FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
------------------
Commission File No. 0-16867
UNITED TRUST GROUP, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 37-1172848
(State of incorporation) (I.R.S. Employer
identification No.)
5250 SOUTH SIXTH STREET
P.O. BOX 5147
SPRINGFIELD, IL 62703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (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 [ ]
At October 31, 2002 there were 3,481,970 shares of common stock of the
registrant outstanding.
UNITED TRUST GROUP, INC. AND SUBSIDIARIES
(The "Company")
TABLE OF CONTENTS
Part 1. Financial Information................................................3
ITEM 1. FINANCIAL STATEMENTS...............................................3
Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001......................................................3
Consolidated Statements of Operations for the nine and three
months ended September 30, 2002 and 2001...............................4
Consolidated Statement of Changes in Shareholders' Equity for the
nine months ended September 30, 2002...................................5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001............................................6
Notes to Consolidated Financial Statements................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........................................15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........19
ITEM 4. CONTROLS AND PROCEDURES ..........................................20
PART II. OTHER INFORMATION..................................................21
ITEM 1. LEGAL PROCEEDINGS.................................................21
ITEM 2. CHANGE IN SECURITIES..............................................21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............21
ITEM 5. OTHER INFORMATION.................................................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................21
SIGNATURES....................................................................22
CERTIFICATIONS ...............................................................23
EXHIBIT INDEX.................................................................25
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
---------------------------------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 2002 2001*
----------------- -----------------
Investments:
Fixed maturities at amortized cost
(market $65,370,830 and $77,725,410) $ 62,752,005 $ 75,005,395
Investments held for sale:
Fixed maturities, at market
(cost $110,241,610 and $97,584,094) 113,997,268 98,628,440
Equity securities, at market
(cost $4,122,887 and $3,937,812) 4,862,102 3,852,716
Mortgage loans on real estate at amortized cost 23,788,416 23,386,895
Investment real estate, at cost,
net of accumulated depreciation 17,323,552 18,226,451
Policy loans 13,372,274 13,608,456
Short-term investments 426,173 581,382
----------------- -----------------
236,521,790 233,289,735
Cash and cash equivalents 15,753,940 15,477,348
Accrued investment income 2,470,596 3,002,860
Reinsurance receivables:
Future policy benefits 33,283,285 33,776,688
Policy claims and other benefits 3,752,672 4,042,779
Cost of insurance acquired 24,112,755 33,666,336
Deferred policy acquisition costs 2,599,595 3,107,919
Costs in excess of net assets purchased,
net of accumulated amortization 0 345,779
Property and equipment,
net of accumulated depreciation 2,265,917 2,459,117
Income taxes receivable, current 231,758 215,865
Other assets 228,427 139,245
----------------- -----------------
Total assets $ 321,220,735 $ 329,523,671
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 235,015,786 $ 236,449,241
Policy claims and benefits payable 2,210,767 2,781,920
Other policyholder funds 1,179,580 1,255,990
Dividend and endowment accumulations 12,722,930 13,055,024
Income taxes payable:
Deferred 11,854,167 13,569,523
Notes payable 4,508,797 4,400,670
Other liabilities 5,853,491 5,465,896
----------------- -----------------
Total liabilities 273,345,518 276,978,264
----------------- -----------------
Minority interests in consolidated subsidiaries 0 7,771,793
----------------- -----------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share
Authorized 7,000,000 shares - 3,484,825 and 3,549,791 shares
issued after deducting treasury shares of 140,202 and 75,236 69,697 70,996
Additional paid-in capital 42,323,860 42,789,636
Retained earnings 2,531,450 1,004,238
Accumulated other comprehensive income 2,950,210 908,744
----------------- -----------------
Total shareholders' equity 47,875,217 44,773,614
----------------- -----------------
Total liabilities and shareholders' equity $ 321,220,735 $ 329,523,671
================= =================
* Balance sheet audited at 12/31/01
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
---------------- ----------------- ----------------- -----------------
Revenues:
Premiums and policy fees $ 4,458,645 $ 5,006,069 $ 14,408,541 $ 15,839,391
Reinsurance premiums and policy fees (732,822) (868,708) (2,017,573) (2,378,771)
Net investment income 3,336,329 3,557,702 9,931,415 11,503,804
Realized investment gains and (losses), net 3,404 32,798 14,831 45,392
Other income 188,129 235,413 608,487 387,044
---------------- ----------------- ----------------- -----------------
7,253,685 7,963,274 22,945,701 25,396,860
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 5,436,371 4,719,889 15,847,861 15,043,502
Reinsurance benefits and claims (950,836) (732,664) (3,010,828) (2,038,346)
Annuity 388,660 362,899 962,456 930,153
Dividends to policyholders 236,395 236,133 756,206 781,983
Commissions and amortization of deferred
policy acquisition costs 128,619 123,480 624,730 876,835
Amortization of cost of insurance acquired 372,664 387,990 1,143,859 1,185,860
Operating expenses 1,441,502 1,573,817 4,621,069 4,856,690
Interest expense 71,230 108,018 204,834 244,438
---------------- ----------------- ----------------- -----------------
7,124,605 6,779,562 21,150,187 21,881,115
Income before income taxes, minority interest
and equity in earnings of investees 129,080 1,183,712 1,795,514 3,515,745
Income tax (expense) credit 198,419 (383,753) (4,687) (1,087,195)
Minority interest in income of
consolidated subsidiaries 0 (154,086) (263,615) (463,527)
---------------- ----------------- ----------------- -----------------
