UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 No. 0-16867
UNITED TRUST GROUP, INC.
(Exact name of registrant as specified in its charter)
ILLINOIS 37-1172848
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5250 SOUTH SIXTH STREET
P.O. BOX 5147
SPRINGFIELD, IL 62705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (217) 241-6300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's common stock as of October
31, 2003, were 4,008,619.
UNITED TRUST GROUP,INC. AND SUBSIDIARIES
(The "Company")
TABLE OF CONTENTS
Part 1. Financial Information................................................3
Item 1. Financial Statements...............................................3
Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002.....................................................3
Consolidated Statements of Operations for the three and nine months
ended September 30, 2003 and 2002.....................................4
Consolidated Statement of Changes in Shareholders' Equity for the
nine months ended September 30, 2003..................................5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002...........................................6
Notes to Consolidated Financial Statements................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........18
ITEM 4. CONTROLS AND PROCEDURES...........................................18
PART II. OTHER INFORMATION..................................................19
ITEM 1. LEGAL PROCEEDINGS.................................................19
ITEM 2. CHANGE IN SECURITIES..............................................19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............19
ITEM 5. OTHER INFORMATION.................................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................19
SIGNATURES....................................................................20
EXHIBIT INDEX.................................................................21
Part 1. Financial Information.
Item 1. Financial Statements.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
--------------------------------------------------------------------------------
September 30, December 31,
ASSETS 2003 2002*
------------------- -------------------
Investments:
Fixed maturities at amortized cost
(market $32,489,810 and $60,517,065) $ 31,395,132 $ 58,327,663
Investments held for sale:
Fixed maturities, at market
(cost $145,930,785 and $105,244,887) 147,673,849 108,704,518
Equity securities, at market
(cost $10,699,122 and $4,122,887) 11,714,245 4,883,870
Mortgage loans on real estate at amortized cost 21,410,925 23,804,827
Investment real estate, at cost,
net of accumulated depreciation 17,863,940 17,503,812
Policy loans 13,297,447 13,346,504
Short-term investments 131,272 377,676
------------------- -------------------
243,486,810 226,948,870
Cash and cash equivalents 7,115,553 24,050,485
Accrued investment income 2,041,316 2,452,840
Reinsurance receivables:
Future policy benefits 32,798,788 33,039,036
Policy claims and other benefits 3,809,551 3,770,285
Cost of insurance acquired 21,937,974 23,156,164
Deferred policy acquisition costs 2,172,104 2,462,487
Property and equipment,
net of accumulated depreciation 2,555,195 2,203,408
Income taxes receivable, current 162,622 245,132
Other assets 299,745 574,263
------------------- -------------------
Total assets $ 316,379,658 $ 318,902,970
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 235,992,470 $ 234,762,656
Policy claims and benefits payable 2,190,731 1,834,952
Other policyholder funds 1,095,666 1,176,359
Dividend and endowment accumulations 12,598,522 12,628,294
Deferred income taxes 10,624,608 12,239,060
Notes payable 2,289,776 2,995,275
Other liabilities 6,252,860 4,943,507
------------------- -------------------
Total liabilities 271,044,633 270,580,103
------------------- -------------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share
Authorized 7,000,000 shares - 3,993,564 and 3,536,311 shares issued
after deducting treasury shares of 168,692 and 147,607 79,787 70,726
Additional paid-in capital 42,510,808 42,976,344
Retained earnings 876,098 2,503,856
Accumulated other comprehensive income 1,868,332 2,771,941
------------------- -------------------
Total shareholders' equity 45,335,025 48,322,867
------------------- -------------------
Total liabilities and shareholders' equity $ 316,379,658 $ 318,902,970
=================== ===================
* Balance sheet audited at December 31, 2002.
