SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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 Number 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, Springfield, IL 62703
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (217) 241-6300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, stated value $ .02 per share
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [ ] No [X]
As of June 26, 2003, shares of the Registrant's common stock held by
non-affiliates (based upon the price of the last sale of $ 7.25 per share), had
an aggregate market value of approximately $9,743,050.
At March 1, 2004 the Registrant had 4,001,654 outstanding shares of Common
Stock, stated value $.02 per share.
DOCUMENTS INCORPORATED BY REFERENCE: None
UNITED TRUST GROUP, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
PART I.........................................................................3
ITEM 1. BUSINESS......... .................................................3
ITEM 2. PROPERTIES........................................................16
ITEM 3. LEGAL PROCEEDINGS.................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............18
PART II.......................................................................19
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS..........................................................19
ITEM 6. SELECTED FINANCIAL DATA.... ......................................20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................35
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.......................................................71
ITEM 9A. CONTROLS AND PROCEDURES..........................................71
PART III......................................................................72
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF UTG..........................72
ITEM 11. EXECUTIVE COMPENSATION UTG.......................................74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF UTG...............................................77
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................79
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES...........................82
PART IV.......................................................................84
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.........................................84
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING INFORMATION
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 those projected in forward-looking statements. Additional information
concerning factors that could cause actual results to differ from those in the
forward-looking statements is contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
OVERVIEW
United Trust Group, Inc. (the "Registrant") was incorporated in 1984, under the
laws of the State of Illinois to serve as an insurance holding company. The
Registrant and its subsidiaries (the "Company") have only one significant
industry segment - insurance. The Company's dominant business is individual life
insurance, which includes the servicing of existing insurance business in force,
the solicitation of new individual life insurance, the acquisition of other
companies in the insurance business, and the administration processing of life
insurance business for other entities.
At December 31, 2003, significant majority-owned subsidiaries of the Registrant
were as depicted on the following organizational chart:
This document at times will refer to the Registrant's largest shareholder, Mr.
Jesse T. Correll and certain companies controlled by Mr. Correll. Mr. Correll
holds a majority ownership of First Southern Funding LLC, a Kentucky
corporation, (FSF) and First Southern Bancorp, Inc. (FSBI), a financial services
holding company that owns 100% of First Southern National Bank (FSNB), which
operates out of 14 locations in central Kentucky. Mr. Correll is Chief Executive
Officer and Chairman of the Board of Directors of UTG and is currently UTG's
largest shareholder through his ownership control of FSF, FSBI and affiliates.
At December 31, 2003 Mr. Correll owns or controls directly and indirectly
approximately 65% of UTG's outstanding stock.
UTG is a life insurance holding company. The focus of UTG is the acquisition of
other companies in similar lines of business and management of the insurance
subsidiaries. UTG has no activities outside the life insurance focus. The UTG
companies became members of the same affiliated group through a history of
acquisitions in which life insurance companies were involved. Effective on
June 12, 2002, First Commonwealth Corporation (FCC), a former life insurance
holding company and a then 82% owned subsidiary of UTG, merged with and into
UTG, with UTG being the surviving corporation of the merger. As a result of the
merger, UG became a direct wholly-owned subsidiary of UTG. (See Note 15 to the
financial statements for additional information regarding the merger.)
Effective July 1, 2003, Abraham Lincoln Insurance Company (ABE) and Appalachian
Life Insurance Company (APPL), former life insurance companies and then 100%
owned subsidiaries of UG, merged with and into UG, with UG being the surviving
corporation of the merger. The surviving insurance company operates in the
individual life insurance business. The primary focus of the insurance company
has been the servicing of existing insurance business in force and the
solicitation of new insurance business.
REC is a wholly owned subsidiary of UTG, which was incorporated under the laws
of the State of Delaware on June 1, 1971, for the purpose of dealing and
brokering in securities. REC acts as an agent for its customers by placing
orders of mutual funds and variable annuity contracts which are placed in the
customers' names, the mutual fund shares and variable annuity accumulation units
are held by the respective custodians, and the only financial involvement of REC
is through receipt of commission (load). REC was originally established to
enhance the life insurance sales by providing an additional option to the
prospective client. The objective was to provide an insurance sale and mutual
fund sale in tandem. REC functions at a minimum broker-dealer level. It does not
maintain any of its customer accounts nor receives customer funds directly.
Operating activity of REC accounts for less than $ 100,000 of earnings annually.
NORTH PLAZA is a wholly owned subsidiary of UTG, which owns for investment
purposes, a shopping center in Somerset, Kentucky, approximately 14,000 acres of
timberland in Kentucky, and a 50% partnership interest in an additional 11,000
acres of Kentucky timberland. Operating activity of North Plaza accounts for
less than $ 100,000 of earnings annually.
HAMPSHIRE PLAZA is a 67% owned subsidiary of UG, which owns for investment
purposes, a property consisting of a 254,228 square foot office tower, and
72,382 square foot attached retail plaza totaling 326,610 square feet along with
an attached 349 space parking garage, in New Hampshire. Operating activity of
Hampshire Plaza accounted for approximately $ 290,000 of loss, net of tax, in
the current year.
HP GARAGE is a 67% owned subsidiary of UG, which owns for investment purposes, a
property consisting of a 578 space parking garage, in New Hampshire. Operating
activity of HP Garage accounted for approximately $ 0 of earnings in the current
year.
HISTORY
UTG was incorporated December 14, 1984, as an Illinois corporation. The original
name was United Trust, Inc. (UTI). The name was changed in 1999 following a
merger with United Income Inc. (UII). During its first two and one-half years,
UTG was engaged in an intrastate public offering of its securities, raising over
$ 12,000,000 net of offering costs. In 1986, UTG formed a life insurance
subsidiary, United Trust Assurance Company (UTAC), and by 1987 began selling
life insurance products.
On June 16, 1992, UTG and its affiliates acquired 67% of the outstanding common
stock of the now dissolved Commonwealth Industries Corporation, (CIC) for a
purchase price of $15,567,000. Following the acquisition UTG controlled eleven
life insurance subsidiaries and six holding companies. The Company has taken
several steps to streamline and simplify the corporate structure following the
acquisitions, including dissolution of intermediate holding companies and
mergers of several life insurance companies.
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.
Following this transaction, FSF and its affiliates were the largest shareholders
of UTG. At December 31, 2003, Mr. Jesse T. Correll controls approximately 65% of
the outstanding common stock of UTG either directly or through various
affiliated entities including First Southern Holdings, LLC (FSH).
During 1999, the Company made several significant changes to streamline and
simplify its corporate structure. There were two mergers and a liquidation,
reducing the number of holding companies to two and the number of life insurance
companies to three. The first merger and company liquidation took place in July
of 1999. Prior to July 1999, UTG was known as United Trust, Inc. (UTI). UTI and
United Income, Inc. (UII) owned 100% of the former United Trust Group, Inc.,
(which was formed in February of 1992 and liquidated in July of 1999) through a
shareholder vote and special meeting on July 26, 1999, UII merged into UTI, and
simultaneously with the merger, the former UTG was liquidated and UTI changed
its corporate name to United Trust Group, Inc. The second merger occurred on
December 29, 1999, when UG was the survivor to a merger with its 100% owned
subsidiary, United Security Assurance Company (USA).
The first merger transaction, and an anterior corresponding proposal to increase
the number of authorized shares of UTG common stock from 3,500,000 to 7,000,000,
received necessary shareholder approvals at a special meeting and vote held on
July 26, 1999. The Board of Directors of the respective companies concluded that
the merger would benefit the business operations of UTG and UII and their
respective stockholders by creating a larger more viable Company with lower
administrative costs, a simplified corporate structure, and more readily
marketable securities. The second merger was completed as a part of management's
efforts to reduce costs and simplify the corporate structure.
On December 31, 1999, UTG and Mr. Jesse T. Correll entered into a transaction
whereby Mr. Correll, in combination with other individuals, made an additional
equity investment in UTG. Under the terms of the Stock Acquisition Agreement,
Mr. Correll and certain of his affiliates contributed their 100% ownership of
North Plaza to UTG in exchange for 681,818 authorized but unissued shares of UTG
common stock. The Board of Directors of UTG approved the transaction at their
regular quarterly board meeting held on December 7, 1999. At the time, North
Plaza owned for investment purposes, a shopping center in Somerset, Kentucky,
approximately 12,000 acres of timberland in Kentucky, and a 50% partnership
interest in an additional 11,000 acres of Kentucky timberland. North Plaza had
no debt. The net assets were valued at $ 7,500,000, which equates to $ 11.00 per
share for the new shares of UTG that were issued in the transaction.
On September 27, 2001, UG purchased real estate at a cost of $6,333,336 from an
outside third party through the formation of an LLC in which UG is a two-thirds
owner. The other one-third partner is Millard V. Oakley, who is a former
Director of UTG. Hampshire Plaza consists of 254,000 square foot office tower,
an attached 72,000 square foot retail plaza, and an attached parking garage with
approximately 350 parking spaces located in Manchester, New Hampshire.
On October 26, 2001, APPL effected a reverse stock split, as a result of which
(i) it became a wholly-owned subsidiary of UG, and an indirect wholly-owned
subsidiary of FCC and UTG, and (ii) its minority shareholders received an
aggregate of $1,055,295 in respect of their shares. Prior to the reverse stock
split, UG owned 88% of the outstanding shares of APPL.
On June 12, 2002, FCC a life insurance holding company and a then 82% owned
subsidiary of UTG, merged with and into UTG, with UTG being the surviving
corporation of the merger. Minority shareholders of FCC (other than shares held
by UTG or shares held in treasury by FCC or by any of its subsidiaries) received
an aggregate of $2,480,000 in respect of their shares.
On October 1, 2002, APPL entered into a 100% coinsurance agreement with UG,
whereby APPL ceded and UG assumed all policies in force of APPL. UG assumed
ownership of APPL's 100% investment in ABE as a result of this transaction.
On July 1, 2003, ABE and APPL merged with and into UG, with UG being the
surviving corporation of the merger. ABE and APPL were each 100% owned
subsidiaries of UG prior to the merger. The mergers resulted in a more
simplified holding company structure.
On November 6, 2003, UG purchased real estate at a cost of $2,220,256 from an
outside third party through the formation of an LLC in which UG is a two-thirds
owner. The other one-third partner is Millard V. Oakley, who is a former
Director of UTG. HP Garage consists of a parking garage with approximately 580
parking spaces located in New Hampshire.
PRODUCTS
UG's portfolio consists of two universal life insurance products and two
traditional whole life insurance products. Universal life insurance is a form of
permanent life insurance that is characterized by its flexible premiums,
flexible face amounts, and unbundled pricing factors.
UG's primary universal life insurance product is referred to as the "UL90A", it
is issued for ages 0 - 65 and has a minimum face amount of $25,000. The
administrative load is based on the issue age, sex and rating class of the
policy. Policy fees vary from $1 per month in the first year to $4 per month
in the second and third years and $3 per month each year thereafter. The UL90A
currently credits 4.5% interest with a 4.5% guaranteed interest rate. Partial
withdrawals, subject to a remaining minimum $500 cash surrender value and a
$25 fee, are allowed once a year after the first duration. Policy loans are
available at 7.4% interest in advance. The policy's accumulated fund will be
credited the guaranteed interest rate in relation to the amount of the policy
loan. Surrender charges are based on a percentage of target premium starting at
120% for years 1-5 then grading downward to zero in year 15. This policy
contains a guaranteed interest credit bonus for the long-term policyholder. From
years 10 through 20, additional interest bonuses can be earned if certain
criteria are met, primarily relating to the total amount of premiums paid and
amount of accumulated value, with a total in the twentieth year of 1.375%. The
bonus is credited from the policy issue date and is contractually guaranteed.
In 2003 UG replaced its "Century 2000" product with a new universal life
contract; the "Legacy" product. This product was designed for use with several
distribution channels including the Company's own internal agents, bank
agent/employees and through personally producing general agents "PPGA". Similar
to the UL90A, this policy is issued for ages 0 - 65, in face amounts with a
minimum of $ 25,000. But unlike the Century 2000 this product was designed with
level commissions. The Legacy product has a current declared interest rate of
4.0%, which is equal to its guaranteed rate. After five years the guaranteed
rate drops to 3.0%. During the first five years the policy fee will be $ 6.00
per month on face amounts less than $ 50,000 and $ 5.00 per month for larger
amounts. After the first five years the Company may increase this rate but not
more than $ 8.00 per month. The policy has other loads that vary based upon
issue age and risk classification. Partial withdrawals, subject to a remaining
minimum $ 500 cash surrender value and a $ 25 fee, are allowed once a year after
the first duration. Policy loans are available at 7.4% interest in advance. The
policy's accumulated fund will be credited the guaranteed interest rate in
relation to the amount of the policy loan. Surrender charges are based on a
percentage of target premium starting at 100% for years 1 and 2 then grading
downward to zero in year 5.
The Company's actual experience for earned interest, persistency and mortality
varies from the assumptions applied to pricing and for determining premiums.
Accordingly, differences between the Company's actual experience and those
assumptions applied may impact the profitability of the Company. The Company
monitors investment yields, and when necessary adjusts credited interest rates
on its insurance products to preserve targeted interest spreads. Credited rates
are reviewed and established by the Board of Directors of UG.
The Company believes its premium rates are competitive with other insurers doing
business in the states in which the Company is marketing its products.
The Company markets other products, none of which are significant to operations.
The Company has a variety of policies in force different from those being
marketed. Interest sensitive products, including universal life and excess
interest whole life ("fixed premium UL"), account for 59% of the insurance in
force. Approximately 20% of the insurance in force is participating business,
which represents policies under which the policyowner shares in the insurance
company's statutory divisible surplus. The Company's average persistency rate
for its policies in force for 2003 and 2002 has been 94.9% and 93.6%,
respectively.
Interest sensitive life insurance products have characteristics similar to
annuities with respect to the crediting of a current rate of interest at or
above a guaranteed minimum rate and the use of surrender charges to discourage
premature withdrawal of cash values. Universal life insurance policies also
involve variable premium charges against the policyholder's account balance for
the cost of insurance and administrative expenses. Interest-sensitive whole-life
products generally have fixed premiums. Interest-sensitive life insurance
products are designed with a combination of front-end loads, periodic variable
charges, and back-end loads or surrender charges.
Traditional life insurance products have premiums and benefits predetermined at
issue; the premiums are set at levels that are designed to exceed expected
policyholder benefits and insurance company expenses. Participating business is
traditional life insurance with the added feature that the policyholder may
share in the divisible surplus of the insurance company through policyholder
dividend. This dividend is set annually by the Board of Directors of UG and is
completely discretionary.
MARKETING
The Company has not actively marketed life products in the past several years.
Management currently places little emphasis on new business production,
believing resources could be better utilized in other ways. Current sales
primarily represent sales to existing customers through additional insurance
needs or conservation efforts. In 2001, the Company increased its emphasis on
policy retention in an attempt to improve current persistency levels. In this
regard, several of the home office staff have become licensed insurance agents
enabling them broader abilities when dealing with the customer in regards to
their existing policies and possible alternatives. The conservation efforts
described above have been generally positive. Management will continue to
monitor these efforts and make adjustments as seen appropriate to enhance the
future success of the program.
Excluding licensed home office personnel, UG has 15 general agents. UG primarily
markets its products in the Midwest region with most sales in the states of
Ohio, Illinois and West Virginia. UG is licensed to sell life insurance in
Alabama, Arizona, Arkansas, Colorado, Delaware, Florida, Georgia, Idaho,
Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South
Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West
Virginia and Wisconsin.
In 2003, $ 18,612,854 of total direct premium was collected by the insurance
subsidiaries. Ohio accounted for 27%, Illinois accounted for 19%, and West
Virginia accounted for 11% of total direct premiums collected. No other state
accounted for more than 5% of direct premiums collected.
UNDERWRITING
The underwriting procedures of the insurance subsidiary are established by
management. Insurance policies are issued by the Company based upon underwriting
practices established for each market in which the Company operates. Most
policies are individually underwritten. Applications for insurance are reviewed
to determine additional information required to make an underwriting decision,
which depends on the amount of insurance applied for and the applicant's age and
medical history. Additional information may include inspection reports, medical
examinations, and statements from doctors who have treated the applicant in the
past and, where indicated, special medical tests. After reviewing the
information collected, the Company either issues the policy as applied for, with
an extra premium charge because of unfavorable factors, or rejects the
application. Substandard risks may be referred to reinsurers for full or partial
reinsurance of the substandard risk.
The Company requires blood samples to be drawn with individual insurance
applications for coverage over $45,000 (age 46 and above) or $ 95,000 (ages
16-45). Blood samples are tested for a wide range of chemical values and are
screened for antibodies to the HIV virus. Applications also contain questions
permitted by law regarding the HIV virus, which must be answered by the proposed
insureds.
RESERVES
The applicable insurance laws under which the insurance subsidiary operates
require that the insurance company report policy reserves as liabilities to meet
future obligations on the policies in force. These reserves are the amounts
which, with the additional premiums to be received and interest thereon
compounded annually at certain assumed rates, are calculated in accordance with
applicable law to be sufficient to meet the various policy and contract
obligations as they mature. These laws specify that the reserves shall not be
less than reserves calculated using certain mortality tables and interest rates.
The liabilities for traditional life insurance and accident and health insurance
policy benefits are computed using a net level method. These liabilities include
assumptions as to investment yields, mortality, withdrawals, and other
assumptions based on the life insurance subsidiary's experience adjusted to
reflect anticipated trends and to include provisions for possible unfavorable
deviations. The Company makes these assumptions at the time the contract is
issued or, in the case of contracts acquired by purchase, at the purchase date.
Future policy benefits for individual life insurance and annuity policies are
computed using interest rates ranging from 2% to 6% for life insurance and 3.0%
to 9.25% for annuities. Benefit reserves for traditional life insurance policies
include certain deferred profits on limited-payment policies that are being
recognized in income over the policy term. Policy benefit claims are charged to
expense in the period that the claims are incurred. Current mortality rate
assumptions are based on 1975-80 select and ultimate tables. Withdrawal rate
assumptions are based upon Linton B or Linton C, which are industry standard
actuarial tables for forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life
insurance products are computed under a retrospective deposit method and
represent policy account balances before applicable surrender charges. Policy
benefits and claims that are charged to expense include benefit claims in excess
of related policy account balances. Interest crediting rates for universal life
and interest sensitive products range from 4.0% to 5.5% for the years ended
December 31, 2003, 2002 and 2001.
REINSURANCE
As is customary in the insurance industry, the insurance subsidiary of the
Company cedes insurance to, and assumes insurance from, other insurance
companies under reinsurance agreements. Reinsurance agreements are intended to
limit a life insurer's maximum loss on a large or unusually hazardous risk or to
obtain a greater diversification of risk. The ceding insurance company remains
primarily liable with respect to ceded insurance should any reinsurer be unable
to meet the obligations assumed by it. However, it is the practice of insurers
to reduce their exposure to loss to the extent that they have been reinsured
with other insurance companies. The Company sets a limit on the amount of
insurance retained on the life of any one person. The Company will not retain
more than $ 125,000, including accidental death benefits, on any one life. At
December 31, 2003, the Company had gross insurance in force of $ 2.290 billion
of which approximately $ 580 million was ceded to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The Company
believes the assuming companies are able to honor all contractual commitments,
based on the Company's periodic reviews of their financial statements, insurance
industry reports and reports filed with state insurance departments.
Currently, the Company is utilizing reinsurance agreements with Business Mens'
Assurance Company, (BMA) and Swiss Re Life and Health America Incorporated
(SWISS RE). BMA and SWISS RE currenty hold an "A" (Excellent), and "A+"
(Superior) rating, respectively, from A.M. Best, an industry rating company. The
reinsurance agreements were effective December 1, 1993, and cover all new
business of the Company. The agreements are a yearly renewable term (YRT) treaty
where the Company cedes amounts above its retention limit of $ 100,000 with a
minimum cession of $ 25,000.
UG entered a coinsurance agreement with Park Avenue Life Insurance Company
(PALIC) as of September 30, 1996. Under the terms of the agreement, UG ceded to
PALIC substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies. PALIC
and its ultimate parent The Guardian Life Insurance Company of America
(Guardian), currently holds an "A" (Excellent), and "A+" (Superior) rating,
respectively, from A.M. Best, an industry rating company. The agreement with
PALIC accounts for approximately 65% of the reinsurance reserve credit, as of
December 31, 2003.
On September 30, 1998, UG entered into a coinsurance agreement with The
Independent Order of Vikings, an Illinois fraternal benefit society (IOV). Under
the terms of the agreement, UG agreed to assume, on a coinsurance basis, 25% of
the reserves and liabilities arising from all in-force insurance contracts
issued by the IOV to its members. At December 31, 2003, the IOV insurance
in-force was approximately $ 1,688,000, with reserves being held on that amount
of approximately $ 399,000.
On June 1, 2000, UG assumed an already existing coinsurance agreement, dated
January 1, 1992, between Lancaster Life Reinsurance Company, an Arizona
corporation (LLRC) and Investors Heritage Life Insurance Company, a corporation
organized under the laws of the Commonwealth of Kentucky (IHL). Under the terms
of the agreement, LLRC agreed to assume from IHL a 90% quota share of new issues
of credit life and accident and health policies that have been written on or
after January 1, 1992 through various branches of the First Southern National
Bank. The maximum amount of credit life insurance that can be assumed on any one
individual's life is $ 15,000. UG assumed all the rights and obligations
formerly held by LLRC as the reinsurer in the agreement. LLRC liquidated its
charter immediately following the transfer. At December 31, 2003, IHL has
insurance in-force of approximately $ 2,924,000, with reserves being held on
that amount of approximately $ 35,000.
The Company does not have any short-duration reinsurance contracts. The effect
of the Company's long-duration reinsurance contracts on premiums earned in 2003,
2002 and 2001 was as follows:
Shown in thousands
2003 2002 2001
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 18,087 $ 18,597 $ 20,333
Assumed 34 96 111
Ceded (2,896) (2,701) (3,172)
Net premiums $ 15,225 $ 15,992 $ 17,272
========= ========= =========
INVESTMENTS
Investment income represents a significant portion of the Company's total
income. Investments are subject to applicable state insurance laws and
regulations, which limit the concentration of investments in any one category or
class and further limit the investment in any one issuer. Generally, these
limitations are imposed as a percentage of statutory assets or percentage of
statutory capital and surplus of each company.
The following table reflects net investment income by type of investment.
December 31,
----------------------------------------------------------
2003 2002 2001
--------------- ---------------- ----------------
Fixed maturities and fixed maturities
held for sale $ 8,418,969 $ 10,302,735 $ 10,831,162
Equity securities 456,361 131,778 131,263
Mortgage loans 1,522,700 1,749,935 2,715,834
Real estate 2,832,171 3,261,043 567,368
Policy loans 949,770 965,227 970,142
Short-term investments 11,161 26,522 110,229
Cash 137,478 211,293 606,128
--------------- ---------------- ----------------
Total consolidated investment income 14,328,610 16,648,533 15,932,126
Investment expenses (4,058,110) (3,133,731) (785,867)
---------------- ---------------- ----------------
Consolidated net investment income $ 10,270,500 $ 13,514,802 $ 15,146,259
=============== ================ ================
At December 31, 2003, the Company had a total of $ 656,716 in investment real
estate, which did not produce income during 2003.
The following table summarizes the Company's fixed maturities distribution at
December 31, 2003 and 2002 by ratings category as issued by Standard and Poor's,
a leading ratings analyst.
Fixed Maturities
Rating % of Portfolio
----------------------
2003 2002
---------- ----------
Investment Grade
AAA 82% 65%
AA 1% 3%
A 12% 24%
BBB 4% 6%
Below investment grade 1% 2%
---------- ----------
100% 100%
========== ==========
The following table summarizes the Company's fixed maturities and fixed
maturities held for sale by major classification.
Carrying Value
--------------------------------------------------
2003 2002
-------------------- --------------------
U.S. government and government agencies $ 42,023,692 $ 35,127,381
States, municipalities and political subdivisions 6,520,332 8,407,263
Collateralized mortgage obligations 89,195,177 66,881,569
Public utilities 5,397,880 15,134,965
Corporate 22,977,808 41,481,003
-------------------- --------------------
$ 166,114,889 $ 167,032,181
==================== ====================
The following table shows the composition, average maturity and yield of the
Company's investment portfolio at December 31, 2003.
Average
Carrying Average Average
Investments Value Maturity Yield
----------------------------------- ---------------- ------------------ ------------
Fixed maturities and fixed
maturities held for sale $ 166,573,535 5 years 5.05%
Equity securities 9,123,018 Not applicable 5.00%
Mortgage Loans 25,260,398 5 years 6.03%
Investment real estate 22,836,406 Not applicable (2.30)%
Policy loans 13,286,452 Not applicable 7.15%
Short-term investments 206,177 Not applicable 5.41%
Cash and cash equivalents 16,396,085 On demand 0.84%
----------------
Total Investments and Cash $ 253,682,071 4.05%
================
At December 31, 2003, fixed maturities and fixed maturities held for sale have a
combined market value of $ 166,830,659. Fixed maturities held to maturity are
carried at amortized cost. Management has the ability and intent to hold these
securities until maturity. Fixed maturities held for sale are carried at market.
The Company holds $ 34,677 in short-term investments. Management monitors its
investment maturities, which in their opinion is sufficient to meet the
Company's cash requirements. Fixed maturities of $ 22,178,274 mature in one year
and $ 32,850,488 mature in two to five years.
The Company holds $ 26,715,968 in mortgage loans, which represents approximately
9% of the total assets. All mortgage loans are first position loans. Before a
new loan is issued, the applicant is subject to certain criteria set forth by
Company management to ensure quality control. These criteria include, but are
not limited to, a credit report, personal financial information such as
outstanding debt, sources of income, and personal equity. Loans issued are
limited to no more than 80% of the appraised value of the property and must be
first position against the collateral.
