UTG INC - Quarter Report: 2002 March (Form 10-Q)
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 March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 0-16867
UNITED TRUST GROUP, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
ILLINOIS 37-1172848
------------------------------- -------------------
(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 April
30, 2002, was 3,505,048.
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 March 31, 2002
and December 31, 2001...................................................3
Consolidated Statements of Operations for the three months
ended March 31,2002 and 2001..........................................4
Consolidated Statement of Shareholders'Equity for the Period
ended March 31, 2002....................................................5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and 2001.................................................6
Notes to Consolidated Financial Statements................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...... ..................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........17
PART II. OTHER INFORMATION..................................................18
ITEM 1. LEGAL PROCEEDINGS.................................................18
ITEM 2. CHANGE IN SECURITIES..............................................18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............18
ITEM 5. OTHER INFORMATION.................................................18
ITEM 6. EXHIBITS..........................................................18
SIGNATURES....................................................................19
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
----------------------------------------------------------------------------------------------------------
March 31, December 31,
ASSETS 2002 2001
-------------- --------------
Investments:
Fixed maturities at amortized cost
(market $73,181,106 and $77,725,410) $ 71,187,074 $ 75,005,395
Investments held for sale:
Fixed maturities, at market
(cost $104,705,734 and $97,584,094) 104,704,236 98,628,440
Equity securities, at market
(cost $4,122,887 and $3,937,812) 4,930,491 3,852,716
Mortgage loans on real estate at amortized cost 24,557,830 23,386,895
Investment real estate, at cost,
net of accumulated depreciation 17,734,402 18,226,451
Policy loans 13,474,584 13,608,456
Short-term investments 532,832 581,382
-------------- --------------
237,121,449 233,289,735
Cash and cash equivalents 14,919,864 15,477,348
Accrued investment income 2,626,552 3,002,860
Reinsurance receivables:
Future policy benefits 33,525,507 33,776,688
Policy claims and other benefits 3,898,370 4,042,779
Cost of insurance acquired 33,280,239 33,666,336
Deferred policy acquisition costs 2,852,811 3,107,919
Costs in excess of net assets purchased,
net of accumulated amortization 345,779 345,779
Property and equipment,
net of accumulated depreciation 2,387,678 2,459,117
Income taxes receivable, current 197,066 215,865
Other assets 458,794 139,245
-------------- --------------
Total assets $ 331,614,109 $ 329,523,671
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 235,988,455 $ 236,449,241
Policy claims and benefits payable 2,242,219 2,781,920
Other policyholder funds 1,322,700 1,255,990
Dividend and endowment accumulations 12,849,266 13,055,024
Deferred income taxes 13,581,003 13,569,523
Notes payable 4,223,471 4,400,670
Other liabilities 8,677,001 5,465,896
-------------- --------------
Total liabilities 278,884,115 276,978,264
-------------- --------------
Minority interests in consolidated subsidiaries 7,859,396 7,771,793
-------------- --------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share
Authorized 7,000,000 shares - 3,508,925 and 3,549,791 shares
issued after deducting treasury shares of 116,102 and 75,236 70,179 70,996
Additional paid-in capital 42,491,788 42,789,636
Retained earnings 1,481,272 1,004,238
Accumulated other comprehensive income 827,359 908,744
-------------- -------------
Total shareholders' equity 44,870,598 44,773,614
-------------- -------------
Total liabilities and shareholders' equity $ 331,614,109 $ 329,523,671
============== =============
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
--------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
2002 2001
----------------- -----------------
Revenues:
Premiums and policy fees $ 4,994,227 $ 5,333,743
Reinsurance premiums and policy fees (717,366) (779,292)
Net investment income 3,307,478 4,014,425
Realized investment gains and (losses), net 4,696 (230,569)
Other income 204,006 89,928
----------------- -----------------
7,793,041 8,428,235
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 5,328,814 4,976,685
Reinsurance benefits and claims (1,026,833) (594,279)
Annuity 268,675 274,051
Dividends to policyholders 264,450 281,268
Commissions and amortization of deferred
policy acquisition costs 302,521 530,443
Amortization of cost of insurance acquired 386,097 398,972