Net income $ 327,499 $ 645,873 $ 1,527,212 $ 1,965,023
================ ================= ================= =================
Basic earnings per share from continuing
operations and net income $ 0.09 $ 0.18 $ 0.44 $ 0.52
================ ================= ================= =================
Diluted earnings per share from continuing
operations and net income $ 0.09 $ 0.18 $ 0.44 $ 0.52
================ ================= ================= =================
Basic weighted average shares outstanding 3,488,731 3,565,462 3,505,647 3,793,886
================ ================= ================= =================
Diluted weighted average shares outstanding 3,488,731 3,565,462 3,505,647 3,793,886
================ ================= ================= =================
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the nine months ended September 30, 2002 (Unaudited)
------------------------------------------------------------------------------------------------------------------------
Common stock
Balance, beginning of year $ 70,996
Issued during year 0
Purchase treasury shares (1,299)
------------------
Balance, end of period 69,697
------------------
Additional paid-in capital
Balance, beginning of year 42,789,636
Issued during year 0
Purchase treasury shares (465,776)
------------------
Balance, end of period 42,323,860
------------------
Retained earnings
Balance, beginning of year 1,004,238
Net income 1,527,212 $ 1,527,212
------------------ ------------------
Balance, end of period 2,531,450
------------------
Accumulated other comprehensive income
Balance, beginning of year 908,744
Other comprehensive income
Unrealized holding gain on securities
net of minority interest and
reclassification adjustment 2,041,466 2,041,466
------------------ ------------------
Comprehensive income $ 3,568,678
==================
Balance, end of period 2,950,210
------------------
Total shareholders' equity, end of period $ 47,875,217
==================
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30, September 30,
2002 2001
--------------- --------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 1,527,212 $ 1,965,023
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization/accretion of fixed maturities 343,663 87,998
Realized investment gains (14,831) (45,392)
Policy acquisition costs deferred (55,000) (129,000)
Amortization of deferred policy acquisition costs 563,324 639,933
Amortization of cost of insurance acquired 1,143,859 1,185,860
Amortization of costs in excess of net
assets purchased 0 67,500
Depreciation 420,367 272,786
Minority interest 263,615 463,527
Change in accrued investment income 532,264 832,488
Change in reinsurance receivables 783,510 643,526
Change in policy liabilities and accruals (1,639,905) (1,251,478)
Charges for mortality and administration of
universal life and annuity products (6,549,405) (7,094,380)
Interest credited to account balances 4,147,153 4,368,033
Change in income taxes payable (54,032) 1,076,855
Change in other assets and liabilities, net (627,362) (2,095,175)
--------------- --------------
Net cash provided by operating activities 784,432 988,104
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 9,070,000 15,250,000
Fixed maturities matured 23,803,620 43,515,439
Equity securities 0 2,240,967
Mortgage loans 5,758,639 11,156,017
Real estate 913,978 1,334,693
Policy loans 2,323,496 2,281,517
Short-term 155,209 2,154,528
--------------- --------------
Total proceeds from investments sold and matured 42,024,942 77,933,161
Cost of investments acquired:
Fixed maturities held for sale (30,562,133) (56,082,030)
Fixed maturities (3,053,805) (1,124,925)
Equity securities (185,075) (1,143,724)
Mortgage loans (6,160,160) (6,654,908)
Real estate (206,849) (250,781)
Policy loans (2,087,314) (1,858,852)
Short-term 0 (1,118,435)
--------------- --------------
Total cost of investments acquired (42,255,336) (68,233,655)
Purchase of property and equipment (22,043) (78,888)
Sale of property and equipment 0 201,064
--------------- --------------
Net cash provided by (used in) investing activities (252,437) 9,821,682
Cash flows from financing activities:
Policyholder contract deposits 7,835,749 8,751,698
Policyholder contract withdrawals (6,206,704) (7,276,743)
Proceeds from line of credit 2,000,000 0
Purchase of treasury stock (467,075) (1,123,234)
Purchase of stock of subsidiaries 0 (21,600)
Payments from FCC merger (1,525,500) 0
Payments of principal on notes payable (1,891,873) 0
--------------- --------------
Net cash provided by (used in) financing activities (255,403) 330,121
--------------- --------------
Net increase in cash and cash equivalents 276,592 11,139,907
Cash and cash equivalents at beginning of period 15,477,348 15,065,076
--------------- --------------
Cash and cash equivalents at end of period $ 15,753,940 $ 26,204,983
=============== ==============
UNITED TRUST GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared by United
Trust Group, 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,
2001.
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.
At September 30, 2002, consolidated subsidiaries of UTG were as depicted on the
following organizational chart. In addition, this document may at times refer to
Jesse Correll, the Company's Chairman and CEO, and his affiliated entities who
own a majority of UTG's outstanding common stock. See note 9 to the consolidated
financial statements regarding the June 12, 2002 merger of First Commonwealth
Corporation, a former subsidiary of UTG ("FCC"), with and into UTG.
2. INVESTMENTS
At September 30, 2002 and December 31, 2001, fixed maturities and fixed
maturities held for sale represented 75% and 74% of total invested assets,
respectively. As prescribed by the various state insurance department statutes
and regulations applicable to UTG's insurance subsidiaries, the insurance
companies' investment portfolio is required to be invested in investment grade
securities to provide ample protection for policyholders. The insurance
subsidiaries do not invest in so-called "junk bonds" or similar investments. As
of September 30 2002, 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
value, 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 September 30, 2002 and December 31, 2001, the Company had $4,508,797 and
$4,400,670 in long-term debt outstanding, respectively.