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
-------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
---------------- --------------- ---------------- ----------------
Revenues:
Premiums and policy fees $ 4,462,516 $ 4,458,645 $ 13,832,708 $ 14,408,541
Reinsurance premiums and policy fees (775,932) (732,822) (2,169,882) (2,017,573)
Net investment income 2,656,624 3,336,329 8,305,473 9,931,415
Realized investment gains, net 168,735 3,404 728,893 14,831
Other income 180,653 188,129 521,469 608,487
---------------- --------------- ---------------- ----------------
6,692,596 7,253,685 21,218,661 22,945,701
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 5,647,392 5,436,371 16,174,507 15,847,861
Reinsurance benefits and claims (658,342) (950,836) (1,815,565) (3,010,828)
Annuity 298,465 388,660 864,818 962,456
Dividends to policyholders 228,709 236,395 744,827 756,206
Commissions and amortization of deferred
policy acquisition costs 35,119 128,619 281,351 624,730
Amortization of cost of insurance acquired 478,369 372,664 1,218,190 1,143,859
Operating expenses 1,451,973 1,441,502 6,122,220 4,621,069
Interest expense 40,400 71,230 121,778 204,834
---------------- --------------- ---------------- ----------------
7,522,085 7,124,605 23,712,126 21,150,187
Income (loss) before income taxes, minority interest
and equity in earnings of investees (829,489) 129,080 (2,493,465) 1,795,514
Income tax (expense) credit 365,347 198,419 865,707 (4,687)
Minority interest in income of
consolidated subsidiaries 0 0 0 (263,615)
---------------- --------------- ---------------- ----------------
Net income (loss) $ (464,142)$ 327,499 $ (1,627,758)$ 1,527,212
================ =============== ================ ================
Basic income (loss) per share from continuing
operations and net income (loss) $ (0.12)$ 0.09 $ (0.43)$ 0.44
================ =============== ================ ================
Diluted income (loss) per share from continuing
operations and net income (loss) $ (0.12)$ 0.09 $ (0.43)$ 0.44
================ =============== ================ ================
Basic weighted average shares outstanding 3,993,541 3,488,731 3,784,894 3,505,647
================ =============== ================ ================
Diluted weighted average shares outstanding 3,993,541 3,488,731 3,784,894 3,505,647
================ =============== ================ ================
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the nine months ended September 30, 2003 (Unaudited)
-------------------------------------------------------------------------------
Common stock
Balance, beginning of year $ 70,726
Issued during year 10,000
Retired common shares (433)
Purchase treasury shares (422)
Cumulative change in accounting principal (84)
------------------
Balance, end of period 79,787
------------------
Additional paid-in capital
Balance, beginning of year 42,976,344
Issued during year (10,000)
Retired common shares (258,361)
Purchase treasury shares (147,624)
Cumulative change in accounting principal (49,551)
------------------
Balance, end of period 42,510,808
------------------
Retained earnings
Balance, beginning of year 2,503,856
Net loss (1,627,758) $ (1,627,758)
------------------ ------------------
Balance, end of period 876,098
------------------
Accumulated other comprehensive income
Balance, beginning of year 2,771,941
Other comprehensive income
Unrealized holding loss on securities
net of minority interest and
reclassification adjustment (903,609) (903,609)
------------------ ------------------
Comprehensive income $ (2,531,367)
==================
Balance, end of period 1,868,332
------------------
Total shareholders' equity, end of period $ 45,335,025
==================
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------------
Nine Months Ended
September 30, September 30,
2003 2002
---------------- -----------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ (1,627,758) $ 1,527,212
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization/accretion of fixed maturities 777,390 343,663
Realized investment gains, net of losses (728,893) (14,831)
Policy acquisition costs deferred (51,000) (55,000)
Amortization of deferred policy acquisition costs 341,383 563,324
Amortization of cost of insurance acquired 1,218,190 1,143,859
Depreciation 481,543 420,367
Minority interest 0 263,615
Change in accrued investment income 411,524 532,264
Change in reinsurance receivables 200,982 783,510
Change in policy liabilities and accruals 2,178,296 (1,639,905)
Charges for mortality and administration of
universal life and annuity products (6,732,981) (6,549,405)
Interest credited to account balances 4,087,999 4,147,153
Change in income taxes payable (970,707) (54,032)
Change in other assets and liabilities, net 1,731,222 (627,362)
---------------- ----------------
Net cash provided by operating activities 1,317,190 784,432
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 56,788,550 9,070,000