The Company has one mortgage loan in default and in the process of foreclosure,
with a balance due of $ 1,423,804 at December 31, 2003. The Company has no loans
under a repayment plan or restructuring. Letters are sent to each mortgagee when
the loan becomes 30 days or more delinquent. Loans 90 days or more delinquent
are placed on a non-performing status and classified as delinquent loans.
Reserves for loan losses are established based on management's analysis of the
loan balances compared to the expected realizable value should foreclosure take
place. Loans are placed on a non-accrual status based on a quarterly analysis of
the likelihood of repayment. All delinquent and troubled loans held by the
Company are loans, which were held in portfolios by acquired companies at the
time of acquisition. Management believes the current internal controls
surrounding the mortgage loan selection process provide a quality portfolio with
minimal risk of foreclosure and/or negative financial impact.
The Company has in place a monitoring system to provide management with
information regarding potential troubled loans. Management is provided with a
monthly listing of loans that are 30 days or more past due along with a brief
description of what steps are being taken to resolve the delinquency. Quarterly,
coinciding with external financial reporting, the Company determines how each
delinquent loan should be classified. All loans 90 days or more past due are
classified as delinquent. Each delinquent loan is reviewed to determine the
classification and status the loan should be given. Interest accruals are
analyzed based on the likelihood of repayment. In no event will interest
continue to accrue when accrued interest along with the outstanding principal
exceeds the net realizable value of the property. The Company does not utilize a
specified number of days delinquent to cause an automatic non-accrual status.
In the past few years the Company has invested more of its funds in mortgage
loans. This is the result of increased mortgage opportunities available through
FSNB, an affiliate of Mr. Jesse T. Correll. Mr. Correll is the CEO and Chairman
of the Board of Directors of UTG and is, directly and through his affiliates,
its largest shareholder. FSNB has been able to provide the Company with
expertise and experience in underwriting commercial and residential mortgage
loans, which provide more attractive yields than the traditional bond market.
During 2003, 2002 and 2001 the Company issued approximately $ 11,405,000,
$ 6,920,000 and $ 4,535,000 in new mortgage loans, respectively. These new loans
were originated through FSNB and funded by the Company through participation
agreements with FSNB. FSNB services all the mortgage loans of the Company. The
Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan
origination of .50% of the original loan amount to cover costs incurred by FSNB
relating to the processing and establishment of the loan. UG paid $ 63,214,
$ 70,140 and $ 79,730 in servicing fees and $ 13,821, $ 35,127 and $ 22,626 in
origination fees to FSNB during 2003, 2002 and 2001, respectively.
A mortgage loan reserve is established and adjusted based on management's
quarterly analysis of the portfolio and any deterioration in value of the
underlying property which would reduce the net realizable value of the property
below its current carrying value.
In addition, the Company also attempts to ensure that current and adequate
insurance on the properties underlying the mortgages is being maintained. The
Company requires proof of insurance on each loan and further requires to be
shown as a lien holder on the policy so that any change in coverage status is
reported to the Company. Proof of payment of real estate taxes is another
monitoring technique utilized by the Company. Management believes a change in
insurance status or non-payments of real estate taxes are indicators that a loan
is potentially troubled. Correspondence with the mortgagee is performed to
determine the reasons for either of these events occurring.
The following table shows a distribution of the Company's mortgage loans by
type.
Mortgage Loans Amount % of Total
-------------------------------------------- ---------------- -------------
Commercial - insured or guaranteed $ 4,077,648 15%
Commercial - all other 18,104,800 68%
Farm 4,426,873 17%
Residential - insured or guaranteed 70,797 0%
Residential - all other 35,850 0%
The following table shows a geographic distribution of the Company's mortgage
loan portfolio and investment real estate.
Mortgage Real
Loans Estate
------------ ----------
Alabama 12% 0%
Colorado 11% 0%
Illinois 5% 3%
Indiana 3% 0%
Kentucky 50% 39%
New Hampshire 0% 58%
Texas 16% 0%
Virginia 3% 0%
------------ ----------
Total 100% 100%
============ ==========
The following table summarizes delinquent mortgage loan holdings of the Company.
Delinquent
90 days or more 2003 2002 2001
----------------------------------- ------------- ------------- -------------
Non-accrual status $ 179,204 $ 171,300 $ 174,941
Other 0 0 0
Reserve on delinquent
loans (120,000) (120,000) (120,000)
------------- ------------- -------------
Total delinquent $ 59,204 $ 51,300 $ 54,941
============= ============= =============
Interest income past due
(delinquent loans) $ 0 $ 0 $ 0
============= ============= =============
In process of restructuring $ 0 $ 0 $ 0
Restructuring on other
than market terms 0 0 0
Other potential problem
loans 0 1,709 9,299
------------- ------------- -------------
Total problem loans $ 0 $ 1,709 $ 9,299
============= ============= =============
Interest income foregone
(restructured loans) $ 0 $ 0 $ 0
============= ============= =============
In process of foreclosure $ 1,423,804 $ 0 $ 28,536
------------- ------------- -------------
Total foreclosed loans $ 1,423,804 $ 0 $ 28,536
============= ============= =============
Interest income foregone
(restructured loans) $ 0 $ 0 $ 2,497
============= ============= =============
See Item 2, Properties, for description of real estate holdings.
COMPETITION
The insurance business is a highly competitive industry and there are a number
of other companies, both stock and mutual, doing business in areas where the
Company operates. Many of these competing insurers are larger, have more
diversified and established lines of insurance coverage, have substantially
greater financial resources and brand recognition, as well as a greater number
of agents. Other significant competitive factors in the insurance industry
include policyholder benefits, service to policyholders, and premium rates.
The Company has not placed an emphasis on new business production. Costs
associated with supporting new business can be significant. In recent years, the
insurance industry as a whole has experienced a decline in the total number of
agents who sell insurance products; therefore competition has intensified for
top producing sales agents. The relatively small size of the Company, and the
resulting limitations, has made it challenging to compete in this area. The
number of agents marketing the Company's products has reduced to a negligible
number.
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 250,000
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 year ended 2003, 2002 and
2001, the Company received $ 473,145, $ 521,782 and $ 299,905 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 in 2002 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.
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.
In 1999, Congress passed legislation reducing or eliminating certain barriers,
which existed between insurance companies, banks and brokerages. This
legislation opens markets for financial institutions to compete against one
another and to acquire one another across previously established barriers. This
creates both additional challenges and opportunities for the Company. The full
impact of these changes on the financial industries is still evolving, and the
Company continues to watch these changes and how they impact the Company. The
Company has considered the feasibility of a marketing opportunity with First
Southern National Bank (FSNB) an affiliate of UTG's largest shareholder.
Management has considered various products including annuity type products,
mortgage protection products and existing insurance products, as a possibility
to market to all banking customers. This marketing opportunity has potential and
is believed to be a viable niche. The Company has recently designed the
"Horizon" annuity product as well as the "Legacy" life product, which are both
to be used in marketing efforts by FSNB. The introduction of these new products
is currently not expected to produce significant premium writings.
GOVERNMENT REGULATION
The Company's current and merged insurance subsidiaries are assessed
contributions by life and health guaranty associations in almost all states to
indemnify policyholders of failed companies. In several states the company may
reduce premium taxes paid to recover a portion of assessments paid to the
states' guaranty fund association. This right of "offset" may come under review
by the various states, and the company cannot predict whether and to what extent
legislative initiatives may affect this right to offset. In addition, some state
guaranty associations have adjusted the basis by which they assess the cost of
insolvencies to individual companies. The Company believes that its reserve for
future guaranty fund assessments is sufficient to provide for assessments
related to known insolvencies. This reserve is based upon management's current
expectation of the availability of this right of offset, known insolvencies and
state guaranty fund assessment bases. However, changes in the basis whereby
assessments are charged to individual companies and changes in the availability
of the right to offset assessments against premium tax payments could materially
affect the Company's results.
Currently, UG, the insurance subsidiary, is subject to government regulation in
each of the states in which it conducts business. Such regulation is vested in
state agencies having broad administrative power dealing with all aspects of the
insurance business, including the power to: (i) grant and revoke licenses to
transact business; (ii) regulate and supervise trade practices and market
conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve
policy forms; (vi) approve premium rates for some lines of business; (vii)
establish reserve requirements; (viii) prescribe the form and content of
required financial statements and reports; (ix) determine the reasonableness and
adequacy of statutory capital and surplus; and (x) regulate the type and amount
of permitted investments. Insurance regulation is concerned primarily with the
protection of policyholders. The Company cannot predict the impact of any future
proposals, regulations or market conduct investigations. UG is domiciled in the
state of Ohio.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners (NAIC). The NAIC is an association whose membership consists of
the insurance commissioners or their designees of the various states. The NAIC
has no direct regulatory authority over insurance companies. However, its
primary purpose is to provide a more consistent method of regulation and
reporting from state to state. This is accomplished through the issuance of
model regulations, which can be adopted by individual states unmodified,
modified to meet the state's own needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes, which require
registration and periodic reporting by insurance companies controlled by other
corporations licensed to transact business within their respective
jurisdictions. The insurance subsidiary is subject to such legislation and
registered as controlled insurers in those jurisdictions in which such
registration is required. Statutes vary from state to state but typically
require periodic disclosure, concerning the corporation that controls the
registered insurers and all subsidiaries of such corporation. In addition, prior
notice to, or approval by, the state insurance commission of material
intercorporate transfers of assets, reinsurance agreements, management
agreements (see Note 9 to the consolidated financial statements), and payment of
dividends (see Note 2 to the consolidated financial statements) in excess of
specified amounts by the insurance subsidiary, within the holding company
system, are required.
Each year the NAIC calculates financial ratio results (commonly referred to as
IRIS ratios) for each insurance company. These ratios compare various financial
information pertaining to the statutory balance sheet and income statement. The
results are then compared to pre-established normal ranges determined by the
NAIC. Results outside the range typically require explanation to the domiciliary
insurance department.
At year-end 2003, UG had five ratios outside the normal range. Three of the
suspect ratios were as a result of the settlement of a lawsuit (See Note 8). The
fourth ratio was slightly outside the normal range relating to net investment
income while the fifth ratio was outside the normal range due to the additional
current year reinsurance premium due to the Company's reinsurers.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. The
risk-based capital (RBC) formula measures the adequacy of statutory capital and
surplus in relation to investment and insurance risks such as asset quality,
mortality and morbidity, asset and liability matching and other business
factors. The RBC formula is used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines new minimum capital standards that will supplement the
current system of low fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio of the
insurance company's regulatory total adjusted capital, as defined by the NAIC,
to its authorized control level RBC, as defined by the NAIC. Insurance companies
below specific trigger points or ratios are classified within certain levels,
each of which requires specific corrective action. The levels and ratios are as
follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2.0*
Regulatory action level 1.5
Authorized control level 1.0
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 2003, the insurance subsidiary has a ratio that is in excess of
3, which is 300% of the authorized control level; accordingly, the insurance
subsidiary meets the RBC requirements.
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. The Company's insurance subsidiary has no race-based
premium products, but does 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 October 26, 2001, President Bush signed into law the "USA PATRIOT" Act of
2001 ("the Patriot Act"). This Law, enacted in response to the terrorist attacks
of September 11, 2001, strengthens our Nation's ability to combat terrorism and
prevent and detect money-laundering activities. Under Section 352 of the Patriot
Act, financial institutions (definition includes insurance companies) are
required to develop an anti-money laundering program. The practices and
procedures implemented under the program should reflect the risks of money
laundering given the entity's products, methods of distribution, contact with
customers and forms of customer payment and deposits. In addition, Section 326
of the Patriot Act creates minimum standards for financial institutions
regarding the identity of their customers in connection with the purchase of a
policy or contract of insurance. The Company has instituted an anti-money
laundering program to comply with Section 352, and has communicated this program
throughout the organization. The Company implemented a preliminary database
program in order to facilitate compliance with Section 326. In addition, all new
business applications are regularly screened through the Medical Information
Bureau. The Company regularly updates the information provided by the Office of
Foreign Asset Control, U.S. Treasury Department in order to remain in compliance
with the Patriot Act and will continue to monitor this issue as changes and new
proposals are made.
On July 30, 2002, President Bush signed into law the "SARBANES-OXLEY" Act of
2002 ("the Act"). This Law, enacted in response to several high-profile business
failures, was developed to provide meaningful reforms that protect the public
interest and restore confidence in the reporting practices of publicly traded
companies. The implications of the Act to public companies (which includes UTG)
are vast, widespread, and evolving. Many of the new requirements will not take
effect or full effect until after calendar-year-end companies have completed
their 2003 annual reports. The Company has implemented requirements affecting
the current reporting period, and is continually monitoring, evaluating, and
planning implementation of requirements that will need to be taken into account
in future reporting periods.
EMPLOYEES
There are approximately 51 persons who are employed full-time by the Company.
ITEM 2. PROPERTIES
The following table shows a breakout of property, net of accumulated
depreciation, owned and occupied by the Company and the distribution of real
estate by type.
Property owned Amount % of Total
Home Office $ 1,889,038 7%
Investment real estate
Commercial 23,920,037 90%
Residential development 805,787 3%
24,725,824 93%
Grand total $ 26,614,862 100%
============= =======
Total investment real estate holdings represent approximately 8% of the total
assets of the Company net of accumulated depreciation of $ 1,729,001 and
$ 460,170 at year-end 2003 and 2002 respectively. The Company owns an office
complex in Springfield, Illinois, which houses the primary insurance operations.
The office buildings in this complex contain 57,000 square feet of office and
warehouse space, and are carried at $ 1,889,038. Currently, the facilities
occupied by the Company are adequate relative to the Company's present
operations.
Commercial property mainly consists of North Plaza, which owns for investment
purposes, a shopping center in Somerset, Kentucky, approximately 14,000 acres of
timberland in Kentucky, and a 50% partnership interest in an additional 11,000
acres of Kentucky timberland. The timberland is harvested and in various stages
of maturity. The property is carried at $ 9,583,967.
UG is a two-thirds owner for investment purposes in a commercial office
building, held in an LLC, referred to as Hampshire Plaza. The other one-third
partner is Millard V. Oakley, who is a former Director of UTG. Hampshire Plaza
consists of a 254,000 square foot office tower, an attached 72,000 square foot
retail plaza, and an attached parking garage with approximately 350 parking
spaces located in New Hampshire. The Company invested an additional $ 1,100,000
in 2003 in order to renovate and improve existing office space within the
building and plans to contribute an additional $ 400,000 in the next year. The
improvements have been made in order to lease the office space in the near
future. During the first half of 2002 a significant portion of existing office
leases expired. In 2003, the Company obtained new lease agreements whereby
approximately 70% of the building would become leased. The addition of this
substantial lease agreement will positively impact future cash flows on this
investment. At December 31, 2003, the property was carried at $ 11,005,688.
UG purchased real estate, known as Hampshire Plaza Garage, at a cost of
$ 2,220,256 from an outside third party through the formation of an LLC in which
UG is a two-thirds owner. The other one-third partner is Millard V. Oakley, who
is a former Director of UTG. The property consists of a parking garage with
approximately 580 parking spaces located in New Hampshire.
Residential development property is primarily located in Springfield, Illinois,
and consists of two parcels. The Company has no current plans to further develop
these parcels. The properties are located in a growing area of the community and
are currently being marketed for sale.
ITEM 3. LEGAL PROCEEDINGS
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. District Court for the Southern District of Illinois)
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) (merged into UG in 1999), UTG and FCC as
defendants. The plaintiffs alleged that they were employees of UG, UTAC or USAC
rather than independent contractors. The plaintiffs sought class action status
and 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.
In late June 2003, mediation was held in an attempt to bring resolution to this
lawsuit. The negotiations continued in July and August, and a proposed
settlement was ultimately reached. Although the Company continued to believe
that it has meritorious grounds to defend this lawsuit, the legal process can be
lengthy and costly, with no guarantee of success in the final resolution. Under
these circumstances, management believed a settlement of the matter was in the
best interests of the Company. Under the terms of the proposed settlement, the
Company would pay $ 1,950,000 in attorneys' fees, costs and expenses, and the
Company, through its insurance subsidiary, will provide certain life insurance
benefits at a discount to members of the class (or their transferees) choosing
to purchase life insurance benefits.
On November 20, 2003, Hon. G. Patrick Murphy, Chief Judge for the United States
District Court for the Southern District of Illinois, entered the order settling
this action. On December 21, 2003 this order became final at the expiration of
the appellate window and the Company paid $ 1,950,000 in attorneys' fees, costs
and expenses. Initial mailings were sent to class members in February 2004. At
December 31, 2003, the Company maintained a $ 200,000 accrual to cover expected
future costs regarding this matter.
UTG and its subsidiaries, both current and merged, are named as defendants in a
number of 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2003.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Registrant is a public company whose common stock is traded in the
over-the-counter market. Over-the-counter quotations can be obtained with the
UTGI.OB stock symbol.
The following table shows the high and low bid quotations for each quarterly
period during the past two years, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions. The quotations
below were acquired from the NASDAQ web site, which also provides quotes for
over-the-counter traded securities such as UTG. UTG was listed on the NASDAQ
small cap market up to December 31, 2001, at which time the Company voluntarily
de-listed the stock.
BID
PERIOD LOW HIGH
2003
First quarter 6.800 7.000
Second quarter 6.850 8.000
Third quarter 6.700 7.150
Fourth quarter 5.800 7.490
BID
PERIOD LOW HIGH
2002
First quarter 6.000 9.850
Second quarter 6.000 7.250
Third quarter 6.250 7.050
Fourth quarter 6.500 8.000
UTG has not declared or paid any dividends on its common stock in the past two
fiscal years, and has no current plans to pay dividends on its common stock as
it intends to retain all earnings for investment in and growth of the Company's
business. The payment of future dividends, if any, will be determined by the
Board of Directors in light of existing conditions, including the Company's
earnings, financial condition, business conditions and other factors deemed
relevant by the Board of Directors. See Note 2 in the accompanying consolidated
financial statements for information regarding dividend restrictions, including
applicable restrictions on the ability of the Company's life insurance
subsidiary to pay dividends up to the Registrant, which discussion is
incorporated herein by this reference.
As of March 1, 2004 there were 9,564 record holders of UTG common stock.
The following table reflects the Company's Employee and Director Stock Purchase
Plan Information:
Plan category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants and rights future issuance under
warrants and rights employee and director stock
purchase plans (excluding
securities reflected in
column (a))
(a) (b) (c)
Employee and Director Stock
Purchase plans approved by
security holders
324,563
0 0
Employee and Director Stock
Purchase plans not approved by
security holders
0 0 0
Total 0 0 324,563
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 allows for the issuance of up to 400,000
shares of UTG common stock. The plan's purpose is to encourage ownership of UTG
stock by eligible directors and employees of UTG and its subsidiary 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 2003 meeting, the Board of Directors
of UTG approved a second offering under the plan to qualified individuals.
Following the 30-day offer period, ending in October 2003, three individuals
executed the appropriate documents and acquired a total of 16,546 shares of UTG
common stock. UTG received $ 195,905 from the issuance of these shares. Each
participant under the plan executed a "stock restriction and buy-sell
agreement", which among other things provides UTG with a right of first refusal
on any future sales of the shares acquired by the participant under this plan.
The purchase price of shares repurchased under the stock restriction and
buy-sell agreement shall be computed, on a per share basis, equal to the sum of
(i) the original purchase price paid to acquire such shares from UTG and (ii)
the consolidated statutory net earnings (loss) per share of such shares during
the period from the end of the month next preceding the month in which such
shares were acquired pursuant to the plan, to the end of the month next
preceding the month in which the sale of such shares to UTG occurs. At
December 31, 2003, UTG had 75,437 shares outstanding that were issued under this
program with a value of $ 11.63 per share pursuant to the above formula.
The Company has no other stock plans.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data should be read in
conjunction with "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Item 8 - Financial Statements and
Supplementary Data" and other financial information included elsewhere in this
Form 10-K.
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
2003 2002 2001 2000 1999
------------- ----------- ----------- ------------ ------------
Premium income
net of reinsurance $ 15,023 $ 15,832 $ 17,141 $ 19,490 $ 21,581
Total revenues $ 26,488 $ 30,177 $ 33,313 $ 35,747 $ 36,057
Net income (loss)* $ (6,396) $ 1,339 $ 2,308 $ (696) $ 1,076
Basic income (loss) per share $ (1.67) $ 0.38 $ 0.62 $ (0.17) $ 0.38
Total assets $ 311,557 $ 320,494 $ 328,939 $ 333,035 $ 338,576
Total long-term debt $ 2,290 $ 2,995 $ 4,401 $ 1,817 $ 5,918
Dividends paid per share NONE NONE NONE NONE NONE
* Includes equity earnings of investees.
ITEM 7. 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
for the three years ended December 31, 2003. This analysis should be read in
conjunction with the consolidated financial statements and related notes, which
appear elsewhere in this Form 10-K. The Company reports financial results on a
consolidated basis. The consolidated financial statements include the accounts
of UTG and its subsidiaries at December 31, 2003.
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.
Critical Accounting Policies
General
We have identified the accounting policies below as critical to the
understanding of our results of operations and our financial position. The
application of these critical accounting policies in preparing our financial
statement requires management to use significant judgments and estimates
concerning future results or other developments including the likelihood, timing
or amount of one or more future transactions or amounts. Actual results may
differ from these estimates under different assumptions or conditions. On an
on-going basis, we evaluate our estimates, assumptions and judgments based upon
historical experience and various other information that we believe to be
reasonable under the circumstances. For a detailed discussion of other
significant accounting policies, see Note 1.
DAC and Cost of Insurance Acquired
Deferred acquisition costs (DAC) and cost of insurance acquired reflect our
expectations about the future experience of the existing business in-force. The
primary assumptions regarding future experience that can affect the carrying
value of DAC and cost of insurance acquired balances include mortality, interest
spreads and policy lapse rates. Significant changes in these assumptions can
impact amortization of DAC and cost of insurance acquired in both the current
and future periods, which is reflected in earnings.
Investments
We regularly monitor our investment portfolio to ensure that investments that
may be other than temporarily impaired are identified in a timely manner and
properly valued, and that any impairments are charged against earnings in the
proper period.
Valuing our investment portfolio involves a variety of assumptions and
estimates, particularly for investments that are not actively traded. We rely on
external pricing sources for highly liquid publicly traded securities. Many
judgments are involved in timely identifying and valuing securities, including
potentially impaired securities. Inherently, there are risks and uncertainties
involved in making these judgments. Changes in circumstances and critical
assumptions such as a continued weak economy, a more pronounced economic
downturn or unforeseen events which affect one or more companies, industry
sectors or countries could result in write downs in future periods for
impairments that are deemed other than temporary.
Results of Operations
(a) Revenues
Premiums and policy fee revenues, net of reinsurance premiums and policy fees,
decreased 5% when comparing 2003 to 2002 and 8% from 2002 to 2001. The Company
currently writes little new business. Unless the Company acquires a block of
in-force business or marketing significantly increases on traditional business,
management expects premium revenue to continue to decline at a rate consistent
with prior experience. The Company's average persistency rate for all policies
in force for 2003, 2002 and 2001 was approximately 94.9%, 93.6%, and 91.6%,
respectively. Persistency is a measure of insurance in force retained in
relation to the previous year.
New business production decreased steadily and significantly over the last
several years. The Company has not placed an emphasis on new business production
in recent years. Costs associated with supporting new business can be
significant. In recent years, the insurance industry as a whole has experienced
a decline in the total number of agents who sell insurance products; therefore
competition has intensified for top producing sales agents. The relatively small
size of the Company, and the resulting limitations, has made it challenging to
compete in this area.
During 2001, the Company implemented a conservation effort, which is still in
place, in an attempt to improve the persistency rate of insurance company's
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, their ability to reach these customers diminished, making
conservation efforts difficult. The conservation efforts described above have
been generally positive. Management will continue to monitor these efforts and
make adjustments as seen appropriate to enhance the future success of the
program. The Company has also implemented a new product referred to as "the
Legacy" to be specifically used by the licensed customer service representatives
as an alternative for the customer in the conservation efforts. The Company is
looking at additional products to offer to further enhance conservation and home
office sales.
The Company has considered the feasibility of a marketing opportunity with First
Southern National Bank (FSNB) an affiliate of UTG's largest shareholder,
Chairman and CEO, Mr. Jesse T. Correll. Management has considered various
products including annuity type products, mortgage protection products and
existing insurance products, as potential products that could be marketed to
banking customers. This marketing opportunity has potential and is believed to
be a viable niche. The Company has recently designed the "Horizon" annuity
product as well as the "Legacy" life product which are both to be used in
marketing efforts by FSNB. The introduction of these new products is currently
not expected to produce significant premium writings. The Company is currently
looking at other types of products to compliment the existing offerings. Among
these being considered is a child product and term life insurance.
Net investment income decreased 24% when comparing 2003 to 2002 and decreased
11% when comparing 2002 to 2001. The overall investment yields for 2003, 2002
and 2001, are 4.05%, 5.37% and 6.39%, respectively. The decline in investment
yields are directly affected by the decline in the national prime rate, which
has declined from 9.5% at December 31, 2000 to 4.00% at December 31, 2003. This
decrease has 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.
Many insurance companies have suffered significant losses in their investment
portfolios as a result of corporate defaults and bankruptcies in the last couple
of years; however, because of the Company's conservative investment philosophy
the Company has so far avoided such significant losses. The Company's corporate
holdings are relatively small compared to the insurance industry. Recent periods
investments acquired include a very limited amount in corporate securities.
Management continues to shorten the length of the Company's portfolio which has
limited investment earnings in the short run. The Company has not written off
any investment losses in these turbulent economic times.
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%. 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 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 described above. Policy interest crediting
rate changes and expense load changes become effective on an individual policy
basis on the next policy anniversary. Therefore, it takes a full year from the
time the change was determined for the full impact of such change to be
realized. 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.