09/30/02 12/31/01
------------- -------------
Subordinated 20 yr. Notes 0 514,674
Other notes payable 3,108,797 3,885,996
Lines of credit 1,400,000 0
------------- -------------
$ 4,508,797 $ 4,400,670
============= =============
A. Subordinated debt
The subordinated debt was incurred June 16, 1992 as a part of the acquisition of
the now dissolved Commonwealth Industries Corporation. These notes bear interest
at the variable rate of 1% under prime per annum (paid quarterly). In May 2002 a
principal payment of $113,112 was made on the subordinated debt. On July 9,
2002, the remaining outstanding balance of $401,562 on these notes was paid.
B. Other notes payable
The other notes payable were incurred in April 2001 to facilitate the repurchase
of common stock owned primarily by James E. Melville and Larry E. Ryherd, two
former officers and directors of UTG, and members of their respective families.
These notes bear interest at the fixed rate of 7% per annum (paid quarterly)
with payments of principal to be made in five equal annual installments, the
first principal payment of which, in the amount of $777,199, was made on March
31, 2002.
The collective scheduled principal reductions on these notes for the next five
years is as follows:
Year Amount
-------- -----------
2002 $ 0
2003 777,199
2004 777,199
2005 777,199
2006 777,200
C. Lines of Credit
On November 15, 2001, UTG was extended a $3,300,000 line of credit from the
First National Bank of the Cumberlands located in Livingston, Tennessee. The
First National Bank of the Cumberlands is owned by Millard V. Oakley, who is a
director of UTG. The line of credit will expire one-year from the date of issue.
The interest rate on the line of credit is variable and indexed to be the lowest
of the U.S. prime rates as published in the money section of the Wall Street
Journal, with any interest rate adjustments to be made monthly. At September 30,
2002, the interest rate was 4.75%, and the Company had outstanding borrowings of
$1,000,000 attributable to this line of credit. Subsequent to September 30,
2002, the line of credit was repaid in the amount of $1,000,000. The draws on
this line of credit were used to facilitate the payments due to the former
shareholders of FCC as a result of, the June 12, 2002 merger of FCC with and
into UTG, as further described in note 9 to the consolidated financial
statements. UTG anticipates renewing this line of credit for an additional
one-year term upon original maturity.
On April 1, 2002, UTG was extended a $5,000,000 line of credit from an
unaffiliated third party, Southwest Bank of St. Louis. The line of credit will
expire one-year from the date of issue. As collateral for any draws under the
line of credit, the former FCC, which has now merged into UTG, pledged 100% of
the common stock of its insurance subsidiary UG. Borrowings under the line of
credit will bear interest at the rate of 0.25% in excess of Southwest Bank of
St. Louis' prime rate. At September 30, 2002, the interest rate on this line of
credit was 5.00%, payable monthly, and the Company had outstanding borrowings of
$400,000 attributable to this line of credit. Draws on this line of credit were
used to retire the remaining subordinated debt, as described in note 3A above.
Subsequent to September 30, 2002 the line of credit was repaid in the amount of
$400,000.
Borrowings made on the aforementioned lines of credit were repaid on October 22,
2002, facilitated by a dividend payment of $1,400,000 to UTG from its insurance
subsidiary UG.
4. CAPITAL STOCK TRANSACTIONS
A. Stock Repurchase Program
On June 5, 2001, the Board of Directors of UTG authorized the repurchase from
time to time in the open market or in privately negotiated transactions of up to
$1 million of UTG's common stock. Repurchased shares under the program will be
available for future issuance for general corporate purposes. Through October
31, 2002, UTG has spent $617,898 in the acquisition of 87,890 shares of its
common stock under this program.
B. 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 September 30, 2002 and September 30, 2001 diluted earnings per share
were the same as basic earnings per share since the UTG had no dilutive
instruments outstanding.
C. Officer 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.
At its September 2002 meeting, the Board of Directors of UTG approved initial
offerings under the plan to qualified individuals totaling 367,000 shares,
subject to the registration or qualification of the shares for sale under
Federal or applicable state securities laws. These initial offers are expected
to be made November 1, 2002, at which time each offeree has 30 days to accept
the offer, execute the appropriate documents and pay for the shares to be
acquired. At the end of the 30 day period, accepted offers expire. This initial
offering is at a purchase price of $12.00 per share. Each participant under the
plan must execute 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.
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 amount of any future assessments cannot be predicted with any degree of
certainty.
The State of Florida began an investigation of industrial life insurance
policies in the fall of 1999 regarding policies with race-based premiums. This
investigation has quickly spread to other states and to other types of small
face amount policies and was expanded to consider the fairness of premiums for
all small policies including policies which did not have race-based premiums.
The NAIC historically has defined a "small face amount policy" as one with a
face amount of $15,000 or less. Under current reviews, some states have
increased this amount to policies of $25,000 or less. These states are
attempting to force insurers to refund "excess premiums" to insureds or
beneficiaries of insureds based on a prior settlement. The Company's insurance
subsidiaries have no race-based premium products, but do have policies with face
amounts under the above-scrutinized limitations. The outcome of this issue could
be dramatic on the insurance industry as a whole as well as the Company itself.
The Company will continue to monitor developments regarding this matter to
determine to what extent, if any, the Company may be exposed.