Fixed maturities matured 31,415,470 23,803,620
Equity securities 165,262 0
Mortgage loans 7,759,900 5,758,639
Real estate 987,675 913,978
Policy loans 1,873,293 2,323,496
Short-term 250,000 155,209
---------------- ----------------
Total proceeds from investments sold and matured 99,240,150 42,024,942
Cost of investments acquired:
Fixed maturities held for sale (98,132,344) (30,562,133)
Fixed maturities (4,283,410) (3,053,805)
Equity securities (6,576,236) (185,075)
Mortgage loans (5,365,998) (6,160,160)
Real estate (1,577,323) (206,849)
Policy loans (1,824,238) (2,087,314)
Short-term (3,596) 0
---------------- ----------------
Total cost of investments acquired (117,763,145) (42,255,336)
Purchase of property and equipment (558,602) (22,043)
---------------- ----------------
Net cash used in investing activities (19,081,597) (252,437)
Cash flows from financing activities:
Policyholder contract deposits 7,318,773 7,835,749
Policyholder contract withdrawals (5,376,959) (6,206,704)
Proceeds from line of credit 0 2,000,000
Retirement of common stock (258,794) 0
Purchase of treasury stock (148,046) (467,075)
Payments from FCC merger 0 (1,525,500)
Payments of principal on notes payable (705,499) (1,891,873)
---------------- ----------------
Net cash provided by (used in) financing activities 829,475 (255,403)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (16,934,932) 276,592
Cash and cash equivalents at beginning of period 24,050,485 15,477,348
---------------- ----------------
Cash and cash equivalents at end of period $ 7,115,553 $ 15,753,940
================ ================
See accompanying notes.
UNITED TRUST GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared by United
Trust Group, Inc. ("UTG") and its consolidated subsidiaries ("Company") pursuant
to the rules and regulations of the Securities and Exchange Commission. Although
the Company believes the disclosures are adequate to make the information
presented not be misleading, it is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto presented in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
2002.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary for a
fair presentation of the results of operations for the periods presented.
Operating results for interim periods are not necessarily indicative of
operating results to be expected for the year or of the Company's future
financial condition.
This document at times will refer to the Registrant's largest shareholder, Mr.
Jesse T. Correll and certain companies controlled by Mr. Correll. Mr. Correll
holds a majority ownership of First Southern Funding LLC, a Kentucky
corporation, ("FSF") and First Southern Bancorp, Inc. ("FSBI"), a financial
services holding company that owns 100% of First Southern National Bank
("FSNB"), which operates in the State of Kentucky. Mr. Correll is Chief
Executive Officer and Chairman of the Board of Directors of UTG and is currently
UTG's largest shareholder through his ownership control of FSF, FSBI and
affiliates. At September 30, 2003 Mr. Correll owns or controls directly and
indirectly approximately 65% of UTG's outstanding stock.
At September 30, 2003, consolidated subsidiaries of United Trust Group, Inc.
were as depicted on the following organizational chart. For an explanation of
recent changes to the organizational structure, please refer to note 10 to the
consolidated financial statements.
2. INVESTMENTS
As of September 30, 2003 and December 31, 2002, fixed maturities and fixed
maturities held for sale represented 74% of total invested assets. As prescribed
by the various state insurance department statutes and regulations, the
insurance companies' investment portfolio is required to be invested in
investment grade securities to provide ample protection for policyholders. In
light of these statutes and regulations, and the Company's business and
investment strategy, the Company generally seeks to invest in United States
government and government agency securities and other high quality low risk
investments. As of September 30, 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 investments held for sale
are carried at market, with changes in market value directly charged to
shareholders' equity. To provide additional flexibility and liquidity, the
Company has categorized almost all fixed maturity investments acquired since
2000 as available for sale.
3. NOTES PAYABLE
At September 30, 2003 and December 31, 2002, the Company had $2,289,776 and
$2,995,275 in long-term debt outstanding, respectively. The notes payable were
incurred in April 2001 to facilitate the repurchase of common stock owned
primarily by James E. Melville and Larry E. Ryherd, two former officers and
directors of UTG, and members of their respective families. These notes bear
interest at the fixed rate of 7% per annum (paid quarterly) with payments of
principal to be made in five equal annual installments.