Realized investment gains, net of realized losses, were $ 485,436, $ 13,634 and
$ 436,840 in 2003, 2002 and 2001, respectively. The primary source for the 2003
gain is from the sale of two investments. The Company sold one common stock
holding, realizing a gain of $ 165,262 and one real estate holding, realizing a
gain of $ 211,352. During 2002, the modest realized gain consisted primarily of
real estate sales on residential development property the Company owned in
Springfield, Illinois. During 2001, the Company sold the West Virginia
properties including the former home office building of APPL, realizing a gain
of $ 217,574.
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 250,000
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 year ended 2003 and 2002,
the Company received $ 473,145, and $ 521,782 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 in 2002 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. 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. 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. Although no additional TPA work has been added to date,
management believes this area is a growing market and the Company is well
positioned to serve this market.
(b) Expenses
Benefits, claims and settlement expenses net of reinsurance benefits and claims,
increased $ 1,631,372 from 2002 to 2003 and increased $ 84,561 from 2001 to
2002. The 2003 increase is primarily related to increases in the Company's
policyholder reserves, or future policy benefits. Reserves are calculated on an
individual policy basis and generally increase over the life of the policy as a
result of additional premium payments and acknowledgement of increased risk as
the insured continues to age. Fluctuations in death claim experience from year
to year typically have a significant impact on variances in this line item.
Direct (prior to reinsurance) death claims were approximately $ 2,752,000 less
in 2003 than in 2002 and approximately $ 1,812,000 greater in 2002 than in 2001.
There is no single event that caused the mortality variances. Policy claims vary
from year to year and therefore, fluctuations in mortality are to be expected
and are not considered unusual by management. Policy surrender benefits
decreased approximately $ 980,000 during the year 2003 compared to the same
period in 2002 and decreased approximately $ 2,000,000 during the year 2002
compared to the same period in 2001. As discussed above, stronger efforts have
been made in policy retention through more personal contact with 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 and generally greater than the cash surrender value of a
policy. Therefore, a decline in current period surrenders results in an overall
increase in the policy benefits number in the current period. The benefit of
fewer policy surrenders is primarily received over a longer time period through
the retention of the Company's asset base.
In March 2001, the Board of UG lowered crediting rates one-half percent on all
rate-adjustable products that could be lowered. With this reduction, the
Company's rate-adjustable products have been lowered to their guaranteed minimum
rates, and as such, cannot be lowered any further. In addition, in 2002, the
Board of UG adjusted the expense loads of the Century 2000 product to the
guaranteed amounts. These adjustments were in response to continued declines in
interest rates in the marketplace. Policy interest crediting rate changes and
expense load changes become effective on an individual policy basis on the next
policy anniversary. Therefore, it takes a full year from the time the change was
determined for the full impact of such change to be realized.
Commissions and amortization of deferred policy acquisition costs decreased 60%
in 2003 compared to 2002 and decreased 38% in 2002 compared to 2001. The most
significant factor in the continuing 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 any of the
three periods reported.
Amortization of cost of insurance acquired increased 12% in 2003 compared to
2002 and decreased 4% in 2002 compared to 2001. Cost of insurance acquired is
established when an insurance company is acquired. The Company assigns a portion
of its cost to the right to receive future cash flows from insurance contracts
existing at the date of the acquisition. The cost of policies purchased
represents the actuarially determined present value of the projected future cash
flows from the acquired policies. Cost of insurance acquired is comprised of
individual life insurance products including whole life, interest sensitive
whole life and universal life insurance products. Cost of insurance acquired is
amortized with interest in relation to expected future profits, including direct
charge-offs for any excess of the unamortized asset over the projected future
profits. The interest rates utilized in the amortization calculation are 9% on
approximately 25% of the balance and 15% on the remaining balance. The interest
rates vary due to risk analysis performed at the time of acquisition on the
business acquired. The amortization is adjusted retrospectively when estimates
of current or future gross profits to be realized from a group of products are
revised. Amortization of cost of insurance acquired is particularly sensitive to
changes in interest rate spreads and persistency of certain blocks of insurance
in-force. Persistency is a measure of insurance in force retained in relation to
the previous year. The Company's average persistency rate for all policies in
force for 2003, 2002 and 2001 has been approximately 94.9%, 93.6% and 91.6%,
respectively. Based on the projected future profits and persistency of the
insurance in-force, the Company wrote off an additional $ 5,000,000 of cost of
insurance acquired during 2003. This write-off is primarily the result of
continued tightening of interest rate spreads of the Company. The Company will
continue to analyze these projections to determine the adequacy of present
values assigned to future cash flows.
Operating expenses increased 29% in 2003 compared to 2002 and decreased 9% in
2002 compared to 2001. During 2003, the Company paid $ 1,950,000 in settlement
of a lawsuit. In addition, the Company maintains a $ 200,000 accrual to cover
expected future costs regarding this matter. During 2001, the Company
transferred all remaining functions of its former insurance subsidiary APPL from
Huntington, West Virginia to the Springfield, Illinois location, and sold the
West Virginia property. The closing of the Huntington office resulted in an
approximately $ 325,000 reduction to operating expenses in 2002. Also during
2002, 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. These expense reductions have been partially
offset by increased operating costs of approximately $ 285,000 attributable to
the Company's conversion of its existing business and TPA clients to "ID3", a
software system owned by Fiserv LIS. Conversion costs to date include fees for
initial licensing, consultation, and training.
Interest expense declined 38% comparing 2003 to 2002 and declined 19% comparing
2002 to 2001. The Company repaid $ 705,499, $ 1,405,395 and $ 1,302,495 in
outside debt in 2003, 2002 and 2001 respectively, through operating cash flows
and dividends received from its subsidiary UG. 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. These notes bear interest at the fixed rate of 7%
per annum (paid quarterly) with payments of principal to be made in five equal
installments, the first principal payment of which, in the amount of $ 777,199,
was made on March 31, 2002. At December 31, 2003, UTG had $ 2,289,776 in notes
payable remaining, all of which were incurred in the April 2001 stock purchase
transaction with Mr. Ryherd and Mr. Melville. Principal payments of $ 763,259
were due annually over the next three-year period ending in April of 2006 with
the next principal payment scheduled due in April of 2004. Subsequent to
year-end 2003, the Company paid the remaining balance of these notes with a draw
on its line of credit with Southwest Bank of St. Louis. The line of credit bears
interest at the rate of 0.25% in excess of the Southwest Bank of St. Louis'
prime rate. This action will further reduce interest expense in future periods
as the current rate on the line of credit is 4.25% compared to the fixed rate of
7% on the notes paid. The Company has aggressively pursued the repayment of its
existing debt in recent periods. With the current interest rate environment,
management believes it is in the Company's best long-term interest to reduce or
eliminate its debt with any excess funds available to do so.
Management believes overall sources available are more than adequate to service
this debt. These sources include current cash balances of UTG, expected future
operating cash flows and payment of dividends from the Company's life
subsidiary.
Deferred taxes are established to recognize future tax effects attributable to
temporary differences between the financial statements and the tax return. As
these differences are realized in the financial statement or tax return, the
deferred income tax established on the difference is recognized in the financial
statements as an income tax expense or credit.
(c) Net income (loss)
The Company had a net income (loss) of $ (6,396,490), $ 1,338,795 and
$ 2,308,096 in 2003, 2002 and 2001 respectively. Significant one-time charges
and accruals to operating expenses, combined with an additional write-off of
cost of insurance acquired and continued decline in interest rates during 2003
as previously described, were the primary differences in the 2003 to 2002
results. The decrease in net income in 2002 as compared to 2001 is primarily
related to lower investment income returns and increased death claims. The
Company continues to monitor and adjust those items within its control.
Financial Condition
(a) Assets
Investments are the largest asset group of the Company. The Company's insurance
subsidiary is regulated by insurance statutes and regulations as to the type of
investments 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, and
the Company's business and investment strategy, the Company generally seeks to
invest in United States government and government agency securities and other
high quality low risk investments. Many insurance companies have suffered
significant losses in their investment portfolios in the last couple of years;
however, because of the Company's conservative investment philosophy our Company
has so far largely avoided such significant losses. Management continues to
shorten the length of the Company's portfolio which has limited investment
earnings in the short run. The Company has not written off any investment losses
in these turbulent economic times.
At December 31, 2003, 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 in 2003
and 2002 as available for sale. It was determined it would be in the Company's
best financial interest to classify these new purchases as available for sale to
provide additional liquidity and flexibility.
The following table summarizes the Company's fixed maturities distribution at
December 31, 2003 and 2002 by ratings category as issued by Standard and Poor's,
a leading ratings analyst.
Fixed Maturities
Rating % of Portfolio
----------------------
2003 2002
---------- ----------
Investment Grade
AAA 82% 65%
AA 1% 3%
A 12% 24%
BBB 4% 6%
Below investment grade 1% 2%
---------- ----------
100% 100%
========== ==========
In the past few years the Company has invested more of its funds in mortgage
loans. This is the result of increased mortgage opportunities available through
FSNB, an affiliate of Mr. Jesse T. Correll. Mr. Correll is the CEO and Chairman
of the Board of Directors of UTG, and directly and indirectly through
affiliates, its largest shareholder. FSNB has been able to provide the Company
with additional expertise and experience in underwriting commercial and
residential mortgage loans, which provide more attractive yields than the
traditional bond market. During 2003, 2002 and 2001 the Company issued
approximately $ 11,405,000, $ 6,920,000 and $ 4,535,000 respectively, in new
mortgage loans. These new loans were originated through FSNB and funded by the
Company through participation agreements with FSNB. FSNB services the loans
covered by these participation agreements. The Company pays FSNB a .25%
servicing fee on these loans and a one-time fee at loan origination of .50% of
the original loan amount to cover costs incurred by FSNB relating to the
processing and establishment of the loan. UG paid $ 63,214, $ 70,140 and
$ 79,730 in servicing fees and $ 13,821, $ 35,127 and $ 22,626 in origination
fees to FSNB during 2003, 2002 and 2001, respectively.
Total investment real estate holdings represent approximately 8% and 7% of the
total assets of the Company, net of accumulated depreciation, at year-end 2003
and 2002 respectively. Total investment real estate is separated into two
categories: Commercial 97% and Residential Development 3%.
Policy loans remained consistent for the periods presented. Industry experience
for policy loans indicates that few policy loans are ever repaid by the
policyholder, other than through termination of the policy. Policy loans are
systematically reviewed to ensure that no individual policy loan exceeds the
underlying cash value of the policy.
Deferred policy acquisition costs decreased 14% in 2003 compared to 2002.
Deferred policy acquisition costs, which vary with, and are primarily related to
producing new business, are referred to as DAC. DAC consists primarily of
commissions and certain costs of policy issuance and underwriting, net of fees
charged to the policy in excess of ultimate fees charged. To the extent these
costs are recoverable from future profits, the Company defers these costs and
amortizes them with interest in relation to the present value of expected gross
profits from the contracts, discounted using the interest rate credited by the
policy. The Company had $ 61,000 in policy acquisition costs deferred, $ 17,000
in interest accretion and $ 417,844 in amortization in 2003, and had $ 69,000 in
policy acquisition costs deferred, $ 55,000 in interest accretion and $ 769,432
in amortization in 2002.
Cost of insurance acquired decreased 31% in 2003 compared to 2002. When an
insurance company is acquired, the Company assigns a portion of its cost to the
right to receive future cash flows from insurance contracts existing at the date
of the acquisition. The cost of policies purchased represents the actuarially
determined present value of the projected future cash flows from the acquired
policies. Cost of insurance acquired is amortized with interest in relation to
expected future profits, including direct charge-offs for any excess of the
unamortized asset over the projected future profits. In 2003 and 2002
amortization decreased the asset by $ 1,695,328 and $ 1,515,450, respectively.
In 2003, the balance was reduced by an additional $ 5,000,000 as a direct
charge-off of unamortized asset over the projected future profits. Also, the
balance was reduced $ 8,409,722 in 2002 as a result of the valuation adjustment
attributable to the acquisition of the minority positions of FCC through its
merger with and into UTG.
(b) Liabilities
Total liabilities decreased 1% in 2003 compared to 2002. Policy liabilities and
accruals, which represented 95% and 93% of total liabilities at year end 2003
and 2002, respectively, increased slightly during the current year. The increase
is attributable to a the continued aging of the in-force population and an
improvement in the persistency rate on the policies.
Notes payable decreased 24% in 2003 compared to 2002. At December 31, 2002, UTG
had $ 2,995,275 in notes payable. During 2003, the Company repaid $ 705,499 of
its debt through operating cash flows and dividends received from its subsidiary
UG. At December 31, 2003, UTG had $ 2,289,776 in notes payable, all remaining
debt is owed to two former Officers and Directors of the Company and their
respective families as a result of an April 2001 stock purchase transaction.
These notes bear interest at the fixed rate of 7% per annum (paid quarterly),
with three remaining principal payments of approximately $ 763,000 due annually.
The next principal payment due date was April of 2004. Subsequent to year-end
2003, the Company paid the remaining balance of these notes with a draw on its
line of credit with Southwest Bank of St. Louis. The line of credit will bear
interest at the rate of 0.25% in excess of the Southwest Bank of St. Louis'
prime rate. Management believes overall sources of liquidity available are more
than adequate to service this debt. These sources include current cash balances
of UTG, expected future operating cash flows and payment of dividends from the
Company's life subsidiary. The Company's long-term debt is discussed in more
detail in Note 11 to the consolidated financial statements, which is
incorporated herein by this reference.
(c) Shareholders' Equity
Total shareholders' equity decreased 17% in 2003 compared to 2002. This is
primarily due to a loss during the year of $ (6,396,490) and a decrease in
unrealized gains on investments in the current year of $ (1,205,544). In
addition shareholders' equity increased by $ 195,905 from an employee and
director stock purchase plan which was approved and implemented in 2002;
however, this was offset by purchases of treasury shares and retirements
totaling $ (441,143). During the current year's financial statement preparation,
the Company determined the amount of reinsurance premiums paid to reinsurers was
insufficient in the current year as well as prior years. It was determined that,
in total, $903,325 in due premium was owed the Company's reinsurers, of which
$729,321 related to years prior to 2003.
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 3% and 8% as of December 31, 2003 and 2002, respectively.
Fixed maturities as a percentage of total invested assets were 68% and 72% as of
December 31, 2003 and 2002, respectively.
The Company's investments are predominantly in fixed maturity investments such
as bonds and mortgage loans, which provide sufficient return to cover future
obligations. The Company carries certain of its fixed maturity holdings as held
to maturity which are 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 $ (933,048), $ 467,034 and
$ 1,527,856 in 2003, 2002 and 2001, respectively. Reporting regulations require
cash inflows and outflows from universal life insurance products to be shown as
financing activities when reporting on cash flows. The net cash provided by
operating activities plus policyholder contract deposits less policyholder
contract withdrawals equaled $ 1,504,730 in 2003, $ 2,798,799 in 2002 and
$ 3,547,366 in 2001. Management utilizes this measurement of cash flows as an
indicator of the performance of the Company's insurance operations.
Cash provided by (used in) investing activities was $ (15,846,714), $ 7,833,788
and $ 714,155 for 2003, 2002 and 2001, respectively. The most significant aspect
of cash provided by (used in) investing activities is the fixed maturity
transactions. Fixed maturities account for 82%, 78% and 81% of the total cost of
investments acquired in 2003, 2002 and 2001, respectively.
Net cash provided by (used in) financing activities was $ 1,487,041, $ (473,692)
and $ (1,091,769) for 2003, 2002 and 2001, respectively. The Company continues
to pay down its outstanding debt. Such payments are included within this
category. In addition, in 2001 the Board of Directors of the Company authorized
a repurchase program of UTG's common stock and the purchase of stock is still
pursued as it becomes available. In addition, in 2002 this category includes
payments made to former FCC shareholders for shares they owned prior to the
merger of FCC into UTG.
Policyholder contract deposits decreased 8% in 2003 compared to 2002, and
decreased 9% in 2002 when compared to 2001. The decrease in policyholder
contract deposits relates to the decline in new business production experienced
in the last few years by the Company. Policyholder contract withdrawals have
decreased 11% in 2003 compared to 2002, and 15% in 2002 compared to 2001. The
change in policyholder contract withdrawals is not attributable to any one
significant event. Factors that influence policyholder contract withdrawals are
fluctuation of interest rates, competition and other economic factors.
At December 31, 2003, UTG had $ 2,289,776 in notes payable, all remaining debt
is owed to two former officers and directors of the Company and their respective
families as a result of an April 2001 stock purchase transaction. These notes
bear interest at the fixed rate of 7% per annum (paid quarterly), with three
remaining principal payments of $ 763,259 due annually. The next principal
payment due date was April of 2004. Subsequent to year-end 2003, the Company
paid the remaining balance of these notes with a draw on its line of credit with
Southwest Bank of St. Louis. The line of credit will bear interest at the rate
of 0.25% in excess of the Southwest Bank of St. Louis' prime rate. Management
believes overall sources available are more than adequate to service this debt.
These sources include current cash balances of UTG, expected future operating
cash flows and payment of dividends from the Company's life subsidiary.
On November 15, 2001, UTG was extended a $ 3,300,000 line of credit (LOC) from
the First National Bank of the Cumberlands (FNBC) located in Livingston,
Tennessee. The FNBC is owned by Millard V. Oakley, who at the time was a
director of UTG. The LOC was for a one-year term from the date of issue. The
Company has renewed the LOC annually. The interest rate on the LOC is variable
and indexed to be the lowest of the U.S. prime rates as published in the Wall
Street Journal, with any interest rate adjustments to be made monthly. At
December 31, 2003, the Company had no outstanding borrowings attributable to
this LOC. During 2003, the Company had no borrowings against this LOC. During
2002 the Company had total borrowings of $ 1,600,000 on this LOC, which were all
repaid during the year. The draws on this LOC 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 15 to the
consolidated financial statements and incorporated herein by this reference.
On April 1, 2002, UTG was extended a $ 5,000,000 line of credit (LOC) from an
unaffiliated third party, Southwest Bank of St. Louis. The LOC expired one-year
from the date of issue and was renewed for an additional one-year term. 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 LOC will bear interest at the rate of 0.25% in excess
of Southwest Bank of St. Louis' prime rate. At December 31, 2003, the Company
had no outstanding borrowings attributable to this LOC. During 2002 the Company
had total borrowings of $ 400,000 on this LOC which were all repaid during the
year. Draws on this LOC were used to retire the remaining subordinated debt, as
described in note 11 to the consolidated financial statements and incorporated
herein by this reference. Subsequent to year-end 2003, the Company made a draw
on this LOC to repay the remaining balance of debt owed to two former Officers
and Directors of the Company and their respective families.
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 the Company. The Company will
staff the administration effort. To facilitate the alliance, the Company plans
to convert its existing business and TPA clients to "ID3", a software system
owned by Fiserv 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.
In June 2002, the Company entered into a five-year contract with Fiserv LIS for
services related to their purchase of the "ID3" software system. Under the
contract, the Company is required to pay $ 12,000 per month in software
maintenance costs and a monthly fee for offsite data center costs, based on the
number and type of policies being administered o the ID3 software system for a
five-year period from the date of the signing.
At a December 17, 2001 joint meeting of the Board of Directors of UTG, FCC and
their insurance subsidiaries, the Boards of Directors of the insurance
subsidiaries discussed and decided to further explore and pursue a possible sale
of the insurance charters of each of APPL and ABE. In the alternative to a sale
of the APPL charter, the boards also discussed and decided to further explore a
possible merger of APPL into UG. At the September 24, 2002 joint meeting of the
Board of Directors of UTG and its insurance subsidiaries, the Boards of
Directors of UG and ABE each approved the exploration of a merger transaction
whereby ABE would be merged with and into UG.
In preparation for a possible charter sale of APPL, UG and APPL entered into a
100% coinsurance agreement effective October 1, 2002, whereby UG assumed and
APPL ceded all of the existing business of APPL. The coinsurance transaction had
no financial impact on the consolidated financial statements or operating
results of UTG. At the March 2003 Board of Directors meeting, the APPL and UG
Boards reaffirmed the merger of APPL with and into UG and approved the final
merger documents.
Upon receiving the necessary regulatory approvals, the merger of ABE and APPL
with and into UG was consummated effective July 1, 2003. ABE and APPL were each
100% owned subsidiaries of UG prior to the merger. Management of the Company
believes the completion of the mergers will provide the Company with additional
cost savings. These cost savings result from streamlining the Company's
operations and organizational structure from three life insurance subsidiaries
to one life insurance subsidiary, UG. Thus, the Company will further improve
administrative efficiency.
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, and 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. For the five-year period starting January 1, 1998 and ending
December 31, 2003, the Company had total earnings of $ 17,011,307 applicable to
this covenant. Therefore, UTG did not meet the earnings requirements stipulated,
and during 2003, UTG was required to issue 500,000 additional shares to FSF or
its assigns.
UTG is a holding company that has no day-to-day operations of its own. Funds
required to meet its expenses, generally costs associated with maintaining the
Company in good standing with states in which it does business, are primarily
provided by its subsidiaries. On a parent only basis, UTG's cash flow is
dependent on management fees received from its subsidiary and earnings received
on cash balances. On December 31, 2003, substantially all of the consolidated
shareholders equity represents net assets of its subsidiary. The Company's
insurance subsidiary has maintained adequate statutory capital and surplus and
has not used surplus relief or financial reinsurance, which have come under
scrutiny by many state insurance departments. The payment of cash dividends to
shareholders is not legally restricted. However, the state insurance department
regulates insurance company dividend payments where the company is domiciled.
Following the merger of FCC with and into UTG (see note 15 to the consolidated
financial statements) UG became a 100% owned subsidiary of UTG.
UG is an Ohio domiciled insurance company, which requires five days prior
notification to the insurance commissioner for the payment of an ordinary
dividend. Ordinary dividends are defined as the greater of: a) prior year
statutory earnings or b) 10% of statutory capital and surplus. At December 31,
2003 UG statutory shareholders' equity was $ 13,008,198. At December 31, 2003,
UG statutory loss from operations was $ (1,461,177). 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 ordinary dividends of $ 600,000 to UTG in 2003.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
REGULATORY ENVIRONMENT
The Company's current and merged insurance subsidiaries are assessed
contributions by life and health guaranty associations in almost all states to
indemnify policyholders of failed companies. In several states the company may
reduce premium taxes paid to recover a portion of assessments paid to the
states' guaranty fund association. This right of "offset" may come under review
by the various states, and the company cannot predict whether and to what extent
legislative initiatives may affect this right to offset. In addition, some state
guaranty associations have adjusted the basis by which they assess the cost of
insolvencies to individual companies. The Company believes that its reserve for
future guaranty fund assessments is sufficient to provide for assessments
related to known insolvencies. This reserve is based upon management's current
expectation of the availability of this right of offset, known insolvencies and
state guaranty fund assessment bases. However, changes in the basis whereby
assessments are charged to individual companies and changes in the availability
of the right to offset assessments against premium tax payments could materially
affect the company's results.
Currently, UG, the insurance subsidiary, is subject to government regulation in
each of the states in which it conducts business. Such regulation is vested in
state agencies having broad administrative power dealing with all aspects of the
insurance business, including the power to: (i) grant and revoke licenses to
transact business; (ii) regulate and supervise trade practices and market
conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve
policy forms; (vi) approve premium rates for some lines of business; (vii)
establish reserve requirements; (viii) prescribe the form and content of
required financial statements and reports; (ix) determine the reasonableness and
adequacy of statutory capital and surplus; and (x) regulate the type and amount
of permitted investments. Insurance regulation is concerned primarily with the
protection of policyholders. The Company cannot predict the impact of any future
proposals, regulations or market conduct investigations. UG is domiciled in the
state of Ohio.
The insurance regulatory framework continues to be scrutinized by various
states, the federal government and the National Association of Insurance
Commissioners (NAIC). The NAIC is an association whose membership consists of
the insurance commissioners or their designees of the various states. The NAIC
has no direct regulatory authority over insurance companies. However, its
primary purpose is to provide a more consistent method of regulation and
reporting from state to state. This is accomplished through the issuance of
model regulations, which can be adopted by individual states unmodified,
modified to meet the state's own needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes, which require
registration and periodic reporting by insurance companies controlled by other
corporations licensed to transact business within their respective
jurisdictions. The insurance subsidiary is subject to such legislation and
registered as controlled insurers in those jurisdictions in which such
registration is required. Statutes vary from state to state but typically
require periodic disclosure, concerning the corporation that controls the
registered insurers and all subsidiaries of such corporation. In addition, prior
notice to, or approval by, the state insurance commission of material
intercorporate transfers of assets, reinsurance agreements, management
agreements (see Note 9 to the consolidated financial statements), and payment of
dividends (see Note 2 to the consolidated financial statements) in excess of
specified amounts by the insurance subsidiary, within the holding company
system, are required.
Each year the NAIC calculates financial ratio results (commonly referred to as
IRIS ratios) for each company. These ratios compare various financial
information pertaining to the statutory balance sheet and income statement. The
results are then compared to pre-established normal ranges determined by the
NAIC. Results outside the range typically require explanation to the domiciliary
insurance department.
At year-end 2003, UG had five ratios outside the normal range. Three of the
suspect ratios were as a result of the settlement of a lawsuit (See Note 8). The
fourth ratio was slightly outside the normal range relating to net investment
income while the fifth ratio was outside the normal range due to the 2002
coinsurance agreement with its then 100% owned subsidiary, APPL.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. The
risk-based capital (RBC) formula measures the adequacy of statutory capital and
surplus in relation to investment and insurance risks such as asset quality,
mortality and morbidity, asset and liability matching and other business
factors. The RBC formula is used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines new minimum capital standards that will supplement the
current system of low fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio of the
insurance company's regulatory total adjusted capital, as defined by the NAIC,
to its authorized control level RBC, as defined by the NAIC. Insurance companies
below specific trigger points or ratios are classified within certain levels,
each of which requires specific corrective action. The levels and ratios are as
follows: Ratio of Total Adjusted Capital to Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 2003, the insurance subsidiary has a ratio that is in excess of
3, which is 300% of the authorized control level; accordingly, the insurance
subsidiary meets the RBC requirements.
