performs periodic projections of asset
and liability cash flows to evaluate the potential sensitivity of the
investments and liabilities. Management assesses interest rate sensitivity with
respect to the available-for-sale fixed maturities investments using
hypothetical test scenarios that assume either upward or downward 100-basis
point shifts in the prevailing interest rates. The following tables set forth
the potential amount of unrealized gains (losses) that could be caused by
100-basis point upward and downward shifts on the available-for-sale fixed
maturities investments as of JuneSeptember 30, 2005:
Decreases in Interest Rates Increases in Interest Rates
----------------------- ------------------ ----------------- ---------------------- -----------------------
200 Basis 100 Basis 100 Basis 200 Basis 300 Basis
Points Points Points Points Points
----------------------- ------------------ ----------------- ---------------------- -----------------------
$ 6,707,0006,186,000 $ 4,206,0003,793,000 $ (5,060,000)(6,452,000) $ (10,694,000)(11,819,000) $ (16,062,000)(17,041,000)
----------------------- ------------------ ----------------- ---------------------- -----------------------
While the test scenario is for illustrative purposes only and does not reflect
our expectations regarding future interest rates or the performance of
fixed-income markets, it is a near-term change that illustrates the potential
impact of such events. Due to the composition of the Company's book of insurance
business, management believes it is unlikely that the Company would encounter
large surrender activity due an interest rate increase that would force the
disposal of fixed maturities at a loss.
There are no fixed maturities or other investment that management classifies as
trading instruments. At JuneSeptember 30, 2005 and December 31, 2004, there were no
investments in derivative instruments.
The Company had no long-term debt, capital lease obligations, material operating
lease obligations or purchase obligations outstanding as of JuneSeptember 30, 2005.
Future policy benefits reflected as liabilities of the Company on its balance
sheet as of JuneSeptember 30, 2005, represent actuarial estimates of liabilities of
future policy obligations such as expected death claims on the insurance
policies in force as of the financial reporting date. Due toThe following table
provides information about the natureCompany's estimated future policy obligations.
---------------------------- ----------------- ---------------- ----------------- ----------------- ----------------
2006 2007 2008 2009 2010
---------------------------- ----------------- ---------------- ----------------- ----------------- ----------------
---------------------------- ----------------- ---------------- ----------------- ----------------- ----------------
Future policy benefits $17,200 $17,200 $17,200 $17,200 $17,200
---------------------------- ----------------- ---------------- ----------------- ----------------- ----------------
These are estimates of future policy benefits presented are based on historic
trend analysis and actuarially determined estimates of future results. Actual
results could vary significantly from these liabilities, maturity is event dependentestimates resulting in a material
impact on the Company's liquidity and therefore, these liabilities have
been classified as having an indeterminate maturity.financial condition.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this quarterly report, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the President and Chief Executive Officer (the
"CEO") and the Chief Financial Officer (the "CFO"), of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective
in alerting them on a timely basis to material information relating to the
Company required to be included in the Company's periodic reports filed or
submitted under the Securities Exchange Act of 1934, as amended. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to the date of the
evaluation.
PART II. OTHER INFORMATION.ITEM 1. LEGAL PROCEEDINGS.
NONE
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Shareholders held on June 15, 2005, the following
matters were submitted to the shareholders of UTG and voted on as indicated:
1. To elect eight directors to serve for a term of one year and until their
successors are elected and qualified:
--------------------------- --------------- ---------------- ---------------
DIRECTOR FOR WITHHELD AGAINST
--------------------------- --------------- ---------------- ---------------
John S. Albin 2,746,076 510 10,059
--------------------------- --------------- ---------------- ---------------
Randall L. Attkisson 2,731,638 14,810 10,197
--------------------------- --------------- ---------------- ---------------
Joseph A. Brinck 2,746,574 0 10,071
--------------------------- --------------- ---------------- ---------------
Jesse T. Correll 2,731,680 14,810 10,155
--------------------------- --------------- ---------------- ---------------
Ward F. Correll 2,731,638 14,810 10,197
--------------------------- --------------- ---------------- ---------------
Thomas F. Darden 2,746,658 0 9,987
--------------------------- --------------- ---------------- ---------------
William W. Perry 2,746,658 0 9,987
--------------------------- --------------- ---------------- ---------------
James P. Rousey 2,731,764 14,810 10,071
--------------------------- --------------- ---------------- ---------------
2. To change the state of incorporation of the Company from Illinois to
Delaware by merging the Company into a wholly-owned subsidiary of the
Company that is incorporated under the laws of Delaware:
In March 2005, UTG's Board of Directors adopted a proposal to change the
state of incorporation of UTG from Illinois to Delaware by merging UTG with
and into a wholly-owned Delaware subsidiary (the "reincorporation merger").