The collective scheduled principal reductions on these notes for the next four
years is as follows:
Year Amount
2003 $ 0
2004 763,259
2005 763,259
2006 763,258
A. 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 is a former Director of
UTG. The line of credit was for a one-year term from the date of issue. Upon
maturity the Company renewed the LOC for an additional one-year term. 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 September 30, 2003, the Company had no
outstanding borrowings attributable to this LOC.
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 was for a
one-year term from the date of issue. Upon maturity the Company renewed the LOC
for an additional one-year term, with a maturity date of April 30, 2004. 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 .25% in excess of
Southwest Bank of St. Louis' prime rate. At September 30, 2003, the Company had
no outstanding borrowings attributable to this LOC.
4. CAPITAL STOCK TRANSACTIONS
A. Employee and Director Stock Purchase Program
On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002,
the shareholders of UTG approved, the United Trust Group, Inc. Employee and
Director Stock Purchase Plan. The plan's purpose is to encourage ownership of
UTG stock by eligible directors and employees of UTG and its subsidiaries by
providing them with an opportunity to invest in shares of UTG common stock. The
plan is administered by the Board of Directors of UTG.
A total of 400,000 shares of common stock may be purchased under the plan,
subject to appropriate adjustment for stock dividends, stock splits or similar
recapitalizations resulting in a change in shares of UTG. The plan is not
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code. 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 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 September
30, 2003, UTG had 37,229 shares outstanding that were issued under this program
with a value of $11.88 per share pursuant to the above formula.
B. Stock Repurchase Program
On June 5, 2001, the board of directors of UTG authorized the repurchase from
time to time in the open market or in privately negotiated transactions of up to
$1 million of UTG's common stock. Repurchased shares under the program will be
available for future issuance for general corporate purposes. Through October
31, 2003, UTG has spent $807,477 in the acquisition of 115,016 shares of its
common stock under this program.
C. Earnings Per Share Calculations
Earnings per share are based on the weighted average number of common shares
outstanding during each period, retroactively adjusted to give effect to all
stock splits, in accordance with Statement of Financial Accounting Standards No.
128. At September 30, 2003 and September 30, 2002 diluted earnings per share
were the same as basic earnings per share since the UTG had no dilutive
instruments outstanding.
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 was an earnings covenant whereby UTG
warranted UTG and its subsidiaries and affiliates would have future earnings of
at least $30,000,000 for a five-year period beginning January 1, 1998. Such
earnings were 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 was 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 would first be reduced by the actual
average tax rate for UTG for the period, then would be further reduced by
one-half of the percentage, if any, representing UTG's ownership percentage of
the insurance company subsidiaries. This result would then be reduced by
$250,000. The remaining amount would 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 was to be no limit to the number of shares transferred
to the extent that there were legal fees, settlements, damage payments or other
losses as a result of certain legal action taken. The price and number of shares
would 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 $16,970,883 applicable to
this covenant. Therefore, UTG did not meet the earnings requirements stipulated,
and pursuant to the covenant based on a final accounting, the Company issued
500,000 previously unissued shares of UTG common stock to FSF on April 30, 2003.
5. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts which
have been returned against life and health insurers in the jurisdictions in
which the Company does business involving the insurers' sales practices, alleged
agent misconduct, failure to properly supervise agents, and other matters. Some
of the lawsuits have resulted in the award of substantial judgments against the
insurer, including material amounts of punitive damages. In some states, juries
have substantial discretion in awarding punitive damages in these circumstances.
The Company cannot predict the effect that these lawsuits may have on the
Company in the future.
Under the insurance guaranty fund laws in most states, insurance companies doing
business in a participating state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent or failed insurance companies.
Although the Company cannot predict the amount of any future assessments, most
insurance guaranty fund laws currently provide that an assessment may be excused
or deferred if it would threaten an insurer's financial strength. Mandatory
assessments may be partially recovered through a reduction in future premium tax
in some states. The Company does not believe such assessments will be materially
different from amounts already provided for in the financial statements, though
the Company has no control over such assessments.
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 subsidiaries have no
race-based premium products, but do have policies with face amounts under the
above-scrutinized limitations. The outcome of this issue could be dramatic on
the insurance industry as a whole as well as the Company itself. The Company
will continue to monitor developments regarding this matter to determine to what
extent, if any, the Company may be exposed.