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. The Company's insurance subsidiary has 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 October 26, 2001, President Bush signed into law the "USA PATRIOT" Act of
2001 ("the Patriot Act"). This Law, enacted in response to the terrorist attacks
of September 11, 2001, strengthens our Nation's ability to combat terrorism and
prevent and detect money-laundering activities. Under Section 352 of the Patriot
Act, financial institutions (definition includes insurance companies) are
required to develop an anti-money laundering program. The practices and
procedures implemented under the program should reflect the risks of money
laundering given the entity's products, methods of distribution, contact with
customers and forms of customer payment and deposits. In addition, Section 326
of the Patriot Act creates minimum standards for financial institutions
regarding the identity of their customers in connection with the purchase of a
policy or contract of insurance. The Company has instituted an anti-money
laundering program to comply with Section 352, and has communicated this program
throughout the organization. The Company implemented a preliminary database
program in order to facilitate compliance with Section 326. In addition, all new
business applications are regularly screened through the Medical Information
Bureau. The Company regularly updates the information provided by the Office of
Foreign Asset Control, U.S. Treasury Department in order to remain in compliance
with the Patriot Act and will continue to monitor this issue as changes and new
proposals are made.
On July 30, 2002, President Bush signed into law the "SARBANES-OXLEY" Act of
2002 ("the Act"). This Law, enacted in response to several high-profile business
failures, was developed to provide meaningful reforms that protect the public
interest and restore confidence in the reporting practices of publicly traded
companies. The implications of the Act to public companies, (which includes UTG)
are vast, widespread, and evolving. Many of the new requirements will not take
effect or full effect until after calendar-year-end companies have completed
their 2003 annual reports. The Company has implemented requirements affecting
the current reporting period, and is continually monitoring, evaluating, and
planning implementation of requirements that will need to be taken into account
in future reporting periods.
ACCOUNTING AND LEGAL DEVELOPMENTS
The Financial Accounting Standards Board (FASB) has issued Statement No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
Statement 149 was issued to amend and clarify financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement 133. The provisions of Statement 149 are
effective on contracts entered into or modified after June 30, 2003, with some
exceptions for Statement 133 Implementation Issues and hedging relationships
designated after June 30, 2003. The adoption of Statement 149 did not affect the
Company's financial position or results of operations, since the Company has had
no acquisitions of this nature during the reporting period.
The Financial Accounting Standards Board (FASB) has issued Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. Statement No. 150 was issued to address how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer must classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) which may have previously been classified as equity.
Examples of such a financial instrument would be shares that are mandatorily
redeemable which include an unconditional obligation requiring the issuer to
redeem them by transferring its assets at a specified date or upon an event that
is certain to occur, or a financial instrument other than an outstanding share
that, at inception, includes an obligation to repurchase the issuer's equity
shares and that requires or may require the issuer to settle the obligation by
transferring assets.
This statement was effective at the beginning of the first interim period
beginning after June 15, 2003. The Company adopted Statement No. 150 in its
September 30, 2003 financials and as a result, 4,178 shares of common stock no
longer met the requirements to be classified as equity. The adoption of this
Statement resulted in a reclassification of $ 49,635 from Shareholders' Equity
to Other Liabilities.
ITEM 7A. 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 staggering 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. he
December 31, 2003
Expected maturity date
2004 2005 2006 2007 Thereafter Total Fair value
Long term debt
Fixed rate 763,259 763,259 763,258 0 0 2,289,776 2,390,810
Avg. int. rate 7.0% 7.0% 7.0% 0 0 7.0%
Variable rate 0 0 0 0 0 0 0
Avg. int. rate 0 0 0 0 0 0
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Listed below are the financial statements included in this Part of the Annual
Report on SEC Form 10-K:
Page No.
UNITED TRUST GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
Independent Auditors' Report for the
years ended December 31, 2003, 2002, 2001..................................36
Consolidated Balance Sheets...................................................37
Consolidated Statements of Operations.........................................38
Consolidated Statements of Shareholders' Equity...............................39
Consolidated Statements of Cash Flows.........................................40
Notes to Consolidated Financial Statements................................ 41-70
Independent Auditors' Report
Board of Directors and Shareholders
UNITED TRUST GROUP, INC.
We have audited the accompanying consolidated balance sheets of UNITED
TRUST GROUP, INC. (an Illinois corporation) and subsidiaries as of December 31,
2003 and 2002, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of UNITED TRUST
GROUP, INC. and subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
We have also audited Schedule I as of December 31, 2003, and Schedules II,
IV and V as of December 31, 2003 and 2002, of UNITED TRUST GROUP, INC. and
subsidiaries and Schedules II, IV and V for each of the three years in the
period then ended. In our opinion, these schedules present fairly, in all
material respects, the information required to be set forth therein.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 18, 2004
UNITED TRUST GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2003 and 2002
ASSETS
2002
2003 (Restated)
--------------- --------------
Investments:
Fixed maturities held to maturity, at amortized cost
(market $27,440,277 and $60,517,065) $ 26,724,507 $ 58,327,663
Investments held for sale:
Fixed maturities, at market (cost $139,248,547 and $105,244,887) 139,390,382 108,704,518
Equity securities, at market (cost $7,209,443 and $4,122,887) 9,362,165 4,883,870
Mortgage loans on real estate at amortized cost 26,715,968 23,804,827
Investment real estate, at cost, net of accumulated depreciation 24,725,824 20,946,987
Policy loans 13,226,399 13,346,504
Short-term investments 34,677 377,676
--------------- --------------
240,179,922 230,392,045
Cash and cash equivalents 8,749,727 24,042,448
Securities of affiliate 4,000,000 0
Accrued investment income 1,961,552 2,452,840
Reinsurance receivables:
Future policy benefits 32,789,725 33,039,036
Policy claims and other benefits 4,120,299 3,770,285
Cost of insurance acquired 14,616,667 21,311,995
Deferred policy acquisition costs 2,122,643 2,462,487
Property and equipment, net of accumulated depreciation 2,450,109 2,203,408
Income taxes receivable, current 212,197 245,132
Other assets 354,292 574,263
--------------- --------------
Total assets $ 311,557,133 $ 320,493,939
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 236,192,132 $ 234,762,656
Policy claims and benefits payable 2,541,735 1,834,952
Other policyholder funds 1,038,063 1,176,359
Dividend and endowment accumulations 12,626,515 12,628,294
Deferred income taxes 6,763,648 10,394,891
Notes payable 2,289,776 2,995,275
Other liabilities 5,557,215 5,694,121
--------------- --------------
Total liabilities 267,009,084 269,486,548
--------------- --------------
Minority interests in consolidated subsidiaries 4,851,410 3,413,845
--------------- --------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share.
Authorized 7,000,000 shares - 4,004,666 and 3,536,311 shares issued
and outstanding after deducting treasury shares of 174,136 and 147,607 80,008 70,726
Additional paid-in capital 42,672,189 42,976,344
Retained earnings (4,621,955) 1,774,535
Accumulated other comprehensive income 1,566,397 2,771,941
--------------- --------------
Total shareholders' equity 39,696,639 47,593,546
--------------- --------------
Total liabilities and shareholders' equity $ 311,557,133 $ 320,493,939
=============== ==============
See accompanying notes
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 2003
2002 2001
2003 (Restated) (Restated)
--------------- ---------------- ----------------
Revenues:
Premiums and policy fees $ 18,121,018 $ 18,693,022 $ 20,444,514
Reinsurance premiums and policy fees (3,097,980) (2,861,445) (3,303,575)
Net investment income 10,270,500 13,514,802 15,146,259
Realized investment gains, net 485,436 13,634 436,840
Other income 709,384 817,186 589,017
--------------- ---------------- ----------------
26,488,358 30,177,199 33,313,055
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 22,175,842 20,393,044 19,614,470
Reinsurance benefits and claims (3,194,541) (3,043,115) (2,349,102)
Annuity 1,122,707 1,151,973 1,244,663
Dividends to policyholders 966,668 984,346 1,015,055
Commissions and amortization of deferred
policy acquisition costs 311,939 785,861 1,262,974
Amortization of cost of insurance acquired 6,695,328 1,515,450 1,572,920
Operating expenses 7,566,780 5,876,456 6,485,691
Interest expense 162,179 263,441 326,499
--------------- ---------------- ----------------
35,806,902 27,927,456 29,173,170
--------------- ---------------- ----------------
Income (loss) before income taxes
and minority interest (9,318,544) 2,249,743 4,139,885
Income tax benefit (expense) 2,699,493 (479,355) (1,181,133)
Minority interest in (income) loss
of consolidated subsidiaries 222,561 (431,593) (650,656)
--------------- ---------------- ----------------
Net income (loss) $ (6,396,490) $ 1,338,795 $ 2,308,096
=============== ================ ================
Basic income (loss) per share from continuing
operations and net income (loss) $ (1.67) $ 0.38 $ 0.62
=============== ================ ================
Diluted income (loss) per share from continuing
operations and net income (loss) $ (1.67) $ 0.33 $ 0.62
=============== ================ ================
Basic weighted average shares outstanding 3,839,947 3,505,424 3,733,432
=============== ================ ================
Diluted weighted average shares outstanding 3,839,947 4,005,424 3,733,432
=============== ================ ================
See accompanying notes
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 2003
2002 2001
2003 (Restated) (Restated)
--------- --------- --------------
Common stock
Balance, beginning of year $ 70,726 $ 70,996 $ 83,501
Issued during year 10,331 1,177 0
Treasury shares acquired (532) (1,447) (555)
Retired during year (433) 0 (11,950)
Cumulative change
in accounting principal (84) 0 0
------------ ------------ -------------
Balance, end of year 80,008 $ 70,726 $ 70,996
=========== =========== =============
Additional paid-in capital
Balance, beginning of year $42,976,344 $42,789,636 $ 47,730,980
Issued during year 185,574 705,514 0
Treasury shares acquired (181,817) (518,806) (172,927)
Retired during year (258,361) 0 (4,768,417)
Cumulative change in
accounting principal (49,551) 0 0
----------- ----------- -------------
Balance, end of year $42,672,189 $42,976,344 $ 42,789,636
=========== =========== =============
Retained earnings
(accumulated deficit)
Balance, beginning of year,
as previously reported 1,774,535 $ 435,740 $ (1,435,335)
Prior period adjustment -
reinsurance premiums 0 0 (437,021)
----------- ----------- -------------
Balance, beginning of year,
as restated 1,774,535 435,740 (1,872,356)
Net income (loss),
as restated
for 2002 and 2001 (6,396,490) $ (6,396,490) 1,338,795 $ 1,338,795 2,308,096 $2,308,096
----------- ----------- -------------
Balance, end of year $(4,621,955) $ 1,774,535 $ 435,740
=========== =========== =============
Accumulated other
comprehensive income
Balance, beginning of year $ 2,771,941 $ 908,744 $ 335,287
Other comprehensive
income (loss)
Unrealized holding
gain (loss)
on securities
net of minority
interest and
reclassification
adjustment (1,205,544) (1,205,544) 1,863,197 1,863,197 573,457 573,457
----------- ------------- ----------- -------------- ------------- -----------
Comprehensive income (loss) $ (7,602,034) $ 3,201,992 $2,881,553
============= ============== ==========
Balance, end of year $ 1,566,397 $ 2,771,941 $ 908,744
=========== =========== =============
Total shareholders' equity,
end of year $39,696,639 $47,593,546 $ 44,205,116
=========== =========== =============
See accompanying notes
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 2003
2002 2001
2003 (Restated) (Restated)
-------------- -------------- ---------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ (6,396,490) $ 1,338,795 $ 2,308,096
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities net of changes in assets and liabilities
resulting from the sales and purchases of subsidiaries:
Amortization/accretion of fixed maturities 978,307 513,308 150,579
Realized investment gains, net (485,436) (13,634) (436,840)
Amortization of deferred policy acquisition costs 400,844 714,432 1,007,577
Amortization of cost of insurance acquired 6,695,328 1,515,450 1,572,920
Amortization of costs in excess of net assets purchased 0 0 90,000
Depreciation 1,052,964 835,538 494,441
Minority interest (222,561) 431,593 650,656
Charges for mortality and administration
of universal life and annuity products (9,083,778) (8,660,548) (9,344,711)
Interest credited to account balances 5,478,488 5,468,318 5,749,098
Policy acquisition costs deferred (61,000) (69,000) (141,000)
Change in accrued investment income 491,288 550,020 479,176
Change in reinsurance receivables (100,703) 1,010,146 1,175,305
Change in policy liabilities and accruals 3,163,696 (2,279,449) (2,721,245)
Change in income taxes payable (2,877,425) 413,476 1,090,064
Change in other assets and liabilities, net 33,430 (1,301,411) (596,260)
-------------- -------------- ---------------
Net cash provided by (used in) operating activities (933,048) 467,034 1,527,856
-------------- -------------- ---------------
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 73,314,066 29,748,521 30,309,229
Fixed maturities matured 36,065,715 19,957,888 47,848,810
Equity securities 167,734 0 6,312,727
Mortgage loans 8,494,201 6,472,013 14,738,313
Real estate 1,096,759 1,179,931 2,135,472
Policy loans 2,619,463 3,112,687 2,912,296
Short-term 350,000 203,706 2,229,528
-------------- -------------- ---------------
Total proceeds from investments sold and matured 122,107,938 60,674,746 106,486,375
Cost of investments acquired:
Fixed maturities held for sale (108,410,675) (37,341,428) (84,801,095)
Fixed maturities (4,283,413) (3,973,623) (1,124,925)
Equity securities (7,089,857) (185,075) (4,608,649)
Mortgage loans (11,405,342) (6,889,945) (5,325,569)
Real estate (3,722,406) (1,575,713) (6,420,294)
Policy loans (2,499,358) (2,850,735) (2,429,852)
Short-term (7,001) 0 (1,124,512)
-------------- -------------- ---------------
Total cost of investments acquired (137,418,052) (52,816,519) (105,834,896)
Purchase of property and equipment (536,600) (24,439) (138,388)
Sale of property and equipment 0 0 201,064
-------------- -------------- ---------------
Net cash provided by (used in) investing activities (15,846,714) 7,833,788 714,155
-------------- -------------- ---------------
Cash flows from financing activities:
Policyholder contract deposits 9,505,436 10,291,519 11,361,882
Policyholder contract withdrawals (7,067,658) (7,959,754) (9,342,372)
Payments of principal on notes payable (705,499) (3,405,395) (1,302,495)
Proceeds from line of credit 0 2,000,000 0
Purchase of stock of affiliates 0 0 (632,131)
Payments from FCC merger 0 (1,586,500) 0
Issuance of common stock 195,906 706,691 0
Purchase of treasury stock (441,144) (520,253) (1,176,653)
-------------- -------------- ---------------
Net cash provided by (used in) financing activities 1,487,041 (473,692) (1,091,769)
-------------- -------------- ---------------
Net increase (decrease) in cash and cash equivalents (15,292,721) 7,827,130 1,150,242
Cash and cash equivalents at beginning of year 24,042,448 16,215,318 15,065,076
-------------- -------------- ---------------
Cash and cash equivalents at end of year $ 8,749,727 $ 24,042,448 $ 16,215,318
============== ============== ===============
See accompanying notes
UNITED TRUST GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 2003, the significant majority-owned
subsidiaries of UNITED TRUST GROUP, INC., were as depicted on the following
organizational chart.
The Company's significant accounting policies, consistently applied in the
preparation of the accompanying consolidated financial statements, are
summarized as follows.
B. NATURE OF OPERATIONS - United Trust Group, Inc., is an insurance holding
company, which sells individual life insurance products through its
subsidiary. The Company's principal market is the Midwestern United States.
The Company's dominant business is individual life insurance which includes
the servicing of existing insurance business in force, the solicitation of
new individual life insurance and the acquisition of other companies in the
insurance business.
C. BUSINESS SEGMENTS - The Company has only one significant business segment -
insurance.
D. BASIS OF PRESENTATION - The financial statements of United Trust Group,
Inc., and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America which differ
from statutory accounting practices permitted by insurance regulatory
authorities.
E. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Registrant and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
F. INVESTMENTS - Investments are shown on the following bases:
Fixed maturities held to maturity - at cost, adjusted for amortization of
premium or discount and other-than-temporary market value declines. The
amortized cost of such investments differs from their market values;
however, the Company has the ability and intent to hold these investments
to maturity, at which time the full face value is expected to be realized.
Investments held for sale - at current market value, unrealized
appreciation or depreciation is charged directly to shareholders' equity.
Mortgage loans on real estate - at unpaid balances, adjusted for
amortization of premium or discount, less allowance for possible losses.
Real estate - investment real estate at cost less allowance for
depreciation and, as appropriate, provisions for possible losses.
Accumulated depreciation on investment real estate was $ 1,200,454 and
$ 460,170 as of December 31, 2003 and 2002, respectively.
Policy loans - at unpaid balances including accumulated interest but not in
excess of the cash surrender value.
Short-term investments - at cost, which approximates current market value.
Realized gains and losses on sales of investments are recognized in net
income on the specific identification basis.
Unrealized gains and losses on investments carried at market value are
recognized in other comprehensive income on the specific identification
basis.
G. CASH EQUIVALENTS - The Company considers certificates of deposit and other
short-term instruments with an original purchased maturity of three months
or less cash equivalents.
H. REINSURANCE - In the normal course of business, the Company seeks to limit
its exposure to loss on any single insured and to recover a portion of
benefits paid by ceding reinsurance to other insurance enterprises or
reinsurers under excess coverage and coinsurance contracts. The Company
retains a maximum of $ 125,000 of coverage per individual life.
Amounts paid, or deemed to have been paid, for reinsurance contracts are
recorded as reinsurance receivables. Reinsurance receivables are recognized
in a manner consistent with the liabilities relating to the underlying
reinsured contracts. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
I. FUTURE POLICY BENEFITS AND EXPENSES - The liabilities for traditional life
insurance and accident and health insurance policy benefits are computed
using a net level method. These liabilities include assumptions as to
investment yields, mortality, withdrawals, and other assumptions based on
the life insurance subsidiary's experience adjusted to reflect anticipated
trends and to include provisions for possible unfavorable deviations. The
Company makes these assumptions at the time the contract is issued or, in
the case of contracts acquired by purchase, at the purchase date. Future
policy benefits for individual life insurance and annuity policies are
computed using interest rates ranging from 2% to 6% for life insurance and
3.0% to 9.25% for annuities. Benefit reserves for traditional life
insurance policies include certain deferred profits on limited-payment
policies that are being recognized in income over the policy term. Policy
benefit claims are charged to expense in the period that the claims are
incurred. Current mortality rate assumptions are based on 1975-80 select
and ultimate tables. Withdrawal rate assumptions are based upon Linton B or
Linton C, which are industry standard actuarial tables for forecasting
assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life
insurance products are computed under a retrospective deposit method and
represent policy account balances before applicable surrender charges.
Policy benefits and claims that are charged to expense include benefit
claims in excess of related policy account balances. Interest crediting
rates for universal life and interest sensitive products range from 4.0% to
5.5% for the years ended December 31, 2003, 2002 and 2001, respectively.
J. POLICY AND CONTRACT CLAIMS - Policy and contract claims include provisions
for reported claims in process of settlement, valued in accordance with the
terms of the policies and contracts, as well as provisions for claims
incurred and unreported based on prior experience of the Company. Incurred
but not reported claims were $ 920,656 and $ 908,006 as of December 31,
2003 and 2002, respectively.
K. COST OF INSURANCE ACQUIRED - When an insurance company is acquired, the
Company assigns a portion of its cost to the right to receive future cash
flows from insurance contracts existing at the date of the acquisition. The
cost of policies purchased represents the actuarially determined present
value of the projected future cash flows from the acquired policies. The
Company utilized 9% discount rate on approximately 25% of the business and
15% discount rate on approximately 75% of the business. Cost of insurance
acquired is amortized with interest in relation to expected future profits,
including direct charge-offs for any excess of the unamortized asset over
the projected future profits. The interest rates utilized in the
amortization calculation are 9% on approximately 25% of the balance and 15%
on the remaining balance. The interest rates vary due to differences in the
blocks of business. The amortization is adjusted retrospectively when
estimates of current or future gross profits to be realized from a group of
products are revised.
2003 2002 2001
---------------- ----------------- ----------------
Cost of insurance acquired,
beginning of year $ 21,311,995 $ 31,237,167 $ 32,810,087
Interest accretion 4,370,526 4,570,678 4,777,576
Amortization (6,065,854) (6,086,128) (6,350,496)
---------------- ----------------- ----------------
Net amortization (1,695,328) (1,515,450) (1,572,920)
Impairment loss (5,000,000) 0 0
Revaluation adjustment from
UTG/FCC merger 0 (8,409,722) 0
---------------- ----------------- ----------------
Cost of insurance acquired,
end of year $ 14,616,667 $ 21,311,995 $ 31,237,167
================ ================= ================
Cost of insurance acquired was tested for impairment as part of the regular
reporting process. Due to a decline in projected future cash flows from the
business and lower current investment yields, a revision of the estimated fair
value of the cost of insurance acquired was considered necessary. This revision
resulted in a $ 5,000,000 impairment loss. The fair value of the cost of
insurance acquired was estimated using the expected present value of future cash
flows. The impairment loss is included in the consolidated statements of
operations under the caption of amortization of cost of insurance acquired.
Estimated net amortization expense of cost of insurance acquired for the next
five years is as follows:
Interest Net
Accretion Amortization Amortization
2004 4,140,000 6,034,000 1,894,000
2005 3,875,000 6,084,000 2,209,000
2006 3,560,000 6,422,000 2,862,000
2007 3,145,000 5,994,000 2,849,000
2008 $ 2,730,000 $ 5,256,000 $ 2,526,000
L. DEFERRED POLICY ACQUISITION COSTS - Commissions and other costs (salaries
of certain employees involved in the underwriting and policy issue
functions and medical and inspection fees) of acquiring life insurance
products that vary with and are primarily related to the production of new
business have been deferred. Traditional life insurance acquisition costs
are being amortized over the premium-paying period of the related policies
using assumptions consistent with those used in computing policy benefit
reserves.
For universal life insurance and interest sensitive life insurance
products, acquisition costs are being amortized generally in proportion to
the present value of expected gross profits from surrender charges and
investment, mortality, and expense margins. Under SFAS No. 97, "Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration Contracts
and for Realized Gains and Losses from the Sale of Investments," the
Company makes certain assumptions regarding the mortality, persistency,
expenses, and interest rates it expects to experience in future periods.
These assumptions are to be best estimates and are to be periodically
updated whenever actual experience and/or expectations for the future
change from initial assumptions. The amortization is adjusted
retrospectively when estimates of current or future gross profits to be
realized from a group of products are revised.
The following table summarizes deferred policy acquisition costs and related
data for the years shown.
2003 2002 2001
---------------- ----------------- ----------------
Deferred, beginning of year $ 2,462,487 $ 3,107,919 $ 3,948,496
Acquisition costs deferred:
Commissions 56,000 49,000 108,000
Other expenses 5,000 20,000 59,000
---------------- ----------------- ----------------
Total
Interest accretion 17,000 55,000 76,000
Amortization charged to income (417,844) (769,432) (1,083,577)
---------------- ----------------- ----------------
Net amortization
Change for the year
Deferred, end of year $ 2,122,643 $ 2,462,487 $ 3,107,919
================ ================= ================
The following table reflects the components of the income statement for the line
item commissions and amortization of deferred policy acquisition costs:
2003 2002 2001
------------- ------------- ---------------
Net amortization of deferred
policy acquisition costs $ 400,844 $ 714,432 $ 1,007,577
Commissions (88,905) 71,429 255,397
------------- ------------- ---------------
Total $ 311,939 $ 785,861 $ 1,262,974
============= ============= ===============
Estimated net amortization expense of deferred policy acquisition costs for the
next five years is as follows:
Interest Net
Accretion Amortization Amortization
-------------- --------------- ------------
2004 $ 16,000 $ 690,000 $ 674,000
2005 13,000 585,000 572,000
2006 11,000 486,000 475,000
2007 9,000 359,000 350,000
2008 8,000 296,000 288,000
M. COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of net assets
purchased is the excess of the amount paid to acquire a company over the
fair value of its net assets. On January 1, 2002, the Company adopted FASB
Statement No. 142, Goodwill and Intangible Assets, which required that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment. Accumulated amortization of cost in excess of net assets
purchased was $ 1,780,146 as of December 31, 2003 and 2002, respectively.
At December 31, 2003, the Company had no goodwill on its balance sheet. The
goodwill balance at year end 2001 was eliminated in the purchase accounting
valuations relating to the June 2002 merger of FCC.
N. PROPERTY AND EQUIPMENT - Company-occupied property, data processing
equipment and furniture and office equipment are stated at cost less
accumulated depreciation of $ 6,038,220 and $ 5,748,321 at December 31,
2003 and 2002, respectively. Depreciation is computed on a straight-line
basis for financial reporting purposes using estimated useful lives of
three to thirty years. Depreciation expense was $ 149,664, $ 280,148, and
$ 316,900 for the years ended December 31, 2003, 2002, and 2001,
respectively.
O. INCOME TAXES - Income taxes are reported under Statement of Financial
Accounting Standards Number 109. Deferred income taxes are recorded to
reflect the tax consequences on future periods of differences between the
tax bases of assets and liabilities and their financial reporting amounts
at the end of each such period.