On November 20, 1998, First Southern Funding ("FSF"), an entity controlled by
UTG's Chairman and Chief Executive Officer, Jesse T. Correll, and certain of its
affiliates acquired 929,904 shares of common stock of UTG from UTG and certain
UTG shareholders. As consideration for the shares, FSF paid UTG $10,999,995 and
certain shareholders of UTG $999,990 in cash. Included in the stock acquisition
agreement is an earnings covenant whereby UTG warrants UTG and its subsidiaries
and affiliates will have future earnings of at least $30,000,000 for a five-year
period beginning January 1, 1998. Such earnings are computed based on statutory
results excluding inter-company activities such as inter-company dividends plus
realized and unrealized gains and losses on real estate, mortgage loans and
unaffiliated common stocks. At the end of the covenant period, an adjustment is
to be made equal to the difference between the then market value and statutory
carrying value of real estate still owned that existed at the beginning of the
covenant period. Should UTG not meet the covenant requirements, any shortfall
will first be reduced by the actual average tax rate for UTG for the period,
then will be further reduced by one-half of the percentage, if any, representing
UTG's ownership percentage of the insurance company subsidiaries. This result
will then be reduced by $250,000. The remaining amount will be paid by UTG in
the form of UTG common stock valued at $15.00 per share with a maximum number of
shares to be issued of 500,000, though there is no limit on the number of shares
that can be transferred to the extent that there are legal fees, settlements,
damage payments or other losses as a result of certain legal actions taken. The
price and number of shares shall be adjusted for any applicable stock splits,
stock dividends or other recapitalizations. At September 30, 2002, the Company
had total earnings of $17,124,763 applicable to this covenant. With three months
remaining on the covenant, it appears highly unlikely that UTG will meet the
earnings requirements, resulting in UTG being required to issue additional
shares to FSF or its assigns. Combining current results with management's
expectation for the remainder of 2002, it appears probable at this time that UTG
will be required to issue 500,000 shares of its common stock by April 30, 2003
to satisfy this covenant.
On June 10, 2002 UTG and Fiserv Life Insurance Solutions ("Fiserv LIS") of Cedar
Rapids, Iowa formed an alliance between their respective organizations to
provide third party administration (TPA) services to insurance companies seeking
business process outsourcing solutions. (See note 11 to the consolidated
financial statements). In connection with this alliance UTG paid a license fee
to use "ID3" which is a software system owned by Fiserv LIS to administer an
array of life, health and annuity products in the insurance industry. UTG
additionally contracted with Fiserv LIS to provide data center operations for
business administered by UTG on the "ID3" system. UTG intends to convert its
existing business to "ID3" as soon as practical. UTG has committed to a
five-year contract regarding software maintenance and data center operations
through Fiserv LIS. UTG projects the costs associated with this contract,
including the license fee, data center operations, to be approximately $420,000
per year once fully converted to the "ID3" system, though there can be no
assurance actual costs incurred will not exceed that estimate.
David A. Morlan, individually and on behalf of all others similarly situated v.
Universal Guaranty Life Ins., United Trust Assurance Co., United Security
Assurance Co., United Trust Group, Inc. and First Commonwealth Corporation,
(United States District Court, S.D. III Civil No. 99-274-GPM).
As previously reported in UTG's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 and Quarterly Report on Form 10-Q for the quarterly
periods ended March 31, 2002 and June 30, 2002, respectively, the above lawsuit
was filed on April 21, 1999 by David Morlan and Louis Black in the Southern
District of Illinois against Universal Guaranty Life Insurance Company ("UG")
and United Trust Assurance Company ("UTAC") (merged into UG in 1992). After the
lawsuit was filed, the plaintiffs, who were former insurance agents, amended
their complaint, dropped Louis Black as a plaintiff, and added United Security
Assurance Company ("USAC"), UTG and FCC as defendants. The plaintiffs are
alleging that they were employees of UG, UTAC or USAC rather than independent
contractors. The plaintiffs are seeking class action status and have asked to
recover various employee benefits, costs and attorneys' fees, as well as
monetary damages based on the defendants' alleged failure to withhold certain
taxes.
On September 18, 2001, the case was dismissed without prejudice because Morlan
lacked standing to pursue the claims against defendants. The plaintiffs appealed
the dismissal of the case to the United States Court of Appeals for the Seventh
Circuit. On July 26, 2002, the Seventh Circuit ruled in favor of the plaintiffs
and directed the district court to reinstate the class action. The Company's
petition for rehearing was denied on August 20, 2002. The Company intends to
file a petition for a writ of certiorari with the United States Supreme Court.
In addition to the appeal, on December 10, 2001, a second action was filed
entitled Julie Barrette Ahrens, David Dzuiban, William Milam, Dennis
Schneiderman, individually and on behalf of all others similarly situated v
Universal Guaranty Life, United Trust Assurance Company, United Security
Assurance Company,United Trust Group, Inc and First Commonwealth Corporation
(United States District Court for the Southern District of Illinois.; Case No:
01-4314-JPG). The plaintiffs voluntarily dismissed the second action.
The Company continues to believe that it has meritorious grounds to defend the
lawsuit, and it intends to defend the cases vigorously. It believes that the
defense and ultimate resolution of these lawsuits should not have a material
adverse effect upon the business, results of operations or financial condition
of the Company. Nevertheless, if the plaintiffs' lawsuits were to be successful,
it is likely that such resolution would have a material adverse effect on the
Company's business, results of operations and financial condition. At September
30, 2002, the Company maintains a liability of $250,000 to cover estimated legal
expenses associated with the defense of this matter.
UTG and its subsidiaries are named as defendants in a number of general legal
actions arising as a part of the ordinary course of business relating primarily
to claims made under insurance policies. Those actions have been considered in
establishing the Company's liabilities. Management is of the opinion that the
settlement of those actions will not have a material adverse effect on the
Company's financial position or results of operations.