On 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. Final regulations regarding the aforementioned
Patriot Act, were issued by the Department of the Treasury in April 2003. As
such, the Company has instituted an anti-money laundering program to comply with
Section 352, and has communicated this program throughout the organization. The
Company currently has in place a database program to facilitate compliance with
Section 326. The Company will continue to monitor developments regarding the Act
to determine if any adjustments are needed for continued compliance.
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 2005 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.
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 is expected to be completed by December 31, 2003. The
conversion is being performed utilizing Company personnel with onsite training
and guidance provided by Fiserv. The conversion is expected to cost
approximately $600,000. Through September 30, the Company has incurred
approximately $240,000 in expenses relating to this conversion. Following the
conversion of these blocks of business the Company anticipates immediately
starting the conversion of the remaining insurance business to the "ID3"
software system. 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.
As previously disclosed in the Company's filings, litigation styled David Morlan
et al. v. Universal Guaranty Life Insurance Company, United Trust Assurance
Company, United Security Assurance Company, United Trust Group, Inc. and First
Commonwealth Corporation, is currently pending in the United States District
Court for the Southern District of Illinois.
In late June 2003, a 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 continues 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 believes a settlement of the matter may be in
the best interests of the Company. Under the terms of the proposed settlement,
the Company will pay approximately $1,950,000 in attorneys' fees, costs and
expenses, and the Company, through its insurance subsidiaries, will provide
certain life insurance benefits at a discount to members of the class (or their
transferees) choosing to purchase life insurance benefits.
On October 27, 2003, Hon. G. Patrick Murphy, Chief Judge for the United States
District Court for the Southern District of Illinois, ruled from the bench that
he was approving the proposed settlement. The settlement will become final 30
days after the Court enters an order approving the settlement, unless the order
is appealed. Given the status of the proposed settlement, the Company has
established a contingent liability in its financial statements of $1,950,000.
This figure represents management's best estimation of the initial out-of-pocket
costs associated with the proposed settlement. The ultimate impact, if any, on
the Company's financial condition from providing discounted life insurance
benefits to class members who elect to purchase such benefits cannot be
determined at this time as the Company does not yet know who among the class
members, if any, will elect to purchase such benefits.
UTG and its subsidiaries 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.
6. Other Cash Flow Disclosure
On a cash basis, the Company paid $121,778 and $190,379 in interest expense
during the first nine months of 2003 and 2002, respectively. The Company paid
$105,000 and $45,290 in federal income tax during the first nine months of 2003
and 2002, respectively. In April 2003, the Company issued 500,000 previously
unissued shares of UTG common stock to FSF (please refer to note 4C to the
consolidated financial statements for further discussion).
7. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions that at times may
exceed federally insured limits. The Company maintains its primary operating
cash accounts with First Southern National Bank, an affiliate of UTG, and its
largest shareholder, Chairman and CEO, Jesse Correll. The Company holds
approximately $400,000 for which there are no pledges or guarantees outside FDIC
insurance limits. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash and cash
equivalents.
8. COMPREHENSIVE INCOME
Tax
Before-Tax (Expense) Net of Tax
September 30, 2003 Amount or Benefit Amount
---------------------------------------------- ---------------- ----------------- ---------------
Unrealized holding losses during
Period $ (1,389,547) $ 486,342 $ (903,205)
Less: reclassification adjustment
for gains realized in net income (621) 217 (404)
---------------- ----------------- ---------------
Net unrealized losses (1,390,168) 486,559
(903,609)
---------------- ----------------- ---------------
Other comprehensive income $ (1,390,168) $ 486,559 $ (903,609)
================ ================= ===============
9. RELATED PARTY TRANSACTIONS
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%.
10. MERGER OF LIFE INSURANCE SUBSIDIARIES
At the March 2003 Board of Directors meeting, the ABE, APPL, and UG Boards
reaffirmed the merger of ABE and APPL with and into UG and approved the final
merger documents. Upon receiving the necessary regulatory approvals, the mergers
were 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.
11. NEW ACCOUNTING STANDARDS
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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's consolidated
results of operations, financial condition and liquidity and capital resources.