P. EARNINGS PER SHARE - Earnings per share (EPS) are reported under Statement
of Financial Accounting Standards Number 128. The objective of both basic
EPS and diluted EPS is to measure the performance of an entity over the
reporting period. Basic EPS is computed by dividing income available to
common stockholders (the numerator) by the weighted-average number of
common shares outstanding (the denominator) during the period. Diluted EPS
is similar to the computation of basic EPS except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued.
In addition, the numerator also is adjusted for any changes in income or
loss that would result from the assumed conversion of those potential
common shares.
Q. TREASURY SHARES - The Company holds 174,136 and 147,607 shares of common
stock as treasury shares with a cost basis of $ 1,376,039 and $ 1,193,690
at December 31, 2003 and 2002, respectively.
R. RECOGNITION OF REVENUES AND RELATED EXPENSES - Premiums for traditional
life insurance products, which include those products with fixed and
guaranteed premiums and benefits, consist principally of whole life
insurance policies, and certain annuities with life contingencies are
recognized as revenues when due. Limited payment life insurance policies
defer gross premiums received in excess of net premiums, which is then
recognized in income in a constant relationship with insurance in force.
Accident and health insurance premiums are recognized as revenue pro rata
over the terms of the policies. Benefits and related expenses associated
with the premiums earned are charged to expense proportionately over the
lives of the policies through a provision for future policy benefit
liabilities and through deferral and amortization of deferred policy
acquisition costs. For universal life and investment products, generally
there is no requirement for payment of premium other than to maintain
account values at a level sufficient to pay mortality and expense charges.
Consequently, premiums for universal life policies and investment products
are not reported as revenue, but as deposits. Policy fee revenue for
universal life policies and investment products consists of charges for the
cost of insurance and policy administration fees assessed during the
period. Expenses include interest credited to policy account balances and
benefit claims incurred in excess of policy account balances.
S. PARTICIPATING INSURANCE - Participating business represents 20% and 19% of
the ordinary life insurance in force at December 31, 2003 and 2002,
respectively. Premium income from participating business represents 23%,
25%, and 26% of total premiums for the years ended December 31, 2003, 2002
and 2001, respectively. The amount of dividends to be paid is determined
annually by the respective insurance subsidiary's Board of Directors.
Earnings allocable to participating policyholders are based on legal
requirements that vary by state.
T. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to the 2003 presentation. Such reclassifications had no effect on
previously reported net income or shareholders' equity.
U. USE OF ESTIMATES - In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 2003, substantially all of consolidated shareholders' equity
represents net assets of UTG's subsidiaries. The payment of cash dividends to
shareholders by UTG is not legally restricted. However, the state insurance
department regulates insurance company dividend payments where the company is
domiciled. UG's dividend limitations are described below.
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, 2003, UG
had a statutory loss from operations of $ 1,461,177. At December 31, 2003, UG's
statutory capital and surplus amounted to $ 13,008,198. 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 ordinary dividends of $ 600,000 to UTG in 2003.
3. INCOME TAXES
Until 1984, the insurance company was taxed under the provisions of the Life
Insurance Company Income Tax Act of 1959 as amended by the Tax Equity and Fiscal
Responsibility Act of 1982. These laws were superseded by the Deficit Reduction
Act of 1984. All of these laws are based primarily upon statutory results with
certain special deductions and other items available only to life insurance
companies. Under the provision of the pre-1984 life insurance company income tax
regulations, a portion of "gain from operations" of a life insurance company was
not subject to current taxation but was accumulated, for tax purposes, in a
special tax memorandum account designated as "policyholders' surplus account".
Federal income taxes will become payable on this account at the then current tax
rate when and if distributions to shareholders, other than stock dividends and
other limited exceptions, are made in excess of the accumulated previously taxed
income maintained in the "shareholders surplus account". At December 31, 2003,
the balances of the shareholders' surplus account and the untaxed balance for UG
were $ 23,239,772 and $ 4,363,821, respectively.
The payment of taxes on this income is not anticipated; and, accordingly, no
deferred taxes have been established.
The life insurance company and the non-insurance companies of the group file
separate federal income tax returns.
Life insurance company taxation is based primarily upon statutory results with
certain special deductions and other items available only to life insurance
companies. Income tax expense consists of the following components:
2003 2002 2001
---------------- ----------------- ----------------
Current tax expense $ 197,732 $ 7,893 $ 53,539
Deferred tax (benefit) expense (2,897,225) 471,462 1,127,594
---------------- ----------------- ----------------
$ (2,699,493) $ 479,355 $ 1,181,133
================ ================= ================
The Company's life insurance subsidiary has net operating loss carryforwards for
federal income tax purposes expiring as follows:
UG
-------------
2019 $ 965,080
2021 1,806
2022 5,078
2023 2,756,219
-------------
TOTAL $ 3,728,183
=============
The Company has established a deferred tax asset of $ 1,304,864 for its
operating loss carryforwards and has established no allowance in the current or
prior years.
The following table shows the reconciliation of net income to taxable income of
UTG:
2003 2002 2001
--------------- --------------- ----------------
Net income (loss) $ (6,396,490)$ 1,338,795 $ 2,308,096
Federal income tax provision 263,992 327,472 12,043
Loss (gain) of subsidiaries 6,723,981 (700,226) (2,277,990)
--------------- --------------- ----------------
Taxable income $ 591,483 $ 966,041 $ 42,149
=============== =============== ================
UG has a net operating loss carryforward of $ 3,728,183 at December 31, 2003. UG
must average taxable income of approximately $ 186,409 over the next 20 years to
fully realize its net operating loss carryforward, as UG's operating loss
carryforward does not expire until the year 2023. Management believes future
earnings of both UTG and UG will be sufficient to fully utilize their respective
net operating loss carryforwards. Therefore, management has established no
allowance for potential uncollectibility of its loss carryforwards in the
current year.
The expense or (credit) for income differed from the amounts computed by
applying the applicable United States statutory rate of 35% before income taxes
as a result of the following differences:
2003 2002 2001
--------------- --------------- ----------------
Tax computed at statutory rate $ (3,183,594) $ 728,618 $ 1,421,240
Changes in taxes due to:
Cost in excess of net assets purchased 0 0 31,500
Current year expense previously deducted 175,000 0 0
Tax reserve adjustment 150,831 123,512 0
Benefit of prior losses 0 (309,710) (159,456)
Other 158,270 (63,065) (112,151)
--------------- --------------- ----------------
Income tax expense (benefit) $ (2,699,493) $ 479,355 $ 1,181,133
=============== =============== ================
The following table summarizes the major components that comprise the deferred
tax liability as reflected in the balance sheets:
2003 2002
---------------- ---------------
Investments $ 2,514,031 $ 2,883,414
Cost of insurance acquired 5,115,833 7,484,447
Deferred policy acquisition costs 742,925 861,870
Management/consulting fees (304,038) (321,086)
Future policy benefits (1,145,126) (1,014,369)
Gain on sale of subsidiary 2,312,483 2,312,483
Net operating loss carryforward (1,304,864) (364,358)
Other liabilities 0 (130,594)
Federal tax DAC (1,167,596) (1,316,916)
---------------- ---------------
Deferred tax liability $ 6,763,648 $ 10,394,891
================ ===============
4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A. NET INVESTMENT INCOME - The following table reflects net investment income
by type of investment:
December 31,
----------------------------------------------------------
2003 2002 2001
--------------- ---------------- ----------------
Fixed maturities and fixed maturities
held for sale $ 8,418,969 $ 10,302,735 $ 10,831,162
Equity securities 456,361 131,778 131,263
Mortgage loans 1,522,700 1,749,935 2,715,834
Real estate 2,832,171 3,261,043 567,368
Policy loans 949,770 965,227 970,142
Short-term investments 11,161 26,522 110,229
Cash 137,478 211,293 606,128
--------------- ---------------- ----------------
Total consolidated investment income 14,328,610 16,648,533 15,932,126
Investment expenses (4,058,110) (3,133,731) (785,867)
---------------- ---------------- ----------------
Consolidated net investment income $ 10,270,500 $ 13,514,802 $ 15,146,259
=============== ================ ================
At December 31, 2003, the Company had a total of $ 656,716 in investment real
estate, which did not produce income during 2003.
The following table summarizes the Company's fixed maturity holdings and
investments held for sale by major classifications:
Carrying Value
----------------------------------------
2003 2002
--------------- --------------
Investments held for sale:
Fixed maturities
U.S. Government, government agencies and authorities $ 31,347,586 $ 27,646,891
State, municipalities and political subdivisions 177,963 212,015
Collateralized mortgage obligations 89,117,375 66,820,749
All other corporate bonds 18,747,458 14,024,863
--------------- --------------
$ 139,390,382 $ 108,704,518
=============== ==============
Equity securities
Banks, trust and insurance companies $ 1,517,159 $ 1,209,756
Industrial and miscellaneous 7,845,006 3,674,114
--------------- --------------
$ 9,362,165 $ 4,883,870
=============== ==============
Fixed maturities held to maturity:
U.S. Government, government agencies and authorities $ 10,676,106 $ 7,480,490
State, municipalities and political subdivisions 6,342,369 8,195,248
Collateralized mortgage obligations 77,802 60,820
Public utilities 5,397,880 15,134,965
All other corporate bonds 4,230,350 27,456,140
--------------- --------------
$ 26,724,507 $ 58,327,663
=============== ==============
Securities of affiliate $ 4,000,000 $ 0
=============== ==============
By insurance statute, the majority of the Company's investment portfolio is
invested in investment grade securities to provide ample protection for
policyholders.
Below investment grade debt securities generally provide higher yields and
involve greater risks than investment grade debt securities because their
issuers typically are more highly leveraged and more vulnerable to adverse
economic conditions than investment grade issuers. In addition, the trading
market for these securities is usually more limited than for investment grade
debt securities. Debt securities classified as below-investment grade are those
that receive a Standard & Poor's rating of BB or below.
The following table summarizes securities held, at amortized cost, that are
below investment grade by major classification:
Below Investment
Grade Investments 2003 2002
----------------------------- -------------- ------------
Public Utilities $ 1,001,673 $ 1,274,374
CMO 24,984 40,146
Corporate 1,818,673 1,370,622
------------- ------------
Total $ 2,845,330 $ 2,685,142
============= ============
B. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in securities
including investments held for sale are as follows:
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
2003 Cost Gains Losses Value
------------------------------------ -------------- ------------- --------------- --------------
Investments held for sale:
Fixed maturities
U.S. Government and govt.
agencies and authorities $ 30,850,682 $ 642,756 $ (145,852) $ 31,347,586
States, municipalities and
political subdivisions 160,271 17,692 0 177,963
Collateralized mortgage
obligations 90,353,657 429,542 (1,665,824) 89,117,375
Public utilities 0 0 0 0
All other corporate bonds 17,883,937 886,396 (22,875) 18,747,458
-------------- ------------- --------------- --------------
139,248,547 1,976,386 (1,834,551) 139,390,382
Equity securities 7,209,443 2,152,722 0 9,362,165
-------------- ------------- --------------- --------------
Total $ 146,457,990 $ 4,129,708 $ (1,834,551) $ 148,752,757
============== ============= =============== ==============
Fixed maturities held to maturity:
U.S. Government and govt.
agencies and authorities $ 10,676,106 $ 229,788 $ 0 $ 10,905,894
States, municipalities and
political subdivisions 6,342,369 231,132 (12,919) 6,560,582
Collateralized mortgage
obligations 77,802 875 (444) 78,233
Public utilities 5,397,880 100,056 0 5,497,936
All other corporate bonds 4,230,350 188,071 (20,789) 4,397,632
-------------- ------------- --------------- --------------
Total $ 26,724,507 $ 749,922 $ (34,152) $ 27,440,277
============== ============= =============== ==============
Securities of affiliate $ 4,000,000 $ 0 $ 0 $ 4,000,000
============== ============= =============== ==============
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
2002 Cost Gains Losses Value
------------------------------------ -------------- ------------- --------------- --------------
Investments held for sale:
Fixed maturities
U.S. Government and govt.
agencies and authorities $ 26,271,281 $ 1,375,610 $ 0 $ 27,646,891
States, municipalities and
political subdivisions 193,619 18,396 0 212,015
Collateralized mortgage
obligations 65,603,941 1,225,986 (9,178) 66,820,749
Public utilities 0 0 0 0
All other corporate bonds 13,176,046 869,187 (20,370) 14,024,863
-------------- ------------- --------------- --------------
105,244,887 3,489,179 (29,548) 108,704,518
Equity securities 4,122,887 1,795,527 (1,034,544) 4,883,870
-------------- ------------- --------------- --------------
Total $ 109,367,774 $ 5,284,706 $ (1,064,092) $ 113,588,388
============== ============= =============== ==============
Fixed maturities held to maturity:
U.S. Government and govt.
agencies and authorities $ 7,480,490 $ 403,473 $ (3) $ 7,883,960
States, municipalities and
political subdivisions 8,195,248 406,211 (7,753) 8,593,706
Collateralized mortgage
obligations 60,820 4,296 0 65,116
Public utilities 15,134,965 509,875 (96,029) 15,548,811
All other corporate bonds 27,456,140 1,058,270 (88,938) 28,425,472
-------------- ------------- --------------- --------------
Total $ 58,327,663 $ 2,382,125 $ (192,723) $ 60,517,065
============== ============= =============== ==============
The amortized cost and estimated market value of debt securities at December 31,
2003, by contractual maturity, is shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Fixed Maturities Held for Sale Estimated
Amortized Market
December 31, 2003 Cost Value
------------------------------------ -------------- --------------
Due in one year or less $ 7,944,561 $ 8,014,172
Due after one year through five years 21,649,875 22,790,642
Due after five years through ten years 19,300,454 19,468,193
Due after ten years 0 0
Collateralized mortgage obligations 90,353,657 89,117,375
-------------- --------------
Total $ 139,248,547 $ 139,390,382
============== ==============
Estimated
Fixed Maturities Held to Maturity Amortized Market
December 31, 2003 Cost Value
------------------------------------ -------------- --------------
Due in one year or less $ 14,164,102 $ 14,409,129
Due after one year through five years 10,059,846 10,462,358
Due after five years through ten years 963,865 1,030,640
Due after ten years 1,458,892 1,459,917
Collateralized mortgage obligations 77,802 78,233
-------------- --------------
Total $ 26,724,507 $ 27,440,277
============== ==============
An analysis of sales, maturities and principal repayments of the Company's fixed
maturities portfolio for the years ended December 31, 2003, 2002 and 2001 is as
follows:
Cost or Gross Gross Proceeds
Amortized Realized Realized From
Year ended December 31, 2003 Cost Gains Losses Sale
------------------------------------- --------------- ------------- --------------- ---------------
Scheduled principal repayments,
Calls and tenders:
Held for sale $ 60,702,967 $ 2,283 $ (13,872) $ 60,691,378
Held to maturity 30,923,388 0 (227) 30,923,161
Sales:
Held for sale 12,863,340 0 (240,652) 12,622,688
Held to maturity 4,825,213 319,980 (2,639) 5,142,554
--------------- ------------- --------------- ---------------
Total $ 109,314,908 $ 322,263 $ (257,390) $ 109,379,781
=============== ============= =============== ===============
Cost or Gross Gross Proceeds
Amortized Realized Realized From
Year ended December 31, 2002 Cost Gains Losses Sale
------------------------------------- --------------- ------------- --------------- ---------------
Scheduled principal repayments,
Calls and tenders:
Held for sale $ 29,746,832 $ 1,689 $ 0 $ 29,748,521
Held to maturity 20,071,850 7,782 (6,744) 20,072,888
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
--------------- ------------- --------------- ---------------
Total $ 49,818,682 $ 9,471 $ (6,744) $ 49,821,409
=============== ============= =============== ===============
Cost or Gross Gross Proceeds
Amortized Realized Realized From
Year ended December 31, 2001 Cost Gains Losses Sale
------------------------------------- --------------- ------------- --------------- ---------------
Scheduled principal repayments,
Calls and tenders:
Held for sale $ 23,583,564 $ 10,440 $ 0 $ 23,594,004
Held to maturity 47,921,354 34,690 (107,234) 47,848,810
Sales:
Held for sale 6,518,181 197,044 0 6,715,225
Held to maturity 0 0 0 0
--------------- ------------- --------------- ---------------
Total $ 78,023,099 $ 242,174 $ (107,234) $ 78,158,039
=============== ============= =============== ===============
Annually, the Company completes an analysis of sales of securities held to
maturity to further assess the issuer's creditworthiness of fixed maturity
holdings. Based on this analysis, certain issues were sold that had been
classified as held to maturity. The Company considers these transactions rare
and non recurring.
C. INVESTMENTS ON DEPOSIT - At December 31, 2003, investments carried at
approximately $ 6,952,000 were on deposit with various state insurance
departments.
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value information at
December 31, 2003 and 2002, as required by Statement of Financial Accounting
Standards 107, Disclosure about Fair Value of Financial Instruments (SFAS 107).
Such information, which pertains to the Company's financial instruments, is
based on the requirements set forth in that Statement and does not purport to
represent the aggregate net fair value of the Company.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument required to be valued by SFAS 107 for which
it is practicable to estimate that value:
(a) Cash and Cash equivalents
The carrying amount in the financial statements approximates fair value because
of the relatively short period of time between the origination of the
instruments and their expected realization.
(b) Fixed maturities and investments held for sale
Quoted market prices, if available, are used to determine the fair value. If
quoted market prices are not available, management estimates the fair value
based on the quoted market price of a financial instrument with similar
characteristics.
(c) Mortgage loans on real estate
The fair values of mortgage loans are estimated using discounted cash flow
analyses and interest rates being offered for similar loans to borrowers with
similar credit ratings.
(d) Investment real estate and real estate acquired in satisfaction of debt
An estimate of fair value is based on management's review of the individual real
estate holdings. Management utilizes sales of surrounding properties, current
market conditions and geographic considerations. Management conservatively
estimates the fair value of the portfolio is equal to the carrying value.
(e) Policy loans
It is not practical to estimate the fair value of policy loans as they have no
stated maturity and their rates are set at a fixed spread to related policy
liability rates. Policy loans are carried at the aggregate unpaid principal
balances in the consolidated balance sheets, and earn interest at rates ranging
from 4% to 8%. Individual policy liabilities in all cases equal or exceed
outstanding policy loan balances.
(f) Short-term investments
For short-term instruments, the carrying amount is a reasonable estimate of fair
value. Short-term instruments represent collateral loans and certificates of
deposit with various banks that are protected under FDIC.
(g) Notes payable
For borrowings subject to floating rates of interest, carrying value is a
reasonable estimate of fair value. For fixed rate borrowings fair value was
determined based on the borrowing rates currently available to the Company for
loans with similar terms and average maturities.
The estimated fair values of the Company's financial instruments required to be
valued by SFAS 107 are as follows as of December 31:
2003 2002
-------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
-------------- -------------- --------------- ---------------
Fixed maturities $ 26,724,507 $ 27,440,277 $ 58,327,663 $ 60,517,065
Fixed maturities held for sale 139,390,382 139,390,382 108,704,518 108,704,518
Equity securities 9,362,165 9,362,165 4,883,870 4,883,870
Securities of affiliate 4,000,000 4,000,000 0 0
Mortgage loans on real estate 26,715,968 26,853,183 23,804,827 23,895,111
Investment in real estate 24,725,824 24,725,824 20,946,987 20,946,987
Policy loans 13,226,399 13,226,399 13,346,504 13,346,504
Short-term investments 34,677 34,677 377,676 377,676
Liabilities
Notes payable 2,289,776 2,390,810 2,995,275 3,148,352
6. STATUTORY EQUITY AND INCOME FROM OPERATIONS
The Company's insurance subsidiary is domiciled in Ohio and prepares its
statutory-based financial statements in accordance with accounting practices
prescribed or permitted by the Ohio insurance department. These principles
differ significantly from accounting principles generally accepted in the United
States of America. "Prescribed" statutory accounting practices include state
laws, regulations, and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners (NAIC).
"Permitted" statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ from state to state, from
company to company within a state, and may change in the future. The NAIC
recently completed the process of codifying statutory accounting practices, the
result of which is to constitute the only source of "prescribed" statutory
accounting practices. The new rules promulgated by the codifying of statutory
accounting practices became effective January 1, 2001. Accordingly, these
uniform rules change prescribed statutory accounting practices and result in
changes to the accounting practices that insurance enterprises use to prepare
their statutory financial statements. Implementation of the codification rules
did not have a material financial impact on the financial condition of the
Company's life insurance subsidiary. UG's total statutory shareholders' equity
was $ 13,008,198 and $ 16,030,200 at December 31, 2003 and 2002, respectively.
The Company's life insurance subsidiary reported a statutory operating income
(loss) before taxes (exclusive of intercompany dividends) of approximately
$ (1,461,000), $ 2,700,000 and $ 2,913,000 for 2003, 2002 and 2001,
respectively.
7. REINSURANCE
As is customary in the insurance industry, the insurance subsidiary of the
Company cedes insurance to, and assumes insurance from, other insurance
companies under reinsurance agreements. Reinsurance agreements are intended to
limit a life insurer's maximum loss on a large or unusually hazardous risk or to
obtain a greater diversification of risk. The ceding insurance company remains
primarily liable with respect to ceded insurance should any reinsurer be unable
to meet the obligations assumed by it. However, it is the practice of insurers
to reduce their exposure to loss to the extent that they have been reinsured
with other insurance companies. The Company sets a limit on the amount of
insurance retained on the life of any one person. The Company will not retain
more than $ 125,000, including accidental death benefits, on any one life. At
December 31, 2003, the Company had gross insurance in force of $ 2.290 billion
of which approximately $ 580 million was ceded to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The Company
believes the assuming companies are able to honor all contractual commitments,
based on the Company's periodic reviews of their financial statements, insurance
industry reports and reports filed with state insurance departments.
Currently, the Company is utilizing reinsurance agreements with Business Mens'
Assurance Company, (BMA) and Swiss Re Life and Health America Incorporated
(SWISS RE). BMA and SWISS RE currently hold an "A" (Excellent), and "A+"
(Superior) rating, respectively, from A.M. Best, an industry rating company. The
reinsurance agreements were effective December 1, 1993, and cover all new
business of the Company. The agreements are a yearly renewable term (YRT) treaty
where the Company cedes amounts above its retention limit of $ 100,000 with a
minimum cession of $ 25,000.
UG entered a coinsurance agreement with Park Avenue Life Insurance Company
(PALIC) as of September 30, 1996. Under the terms of the agreement, UG ceded to
PALIC substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to non-premium paying life insurance policies. PALIC
and its ultimate parent The Guardian Life Insurance Company of America
(Guardian), currently hold an "A" (Excellent), and "A+" (Superior) rating,
respectively, from A.M. Best, an industry rating company. The agreement with
PALIC accounts for approximately 65% of the reinsurance reserve credit, as of
December 31, 2003.
On September 30, 1998, UG entered into a coinsurance agreement with The
Independent Order of Vikings, an Illinois fraternal organization (IOV). Under
the terms of the agreement, UG agreed to assume, on a coinsurance basis, 25% of
the reserves and liabilities arising from all in-force insurance contracts
issued by the IOV to its members. At December 31, 2003, the IOV insurance
in-force was approximately $ 1,688,000, with reserves being held on that amount
of approximately $ 399,000.
On June 1, 2000, UG assumed an already existing coinsurance agreement, dated
January 1, 1992, between Lancaster Life Reinsurance Company, an Arizona
corporation (LLRC) and Investors Heritage Life Insurance Company, a corporation
organized under the laws of the Commonwealth of Kentucky (IHL). Under the terms
of the agreement, LLRC agreed to assume from IHL a 90% quota share of new issues
of credit life and accident and health policies that have been written on or
after January 1, 1992 through various branches of the First Southern National
Bank. The maximum amount of credit life insurance that can be assumed on any one
individual's life is $ 15,000. UG assumed all the rights and obligations
formerly held by LLRC as the reinsurer in the agreement. LLRC liquidated its
charter immediately following the transfer. At December 31, 2003, IHL has
insurance in-force of approximately $ 2,924,000, with reserves being held on
that amount of approximately $ 35,000.
The Company does not have any short-duration reinsurance contracts. The effect
of the Company's long-duration reinsurance contracts on premiums earned in 2003,
2002 and 2001 was as follows:
Shown in thousands
---------------------------------------------------------
2003 2002 2001
Premiums Premiums Premiums
Earned Earned Earned
---------------- ---------------- ----------------
Direct $ 18,087 $ 18,597 $ 20,333
Assumed 34 96 111
Ceded (2,896) (2,701) (3,172)
---------------- ---------------- ----------------
Net premiums $ 15,225 $ 15,992 $ 17,272
================ ================ ================
8. 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.
Under the insurance guaranty fund laws in most states, insurance companies doing
business in a participating state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent or failed insurance companies.
Although the Company cannot predict the amount of any future assessments, most
insurance guaranty fund laws currently provide that an assessment may be excused
or deferred if it would threaten an insurer's financial strength. Mandatory
assessments may be partially recovered through a reduction in future premium tax
in some states. The Company does not believe such assessments will be materially
different from amounts already provided for in the financial statements, though
the Company has no control over such assessments.
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. The Company's insurance subsidiary has no race-based
premium products, but does 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 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 the Company. The Company will
staff the administration effort. To facilitate the alliance, the Company plans
to convert its existing business and TPA clients to "ID3", a software system
owned by Fiserv 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.
In June 2002, the Company entered into a five-year contract with Fiserv LIS for
services related to their purchase of the "ID3" software system. Under the
contract, the Company is required to pay $ 12,000 per month in software
maintenance costs and $ 5,000 per month in offsite data center costs for a
five-year period from the date of the signing.
On April 25, 2003 the Company entered into an agreement with Fiserv for the
conversion of the two TPA client companies to the "ID3" system. The conversion
began in May 2003 and was successfully completed in December 2003. The
conversion was performed utilizing Company personnel with onsite training and
guidance provided by Fiserv. The Company will begin the conversion of the
remaining insurance business to the "ID3" software system in 2004.