Operating expenses 1,530,433 1,514,115
Interest expense 72,210 38,614
----------------- -----------------
7,126,367 7,419,869
Income before income taxes, minority interest
and equity in earnings of investees 666,674 1,008,366
Income tax expense (83,880) (591,173)
Minority interest in income of
consolidated subsidiaries (105,760) (73,335)
----------------- -----------------
Net income $ 477,034 $ 343,858
================= =================
Basic earnings per share from continuing
operations and net income $ 0.14 $ 0.08
================= =================
Diluted earnings per share from continuing
operations and net income $ 0.14 $ 0.08
================= =================
Basic weighted average shares outstanding 3,528,436 4,175,066
================= =================
Diluted weighted average shares outstanding 3,528,436 4,175,066
================= =================
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the Period ended March 31, 2002
Common stock
Balance, beginning of year $ 70,996
Issued during year 0
Purchase treasury shares (817)
------------------
Balance, end of period 70,179
------------------
Additional paid-in capital
Balance, beginning of year 42,789,636
Issued during year 0
Purchase treasury shares (297,848)
------------------
Balance, end of period 42,491,788
------------------
Retained earnings
Balance, beginning of year 1,004,238
Net income 477,034 $ 477,034
------------------ ------------------
Balance, end of period 1,481,272
------------------
Accumulated other comprehensive income
Balance, beginning of year 908,744
Other comprehensive income
Unrealized holding loss on securities
net of minority interest and
reclassification adjustment (81,385) (81,385)
------------------ ------------------
Comprehensive income $ 395,649
==================
Balance, end of period 827,359
------------------
Total shareholders' equity, end of period $ 44,870,598
==================
See accompanying notes
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
March 31, March 31,
2002 2001
--------------- ---------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income $ 477,034 $ 343,858
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization/accretion of fixed maturities 97,202 15,286
Realized investment (gains) losses, net (4,696) 230,569
Policy acquisition costs deferred (17,000) (64,000)
Amortization of deferred policy acquisition costs 272,108 414,645
Amortization of cost of insurance acquired 386,097 398,972
Amortization of costs in excess of net
assets purchased 0 22,500
Depreciation 151,597 99,902
Minority interest 105,760 73,335
Change in accrued investment income 376,308 349,414
Change in reinsurance receivables 395,590 383,792
Change in policy liabilities and accruals (859,384) (1,015,775)
Charges for mortality and administration of
universal life and annuity products (2,234,743) (2,421,905)
Interest credited to account balances 1,475,314 1,546,173
Change in income taxes 55,161 770,914
Change in other assets and liabilities, net (813,541) (1,137,024)
--------------- ---------------
Net cash provided by (used in) operating activities (137,193) 10,656
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 8,420,000 5,750,000
Fixed maturities matured 6,885,707 18,364,075
Equity securities 0 814,624
Mortgage loans 2,483,750 2,334,143
Real estate 486,592 281,741
Policy loans 757,831 809,656
Short-term 50,000 1,353,067
--------------- ---------------
Total proceeds from investments sold and matured 19,083,880 29,707,306
Cost of investments acquired:
Fixed maturities held for sale (14,970,384) (19,865,743)
Equity securities (185,075) 0
Mortgage loans (3,654,685) (5,611,673)
Real estate (63,981) (132,538)
Policy loans (623,959) (632,601)
Short-term (1,450) (921,480)
--------------- ---------------
Total cost of investments acquired (19,499,534) (27,164,035)
Purchase of property and equipment (8,051) (47,221)
--------------- ---------------
Net cash provided by (used in) investing activities (423,705) 2,496,050
Cash flows from financing activities:
Policyholder contract deposits 2,746,397 3,203,807
Policyholder contract withdrawals (2,267,119) (2,489,932)
Payments of principal on notes payable (777,199) 0
Proceeds from line of credit 600,000 0
Purchase of stock of affiliates 0 (13,800)
Purchase of treasury stock (298,665) 0
Net cash provided by financing activities 3,414 700,075
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (557,484) 3,206,781
Cash and cash equivalents at beginning of period 15,477,348 15,065,076
--------------- ---------------
Cash and cash equivalents at end of period $ 14,919,864 $ 18,271,857
=============== ===============
See accompanying notes
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 March 31, 2002, consolidated subsidiaries of United Trust Group, Inc. were as
depicted on the following organizational chart. For an explanation of
contemplated future changes to the organizational structure, please refer to
notes 9 and 10 to the consolidated financial statements.