6. Other Cash Flow Disclosure
On a cash basis, the Company paid $190,379 and $205,414 in interest expense
during the first nine months of 2002 and 2001, respectively. The Company paid
$45,290 and $60,636 in federal income tax during the first nine months of 2002
and 2001, respectively. As of September 30, 2002, the Company has $954,500 that
has not been disbursed to former minority shareholders of FCC in connection with
FCC's merger with and into UTG as further described in note 9 to the
consolidated financial statements.
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 $5,000,000 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
September 30, 2002 Amount or Benefit Amount
--------------------------------------------- ---------------- ------------------ ---------------
Unrealized holding gains during
Period $ 3,142,406 $ (1,099,842) $ 2,042,564
Less: reclassification adjustment
for gains realized in net income (1,689) 591 (1,098)
---------------- ------------------ ---------------
Net unrealized gains
3,140,717 (1,099,251) 2,041,466
---------------- ------------------ ---------------
Other comprehensive income $ 3,140,717 $ (1,099,251) $ 2,041,466
================ ================== ===============
9. MERGER OF UNITED TRUST GROUP, INC. AND FIRST COMMONWEALTH CORPORATION
On May 21, 2002, at a special meeting of shareholders, the shareholders of FCC,
then an 82% owned subsidiary of UTG, voted on and approved that certain
Agreement and Plan of Reorganization and related Plan of Merger, each dated as
of June 5, 2001, between UTG, and FCC (collectively, the "Merger Agreement"),
and the merger contemplated thereby in which FCC would be merged with and into
UTG, with UTG being the surviving corporation of the merger. The merger became
effective on June 12, 2002. Pursuant to the terms and conditions of the Merger
Agreement, each share of FCC stock outstanding at the effective time of the
merger (other than shares held by UTG or shares held in treasury by FCC or by
any of its subsidiaries) was at such time automatically converted into the right
to receive $250 in cash per share.
This allowed UTG to acquire the remaining common shares (approximately 18%) of
FCC that UTG did not own prior to the effective time of the merger.
The purchase price in the merger is comprised of the following components:
Investments $ 41,475,198
Cash and cash equivalents 2,020,960
Accrued investment income 493,609
Reinsurance receivables 6,784,813
Cost of insurance acquired (1,371,740)
Property and equipment 424,217
Other assets 314,974
------------------
Total assets 50,142,031
Policy liabilities and accruals (45,981,006)
Income taxes payable - current and deferred 1,063,735
Notes payable (1,958,373)
Other liabilities (786,387)
------------------
Net purchase price $ 2,480,000
==================
The following table summarizes certain unaudited operating results of UTG as
though the merger transaction had taken place at the beginning of the reporting
periods ending on September 30, 2002 and December 31, 2001, respectively.
September December 31, 2001
30, 2002
-------------------- --------------------
Total revenues $ 22,909,741 $ 33,329,372
Total benefits and other expenses $ 21,150,187 $ 28,912,280
Operating income $ 1,759,554 $ 4,417,092
Net Income $ 1,491,252 $ 3,274,486
Basic earnings per share $ 0.43 $ 0.86
Diluted earnings per share $ 0.43 $ 0.86
10. PROPOSED CHARTER SALES OF SUBSIDIARIES
The Company has listed for sale the Charter (state licenses) of APPL. To
accommodate such a sale, APPL has entered into a 100% coinsurance agreement
effective October 1, 2002, with UG, whereby APPL will cede and UG will assume
all policies in force of APPL as of the effective date of the agreement. The
agreement was approved by the Ohio Department of Insurance pursuant to
regulatory requirements. Following the implementation of the coinsurance
agreement, UG will proceed with an assumption reinsurance of these policies.
Assumption reinsurance transfers all financial responsibility under the policies
to UG as though UG had originally issued the policies. Under the coinsurance
arrangement, UG has primary responsibility for the policies, but APPL remains
contingently liable for the policies. Although an outside third party has
expressed interest in acquiring the APPL Charter, no formal agreements have been
entered into and no commitments by either party have been made or signed at this
time. The sale of the APPL Charter would require regulatory approval prior to
any sale or transfer of the APPL charter.
The Company has also been attempting to sell the ABE Charter. Because of the
lack of interest expressed in the ABE Charter (which only includes six state
licenses), the ABE Board determined at its September 2002 meeting that the sale
of the ABE Charter was not likely. As such, the ABE and UG Boards approved a
merger transaction, whereby ABE would be merged with and into UG. The Boards
empowered certain officers of ABE and UG to execute any documents necessary to
complete the merger. The merger will require the approval of the insurance
departments of the States of Ohio and Illinois prior to completion. The merger
is expected to be completed sometime in early 2003.
11. UTG alliance with fiserv LIS
On June 10, 2002 UTG and Fiserv LIS formed an alliance between their respective
organizations to provide third party administration (TPA) services to insurance
companies seeking business process outsourcing solutions. Fiserv LIS will be
responsible for the marketing and sales function for the alliance, as well as
providing the operations processing service for UTG. UTG will staff the
administration effort. To facilitate the alliance, UTG plans to convert its
existing business and TPA clients to "ID3", a software system owned by Fiserv
LIS to administer an array of life, health and annuity products in the insurance
industry. 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.
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
results of operations, financial condition and liquidity and capital resources.
This analysis should be read in conjunction with the consolidated financial
statements and related 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 September 30,
2002.
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.