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, and 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. For the five-year period starting January 1, 1998 and ending
December 31, 2002, the Company had total earnings of $ 17,011,307 applicable to
this covenant. Therefore, UTG did not meet the earnings requirements stipulated,
and during 2003, was required to issue 500,000 additional shares to FSF or its
assigns.
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. District Court for the Southern District of Illinois)
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) (merged into UG in 1999), UTG and FCC as
defendants. The plaintiffs alleged that they were employees of UG, UTAC or USAC
rather than independent contractors. The plaintiffs sought class action status
and 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.
In late June 2003, mediation was held in an attempt to bring resolution to this
lawsuit. The negotiations continued in July and August, and a proposed
settlement was ultimately reached. Although the Company continued to believe
that it had meritorious grounds to defend this lawsuit, the legal process can be
lengthy and costly, with no guarantee of success in the final resolution. Under
these circumstances, management believed a settlement of the matter was in the
best interests of the Company. Under the terms of the proposed settlement, the
Company would pay approximately $ 1,950,000 in attorneys' fees, costs and
expenses, and the Company, through its insurance subsidiary, will provide
certain life insurance benefits at a discount to members of the class (or their
transferees) choosing to purchase life insurance benefits.
On November 20, 2003, Hon. G. Patrick Murphy, Chief Judge for the United States
District Court for the Southern District of Illinois, entered the order settling
this action. On December 21, 2003 this order became final at the expiration of
the appellate window and the Company paid approximately $ 1,950,000 in
attorneys' fees, costs and expenses. The Company is currently awaiting the
updated address information from opposing counsel in order to begin the initial
mailings. At December 31, 2003, the Company maintained a $ 200,000 accrual to
cover expected future costs regarding this matter.
UTG and its subsidiaries, both current and former, are named as defendants in a
number of 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.
9. RELATED PARTY TRANSACTIONS
On February 20, 2003, UG purchased $ 4,000,000 of a trust preferred security
offering issued by FSBI. The security has a mandatory redemption after 30 years
with a call provision after 5 years. The security pays a quarterly dividend at a
fixed rate of 6.515%. The Company received $ 226,104 of dividends in 2003.
On June 18, 2003, UG entered into a lease agreement with Bandyco, LLC, an
affiliated entity, for a one-sixth interest in an aircraft. Bandyco, LLC is
affiliated with Ward F. Correll, who is a director of the Company. The lease
term is for a period of five years at a cost of $ 523,831. The Company is
responsible for its share of annual non-operational costs, in addition to the
operational costs as are billable for specific use.
On November 6, 2003, UG purchased real estate at a cost of $ 2,220,256 from an
outside third party through the formation of an LLC in which UG is a two-thirds
owner. The other one-third partner is Millard V. Oakley, who is a former
Director of UTG. Hampshire Plaza Garage is a 578 space parking garage located in
New Hampshire.
On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002,
the shareholders of UTG approved, the United Trust Group, Inc. Employee and
Director Stock Purchase Plan. The plan's purpose is to encourage ownership of
UTG stock by eligible directors and employees of UTG and its subsidiaries by
providing them with an opportunity to invest in shares of UTG common stock. The
plan is administered by the Board of Directors of UTG. A total of 400,000 shares
of common stock may be purchased under the plan, subject to appropriate
adjustment for stock dividends, stock splits or similar recapitalizations
resulting in a change in shares of UTG. The plan is not intended to qualify as
an "employee stock purchase plan" under Section 423 of the Internal Revenue
Code.
During 2003 and 2002, the Board of Directors of UTG approved offerings under the
plan to qualified individuals. For the years ended December 31, 2003 and 2002,
eight individual purchased 58,891 and three individuals purchased 16,546 shares
of UTG common stock, respectively. Each participant under the plan executed a
"stock restriction and buy-sell agreement", which among other things provides
UTG with a right of first refusal on any future sales of the shares acquired by
the participant under this plan.
The purchase price of shares repurchased under the stock restriction and
buy-sell agreement shall be computed, on a per share basis, equal to the sum of
(i) the original purchase price paid to acquire such shares from UTG and (ii)
the consolidated statutory net earnings (loss) per share of such shares during
the period from the end of the month next preceding the month in which such
shares were acquired pursuant to the plan, to the end of the month next
preceding the month in which the sale of such shares to UTG occurs. At
December 31, 2003, UTG had 75,437shares outstanding that were issued under this
program with a value of $ 11.63 per share pursuant to the above formula.
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, and 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. For the five-year period starting January 1, 1998 and ending
December 31, 2003, the Company had total earnings of $ 17,011,307 applicable to
this covenant. Therefore, UTG did not meet the earnings requirements stipulated,
and during 2003, UTG was required to issue 500,000 additional shares to FSF or
its assigns.
On November 15, 2002, North Plaza acquired 229 acres of timberland from Millard
V. Oakley, a Director of UTG at the time, for a total purchase price of
$ 54,811. The land acquired was adjacent to land already owned by North Plaza.
The purchase price was consistent with other recent similar land acquisitions
made by North Plaza.
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 ($ 2,480,000 in the aggregate).
At a December 17, 2001 joint meeting of the Board of Directors of UTG, FCC and
their insurance subsidiaries, the Boards of Directors of the insurance
subsidiaries discussed and decided to further explore and pursue a possible sale
of the insurance charters of each of APPL and ABE. In the alternative to a sale
of the APPL charter, the boards also discussed and decided to further explore a
possible merger of APPL into UG. At the September 24, 2002 joint meeting of the
Board of Directors of UTG and its insurance subsidiaries, the Boards of
Directors of UG and ABE each approved the exploration of a merger transaction
whereby ABE would be merged with and into UG.
In preparation for a possible charter sale of APPL, UG and APPL entered into a
100% coinsurance agreement effective October 1, 2002, whereby UG assumed and
APPL ceded all of the existing business of APPL. The coinsurance transaction had
no financial impact on the consolidated financial statements or operating
results of UTG. At the March 2003 Board of Directors meeting, the APPL and UG
Boards reaffirmed the merger of APPL with and into UG and approved the final
merger documents.
Upon receiving the necessary regulatory approvals, the merger of ABE and APPL
with and into UG was consummated effective July 1, 2003. ABE and APPL were each
100% owned subsidiaries of UG prior to the merger. Management of the Company
believes the completion of the mergers will provide the Company with additional
cost savings. These cost savings result from streamlining the Company's
operations and organizational structure from three life insurance subsidiaries
to one life insurance subsidiary, UG. Thus, the Company will further improve
administrative efficiency.
On September 27, 2001, UG purchased real estate at a cost of $ 6,333,336 from an
outside third party through the formation of an LLC in which UG is a two-thirds
owner. The other one-third partner is Millard V. Oakley, who at the time was a
Director of UTG. Mr. Oakley resigned from the Board effective March 14, 2003.
Hampshire Plaza consists of a 254,000 square foot office tower, an attached
72,000 square foot retail plaza, and an attached parking garage with
approximately 350 parking spaces located in New Hampshire.
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 at the
time was a Director of UTG. The original line of credit expired one year from
the date of issue and has been renewed annually for additional one-year terms.
The line of credit is available for general business uses. 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. During 2002, the Company
borrowed a total of $ 1,600,000 under this line of credit and incurred interest
expense of $ 17,419. All funds drawn were repaid prior to December 31, 2002. No
borrowings were incurred during 2003.
On April 12, 2001, UTG completed the purchase of 22,500 shares of UTG common
stock and 544 shares of FCC common stock from James E. Melville and family
pursuant to the Melville Purchase Agreement in exchange for five year promissory
notes of UTG in the aggregate principal amount of $ 288,800. On April 12, 2001,
UTG also completed the purchase from another family member of Mr. Melville of an
additional 100 shares of UTG for a total cash payment of $ 800. The purchase for
cash by UTG of an additional 39 shares of FCC common stock owned by Mr. Melville
at a purchase price of $ 200.00 per share was consummated on June 27, 2001. Mr.
Melville was a former Director of UTG, FCC and the three insurance subsidiaries
of UTG; he resigned from those boards on February 13, 2001.
On April 12, 2001, UTG also completed the purchase of 559,440 shares of UTG
common stock from Larry E. Ryherd and family pursuant to the Ryherd Purchase
Agreement for cash payments totaling $ 948,026 and a five year promissory note
of UTG in the principal amount of $ 3,527,494. The purchase by UTG of the
remaining 3,775 shares of UTG common stock to be purchased for cash at $ 8.00
per share pursuant to the Ryherd Purchase Agreement along with an additional 570
shares from certain parties to the Ryherd Purchase Agreement was completed on
June 20, 2001. The promissory notes of UTG received by certain of the sellers
pursuant to the Melville Purchase Agreement and the Ryherd Purchase Agreement
bear interest at a rate of 7% per annum (paid quarterly) with payments of
principal to be made in five equal annual installments, the first such payment
of principal to be due on the first anniversary of the closing.
On April 12, 2001, UTG also purchased in a separate transaction 10,891 shares of
UTG common stock from Robert E. Cook, at a price of $ 8.00 per share. At the
closing, Mr. Cook received $ 17,426 in cash and a five year promissory note of
UTG (substantially similar to the promissory notes issued pursuant to the
Melville and Ryherd Purchase Agreements described above) in the principal amount
of $ 69,702. Mr. Cook was a Director of UTG and FCC who resigned his position on
January 8, 2001. Mr. Cook proposed the stock purchase to Jesse T. Correll who
agreed to purchase Mr. Cook's stock on substantially the same terms as the
purchases of the stock held by Messrs. Melville and Ryherd as described above.
During 2001, FCC paid a majority of the general operating expenses of the
affiliated group. FCC then received management, service fees and reimbursements
from the various affiliates. Beginning in January 2002, and in anticipation of
the merger of FCC, UTG began paying a majority of the general operating expenses
of the affiliated group. Following the FCC merger in June 2002, UTG also assumed
the rights and obligations of the management and service fees agreements with
the various affiliates originally held by FCC.
UTG paid FCC $ 0 and $ 550,000 in 2002 and 2001, respectively for reimbursement
of costs attributed to UTG. During 2002 through the date of the FCC merger, FCC
paid $ 3,200,000 to UTG for reimbursement of costs attributed to FCC and
affiliates under which FCC had management and cost sharing services
arrangements.
On January 1, 1993, FCC entered an agreement with UG pursuant to which FCC
provided management services necessary for UG to carry on its business. UG paid
$ 2,974,088 and $ 6,156,903 to FCC in 2002 and 2001, respectively. UG paid
$ 5,906,406 and $ 3,025,194 to UTG in 2003 and 2002, respectively, under this
arrangement.
ABE paid fees to FCC pursuant to a cost sharing and management fee agreement.
FCC provided management services for ABE to carry on its business. The agreement
required ABE to pay a percentage of the actual expenses incurred by FCC based on
certain activity indicators of ABE business to the business of all the insurance
company subsidiaries plus a management fee based on a percentage of the actual
expenses allocated to ABE. ABE paid fees of $ 188,494 and $332,673 in 2002 and
2001, respectively under this agreement. ABE paid fees of $ 165,269 and
$ 170,729 in 2003 and 2002, respectively, to UTG under this agreement.
APPL had a management fee agreement with FCC whereby FCC provided certain
administrative duties, primarily data processing and investment advice. APPL
paid fees of $ 222,000 and $ 444,000 during 2002 and 2001, respectively under
this agreement. APPL paid fees of $ 222,000 and $ 222,000 to UTG during 2003 and
2002, respectively, under this agreement.
Respective domiciliary insurance departments have approved the agreements of the
insurance companies and it is Management's opinion that where applicable, costs
have been allocated fairly and such allocations are based upon accounting
principles generally accepted in the United States of America.
Since the Company's affiliation with FSF, UG has acquired mortgage loans through
participation agreements with FSNB. FSNB services the loans covered by these
participation agreements. UG pays a .25% servicing fee on these loans and a
one-time fee at loan origination of .50% of the original loan amount to cover
costs incurred by FSNB relating to the processing and establishment of the loan.
UG paid $ 63,214, $ 70,140 and $ 79,730 in servicing fees and $ 13,821, $ 35,127
and $ 22,626 in origination fees to FSNB during 2003, 2002 and 2001,
respectively.
The Company reimbursed expenses incurred by Mr. Jesse T. Correll and Mr. Randall
L. Attkisson relating to travel and other costs incurred on behalf of or
relating to the Company. The Company paid $ 20,238, $ 74,621 and $ 145,407 in
2003, 2002 and 2001, respectively to First Southern Bancorp, Inc. in
reimbursement of such costs. In addition, beginning in 2001, the Company began
reimbursing FSBI a portion of salaries for Mr. Correll and Mr. Attkisson. The
reimbursement was approved by the UTG Board of Directors and totaled $ 151,440,
$ 169,651 and $ 128,411 in 2003, 2002 and 2001, respectively, which included
salaries and other benefits.
10. CAPITAL STOCK TRANSACTIONS
A. EMPLOYEE AND DIRECTOR STOCK PURCHASE PROGRAM
On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002,
the shareholders of UTG approved, the United Trust Group, Inc. Employee and
Director Stock Purchase Plan. The plan's purpose is to encourage ownership of
UTG stock by eligible directors and employees of UTG and its subsidiaries by
providing them with an opportunity to invest in shares of UTG common stock. The
plan is administered by the Board of Directors of UTG. A total of 400,000 shares
of common stock may be purchased under the plan, subject to appropriate
adjustment for stock dividends, stock splits or similar recapitalizations
resulting in a change in shares of UTG. The plan is not intended to qualify as
an "employee stock purchase plan" under Section 423 of the Internal Revenue
Code.
During 2003 and 2002, the Board of Directors of UTG approved offerings under the
plan to qualified individuals. For the years ended December 31, 2003 and 2002,
eight individual purchased 58,891 and three individuals purchased 16,546 shares
of UTG common stock, respectively. Each participant under the plan executed a
"stock restriction and buy-sell agreement", which among other things provides
UTG with a right of first refusal on any future sales of the shares acquired by
the participant under this plan.
The purchase price of shares repurchased under the stock restriction and
buy-sell agreement shall be computed, on a per share basis, equal to the sum of
(i) the original purchase price paid to acquire such shares from UTG and (ii)
the consolidated statutory net earnings (loss) per share of such shares during
the period from the end of the month next preceding the month in which such
shares were acquired pursuant to the plan, to the end of the month next
preceding the month in which the sale of such shares to UTG occurs. At
December 31, 2003, UTG had 75,437 shares outstanding that were issued under this
program with a value of $ 11.63 per share pursuant to the above formula.
B. STOCK REPURCHASE PROGRAM
On June 5, 2001, the Board of Directors of UTG authorized the repurchase in the
open market or in privately negotiated transactions of up to $ 1 million of
UTG's common stock. Repurchased shares are available for future issuance for
general corporate purposes. Through February 20, 2004, UTG has spent $ 846,901
in the acquisition of 121,255 shares under this program.
C. STOCK REPURCHASES
In April 2001, UTG completed the purchase of 22,500 shares of UTG common stock
and 544 shares of First Commonwealth Corporation common stock from James E.
Melville and family pursuant to the Melville Purchase Agreement in exchange for
five year promissory notes of UTG in the aggregate principal amount of
$ 288,800. During 2002, UTG made principal reductions totaling $ 115,520 on the
Melville notes.
In April 2001, UTG completed the purchase of 559,440 shares of UTG common stock
from Larry E. Ryherd and family pursuant to the Ryherd Purchase Agreement in
exchange for cash and a five-year promissory note of UTG in the principal amount
of $ 3,527,494. During 2003 and 2002, UTG made principal reductions of $ 705,499
and $ 705,499, respectively, on the Ryherd note.
In April 2001, UTG also purchased in a separate transaction 10,891 shares of UTG
common stock from Robert E. Cook, a former director, for cash and a five-year
promissory note of UTG in the principal amount of $ 69,702. During 2002, UTG
repaid this note in full.
D. SHARES ACQUIRED BY FSF AND AFFILIATES WITH OPTIONS GRANTED
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, and then will be further reduced by
one-half of the percentage, if any, representing UTG's ownership percentage of
the insurance company subsidiary. 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. For the five-year period starting January 1, 1998 and ending
December 31, 2002, the Company had total earnings of $ 17,011,307 applicable to
this covenant. Therefore, UTG did not meet the earnings requirements stipulated,
and during 2003, UTG was required to issue 500,000 additional shares to FSF or
its assigns.
At the time of the stock acquisition above, UTG also granted, for nominal
consideration, an irrevocable, exclusive option to FSF to purchase up to
1,450,000 shares of UTG common stock for a purchase price in cash equal to
$ 15.00 per share, with such option to expire on July 1, 2001. UTG had a market
price per share of $ 9.50 at the date of grant of the option. The option shares
under this option are to be reduced by two shares for each share of UTG common
stock that FSF or its affiliates purchase from UTG shareholders in private or
public transactions after the execution of the option agreement. The option was
additionally limited to a maximum when combined with shares owned by FSF of 51%
of the issued and outstanding shares of UTG after giving effect to any shares
subject to the option. The option expired unexercised on July 1, 2001.
As of December 31, 2003, no options were exercised and all options have been
forfeited.
2003 2002 2001
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- --------------- ------------- ---------------- ------------- ---------------
Outstanding at beginning of
Period 0 $ 15.00 0 $ 15.00 19,108 $ 15.00
Granted 0 0.00 0 0.00 0 0.00
Exercised 0 0.00 0 0.00 0 0.00
Forfeited 0 15.00 0 15.00 19,108 15.00
------------- --------------- ------------- ---------------- ------------- ---------------
Outstanding at end of period 0 $ 15.00 0 $ 15.00 0 $ 15.00
============= =============== ============= ================ ============= ===============
E. EARNINGS PER SHARE CALCULATIONS
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations as presented on the
income statement.
For the year ended December 31, 2003
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
Basic EPS
Income available to common shareholders $ (6,396,490) 3,839,947 $ (1.67)
=================
Effect of Dilutive Securities
Options 0 0
--------------- ------------------
Diluted EPS
Income available to common shareholders and $
assumed conversions (6,396,490) 3,839,947 $ (1.67)
=============== ================== =================
For the year ended December 31, 2002
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
Basic EPS
Income available to common shareholders $ 1,338,795 3,505,424 $ 0.38
=================
Effect of Dilutive Securities
Earnings covenant 0 500,000
Options 0 0
--------------- ------------------
Diluted EPS
Income available to common shareholders and $
assumed conversions 1,338,795 4,005,424 $ 0.33
=============== ================== =================
For the year ended December 31, 2001
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------------ -----------------
Basic EPS
Income available to common shareholders $ 2,308,096 3,733,432 $ 0.62
=================
Effect of Dilutive Securities
Convertible notes 0 0
Options 0 0
--------------- ------------------
Diluted EPS
Income available to common shareholders and $
assumed conversions 2,308,096 3,733,432 $ 0.62
=============== ================== =================
In accordance with Statement of Financial Accounting Standards No. 128, the
computation of diluted earnings per share is the same as basic earnings per
share for the year ending December 31, 2003, since the Company had a loss from
continuing operation for the year presented, and any assumed conversion,
exercise, or contingent issuance of securities would have an antidilutive effect
on earnings per share. At December 31, 2002, UTG had an obligation to issue to
FSF or its assigns 500,000 shares of UTG common stock, as the result of a failed
earnings covenant (See note 10D to the consolidated financial statements above).
As such, the computation of diluted earnings per share differs from basic
earnings per share for the year ending December 31, 2002. UTG had no stock
options outstanding for the year ended December 31, 2001. As such, the
computation of diluted earnings per share is the same as basic earnings per
share at December 31, 2001.
UTG had granted stock options to FSF of 1,450,000 shares of UTG common stock
which were outstanding as of year end 1998. The option shares under this option
were to be reduced by two shares for each share of UTG common stock that FSF or
its affiliates purchases from UTG shareholders in private or public transactions
after the execution of the option agreement. The option was additionally limited
to a maximum when combined with shares owned by FSF of 51% of the issued and
outstanding shares of UTG after giving effect to any shares subject to the
option. Due to the passage of time and the 51% limitation, all remaining stock
options of 19,108 at $ 15.00 per share expired on July 1, 2001. No options were
exercised during 2001. These options were not included in the computation of
diluted EPS because the exercised price was greater than the average market
price of the common shares for each respective year.
11. NOTES PAYABLE
At December 31, 2003 and 2002, the Company had $ 2,289,776 and $ 2,995,275 in
long-term debt outstanding, respectively. The debt is comprised of the following
components:
2003 2002
------------- -------------
Subordinated 20 yr. Notes $ 0 $ 0
Other notes payable 2,289,776 2,995,275
------------- -------------
$ 2,289,776 $ 2,995,275
============= =============
A. Subordinated debt
The subordinated debt was incurred June 16, 1992 as a part of the acquisition of
the now dissolved CIC. These notes bore 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 installments, the first
principal payment in the amount of $ 777,199, was made on March 31, 2002. In
December 2002 an advance principal payment of $ 113,522 was made on these notes.
An additional principal payment of $ 705,499 was made during 2003. Subsequent to
the current reporting period, in January 2004, UTG paid the remaining principal
balance on these notes.
The collective scheduled principal reductions on these notes for the next five
years were as follows:
Year Amount
2004 763,259
2005 763,259
2006 763,258
2007 0
2008 0
C. Lines of Credit
On November 15, 2001, UTG was extended a $ 3,300,000 line of credit (LOC) from
the First National Bank of the Cumberlands (FNBC) located in Livingston,
Tennessee. The FNBC is owned by, Millard V. Oakley, who at the time was a
Director of UTG. The LOC was for a one-year term from the date of issue. Upon
maturity the Company renewed the LOC for an additional one-year terms. The
interest rate on the LOC is variable and indexed to be the lowest of the U.S.
prime rates as published in the Wall Street Journal, with any interest rate
adjustments to be made monthly. During 2002 the Company had total borrowings of
$ 1,600,000 on this LOC, which were all repaid during the year. The draws on
this LOC 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 15 to the consolidated financial statements. No
borrowings were incurred during 2003.
On April 1, 2002, UTG was extended a $ 5,000,000 line of credit (LOC) from an
unaffiliated third party, Southwest Bank of St. Louis. The LOC expired one-year
from the date of issue and was renewed for an additional one-year term. 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 LOC will bear interest at the rate of 0.25% in excess
of Southwest Bank of St. Louis' prime rate. At December 31, 2003, the Company
had no outstanding borrowings attributable to this LOC. During 2002 the Company
had total borrowings of $ 400,000 on this LOC which were all repaid during the
year. Draws on this LOC were used to retire the remaining subordinated debt, as
described in note 11A above. Subsequent to the current reporting period, in
January 2004, UTG drew on this LOC to repay the outstanding principal balances
on the other notes payable.
12. OTHER CASH FLOW DISCLOSURES
On a cash basis, the Company paid $ 162,179, $ 263,441 and $ 333,365 in interest
expense for the years 2003, 2002 and 2001, respectively. The Company paid
$ 175,000, $ 60,290 and $ 92,006 in federal income tax for 2003, 2002 and 2001,
respectively.
As of December 31, 2003, the Company has $ 450,250 that has not been disbursed
to former minority shareholders of FCC in connection with FCC's merger with and
into UTG. The total consideration to be paid by the Company to the former
minority shareholders as a result of the merger is $ 2,480,000 (see note 15 to
the consolidated financial statements).
At December 31, 2002, the Company sold $ 115,000 in fixed maturity investments
for which the cash had not yet been received. The receivable for these
securities is included in the line item "Other assets" on the consolidated
balance sheet.
In April 2001, the Company issued $ 3,885,996 in new debt in exchange for the
acquisition of UTG and FCC common stock from two former officers and directors
of the Company and their respective families.
13. 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 the largest
shareholder of UTG, Mr. Jesse T. Correll, the Company's CEO and Chairman. In
aggregate at December 31, 2003 these accounts have no balances 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.
14. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities and
Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.
The Financial Accounting Standards Board (FASB) has issued Statement No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
Statement 149 was issued to amend and clarify financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement 133. The provisions of Statement 149 are
effective on contracts entered into or modified after June 30, 2003, with some
exceptions for Statement 133 Implementation Issues and hedging relationships
designated after June 30, 2003. The adoption of Statement 149 did not affect the
Company's financial position or results of operations, since the Company has had
no acquisitions of this nature during the reporting period.
The Financial Accounting Standards Board (FASB) has issued Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. Statement No. 150 was issued to address how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer must classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) which may have previously been classified as equity.
Examples of such a financial instrument would be shares that are mandatorily
redeemable which include an unconditional obligation requiring the issuer to
redeem them by transferring its assets at a specified date or upon an event that
is certain to occur, or a financial instrument other than an outstanding share
that, at inception, includes an obligation to repurchase the issuer's equity
shares and that requires or may require the issuer to settle the obligation by
transferring assets.
This statement was effective at the beginning of the first interim period
beginning after June 15, 2003. The Company adopted Statement No. 150 in its
September 30, 2003 financials and as a result, 4,178 shares of common stock no
longer met the requirements to be classified as equity. The adoption of this
Statement resulted in a reclassification of $ 49,635 from Shareholders' Equity
to Other Liabilities.
15. 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 of the merger was 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 December 31, 2002 and December 31, 2001, respectively.