The Board of Directors and management of UTG believe that reincorporation
in Delaware would be beneficial to the Company because Delaware corporate
law is more comprehensive, widely used and extensively interpreted than
other state corporate laws, including Illinois corporate law. The
reincorporation merger would effect only a change in UTG's legal domicile
and certain other changes of a legal nature. It would not result in any
change in UTG's business, management, fiscal year, assets or liabilities or
location of its principal facilities.
A vote of the shareholders of UTG regarding the proposed merger occurred on
June 15, 2005 at the annual shareholders meeting. Shareholders cast
2,727,502 votes in favor of the merger and 29,487 votes against the merger.
On July 1, 2005, United Trust Group, Inc., an Illinois corporation (UTG)
merged with and into its wholly-owned subsidiary, UTG, Inc., a Delaware
corporation.NONE
ITEM 5. OTHER INFORMATION.
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
11. Exhibits
Exhibit Number Description
2.1 Articles of Merger of United Trust Group, Inc., An Illinois
Corporation with and into UTG, Inc., A Delaware Corporation dated as
of July 1, 2005, including exhibits thereto.
3.1 Articles of Incorporation of the Registrant and all amendments
thereto.
3.2 By-Laws for the Registrant and all amendments thereto.
31.1 Certification of Jesse T. Correll, Chief Executive Officer and
Chairman of the Board of UTG, as required pursuant to Section 302
31.2 Certification of Theodore C. Miller, Chief Financial Officer, Senior
Vice President and Corporate Secretary of UTG, as required pursuant to
Section 302
32.1 Certificate of Jesse T. Correll, Chief Executive Officer and Chairman
of the Board of UTG, as required pursuant to 18 U.S.C. Section 1350
32.2 Certificate of Theodore C. Miller, Chief Financial Officer, Senior
Vice President and Corporate Secretary of UTG, as required pursuant to
18 U.S.C. Section 1350
12. REPORTS ON FORM 8-K
On April 20,July 1, 2005, UTG filed a report on Form 8-K regarding Item 1.01 Entry into
a3.03 Material
Definitive Agreement.Modification to Rights of Security Holders. The information reported in the 8-K
discussed the completionmerger of the agreementUnited Trust Group, Inc. (UTG), an Illinois
corporation, with and into its wholly-owned subsidiary, UTG, Inc. (UTG, Inc), a
Delaware corporation, for the salepurpose of 2,216,776 shareseffecting a change in the Company's
state of common stock
ownedincorporation from Illinois to Delaware.
On September 21, 2005, UTG filed a report on Form 8-K regarding Item 4.01
Changes in Registrant's Certifying Accountant. The information reported in the
8-K discussed the dismissal of BNL Financial Corporation.
the Registrant's independent registered public
account firm effective at the conclusion of its review of the Registrant's third
quarter financial statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UTG, INC.
(Registrant)
Date: AugustNovember 9, 2005 By /s/ Randall L. Attkisson
Randall L. Attkisson
President, Chief Operating Officer
and Director
Date: AugustNovember 9, 2005 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
EXHIBIT INDEX
Exhibit Number Description
2.1 Articles of Merger of United Trust Group, Inc., An Illinois
Corporation with and into UTG, Inc., A Delaware Corporation dated as
of July 1, 2005, including exhibits thereto.
3.1 Articles of Incorporation of the Registrant and all amendments
thereto.
3.2 By-Laws for the Registrant and all amendments thereto.
31.1 Certification of Jesse T. Correll, Chief Executive Officer and
Chairman of the Board of UTG, as required pursuant to Section 302
31.2 Certification of Theodore C. Miller, Chief Financial Officer, Senior
Vice President and Corporate Secretary of UTG, as required pursuant to
Section 302
32.1 Certificate of Jesse T. Correll, Chief Executive Officer and Chairman
of the Board of UTG, as required pursuant to 18 U.S.C. Section 1350
32.2 Certificate of Theodore C. Miller, Chief Financial Officer, Senior
Vice President and Corporate Secretary of UTG, as required pursuant to
18 U.S.C. Section 1350