Results of Operations
---------------------
(a) Revenues
Premiums and policy fee revenues, net of reinsurance premiums and policy fees,
decreased 8% when comparing the first nine months of 2002 to the same period in
2001, and decreased 10% for the 2002 third quarter compared with the 2001 third
quarter. The Company currently writes little new business. A majority of the new
business currently written is universal life insurance. Collected premiums on
universal life and interest sensitive products is not reflected in premiums and
policy revenues because accounting principles generally accepted in the United
States of America requires that premiums collected on these types of products be
treated as deposit liabilities rather than revenue. Unless the Company acquires
a block of in-force business or significantly increases its marketing of
traditional business, management expects premium revenue to continue to decline
at a rate consistent with prior experience. During 2001, the Company implemented
a conservation effort in an attempt to improve the persistency rate of Company
policies. Several of the customer service representatives of the Company have
become 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, the Company's ability to reach these customers diminished,
making conservation efforts difficult. The conservation efforts described above
are relatively new, but early results are generally positive. Management will
continue to monitor these efforts and make adjustments as seen appropriate to
enhance the future success of the program. The Company is currently exploring
the introduction of a new product to be specifically used by the licensed
customer service representatives as an alternative for the customer in the
conservation efforts. The new product has yet to be marketed as of September 30,
2002. The Company hopes to start marketing the product during the first quarter
of 2003. The success of the new product will depend on the its competitiveness
and profitability. Net investment income decreased 14% when comparing the first
nine months of 2002 to the same period in 2001, and decreased 6% for the 2002
third quarter compared with the 2001 third quarter. The national prime rate
ranged from a high of 9.50% to a low of 6.00% during the first nine months of
2001, and was 4.75% during the first nine months of 2002. This resulted in lower
earnings on short-term funds as well as on longer-term investments acquired.
Should this economic climate continue net investment income may continue to
decline, as the Company, along with others in the insurance industry, seeks
adequate returns on investments, while staying within the conservative
investment guidelines set forth by insurance regulators.
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%. It is expected that monitoring of the interest spreads by management will
provide the necessary margin to adequately provide for associated costs on the
insurance policies the Company currently has in force and will write in the
future. At the March 2001 Board of Directors meeting, the Boards of the
insurance subsidiaries lowered crediting rates one-half percent on all products
that could be lowered. With this reduction, the vast majority of the Company's
rate-adjustable products are now at their guaranteed minimum rates, and as such,
cannot be lowered any further. At the March 2002 Board of Directors meeting, the
Boards of the insurance subsidiaries lowered all remaining rate-adjustable
products to their guaranteed minimum rates. The guaranteed minimum crediting
rates on these products range from 3% to 5.5%. These adjustments were in
response to the continued declines in interest rates in the marketplace describe
above. Policy interest crediting rate changes become effective on an individual
policy basis on the next policy anniversary. If interest rates continue to
decline, the company won't be able to lower rates and both net investment income
and net income will be impacted negatively.
On June 1, 2001, the Company began performing administrative work as a third
party administrator ("TPA") for an unaffiliated life insurance company. The
business being administered is a closed block with approximately 260,000
policies, a majority of which are paid up. The Company receives monthly fees
based on policy in force counts and certain other activity indicators such as
number of premium collections performed. During the first nine months of 2002,
and during the third quarter of 2002, the Company received $392,503, and
$120,881 for this work, respectively. These TPA revenue fees are included in the
line item "other income" on the Company's consolidated statements of operations.
The Company intends to pursue other TPA arrangements, and has recently entered
into an alliance with Fiserv Life Insurance Solutions (Fiserv LIS), to provide
TPA services to insurance companies seeking business process outsourcing
solutions. Fiserv LIS will be responsible for the marketing and sales function
for the alliance, as well as providing the datacenter operations. UTG will staff
the administration effort. Although still in its early stages, management
believes this alliance with Fiserv LIS positions the Company to generate
additional revenues by utilizing the Company's current excess capacity and
administrative services.
(b) Expenses
Benefits, claims and settlement expenses net of reinsurance benefits and claims,
decreased 1% in the first nine months of 2002 compared to the same period in
2001, and increased 11% for the 2002 third quarter compared with the 2001 third
quarter. Death benefit claims were approximately $745,000 and $590,000 more in
the first nine months of 2002 and for the third quarter of 2002 as compared to
the same periods in 2001, respectively. Policy claims vary from year to year and
therefore, fluctuations in mortality are to be expected and are not considered
unusual by management. A review of the death claims register for the applicable
periods revealed nothing unusual or out of the ordinary in the view of
management. Policy surrender benefits decreased approximately $2,000,000 in the
first nine months of 2002 compared to the same period in 2001. Stronger efforts
have been made in policy retention through more personal contact with our
customers including telephone calls to discuss alternatives and reasons for a
request to surrender their policy. The short-term impact of such fewer policy
surrenders is negligible since a reserve for future policy benefits payable is
held which is, at a minimum, equal to or even greater than the cash surrender
value of a policy. The benefit of fewer policy surrenders is primarily received
over a longer time period through the retention of the Company's asset base.
Commissions and amortization of deferred policy acquisition costs decreased 29%
for the first nine months of 2002 when compared to the same period in 2001, and
increased slightly for the 2002 third quarter compared with the 2001 third
quarter. The most significant factor in the year-to-date 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. 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. The third quarter comparison
reflects the fact that first year policy premiums received have been declining
to a very immaterial level.
Operating expenses decreased 5% for the first nine months of 2002 when compared
to the same period in 2001, and decreased 8% for the 2002 third quarter compared
with the 2001 third quarter. During 2001, the Company transferred all remaining
functions of its insurance subsidiary APPL from Huntington, West Virginia to the
Springfield, Illinois location, and sold the West Virginia property. The closing
of the Huntington office has resulted in an approximately $400,000 reduction to
operating expenses in 2002. During the current year the Company changed health
insurance coverage on its employees. This change reduced 2002 operating expenses
approximately $75,000, while maintaining similar coverage amounts. Additional
expense reductions have been made in the normal course of business, as the
Company continually monitors expenditures looking for savings opportunities. The
aforementioned expense reductions have been partially offset by increased
operating costs attributable to the Company's conversion of its existing
business and TPA clients to "ID3", a software system owned by Fiserv LIS (see
note 11 to the consolidated financial statements). Conversion costs to date
include fees for initial licensing, consultation, and training.