2. INVESTMENTS
As of March 31, 2002, fixed maturities and fixed maturities held for sale
represented 74% of total invested assets. As prescribed by the various state
insurance department statutes and regulations, the insurance companies'
investment portfolio is required to be invested in investment grade securities
to provide ample protection for policyholders. The Company does not invest in
so-called "junk bonds" or derivative investments. As of March 31, 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, 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 March 31, 2002 and December 31, 2001, the Company had $4,223,471 and
$4,400,670 in long-term debt outstanding, respectively. The debt is comprised of
the following components:
3/31/2002 12/31/2001
------------- -------------
Subordinated 20 yr. Notes $ 514,674 $ 514,674
Other notes payable 3,108,797 3,885,996
Line of credit 600,000 0
------------- -------------
$ 4,223,471 $ 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 (CIC). These notes bear
interest at the variable rate of 1% under prime per annum (paid quarterly). At
March 31, 2002 the 1% under prime variable rate was 3.75%. A lump sum principal
payment on the balance of the notes is due June 16, 2012.
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 the 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 both UTG and FCC. The line of credit will expire one year from the
date of issue is for the repurchase of stock. The interest rate provided for in
the agreement 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. As of March 31, 2002, the Company had
borrowings of $600,000 attributable to this line of credit, which were used as a
principal payment on other notes payable. The line of credit was repaid in
April.
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. The line was sought to provide UTG with
additional liquidity for current operations or growth of business. Borrowings
under the line of credit will bear interest at the rate of .25% in excess of
Southwest Bank of St. Louis' prime rate. As collateral for the loan, FCC pledged
100% of the common stock of UG. To date, the Company has no borrowings or
obligations attributable to this line of credit.
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 will be available for
future issuance for general corporate purposes. Through April 30, 2002, UTG has
spent $456,270 in the acquisition of 64,812 shares 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 March 31, 2002 diluted earnings per share is the same as basic earnings
per share since the Company has no dilutive instruments outstanding. At March
31, 2001, UTG had stock options in the amount of 19,108 at an option price of
$15.00, which was not included in the computation of dilutive earnings per
share, since the exercise price was greater than the average market price of the
common shares.
C. Proposed Officer and Director Stock Purchase Program
On March 26, 2002, the Board of Directors of UTG adopted the United Trust Group,
Inc. Employee and Director Stock Purchase Plan. The plan's purpose is to provide
employees and directors of UTG and its subsidiaries an opportunity to invests in
shares of UTG common stock. The plan will be 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.
The Board of Directors of UTG are submitting the plan to the UTG shareholders
for their approval at the upcoming 2002 Annual Meeting of UTG Shareholders, in
order that directors of UTG who are not eligible employees of UTG or its
subsidiaries may participate in the plan. A proxy statement for the 2002 Annual
Meeting of Shareholders is being mailed to UTG shareholders at or about May 13,
2002. Shareholders of UTG are urged to read the proxy statement when it becomes
available.
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.
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 the recent American General 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, FSF and 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. However, there shall be no limit to the number of shares transferred to
the extent that there are legal fees, settlements, damage payments or other
losses as a result of certain legal action taken. The price and number of shares
shall be adjusted for any applicable stock splits, stock dividends or other
recapitalizations. At March 31, 2002, the Company had total earnings of
$15,479,480 applicable to this covenant. With less than one year remaining on
the covenant, it appears highly unlikely 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
2002, it appears at this time UTG will be required to issue 500,000 shares of
its common stock at December 31, 2002 to satisfy this covenant.