December 31, December 31, 2001
2002
-------------------- --------------------
Total revenues $ 30,064,644 $ 33,329,372
Total benefits and other expenses $ 27,927,456 $ 28,912,280
Operating income $ 2,137,188 $ 4,417,092
Net Income $ 1,394,218 $ 3,274,486
Basic earnings per share $ 0.40 $ 0.86
Diluted earnings per share $ 0.35 $ 0.86
16. COMPREHENSIVE INCOME
Tax
Before-Tax (Expense) Net of Tax
2003 Amount or Benefit Amount
---------------------------------------------- ---------------- ----------------- ---------------
Unrealized holding losses during
period $ (1,941,662) $ 679,582 $ (1,262,080)
Less: reclassification adjustment
for losses realized in net income 86,979 (30,443) 56,536
---------------- ----------------- ---------------
Net unrealized losses (1,854,683) 649,139 (1,205,544)
---------------- ----------------- ---------------
Other comprehensive deficit $ (1,854,683) $ 649,139 $ (1,205,544)
================ ================= ===============
Tax
Before-Tax (Expense) Net of Tax
2002 Amount or Benefit Amount
---------------------------------------------- ---------------- ----------------- ---------------
Unrealized holding gains during
period $ 2,868,146 $ $ 1,864,295
(1,003,851)
Less: reclassification adjustment
for gains realized in net income (1,689) 591 (1,098)
---------------- ----------------- ---------------
Net unrealized gains 2,866,457 (1,003,260) 1,863,197
---------------- ----------------- ---------------
Other comprehensive income $ 2,866,457 $ (1,003,260) $ 1,863,197
================ ================= ===============
Tax
Before-Tax (Expense) Net of Tax
2001 Amount or Benefit Amount
---------------------------------------------- ---------------- ----------------- ---------------
Unrealized holding gains during
period $ 1,222,583 $ $ 794,679
(427,904)
Less: reclassification adjustment
for gains realized in net income (221,222)
(340,341) 119,119
---------------- ----------------- ---------------
Net unrealized gains 882,242 (308,785) 573,457
---------------- ----------------- ---------------
Other comprehensive income $ 882,242 $ $ 573,457
(308,785)
================ ================= ===============
In 2003, 2002 and 2001, the Company established a deferred tax liability of
$ 803,095, $ 1,170,197 and $ 385,432, respectively, for the unrealized gains
based on the applicable United States statutory rate of 35%.
17. PRIOR PERIOD ADJUSTMENT - REINSURANCE PREMIUMS
During 2003, the Company determined the amount of reinsurance premiums paid to
reinsurers was insufficient in the current year as well as prior years. In
total, due premiums of $ 903,325 were owed the Company's reinsurers, of which
$ 729,321 related to years prior to 2003. Accordingly, financial results from
2002 and 2001 have been restated to reflect the correction of the error. The
following table summarizes the impact of this correction:
Effect Effect Effect
on Net on Basic on Diluted
Income EPS EPS
-------------------- --------------------- --------------------
2002 $ (160,823) $ (0.05) $ (0.04)
2001 (131,477) (0.04) (0.04)
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2003
1st 2nd 3rd 4th
--------------- --------------- --------------- ---------------
Premiums and policy fees, net $ 3,883,003 $ 4,093,239 $ 3,686,584 $ 3,360,212
Net investment income 2,888,444 3,231,542 2,462,813 1,687,701
Total revenues 7,185,509 7,811,693 6,498,785 4,992,371
Policy benefits including
dividends 5,520,920 4,931,443 5,516,224 5,102,089
Commissions and
amortization of DAC and COI 544,139 441,914 513,488 5,507,726
Operating expenses 1,169,139 3,500,807 1,451,973 1,444,861
Operating income (loss) (90,406) (1,102,433) (1,023,300) (7,102,405)
Net income (loss) (494,124) (669,492) (464,142) (4,768,732)
Basic earnings (loss) per share (0.14) (0.17) (0.12) (1.24)
Diluted earnings (loss) per
share (0.12) (0.17) (0.12) (1.24)
2002
1st 2nd 3rd 4th
--------------- --------------- --------------- ---------------
Premiums and policy fees, net $ 4,276,861 $ 4,388,284 $ 3,725,823 $ 3,440,609
Net investment income 3,396,613 3,383,548 3,294,038 3,440,603
Total revenues 7,882,176 7,994,915 7,211,394 7,088,714
Policy benefits including
dividends 4,835,106 4,609,999 5,110,590 4,930,553
Commissions and
amortization of DAC and COI 688,618 578,688 501,283 532,722
Operating expenses 1,530,433 1,649,134 1,441,502 1,255,387
Operating income 755,809 1,095,700 86,789 311,445
Net income (loss) 477,034 722,679 327,499 (188,417)
Basic earnings (loss) per share 0.14 0.21 0.08 (0.05)
Diluted earnings (loss) per
share 0.12 0.18 0.08 (0.05)
2001
1st 2nd 3rd 4th
--------------- --------------- --------------- ---------------
Premiums and policy fees, net $ 4,554,451 $ 4,768,808 $ 4,137,361 $ 3,680,319
Net investment income 4,014,425 3,931,677 3,557,702 3,642,455
Total revenues 8,428,235 9,005,351 7,963,274 7,916,195
Policy benefits including
dividends 4,937,725 5,193,310 4,586,257 4,807,794
Commissions and
amortization of DAC and COI 929,415 621,810 511,470 773,199
Operating expenses 1,514,115 1,768,758 1,573,817 1,629,001
Operating income 1,008,366 1,323,667 1,183,712 624,140
Net income 343,858 975,292 645,873 343,073
Basic earnings per share 0.08 0.27 0.18 0.09
Diluted earnings per
share 0.08 0.27 0.18 0.09
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
ITEM 9A. 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 III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF UTG
THE BOARD OF DIRECTORS
In accordance with the laws of Illinois and the Certificate of Incorporation and
Bylaws of UTG, as amended, UTG is managed by its executive officers under the
direction of the Board of Directors. The Board elects executive officers,
evaluates their performance, works with management in establishing business
objectives and considers other fundamental corporate matters, such as the
issuance of stock or other securities, the purchase or sale of a business and
other significant corporate business transactions. In the fiscal year ended
December 31, 2003, the Board met 4 times. All directors attended at least 75% of
all meetings of the board, except Mr. Ward Correll.
The Board of Directors has an Audit Committee consisting of Messrs. Albin,
Perry, and Brinck. The Audit Committee performs such duties as outlined in the
Company's Audit Committee Charter. The Audit Committee reviews and acts or
reports to the Board with respect to various auditing and accounting matters,
the scope of the audit procedures and the results thereof, internal accounting
and control systems of UTG, the nature of services performed for UTG and the
fees to be paid to the independent auditors, the performance of UTG's
independent and internal auditors and the accounting practices of UTG. The Audit
Committee also recommends to the full Board of Directors the auditors to be
appointed by the Board. The Audit Committee met twice in 2003.
The Board has reviewed the qualifications of each member of the audit committee
and determined no member of the committee meets the definition of a "financial
expert". The Board concluded however, that each member of the committee has a
proven track record as a successful businessman, each operating their own
company and their experience as businessmen provide a knowledge base and
experience adequate for participation as a member of the committee.
The compensation of UTG's executive officers is determined by the full Board of
Directors (see report on Executive Compensation).
Under UTG's By-Laws, the Board of Directors should be comprised of at least six
and no more than eleven directors. At December 31, 2003. the Board consisted of
nine directors with one position vacant. Shareholders elect Directors to serve
for a period of one year at UTG's Annual Shareholders' meeting.
Directors and officers of UTG file periodic reports regarding ownership of
Company securities with the Securities and Exchange Commission pursuant to
Section 16(a) of the Securities Exchange Act of 1934 as amended, and the rules
promulgated thereunder. During 2003, UTG was aware of the following individual
who filed a late Form 3, initial statement of beneficial ownership of
securities, with the Securities and Exchange Commission; Daniel S. Maloney,
employee. This individual reported no stock ownership of UTG at the time of the
filing of the Form 3.
AUDIT COMMITTEE REPORT TO SHAREHOLDERS
In connection with the December 31, 2003 financial statements, the audit
committee: (1) reviewed and discussed the audited financial statements with
management; (2) discussed with the auditors the matters required by Statement on
Auditing Standards No. 61; and (3) received and discussed with the auditors the
matters required by Independence Standards Board Statement No.1. Based upon
these reviews and discussions, the audit committee recommended to the Board of
Directors that the audited financial statements be included in the Annual Report
on Form 10-K filed with the SEC.
John S. Albin - Committee Chairman
William W. Perry
Joseph A. Brinck, II
The following information with respect to business experience of the Board of
Directors has been furnished by the respective directors or obtained from the
records of UTG.
DIRECTORS
Name, Age Position with the Company,
Business Experience and Other Directorships
John S. Albin, 75
Director of UTG since 1984; farmer in Douglas and Edgar
counties, Illinois, since 1951; Chairman of the Board of
Longview State Bank since 1978; President of the Longview
Capitol Corporation, a bank holding company, since 1978;
Chairman of First National Bank of Ogden, Illinois, since
1987; Chairman of the State Bank of Chrisman since 1988;
Director and Secretary of Illini Community Development
Corporation since 1990; Commissioner of Illinois Student
Assistance Commission from 1996 to 2002.
Randall L. Attkisson 58
Director of UTG since 1999; President and Chief Operating
Officer of UTG since 2001; Chief Financial Officer,
Treasurer, Director of First Southern Bancorp, Inc, a bank
holding company, since 1986; Treasurer, Director of First
Southern Funding, LLC since 1992; Director of Kentucky
Christian Foundation since 2002; Director of The River
Foundation, Inc. since 1990; President of Randall L.
Attkisson & Associates from 1982 to 1986; Commissioner of
Kentucky Department of Banking & Securities from 1980 to
1982; Self-employed Banking Consultant in Miami, FL from
1978 to 1980.
Joseph A. Brinck, II, 48
Director, elected in 2003; CEO of Stelter & Brinck, LTD, a
full service combustion engineering and manufacturing
company from 1979 to present; President of Superior Thermal,
LTD from 1990 to present. Currently hold Professional
Engineering Licenses in Ohio, Kentucky, Indiana and
Illinois.
Jesse T. Correll 47
Chairman and CEO of UTG since 2000; Director of UTG since
1999; Chairman, President, Director of First Southern
Bancorp, Inc. since 1983; President, Director of First
Southern Funding, LLC since 1992; President, Director of The
River Foundation since 1990; Director of Thomas Nelson,
Inc., a premier publisher of Bibles and Christian Books
since 2001; Director of Computer Services, Inc., provider of
bank technology products and services since 2001; Director
of Global Focus since 2001; Young Life Dominican Republic
Committee Member since 2000. Jesse Correll is the son of
Ward Correll.
Ward F. Correll 75
Director of UTG since 2000; President, Director of Tradeway,
Inc. of Somerset, KY since 1973; President, Director of
Cumberland Lake Shell, Inc. of Somerset, KY since 1971;
President, Director of Tradewind Shopping Center, Inc. of
Somerset, KY since 1966; Director of First Southern Bancorp
since 1988; Director of First Southern Funding, LLC since
1991; Director of The River Foundation since 1990; and
Director First Southern Insurance Agency since 1987. Ward
Correll is the father of Jesse Correll.
Thomas F. Darden 49
Director of UTG since 2001; Managing Partner of Cherokee
Investment Partners LLC, a real estate investment firm,
formerly President and CEO of Cherokee Sanford Group, Inc.
an affiliated predecessor since 1983; Director of Winston
Hotels, Inc. since 1994; Trustee of Shaw University since
1993; Member of the Board of Governors of Research Triangle
Institute since 1998; Former Chairman of the Triangle
Transit Authority, serving from 1993 to 1998 and Chairman
from 1996 to 1997; Prior to 1996, twice appointed to the
North Carolina Board of Transportation.
William W. Perry 47
Director of UTG since 2001; Owner of SES Investments, Ltd.,
an oil and gas investments company since 1991; President of
EGL Resources, Inc., an oil and gas operations company based
in Texas and New Mexico since 1992; President of a real
estate investment company; Chairman of Perry & Perry, Inc.,
a Texas oil and gas consulting company since 1977; Director
of Young Life Foundation and involved with Young Life in
various capacities; Director of Abel-Hangar Foundation,
Director of University of Oklahoma Associates; Midland,
Texas city council member since 2002
James P. Rousey 45
Executive Vice President, Chief Administrative Officer and
Director of UTG since September 2001; Regional CEO and
Director of First Southern National Bank from 1988 to 2001.
Board Member with the Illinois Fellowship of Christian
Athletes since 2001.
EXECUTIVE OFFICERS OF UTG
More detailed information on the following executive officers of UTG appears
under "Directors":
Jesse T. Correll Chairman of the Board and Chief Executive Officer
Randall L. Attkisson President and Chief Operating Officer
James P. Rousey Executive Vice President and Chief Administrative Officer
Other executive officers of UTG are set forth below:
Name, Age Position with UTG and, Business Experience
Theodore C. Miller 41
Corporate Secretary since December 2000, Senior Vice
President and Chief Financial Officer since July 1997; Vice
President since October 1992 and Treasurer from October 1992
to December 2003; Vice President and Controller of certain
affiliated companies from 1984 to 1992. Vice President and
Treasurer of certain affiliated companies from 1992 to 1997;
Senior Vice President and Chief Financial Officer of
subsidiary companies since 1997; Corporate Secretary of
subsidiary companies since 2000.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation Table
The following table sets forth certain information regarding compensation paid
to or earned by UTG's Chief Executive Officer and each of the executive officers
of UTG whose salary plus bonus exceeded $100,000 during UTG's last fiscal year:
SUMMARY COMPENSATION TABLE
Name and Annual Compensation Other Annual All Other (1)
Principal Position Year Salary ($) Bonus ($) Compensation ($) Compensation ($)
Jesse T. Correll (2) 2003 75,000 - - 4,500
Chairman of the Board 2002 75,000 - - 4,500
Chief Executive Officer 2001 56,250 - - -
Randall L. Attkisson 2003 75,000 - - 4,500
President 2002 75,000 - - 4,500
2001 56,250 - - -
Theodore C. Miller 2003 100,000 3,000 - 3,000
Corporate Secretary 2002 100,000 - - 3,000
Senior Vice President 2001 100,000 5,000 - 3,000
Chief Financial Officer
James P. Rousey (3) 2003 135,000 0 - 2,025
Executive Vice President 2002 135,000 10,000 - 2,025
Chief Administrative Officer 2001 50,625 - - -
Member of the Board
Douglas A. Dockter (4) 2003 99,583 4,000 - 2,689
Vice President 2002 95,000 - - 2,316
2001 95,000 2,000 - 2,280
(1) All Other Compensation consists of UTG's matching contribution to the
Employee Savings Trust 401(k) Plan.
(2) On March 27, 2000, Mr. Jesse T. Correll assumed the position as Chairman of
the Board and Chief Executive Officer of UTG and each of its affiliates. In
March 2001, the Board of Directors approved an annual salary for Mr.
Correll of $75,000, with payments to begin on April 1, 2001.
(3) Mr. James P. Rousey became an officer and employee of UTG and its
subsidiaries effective August 16, 2001.
(4) Mr. Douglas A. Dockter is not considered an executive officer of UTG, but
is included in this table pursuant to compensation disclosure requirements.
Option/SAR Grants/Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR Values
At December 31, 2003 there were no shares of the common stock of UTG subject to
unexercised options held by the named executive officers. There were no options
or stock appreciation rights granted to the named executive officers for the
past three fiscal years.
Compensation of Directors
UTG's standard arrangement for the compensation of directors provides that each
director shall receive an annual retainer of $2,400, plus $300 for each meeting
attended and reimbursement for reasonable travel expenses. UTG's director
compensation policy also provides that directors who are employees of UTG or its
affiliates do not receive any compensation for their services as directors
except for reimbursement for reasonable travel expenses for attending each
meeting.
Employment Contracts
There are no employment agreements in effect with any executive officers of the
Company.
Compensation Committee Interlocks and Insider Participation
The following persons served as directors of UTG during 2003 and were officers
or employees of UTG or its affiliates during 2003: Jesse T. Correll, Randall L.
Attkisson and James P. Rousey. Accordingly, these individuals have participated
in decisions related to compensation of executive officers of UTG and its
subsidiaries.
During 2003, Jesse T. Correll and Randall L. Attkisson, executive officers of UTG and UG, were also members of the Board of Directors
of UG.
Jesse T. Correll and Randall L. Attkisson are each directors and executive
officers of FSBI and participate in compensation decisions of FSBI. FSBI owns or
controls directly and indirectly approximately 46.5% of the outstanding common
stock of UTG.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL HOLDERS OF SECURITIES
The following tabulation sets forth the name and address of the entity known to
be the beneficial owners of more than 5% of UTG's Common Stock and shows: (i)
the total number of shares of common Stock beneficially owned by such person as
of March 1, 2004 and the nature of such ownership; and (ii) the percent of the
issued and outstanding shares of common stock so owned as of the same date.
Title Amount Percent
of Name and Address and Nature of of
Class of Beneficial Owner(2) Beneficial Ownership Class (1)
Common Jesse T. Correll 185,454 (3) 4.6%
Stock, no First Southern Bancorp, Inc. 1,739,072 (3)(4) 43.5%
par value First Southern Funding, LLC 335,453 (3)(4) 8.4%
First Southern Holdings, LLC 1,483,791 (3)(4) 37.1%
First Southern Capital Corp., LLC 237,333 (3)(4) 5.9%
First Southern Investments, LLC 24,086 0.6%
Ward F. Correll 98,523 (5) 2.5%
WCorrell, Limited Partnership 72,750 (3) 1.8%
Cumberland Lake Shell, Inc. 98,523 (5) 2.5%
Total(6) 2,619,921 65.5%
(1) The percentage of outstanding shares is based on 4,001,654 shares of Common
Stock outstanding as of March 1, 2004.
(2) The address for each of Jesse Correll, First Southern Bancorp, Inc.
("FSBI"), First Southern Funding, LLC ("FSF"), First Southern Holdings, LLC
("FSH"), First Southern Capital Corp., LLC ("FSC"), First Southern
Investments, LLC ("FSI"), and WCorrell, Limited Partnership ("WCorrell
LP"), is P.O. Box 328, 99 Lancaster Street, Stanford, Kentucky 40484. The
address for each of Ward Correll and Cumberland Lake Shell, Inc. ("CLS") is
P.O. Box 430, 150 Railroad Drive, Somerset, Kentucky 42502.
(3) The share ownership of Jesse Correll listed includes 112,704 shares of
Common Stock owned by him individually. The share ownership of Mr. Correll
also includes 72,750 shares of Common Stock held by WCorrell, Limited
Partnership, a limited partnership in which Jesse Correll serves as
managing general partner and, as such, has sole voting and dispositive
power over the shares held by it.
In addition, by virtue of his ownership of voting securities of FSF and
FSBI, and in turn, their ownership of 100% of the outstanding membership
interests of FSH, Jesse Correll may be deemed to beneficially own the total
number of shares of Common Stock owned by FSH (as well as the shares owned
by FSBI directly), and may be deemed to share with FSH (as well as FSBI)
the right to vote and to dispose of such shares. Mr. Correll owns
approximately 79% of the outstanding membership interests of FSF; he owns
directly approximately 50%, companies he controls own approximately 14%,
and he has the power to vote but does not own an additional 3% of the
outstanding voting stock of FSBI. FSBI and FSF in turn own 99% and 1%,
respectively, of the outstanding membership interests of FSH. Mr. Correll
is also a manager of FSC and thereby may also be deemed to beneficially own
the total number of shares of Common Stock owned by FSC, and may be deemed
to share with it the right to vote and to dispose of such shares. The
aggregate number of shares of Common Stock held by these other entities, as
shown in the above table, is 1,976,405 shares.
(4) The share ownership of FSBI consists of 255,281 shares of Common Stock held
by FSBI directly (which FSBI acquired by virtue of its merger with Dyscim,
LLC) and 1,483,791 shares of Common Stock held by FSH of which FSBI is a
99% member and FSF is a 1% member, as further described below. As a result,
FSBI may be deemed to share the voting and dispositive power over the
shares held by FSH.
(5) Represents the shares of Common Stock held by CLS, all of the outstanding
voting shares of which are owned by Ward F. Correll and his wife. As a
result, Ward F. Correll may be deemed to share the voting and dispositive
power over these shares.
(6) According to the most recent Schedule 13D, as amended, filed jointly by
each of the entities and persons listed above, Jesse Correll, FSBI, FSF,
FSH, FSC, and FSI, have agreed in principle to act together for the purpose
of acquiring or holding equity securities of UTG. In addition, the Schedule
13D indicates that because of their relationships with Jesse Correll and
these other entities, Ward Correll, CLS, and WCorrell, Limited Partnership
may also be deemed to be members of this group. Because the Schedule 13D
indicates that for its purposes, each of these entities and persons may be
deemed to have acquired beneficial ownership of the equity securities of
UTG beneficially owned by the other entities and persons, each has been
identified and listed in the above tabulation.
SECURITY OWNERSHIP OF MANAGEMENT OF UTG
The following tabulation shows with respect to each of the directors of UTG,
with respect to UTG's chief executive officer and each of UTG's executive
officers whose salary plus bonus exceeded $100,000 for fiscal 2003, and with
respect to all executive officers and directors of UTG as a group: (i) the total
number of shares of all classes of stock of UTG or any of its parents or
subsidiaries, beneficially owned as of March 1, 2004 and the nature of such
ownership; and (ii) the percent of the issued and outstanding shares of stock so
owned, and granted stock options available as of the same date.
Title Directors, Named Executive Amount Percent
of Officers, & All Directors & and Nature of of
Class Executive Officers as a Group Ownership Class (1)
UTG's John S. Albin 10,503 (4) *
Common Randall L. Attkisson 0 (2) *
Stock, no Joseph A. Brinck, II 0 *
par value Jesse T. Correll 2,497,312 (3) 62.4%
Ward F. Correll 98,523 (5) 2.5%
Thomas F. Darden 16,780 (6) *
Theodore C. Miller 10,000 (6) *
William W. Perry 20,000 (6) *
James P. Rousey 0 *
All directors and executive officers
as a group (ten in number) 2,653,118 66.3%
(1) The percentage of outstanding shares for UTG is based on 4,001,654 shares
of Common Stock outstanding as of March 1, 2004.
(2) Randall L. Attkisson is an associate and business partner of Mr. Jesse T.
Correll and holds minority ownership positions in certain of the companies
listed as owning UTG Common Stock including First Southern Bancorp, Inc.
Ownership of these shares is reflected in the ownership of Jesse T.
Correll.
(3) The share ownership of Mr. Correll includes 112,704 shares of United Trust
Group common stock owned by him individually, 255,281 shares of United
Trust Group common stock held by First Southern Bancorp, Inc. and 335,453
shares of United Trust Group common stock owned by First Southern Funding,
LLC. The share ownership of Mr. Correll also includes 72,750 shares of
United Trust Group common stock held by WCorrell, Limited Partnership, a
limited partnership in which Mr. Correll serves as managing general partner
and, as such, has sole voting and dispositive power over the shares held by
it. In addition, by virtue of his ownership of voting securities of First
Southern Funding, LLC and First Southern Bancorp, Inc., and in turn, their
ownership of 100% of the outstanding membership interests of First Southern
Holdings, LLC (the holder of 1,483,791 shares of United Trust Group common
stock), Mr. Correll may be deemed to beneficially own the total number of
shares of United Trust Group common stock owned by First Southern Holdings,
and may be deemed to share with First Southern Holdings the right to vote
and to dispose of such shares. Mr. Correll owns approximately 79% of the
outstanding membership interests of First Southern Funding; he owns
directly approximately 50%, companies he controls own approximately 14%,
and he has the power to vote but does not own an additional 3% of the
outstanding voting stock of First Southern Bancorp. First Southern Bancorp
and First Southern Funding in turn own 99% and 1%, respectively, of the
outstanding membership interests of First Southern Holdings. Mr. Correll is
also a manager of First Southern Capital Corp., LLC, and thereby may also
be deemed to beneficially own the 237,333 shares of United Trust Group
common stock held by First Southern Capital, and may be deemed to share
with it the right to vote and to dispose of such shares. Share ownership of
Mr. Correll in United Trust Group common stock does not include 24,086
shares of United Trust Group common stock held by First Southern
Investments, LLC.
(4) Includes 392 shares owned directly by Mr. Albin's spouse.
(5) Cumberland Lake Shell, Inc. owns 98,523 shares of UTG Common Stock, all of
the outstanding voting shares of which are owned by Ward F. Correll and his
wife. As a result Ward F. Correll may be deemed to share the voting and
dispositive power over these shares. Ward F. Correll is the father of Jesse
T. Correll. There are 72,750 shares of UTG Common Stock owned by WCorrell
Limited Partnership in which Jesse T. Correll serves as managing general
partner and, as such, has sole voting and dispositive power over the shares
of Common Stock held by it. The aforementioned 72,750 shares are deemed to
be beneficially owned by and listed under Jesse T. Correll in this section.
(6) Shares subject to UTG Employee and Director Stock Purchase Plan.
* Less than 1%.
Except as indicated above, the foregoing persons hold sole voting and investment
power.
The following table reflects the Company's Employee and Director Stock Purchase
Plan Information:
Plan category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants and rights future issuance under
warrants and rights employee and director stock
purchase plans (excluding
securities reflected in
(a) (b) column (a))
(c)
Employee and director stock
purchase plans approved by
security holders
324,563
0 0
Employee and director stock
purchase plans not approved by
security holders
0 0 0
Total 0 0 324,563
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 allows for the issuance of up to 400,000
shares of UTG common stock. 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 58,891 shares
of UTG common stock were issued under this plan in 2002, to eight individuals at
a purchase price of $12.00 per share. In 2003, 16,546 shares were issued to
three participants at a purchase price of $11.84. Each participant under the
plan executed a "stock restriction and buy-sell agreement", which among other
things provides UTG with a right of first refusal on any future sales of the
shares acquired by the participant under this plan. The purchase price of shares
repurchased under the stock restriction and buy-sell agreement shall be
computed, on a per share basis, equal to the sum of (i) the original purchase
price paid to acquire such shares from UTG and (ii) the consolidated statutory
net earnings (loss) per share of such shares during the period from the end of
the month next preceding the month in which such shares were acquired pursuant
to the plan, to the end of the month next preceding the month in which the sale
of such shares to UTG occurs. At December 31, 2003, shares issued under this
program with a value of $11.63 per share pursuant to the above formula.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002,
the shareholders of UTG approved, the United Trust Group, Inc. Employee and
Director Stock Purchase Plan. The plan's purpose is to encourage ownership of
UTG stock by eligible directors and employees of UTG and its subsidiaries by
providing them with an opportunity to invest in shares of UTG common stock. The
plan is administered by the Board of Directors of UTG. A total of 400,000 shares
of common stock may be purchased under the plan, subject to appropriate
adjustment for stock dividends, stock splits or similar recapitalizations
resulting in a change in shares of UTG. The plan is not intended to qualify as
an "employee stock purchase plan" under Section 423 of the Internal Revenue
Code.