(c) Net income
The Company had a net income of $1,527,212 in the first nine months of 2002
compared to net income of $1,965,023 for the same period in 2001 and net income
of $327,499 in the third quarter of 2002 as compared to $645,873 for the third
quarter of 2001. The decrease in net income can be attributed to declining
premium revenues, a significant decrease in net investment income, and increased
death benefits.
Financial Condition
-------------------
Total shareholders' equity increased approximately $3,100,000 at September 30,
2002 compared to December 31, 2001. The increase was attributable to net income
of approximately $1,500,000 and unrealized gains on investments of approximately
$2,000,000, partially offset by cost of purchasing treasury shares of
approximately $400,000. With the June 12, 2002 merger of the former FCC with and
into UTG (see note 9 to the consolidated financial statements), the Company now
owns 100% of all its consolidated subsidiaries, eliminating the minority
interest liability.
Investments represent approximately 74% and 71% of total assets at September 30,
2002 and December 31, 2001, respectively. Accordingly, investments are the
largest asset group of the Company. The Company's insurance subsidiaries are
regulated by insurance statutes and regulations as to the type of investments
that they are 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.
The Company does not own any "junk bonds" or similar investments. As of
September 30, 2002, 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 of the Company. 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 three principal needs for cash - the insurance companies'
contractual obligations to policyholders, the payment of operating expenses and
the servicing of its long-term debt. Cash and cash equivalents as a percentage
of total assets were approximately 5% as of September 30, 2002, and December 31,
2001, respectively. Fixed maturities as a percentage of total invested assets
were approximately 75% and 74% as of September 30, 2002 and December 31, 2001,
respectively.
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 long-term fixed maturities
held to maturity is reported in the financial statements at their amortized
cost. However, to provide additional flexibility and liquidity, the Company has
categorized almost all fixed maturity investments acquired since 2000 as
available for sale. The investments held for sale are carried at market value,
with changes in market value directly charged to shareholders' equity.
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 provided by operating activities was $784,432 and $988,104 for the nine
month periods ending September 30, 2002 and September 30, 2001, respectively.
The net cash provided by operating activities plus net policyholder contract
deposits after the payment of policyholder withdrawals equaled $2,413,477 for
the first nine months of 2002 and $2,463,059 for the same period in 2001.
Management utilizes this measurement of cash flows as an indicator of the
performance of the Company's insurance operations, since 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 provided by (used in) investing activities was $(252,437) and
$9,821,682, for the nine month periods ending September 30, 2002 and September
30, 2001, respectively. The timings of maturities and fewer repurchase
opportunities at attractive yields resulted in the higher amount of cash
provided by investing activities in the first nine months of 2001. The most
significant aspect of cash provided by (used in) investing activities, are the
fixed maturity transactions. Fixed maturities account for 80% and 84% of the
total cost of investments acquired in the first nine months of 2002 and for the
same period in 2001, respectively. The Company has not directed its investable
funds to so-called "junk bonds" or similar investments. Management expects to
continue investing primarily in fixed maturity investments over the short-term.
Net cash provided by (used in) financing activities was $(255,403) and $330,121
for the nine month periods ending September 30, 2002 and September 30, 2001,
respectively. Policyholder contract deposits decreased 10% in the first nine
months of 2002 compared to the same period in 2001. Policyholder contract
withdrawals decreased 15% in the first nine months of 2002 compared to the same
period in 2001. In addition, as of September 30, 2002, the Company had purchased
$467,075 in treasury stock under its stock repurchase program, and paid former
FCC shareholders $1,525,500 pursuant to the merger of FCC with and into UTG on
June 12, 2002.
At September 30, 2002, the Company had a total of $4,508,797 in long-term debt
outstanding. $3,108,797 is debt relating to the April 2001 purchase by UTG of
the common stock owned primarily by James E. Melville and Larry E. Ryherd, two
former officers and directors of the Company, and members of their respective
families. Future principal payments of $777,199 are due annually over the next
four years at an interest rate of 7% per annum (annual payments due April 12).
At September 30, 2002 the Company had borrowings of $1,000,000 on a line of
credit from the First National Bank of the Cumberlands at a floating rate equal
to prime which is currently 4.75%. Subsequent to September 30, 2002, the line of
credit was repaid in the amount of $1,000,000. The draws on this line of credit
were being used to facilitate the payment due to former FCC shareholders,
following the June 12, 2002 merger of FCC with and into UTG. At September 30,
2002 the Company had borrowings of $400,000 on a line of credit from Southwest
Bank of St. Louis. Borrowings under this line of credit bear interest at the
rate of .25% in excess of Southwest Bank of St. Louis' prime rate. Subsequent to
September 30, 2002 the line of credit was repaid in the amount of $400,000.