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,
(U.S. Court of Appeals for the Seventh Circuit, Appeal No. 01-3795)
On April 26, 1999, the above lawsuit was filed 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
salesmen, 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 have
appealed the dismissal of the case to the United States Court of Appeals for the
Seventh Circuit.
In addition to the appeal, a second action was filed entitled; Julie Barrette
Ahrens, David Dzuiban, William Milam, Dennis Schneiderman, individually and on
behalf of all others similarly situated vs Universal Guaranty Life, United Trust
Assurance Company, United Security Assurance Company. United States District
Court for the Southern District of Illinois. Case No: 01-4314-JPG.
The Company continues to believe that it has meritorious grounds to defend both
the original and related lawsuit, and it intends to defend the cases vigorously,
and 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
plaintiff's 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 March 31, 2002, the Company maintains a
liability of $283,295 to cover estimated legal costs associated with the defense
of this matter.
The Company 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 $71,898 and $0 in interest expense during the
first quarter of 2002 and 2001, respectively. The Company paid $290 and $22,013
in federal income tax during the first quarter of 2002 and 2001, respectively.
At March 31, 2002, the Company had acquired $3,733,821 in fixed maturity
investments for which the cash had not yet been paid. The payable for these
securities is included in the line item other liabilities on the balance sheet.
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. The Company holds approximately $4,565,000 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
March 31, 2002 Amount or Benefit Amount
---------------------------------------------- ---------------- ----------------- ---------------
Unrealized holding losses during
Period $ (123,519) $ 43,232 $ (80,287)
Less: reclassification adjustment
For gains realized in net income (1,689) 591 (1,098)
---------------- ----------------- ---------------
Net unrealized losses 43,823
(125,208) (81,385)
---------------- ----------------- ---------------
Other comprehensive income $ (125,208) $ 43,823 $ (81,385)
================ ================= ===============
9. PROPOSED MERGER
On June 5, 2001, UTG and FCC jointly announced their respective Boards of
Directors approved a definitive agreement whereby UTG would acquire the
remaining common shares (approximately 18%) of FCC which UTG does not currently
own. Under the terms of the agreement, FCC will be merged with and into UTG,
with UTG continuing as the surviving entity in the merger.
Pursuant to the merger agreement, UTG will pay $250 in cash for each share of
FCC common stock not held by United Trust Group. The transaction is subject to
various conditions precedent set forth in the merger agreement, including the
approval of the transaction by the shareholders of FCC. FCC has submitted the
transaction to the vote of the FCC shareholders to be held at a special meeting
to be called for that purpose on May 21, 2002. Shareholders of FCC are urged to
read the Proxy Statement which will be mailed May 13, 2002 to shareholders of
record as of the close of business on April 19, 2002.
10. PROPOSED REDOMESTICATION AND CHARTER SALES OF SUBSIDIARIES
One of the Company's subsidiaries APPL, is currently domiciled in West Virginia,
but has applied for redomestication to the state of Ohio. The redomestication
proposal arose since APPL no longer meets the West Virginia requirement to
maintain a Home Office within the state of West Virginia. The state of Ohio is
where UG, which owns 100% of APPL, is domesticated. The Charter of APPL is also
currently being marketed for sale through an outside broker. Should the charter
be sold, the Company intends to proceed with an assumption reinsurance
transaction whereby all of the policies in force of APPL would be assumed by UG.
A June 2002 target date has been established by management of APPL and UG for
completion of the above transactions, pending necessary regulatory approvals.
The Charter of one of the Company's subsidiaries ABE, is also currently being
marketed for sale through an outside broker. Should the charter be sold, the
Company intends to proceed with an assumption reinsurance transaction whereby
all of the policies in force of ABE would be assumed by UG. The management of
ABE and UG have no time constraints or necessity for completion of this
transaction. Should a buyer for the charter be located, the transaction could
only be completed following necessary regulatory approvals.