During 2003 and 2002, the Board of Directors of UTG approved offerings under the
plan to qualified individuals. For the years ended December 31, 2003 and 2002,
eight individuals purchased 58,891 and three individuals purchased 16,546 shares
of UTG common stock, respectively. Each participant under the plan executed a
"stock restriction and buy-sell agreement", which among other things provides
UTG with a right of first refusal on any future sales of the shares acquired by
the participant under this plan.
The purchase price of shares repurchased under the stock restriction and
buy-sell agreement shall be computed, on a per share basis, equal to the sum of
(i) the original purchase price paid to acquire such shares from UTG and (ii)
the consolidated statutory net earnings (loss) per share of such shares during
the period from the end of the month next preceding the month in which such
shares were acquired pursuant to the plan, to the end of the month next
preceding the month in which the sale of such shares to UTG occurs. At
December 31, 2003, shares issued under this program with a value of $ 11.63 per
share pursuant to the above formula.
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, and 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. For the five-year period starting January 1, 1998 and ending
December 31, 2003, the Company had total earnings of $ 17,011,307 applicable to
this covenant. Therefore, UTG did not meet the earnings requirements stipulated,
and during 2003, UTG was required to issue 500,000 additional shares to FSF or
its assigns.
On November 15, 2002, North Plaza acquired 229 acres of timberland from Millard
V. Oakley, a director of UTG at the time, for a total purchase price of
$ 54,811. The land acquired was adjacent to land already owned by North Plaza.
The purchase price was consistent with other recent similar land acquisitions
made by North Plaza.
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 ($ 2,480,000 in the aggregate).
At a December 17, 2001 joint meeting of the Board of Directors of UTG, FCC and
their insurance subsidiaries, the boards of directors of the insurance
subsidiaries discussed and decided to further explore and pursue a possible sale
of the insurance charters of each of APPL and ABE. In the alternative to a sale
of the APPL charter, the boards also discussed and decided to further explore a
possible merger of APPL into UG. At the September 24, 2002 joint meeting of the
Board of Directors of UTG and its insurance subsidiaries, the boards of
directors of UG and ABE each approved the exploration of a merger transaction
whereby ABE would be merged with and into UG.
In preparation for a possible charter sale of APPL, UG and APPL entered into a
100% coinsurance agreement effective October 1, 2002, whereby UG assumed and
APPL ceded all of the existing business of APPL. The coinsurance transaction had
no financial impact on the consolidated financial statements or operating
results of UTG. At the March 2003 Board of Directors meeting, the APPL and UG
Boards reaffirmed the merger of APPL with and into UG and approved the final
merger documents.
Upon receiving the necessary regulatory approvals, the merger of ABE and APPL
with and into UG was consummated effective July 1, 2003. ABE and APPL were each
100% owned subsidiaries of UG prior to the merger. The mergers result in a more
simplified holding company structure.
On September 27, 2001, UG purchased real estate at a cost of $ 6,333,336 from an
outside third party through the formation of an LLC in which UG is a two-thirds
owner. The other one-third partner is Millard V. Oakley, who at the time was a
Director of UTG. Mr. Oakley resigned from the Board effective March 14, 2003.
Hampshire Plaza, LLC consists of a twenty story, 254,000 square foot office
tower, an attached 72,000 square foot retail plaza, and an attached parking
garage with approximately 350 parking spaces located in Manchester, New
Hampshire.
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 at the
time was a Director of UTG. The original line of credit expired one year from
the date of issue and has been renewed annually for additional one-year terms.
The line of credit is available for general business uses. 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. During 2002, the Company
borrowed a total of $ 1,600,000 under this line of credit and incurred interest
expense of $ 17,419. All funds drawn were repaid prior to December 31, 2002. No
borrowings were incurred during 2003.
On April 12, 2001, UTG completed the purchase of 22,500 shares of UTG common
stock and 544 shares of FCC common stock from James E. Melville and family
pursuant to the Melville Purchase Agreement in exchange for five year promissory
notes of UTG in the aggregate principal amount of $ 288,800. On April 12, 2001,
UTG also completed the purchase from another family member of Mr. Melville of an
additional 100 shares of UTG for a total cash payment of $ 800. The purchase for
cash by UTG of an additional 39 shares of FCC common stock owned by Mr. Melville
at a purchase price of $ 200.00 per share was consummated on June 27, 2001. Mr.
Melville was a former director of UTG, FCC and the three insurance subsidiaries
of UTG; he resigned from those boards on February 13, 2001.
On April 12, 2001, UTG also completed the purchase of 559,440 shares of UTG
common stock from Larry E. Ryherd and family pursuant to the Ryherd Purchase
Agreement for cash payments totaling $ 948,026 and a five year promissory note
of UTG in the principal amount of $ 3,527,494. The purchase by UTG of the
remaining 3,775 shares of UTG common stock to be purchased for cash at $ 8.00
per share pursuant to the Ryherd Purchase Agreement along with an additional 570
shares from certain parties to the Ryherd Purchase Agreement was completed on
June 20, 2001. The promissory notes of UTG received by certain of the sellers
pursuant to the Melville Purchase Agreement and the Ryherd Purchase Agreement
bear interest at a rate of 7% per annum (paid quarterly) with payments of
principal to be made in five equal annual installments, the first such payment
of principal to be due on the first anniversary of the closing.
On April 12, 2001, UTG also purchased in a separate transaction 10,891 shares of
UTG common stock from Robert E. Cook at a price of $ 8.00 per share. At the
closing, Mr. Cook received $ 17,426 in cash and a five year promissory note of
UTG (substantially similar to the promissory notes issued pursuant to the
Melville and Ryherd Purchase Agreements described above) in the principal amount
of $ 69,702. Mr. Cook was a director of UTG and FCC who resigned his position on
January 8, 2001. Mr. Cook proposed the stock purchase to Jesse T. Correll who
agreed to purchase Mr. Cook's stock on substantially the same terms as the
purchases of the stock held by Messrs. Melville and Ryherd as described above.
During 2001, FCC paid a majority of the general operating expenses of the
affiliated group. FCC then received management, service fees and reimbursements
from the various affiliates. Beginning in January 2002, and in anticipation of
the merger of FCC, UTG began paying a majority of the general operating expenses
of the affiliated group. Following the FCC merger in June 2002, UTG also assumed
the rights and obligations of the management and service fees agreements with
the various affiliates originally held by FCC.
UTG paid FCC $ 0 and $ 550,000 in 2002 and 2001, respectively for reimbursement
of costs attributed to UTG. During 2002 through the date of the FCC merger, FCC
paid $ 3,200,000 to UTG for reimbursement of costs attributed to FCC and
affiliates under which FCC had management and cost sharing services
arrangements.
On January 1, 1993, FCC entered an agreement with UG pursuant to which FCC
provided management services necessary for UG to carry on its business. UG paid
$ 2,974,088 and $ 6,156,903 to FCC in 2002 and 2001, respectively. UG paid
$ 5,906,406 and $ 3,025,194 to UTG in 2003 and 2002, respectively, under this
arrangement.
ABE paid fees to FCC pursuant to a cost sharing and management fee agreement.
FCC provided management services for ABE to carry on its business. The agreement
required ABE to pay a percentage of the actual expenses incurred by FCC based on
certain activity indicators of ABE business to the business of all the insurance
company subsidiaries plus a management fee based on a percentage of the actual
expenses allocated to ABE. ABE paid fees of $ 188,494 and $332,673 in 2002 and
2001, respectively under this agreement. ABE paid fees of $ 165,269 and
$ 170,729 in 2003 and 2002, respectively, to UTG under this agreement.
APPL had a management fee agreement with FCC whereby FCC provided certain
administrative duties, primarily data processing and investment advice. APPL
paid fees of $ 222,000 and $ 444,000 2002 and 2001, respectively under this
agreement. APPL paid fees of $ 222,000 to UTG during 2003 and 2002,
respectively, under this agreement.
Respective domiciliary insurance departments have approved the agreements of the
insurance companies and it is Management's opinion that where applicable, costs
have been allocated fairly and such allocations are based upon accounting
principles generally accepted in the United States of America.
Since the Company's affiliation with FSF, UG has acquired mortgage loans through
participation agreements with FSNB. FSNB services the loans covered by these
participation agreements. UG pays a .25% servicing fee on these loans and a
one-time fee at loan origination of .50% of the original loan amount to cover
costs incurred by FSNB relating to the processing and establishment of the loan.
UG paid $ 63,214, $ 70,140 and $ 79,730 in servicing fees and $ 13,821, $ 35,127
and $ 22,626 in origination fees to FSNB during 2003, 2002 and 2001,
respectively.
The Company reimbursed expenses incurred by Mr. Correll and Mr. Attkisson
relating to travel and other costs incurred on behalf of or relating to the
Company. The Company paid $ 20,238, $ 74,621 and $ 145,407 in 2003, 2002 and
2001, respectively to First Southern Bancorp, Inc. in reimbursement of such
costs. In addition, beginning in 2001, the Company began reimbursing FSBI a
portion of salaries for Mr. Correll and Mr. Attkisson. The reimbursement was
approved by the UTG Board of Directors and totaled $ 151,440, $ 169,651 and
$ 128,411 in 2003, 2002 and 2001, respectively, which included salaries and
other benefits.
On February 20, 2003, UG purchased $4,000,000 of a trust preferred security
offering issued by an upstream affiliate, First Southern Bancorp, Inc. The
security has a mandatory redemption after 30 years with a call provision after 5
years. The security pays a quarterly dividend at a fixed rate of 6.515%. The
Company received $ 226,104 of dividends in 2003.
On November 6, 2003, UG purchased real estate at a cost of $ 2,220,256 from an
outside third party through the formation of an LLC in which UG is a two-thirds
owner. The other one-third partner is Millard V. Oakley, who is a former
Director of UTG. Hampshire Plaza Garage is a 578 space parking garage located in
New Hampshire.
On June 18, 2003, UG entered into a lease agreement with Bandyco, LLC, an
affiliated entity, for a one-sixth interest in an aircraft. The lease term is
for a period of five years at a cost of $ 523,831. The Company is responsible
for its share of annual non-operational costs, in addition to the operational
costs as are billable for specific use.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Kerber, Eck and Braeckel LLP ("KEB") served as UTG's independent certified
public accounting firm for the fiscal year ended December 31, 2003 and for
fiscal year ended December 31, 2002. In serving its primary function as outside
auditor for UTG, KEB performed the following audit services: examination of
annual consolidated financial statements; assistance and consultation on reports
filed with the Securities and Exchange Commission; and assistance and
consultation on separate financial reports filed with the State insurance
regulatory authorities pursuant to certain statutory requirements.
Audit Fees. Audit fees billed for these audit services in the fiscal year ended
December 31, 2003 and December 31, 2002 totaled $ 115,000 and $ 157,600,
respectively and audit fees billed for quarterly reviews of the Company's
financial statements totaled $ 13,909 and $ 15,595 for the year 2003 and 2002,
respectively.
Audit Related Fees. No audit related fees were incurred by the Company from KEB
for the fiscal years ended December 31, 2003 and December 31, 2002.
Tax Fees. KEB did not render any services related to tax compliance, tax advice
or tax planning for the fiscal years ended December 31, 2003 and December 31,
2002.
All Other Fees. No other services besides the audit services described above
were performed by, and therefore no other fees were billed by, KEB for services
in the fiscal years ended December 31, 2003 and December 31, 2002.
The audit committee of the Company appoints the independent certified public
accounting firm, with the appointment approved by the entire Board of Directors.
Non-audit related services to be performed by the firm are to be approved by the
audit committee prior to engagement. The Company had no non-audit related
services performed by KEB for the fiscal years ended December 31, 2003 and
December 31, 2002.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
(1) Financial Statements: See Item 8, Index to Financial Statements
(2) Financial Statement Schedules
Schedule I - Summary of Investments - other than invested in related
parties.
Schedule II - Condensed financial information of registrant
Schedule IV - Reinsurance
Schedule V - Valuation and qualifying accounts
NOTE:Schedules other than those listed above are omitted because they
are not required or the information is disclosed in the financial
statements or footnotes.
(b) Reports on Form 8-K filed during fourth quarter.
Therewere no reports on Form 8-K filed during the 2003 fourth
quarter.
(c) Exhibits:
Indexto Exhibits incorporated herein by this reference (See pages 85
and 86).
INDEX TO EXHIBITS
Exhibit
Number
2(a) (4) Articles of Merger of First Commonwealth Corporation,
A Virginia Corporation with and into United Trust Group, Inc.,
An Illinois Corporation dated as of May 30, 2002, including
exhibits thereto.
3(a) Articles of Incorporation of the Registrant and
all amendments thereto.
3(b) By-Laws for the Registrant and all amendments thereto.
4(a) (4) UTG's Agreement pursuant to Item 601(b)(4)(iii)(A) of Regulation
S-K with respect to long-term debt instruments.
10(a) (2) Coinsurance Agreement dated September 30, 1996 between
Universal Guaranty Life Insurance Company and First
International Life Insurance Company, including assumption
reinsurance agreement exhibit and amendments.
10(b) (1) Management and Consultant Agreement dated as of January 1, 1993
between First Commonwealth Corporation and Universal
Guaranty Life Insurance Company.
10(c) (1) Management Agreement dated December 20, 1981 between Commonwealth
Industries Corporation, and Abraham Lincoln Insurance Company.
10(d) (1) Reinsurance Agreement dated January 1, 1991 between
Universal Guaranty Life Insurance Company and Republic Vanguard
Life Insurance Company.
10(e) (1) Reinsurance Agreement dated July 1, 1992 between United Security
Assurance Company and Life Reassurance Corporation of America.
10(f) (1) Agreement dated June 16, 1992 between John K. Cantrell and
First Commonwealth Corporation.
10(g) (1) Stock Purchase Agreement dated February 20, 1992 between
United Trust Group, Inc. and Sellers.
10(h) (1) Amendment No. One dated April 20, 1992 to the Stock Purchase
Agreement between the Sellers and United Trust Group, Inc.
10(i) (1) Security Agreement dated June 16, 1992 between
United Trust Group, Inc. and the Sellers.
10(j) (1) Stock Purchase Agreement dated June 16, 1992 between
United Trust Group, Inc. and First Commonwealth Corporation
10(k) (3) Universal note and security agreement dated November 15, 2001,
between United Trust Group, Inc. and First National
Bank of the Cumberlands.
INDEX TO EXHIBITS
Exhibit
Number
10(l) (3) Line of credit agreement dated November 15, 2001, between
United Trust Group, Inc. and First National Bank of the Cumberlands.
10(m) (4) United Trust Group, Inc. Employee and Director Stock Purchase Plan
and form of related Stock Restriction and Buy-Sell Agreement.
21(a) List of Subsidiaries of the Registrant.
99(a) (3) Audit Committee Charter.
31.1 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.
31.2 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.
Footnote:
(1) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-5392, as of December 31, 1993.
(2) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-5392, as of December 31, 1996.
(3) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-5392, as of December 31, 2001.
(4) Incorporated by reference from the Company's Annual Report on
Form 10-K, File No. 0-5392, as of December 31, 2002.
UNITED TRUST GROUP, INC.
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 2003
Schedule I
Column A Column B Column C Column D
------------------------------------------ ----------------- ---------------- ----------------
Amount at
Which Shown
in Balance
Cost Value Sheet
--------------- ---------------- ----------------
Fixed maturities:
Bonds:
United States Government and
government agencies and authorities $ 10,676,106 $ 10,905,894 $ 10,676,106
State, municipalities, and political
subdivisions 6,342,369 6,560,582 6,342,369
Collateralized mortgage obligations 77,802 78,233 77,802
Public utilities 5,397,880 5,497,936 5,397,880
All other corporate bonds 4,230,350 4,397,632 4,230,350
--------------- ---------------- ----------------
Total fixed maturities 26,724,507 $ 27,440,277 26,724,507
================
Investments held for sale:
Fixed maturities:
United States Government and
government agencies and authorities 30,850,682 $ 31,347,586 31,347,586
State, municipalities, and political
subdivisions 160,271 177,963 177,963
Collateralized mortgage obligations 90,353,657 89,117,375 89,117,375
Public utilities 0 0 0
All other corporate bonds 17,883,937 18,747,458 18,747,458
--------------- ---------------- ----------------
139,248,547 $ 139,390,382 139,390,382
================
Equity securities:
Banks, trusts and insurance companies 2,332,920 $ 1,517,159 1,517,159
All other corporate securities 4,876,523 7,845,006 7,845,006
--------------- ---------------- ----------------
7,209,443 $ 9,362,165 9,362,165
================
Mortgage loans on real estate 26,715,968 26,715,968
Investment real estate 24,725,824 24,725,824
Real estate acquired in satisfaction of debt 0 0
Policy loans 13,226,399 13,226,399
Other long-term investments 0 0
Short-term investments 34,677 34,677
--------------- ----------------
Total investments $ 237,885,365 $ 240,179,922
=============== ================
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT Schedule II
NOTES TO CONDENSED FINANCIAL INFORMATION
(a) The condensed financial information should be read in conjunction with the
consolidated financial statements and notes of United Trust Group, Inc. and
Consolidated Subsidiaries.
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY BALANCE SHEETS
As of December 31, 2003 and 2002
Schedule II
2002
2003 (Restated)
---------------- ---------------
ASSETS
Investment in affiliates $ 44,724,882 $ 53,983,728
Cash and cash equivalents 439,734 1,343,501
FIT recoverable 988 10,969
Accrued interest income 26,058 0
Receivable from affiliates, net 18,477 23,264
Other assets 471,448 59,012
---------------- ---------------
Total assets $ 45,681,587 $ 55,420,474
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 2,289,776 $ 2,995,275
Deferred income taxes 2,008,445 1,929,434
Other liabilities 1,686,727 2,172,898
---------------- ---------------
Total liabilities 5,984,948 7,097,607
---------------- ---------------
Shareholders' equity:
Common stock, net of treasury shares 80,008 70,726
Additional paid-in capital, net of treasury 42,672,189 42,976,344
Accumulated other comprehensive
income of affiliates 1,566,397 2,771,941
Retained earnings (accumulated deficit) (4,621,955) 2,503,856
---------------- ---------------
Total shareholders' equity 39,696,639 48,322,867
---------------- ---------------
Total liabilities and shareholders' equity $ 45,681,587 $ 55,420,474
================ ===============
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 2003
Schedule II
2002 2001
2003 (Restated) (Restated)
--------------- ---------------- ----------------
Revenues:
Management fees from affiliates $ 6,031,472 $ 6,510,753 $ 0
Other income from affiliates 0 0 858
Interest income from affiliates 0 324,467 987,886
Interest income 7,904 11,215 40,323
Other income 50,137 52,163 0
--------------- ---------------- ----------------
6,089,513 6,898,598 1,029,067
Expenses:
Management fee to affiliate 0 0 550,000
Interest expense 162,179 263,441 326,499
Operating expenses 5,335,851 5,669,116 110,419
--------------- ---------------- ----------------
5,498,030 5,932,557 986,918
--------------- ---------------- ----------------
Operating income 591,483 966,041 42,149
Income tax expense (263,992) (327,472) (12,043)
Equity in income (loss) of subsidiaries (6,723,981) 700,226 2,277,990
--------------- ---------------- ----------------
Net income (loss) $ (6,396,490) $ 1,338,795 $ 2,308,096
=============== ================ ================
Basic income (loss) per share from continuing
operations and net income (loss) $ (1.67) $ 0.38 $ 0.62
=============== ================ ================
Diluted income (loss) per share from continuing
operations and net income (loss) $ (1.67) $ 0.33 $ 0.62
=============== ================ ================
Basic weighted average shares outstanding 3,839,947 3,505,424 3,733,432
=============== ================ ================
Diluted weighted average shares outstanding 3,839,947 4,005,424 3,733,432
=============== ================ ================
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 2003
Schedule II
2002 2001
2003 (Restated) (Restated)
---------------- --------------- ----------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ (6,396,490) $ 1,338,795 $ 2,308,096
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Equity in (income) loss of subsidiaries 6,723,981 (700,226) (2,277,990)
Depreciation 52,383 0 0
Change in FIT recoverable 9,981 22,817 0
Change in accrued interest income (26,058) 64,331 (43,494)
Change in indebtedness (to) from affiliates, net 4,787 674,524 (289,963)
Change in deferred income taxes 79,011 327,472 15,429
Change in other assets and liabilities (1,000,625) (226,075) (933)
---------------- --------------- ----------------
Net cash provided by (used in) operating activities (553,030) 1,501,638 (288,855)
---------------- --------------- ----------------
Cash flows from investing activities:
Purchase of stock of affiliates 0 0 (7,800)
Payments received on notes receivable from affiliates 0 800,000 1,302,495
---------------- --------------- ----------------
Net cash provided by investing activities 0 800,000 1,294,695
---------------- --------------- ----------------
Cash flows from financing activities:
Purchase of treasury stock (441,143) (520,253) (1,176,653)
Issuance of common stock 195,905 706,691 0
Payments on notes payable (705,499) (3,405,395) (1,302,495)
Proceeds from line of credit 0 2,000,000 0
Dividend received from subsidiary 600,000 1,400,000 0
Cash received in FCC merger 0 69,187 0
Payments made from FCC merger 0 (1,586,500) 0
---------------- --------------- ----------------
Net cash used in financing activities (350,737) (1,336,270) (2,479,148)
---------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (903,767) 965,368 (1,473,308)
Cash and cash equivalents at beginning of year 1,343,501 378,133 1,851,441
---------------- --------------- ----------------
Cash and cash equivalents at end of year $ 439,734 $ 1,343,501 $ 378,133
================ =============== ================
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 2003 and the year ended December 31, 2003
Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies Net amount net
Life insurance
in force $ 2,289,738,000 $ 580,145,000 $ 1,273,735,000 $ 2,983,328,000 42.7%
================ ================ =============== ===============
Premiums and policy fees:
Life insurance $ 18,000,036 $ 3,062,361 $ 25,026 $ 14,962,701 0.2%
Accident and health
insurance 86,856 35,619 9,100 60,337 15.1%
---------------- ---------------- --------------- ---------------
$ 18,086,892 $ 3,097,980 $ 34,126 $ 15,023,038 0.2%
================ ================ =============== ===============
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 2002 and the year ended December 31, 2002
Schedule IV
Column A Column B Column C Column D Column E Column F
--------------- --------------- --------------- --------------- ------------
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies Net amount net
Life insurance
in force $ 2,440,716,000 $ 560,356,000 $ 1,553,748,000 $ 3,434,108,000 45.2%
=============== =============== =============== ===============
Premiums and policy fees:
Life insurance $ 18,454,030 $ 2,829,619 $ 73,979 $ 15,698,390 0.5%
Accident and health
insurance 130,905 31,826 22,135 121,214 18.3%
--------------- --------------- --------------- ---------------
$ 18,584,935 $ 2,861,445 $ 96,114 $ 15,819,604 0.6%
=============== =============== =============== ===============
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 2001 and the year ended December 31, 2001
Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies Net amount net
Life insurance
in force $ 2,630,460,130 $ 686,887,000 $ 1,632,820,870 $ 3,576,394,000 45.7%
================ ================ =============== ===============
Premiums and policy fees:
Life insurance $ 20,150,537 $ 3,266,788 $ 109,457 $ 16,993,206 0.6%
Accident and health
insurance 150,591 36,787 20,332 134,136 15.2%
---------------- ---------------- --------------- ---------------
$ 20,301,128 $ 3,303,575 $ 129,789 $ 17,127,342 0.8%
================ ================ =============== ===============
UNITED TRUST GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
As of and for the years ended December 31, 2003, 2002, and 2001
Schedule V
Balance at Additions
Beginning Charges Balances at
Description Of Period and Expenses Deductions End of Period
December 31, 2003
Allowance for doubtful accounts -
mortgage loans $ 120,000 $ 0 $ 0 $ 120,000
December 31, 2002
Allowance for doubtful accounts -
mortgage loans $ 120,000 $ 0 $ 0 $ 120,000
December 31, 2001
Allowance for doubtful accounts -
mortgage loans $ 240,000 $ 30,000 $ 150,000 $ 120,000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
UNITED TRUST GROUP, INC.
(Registrant)
/s/ John S. Albin March 24, 2004
John S. Albin, Director
/s/ Randall L. Attkisson March 24, 2004
Randall L. Attkisson, President, Chief
Operating Officer and Director
/s/ Joseph A. Brinck March 24, 2004
Joseph A. Brinck, Director
/s/ Jesse T. Correll March 24, 2004
Jesse T. Correll, Chairman of the Board,
Chief Executive Officer and Director
/s/ Ward F. Correll March 24, 2004
Ward F. Correll, Director
/s/ Thomas F. Darden March 24, 2004
Thomas F. Darden, Director
/s/ William W. Perry March 24, 2004
William W. Perry, Director
/s/ James P. Rousey March 24, 2004
James P. Rousey, Chief Administrative
Officer and Director
/s/ Theodore C. Miller March 24, 2004
Theodore C. Miller, Corporate Secretary
and Chief Financial Officer