Borrowings made on both the aforementioned lines of credit were repaid using a
$1,400,000 dividend payment made to UTG from its insurance subsidiary UG on
October 22, 2002. Also during the third quarter of 2002 the balance of the
subordinated debt was retired with a $401,562 principal payment made on July 9,
2002 (see note 3 to the consolidated financial statements). In addition to debt
repayments, UTG projects costs attributable to the Company's conversion of its
existing business and TPA clients to "ID3", a software system owned by Fiserv
LIS (see note 11 to the consolidated financial statements) to be approximately
$420,000 per year once fully converted to the "ID3" system. At September 30,
2002, the Company has a remaining liability to shareholders of the former FCC of
approximately $950,000. This liability is to individual shareholders who have
not yet returned their FCC stock certificates and letters of transmittal to the
Company to claim their payment of $250 for each share of FCC common stock they
owned prior to the effective date of the merger of FCC with and into UTG on June
12, 2002. Management believes overall sources of cash available are more than
adequate to service the Company's debt and commitments. These sources include
current cash balances of UTG, expected future operating cashflows and existing
lines of credit.
UTG is a holding company and pays the operating expenses for itself and its
subsidiaries. Funds required to meet its expenses are primarily provided through
the receipt of management fees from its subsidiaries. At September 30, 2002,
substantially all of the consolidated shareholders' equity represents net assets
of its subsidiaries and receivables from its subsidiaries. The Company's
insurance subsidiaries have maintained adequate statutory capital and surplus
and have 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.
UTG is the parent of UG. UG's dividend limitations are described below.
Ohio domiciled insurance companies such as UG 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, 2001, UG had a statutory gain from operations of $2,212,215.
At December 31, 2001, UG's statutory capital and surplus amounted to
$16,105,265. 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 an ordinary dividend of $800,000
in April of 2002, and paid an ordinary dividend of $1,400,000 in October of
2002.
Management believes the overall sources of liquidity available will be
sufficient to satisfy the Company's financial obligations.
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 is presented in
U.S. Dollars, the Company's reporting currency.
Interest rate risk
------------------
The Company could experience economic losses if it were required to liquidate
fixed income securities available for sale during periods of rising and/or
volatile interest rates. The Company attempts to mitigate its exposure to
adverse interest rate movements through a staggering of the maturities of its
fixed maturity investments and through maintaining cash and other short term
investments to assure sufficient liquidity to meet its obligations and to
address reinvestment risk considerations.
Tabular presentation
--------------------
The following table provides information about the Company's long term debt that
is sensitive to changes in interest rates. The table presents principal cash
flows and related weighted average interest rates by; expected maturity dates.
The Company has no derivative financial instruments or interest rate swap
contracts.
------------------------------------------------------------------------------------------------------------------------
September 30, 2002
------------------------------------------------------------------------------------------------------------------------
Expected maturity date
------------------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total Fair value
------------------ ------------ ---------- ---------- ---------- ---------- ------------ --------------- ---------------
Long term debt
------------------ ------------ ---------- ---------- ---------- ---------- ------------ --------------- ---------------
Fixed rate 0 777,199 777,199 777,199 777,200 0 3,108,797 3,241,765
------------------ ------------ ---------- ---------- ---------- ---------- ------------ --------------- ---------------
Avg. int. rate 0 7.0% 7.0% 7.0% 7.0% 0 7.0%
------------------ ------------ ---------- ---------- ---------- ---------- ------------ --------------- ---------------
Variable rate 1,400,000 0 0 0 0 0 1,400,000 1,400,000
------------------ ------------ ---------- ---------- ---------- ---------- ------------ --------------- ---------------
Avg. int. rate 4.82% 0 0 0 0 0 4.82%
------------------ ------------ ---------- ---------- ---------- ---------- ------------ --------------- ---------------
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.
See the Morlan and related case discussion in note 5 to the consolidated
financial statements, which is incorporated herein by reference
ITEM 2. CHANGES 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.
NONE
ITEM 5. OTHER INFORMATION.
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
4.1 UTG's Agreement pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K with
respect to long-term debt instruments (incorporated by reference to Exhibit
4.1 to Form 10-Q of the Company for the quarter ended June 30, 2002).
10.1 United Trust Group, Inc. Employee and Director Stock Purchase Plan and form
of related Stock Restriction and Buy-Sell Agreement (incorporated by
reference to Exhibits 99.1 and 99.2 to the S-8 Registration Statement filed
by UTG on October 9, 2002) (Commission No. 333-100454).
99.1 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
99.2 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
(b) Reports on Form 8-K
No reports on Form 8-K were filed by UTG during the quarterly period ended
September 30, 2002.
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.
UNITED TRUST GROUP, INC.
------------------------
(Registrant)
Date: November 11, 2002 By /s/ Randall L. Attkisson
Randall L. Attkisson
President, Chief Operating Officer
and Director
Date: November 11, 2002 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
CERTIFICATIONS
--------------
I, Jesse T. Correll, Chairman of the Board and Chief Executive Officer of United
Trust Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant,
United Trust Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 11, 2002 By /s/ Jesse T. Correll
Chairman of the Board and
Chief Executive Officer
CERTIFICATIONS
--------------
I, Theodore C. Miller, Senior Vice President, Corporate Secretary and Chief
Financial Officer of United Trust Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant,
United Trust Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 11, 2002 By /s/ Theodore C. Miller
Senior Vice President, Corporate Secretary and
Chief Financial Officer
EXHIBIT INDEX
Exhibit Number Description
4.1 UTG's Agreement pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K with
respect to long-term debt instruments (incorporated by reference to Exhibit
4.1 to Form 10-Q of the Company for the quarter ended June 30, 2002).
10.2 United Trust Group, Inc. Employee and Director Stock Purchase Plan and form
of related Stock Restriction and Buy-Sell Agreement (incorporated by
reference to Exhibits 99.1 and 99.2 to the S-8 Registration Statement filed
by UTG on October 9, 2002) (Commission No. 333-100454).
99.1 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
99.2 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