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 March 31, 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 6% when comparing the first quarter of 2002 to the same period in
2001. 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
is in the very preliminary design stage. Introduction and the success of the new
product will depend on the product competitiveness and profitability.
Net investment income decreased 18% when comparing the first quarter of 2002 to
the same period in 2001. The national prime rate was 3.25% lower in the first
quarter 2002 than it was in the first quarter of 2001. This resulted in lower
earnings on short-term funds as well as on longer-term investments acquired.
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. These adjustments were in response to continued
declines in interest rates in the marketplace. The decrease is expected to
result in approximately $500,000 in interest crediting savings annually, when
fully implemented. Policy interest crediting rate changes become effective on an
individual policy basis on the next policy anniversary. Therefore, it will take
a full year from the time the change is determined for the full impact of such
change to be realized. The guaranteed minimum crediting rates on these products
range from 3% to 5.5%.
The Company had net realized investment gains of $4,696 in the first quarter of
2002 compared to net realized investment losses of $230,569 for the same period
in 2001. Approximately $177,330 of the net realized losses in 2001 was
attributable to common stock sales while $61,301 was attributable to bond sales.
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 2002, the Company received
$124,635 for this work. 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. Management believes it is a
good source of generating additional revenues while utilizing the Company's
strength, excess capacity and efficient administrative services.
(b) Expenses
Benefits, claims and settlement expenses net of reinsurance benefits and claims,
decreased 2% in the first quarter of 2002 compared to the same period in 2001.
Death benefit claims were $11,000 more than the prior period. Policy claims vary
from year to year and therefore, fluctuations in mortality are to be expected
and are not considered unusual by management. The reserve decreases on interest
sensitive business in force is due to the reduction of interest crediting rates
and decrease in death benefit claims. Reserves continue to increase on in-force
policies as the age of the insureds increases.
Interest expense increased 87% in the first quarter of 2002 compared to the same
period in 2001. During 2001, the Company repaid $1,302,495 in outside debt
through operating cashflows and dividends from UG to FCC. In April 2001, the
Company issued $3,885,996 in new debt to purchase common stock owned primarily
by James E. Melville and Larry E. Ryherd, two former officers and directors of
the Company and their respective families. On March 31, 2002, the Company made
its first principal payment of $777,199 on these notes with future payments of
$777,199 due annually over the next four years. At March 31, 2002, UTG had
$4,223,471 in long-term debt. Management believes overall sources available are
adequate to service this debt. These sources include current cash balances of
UTG, expected future operating cashflows and repayment of affiliate receivables
held by UTG.
(c) Net income
The Company had a net income of $477,034 in the first quarter of 2002 compared
to income of $343,858 for the same period in 2001. The increase in net income is
mainly attributable to the decrease in income tax expense of $83,880 in 2002
compared to $591,173 in 2001. In addition, the Company had net realized
investment gains of $4,696 in the first quarter of 2002 compared to net realized
investment losses of $230,569 for the same period in 2001. Other income also
increased $114,078 in the first quarter of 2002 compared to the same period in
2001 mainly attributable to third party administrative work performed with an
unaffiliated life insurance company that began on June 1, 2001. However, this
was offset by the decline in net investment income of $3,307,478 in for the
first quarter of 2002 compared to $4,014,425 for the same period in 2001.
Financial Condition
The financial condition of the Company has improved slightly since December 31,
2001. Total shareholders' equity increased approximately $97,000 as of March 31,
2002 compared to December 31, 2001. The increase was mainly attributable to net
income of $477,034 offset by the purchase of treasury shares in the amount
$298,665 and unrealized losses of $81,385 on investments held for sale.
Investments represent approximately 72% and 71% of total assets at March 31,
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 derivative investments or "junk bonds". As of March
31, 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 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 4% and 5% as of March 31, 2002, and December
31, 2001, respectively. Fixed maturities as a percentage of total invested
assets were approximately 74% as of March 31, 2002 and December 31, 2001.
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.
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.
Cash provided by (used in) operating activities was $(137,193) and $10,656 for
the periods ending March 31, 2002 and March 31, 2001, respectively. The net cash
provided by operating activities plus net policyholder contract deposits after
the payment of policyholder withdrawals equaled $342,085 for the first quarter
of 2002 and $724,531 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.
Cash provided by (used in) investing activities was $(423,705) and $2,496,050,
for the periods ending March 31, 2002 and March 31, 2001, respectively. The most
significant aspect of cash provided by (used in) investing activities are the
fixed maturity transactions. Fixed maturities account for 77% and 73% of the
total cost of investments acquired in the first quarter of 2002 and for the same
period in 2001, respectively. The Company has not directed its investable funds
to so-called "junk bonds" or derivative investments.
Net cash provided by financing activities was $3,414 and $700,075 for the
periods ending March 31, 2002 and March 31, 2001, respectively. Policyholder
contract deposits decreased 14% in the first quarter of 2002 compared to the
same period in 2001. Policyholder contract withdrawals decreased 9% in the first
quarter of 2002 compared to the same period in 2001. In addition, as of March
31, 2002, the Company had purchased $298,665 in treasury stock under the stock
repurchase program.
At March 31, 2002, the Company had a total of $4,223,471 in long-term debt
outstanding. In April 2001, the Company issued $3,885,996 in new debt to
purchase 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. On March 31, 2002, the Company made its first principal
payment of $777,199 on these notes with future prinicipal payments of $777,199
due annually, over the next fours years at an interest rate of 7% per annum
(annual payments due April 12). Other debt of $514,674 bears interest at a
floating rate of 1% below prime (paid quarterly) with no principal payments due
until its maturity in 2012. As of March 31, 2002 the Company had borrowings of
$600,000 on the line of credit at a floating rate equal to prime which is
currently 4.75%. The line of credit was subsequently repaid in April 2002.
Management believes overall sources of cash available are more than adequate to
service the Company's debt. These sources include current cash balances of UTG,
expected future operating cashflows and repayment of affiliate receivables held
by UTG. The proposed merger of UTG and FCC will result in the addition of
approximately $2.5 million in additional debt through draws on the
aforementioned line of credit which is through the First National Bank of the
Cumberlands in Livingston Tennessee (see note 3C to the consolidated financial
statements).
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 its earnings received on invested assets (primarily notes
receivable from FCC) and cash balances. At March 31, 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 ultimate
parent of UG through its ownership of FCC. UG can not pay a dividend directly to
UTG due to the ownership structure. However, if UG paid a dividend to its direct
parent, FCC, and FCC paid a dividend equal to the amount it received, UTG would
receive 82% of the original dividend paid by UG. Please refer to Note 1 of the
Notes to the Consolidated Financial Statements. UG's dividend limitations are
described below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to the
insurance commissioner for the payment of an ordinary dividend. Ordinary
dividends are defined as the greater of: a) prior year statutory earnings or b)
10% of statutory capital and surplus. For the year ended December 31, 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 to FCC in April 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 presented below
is 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. The 2002 debt was paid in full in April 2002.
March 31, 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 3,258,512
Avg. int. rate 0 7.0% 7.0% 7.0% 7.0% 0 7.0%
Variable rate 600,000 0 0 0 0 514,674 1,114,674 1,038,094
Avg. int. rate 4.75% 0 0 0 0 3.75% 4.29%
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
NONE
ITEM 2. CHANGE IN SECURITIES.
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) The Company hereby incorporates by reference the exhibits as reflected in
the Index to Exhibits of the Company's Form 10-K for the year ended
December 31, 2001.
(b) On January 2, 2002, UTG filed a report on form 8-K under the heading "Other
Items" relating to UTG's voluntary delisting of UTG's common stock from the
NASDAQ small cap market effective at the close of business on December 31,
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: May 14, 2002 By /s/ Randall L. Attkisson
Randall L. Attkisson
President, Chief Operating Officer
and Director
Date: May 14, 2002 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
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