This analysis should be read in conjunction with the consolidated financial
statements and related notes that appear elsewhere in this report. The Company
reports financial results on a consolidated basis. The consolidated financial
statements include the accounts of UTG and its subsidiaries at September 30,
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.
Results of Operations
(a) Revenues
Premiums and policy fee revenues, net of reinsurance premiums and policy fees,
decreased 6% when comparing the first nine months of 2003 to the same period in
2002, and decreased 1% for the third quarter comparison. The Company currently
writes little new business. Unless the Company acquires a block of in-force
business or significantly increases its marketing, management expects premium
revenue to continue to decline at a similar rate, which is consistent with prior
experience.
Since early 2002, the Company has been putting renewed efforts in strengthening
conservation efforts. The Company has seen an improvement in lapse rates over
historic trends since conservation efforts have been a focus. These efforts have
been focused in the customer service area, where requests for policy termination
are received. As part of this effort, several of the customer service
representatives of the Company have become licensed insurance agents, allowing
them to offer products within the Company's portfolio to existing customers.
The Company is in the early stages of moving forward with a marketing
opportunity with First Southern National Bank ("FSNB") an affiliate of UTG's
largest shareholder, Chairman and CEO, 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.
Although premium writings through FSNB and by the customer service
representatives of the Company are not expected to be significant to Company
revenue in the near future, management believes it is a start in their attempt
to slow down the yearly decline in premium revenue. Net investment income
decreased 16% when comparing the first nine months of 2003 to the same period in
2002, and decreased 20% for the third quarter comparison. The national prime
rate was 4.75% during the first nine months of 2002 and ranged from a high of
4.25% to a low of 4.00% during the first nine months of 2003. This declining
interest rate environment 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 should 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 regulations. Management has shortened the length of the Company's
portfolio and maintained a conservative investment philosophy. As such,
following an analysis of current holdings during the second quarter of 2003, the
Company liquidated approximately $4,084,000 of its corporate bonds. In addition,
as investments have matured or been called, the Company has reinvested at
current lower yields. Although this hurts investment earnings in the short run,
the Company has not had to write off any investment losses due to excessive
risk.
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 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. Policy interest crediting rate changes become
effective on an individual policy basis on the next policy anniversary. If
interest rates continue to decline, the Company won't be able to lower rates,
and both net investment income and net income will be impacted negatively.
The Company had realized investment gains of $728,893 in the first nine months
of 2003 compared to net realized investment gains of $14,831 for the same period
in 2002. The net realized gains in 2003 consist of a $319,022 gain on bonds of
which $316,966 was attributable to the Company's liquidation of its corporate
bonds discussed above. Additionally, in 2003, the Company reported $244,608 in
net realized gains on real estate that was primarily from the sale of two
separate parcels of land held for investment purposes in Springfield, Illinois,
and $165,262 in gain realized from the sale of common stock. In 2002, net
realized gains consisted of a $5,476 gain on bonds and a $9,355 gain on real
estate. A quarterly comparison shows realized investment gains of $168,735 for
the quarterly period ended September 30, 2003, and $3,404 for the same period in
2002. The large net realized gain during the third quarter of 2003 is
attributable to the sale of the Company's common stock holdings in Principal
Financial Group.
Other income decreased 14% when comparing the first nine months of 2003 to the
same period in 2002, and decreased 4% for the third quarter comparison. The
majority of the revenue in this line item comes from the Company performing
administrative work as a third party administrator ("TPA") for unaffiliated life
insurance companies, and as such, receives monthly fees based on policy in force
counts and certain other activity indicators such as number of premium
collections performed. During the first nine months of 2003 and 2002, the
Company received $347,555 and $392,503 respectively, for this work. During the
third quarter of 2003 and 2002, the Company received $115,307 and $120,881
respectively, for this work. These TPA revenue fees are included in the line
item "other income" on the Company's consolidated statements of operations. The
Company intends to pursue other TPA arrangements, 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 data center operations. UTG will staff the
administration effort. Management believes this alliance with Fiserv LIS
positions the Company to generate additional revenues by utilizing the Company's
current excess capacity, administrative services, and implementation of the new
Fiserv LIS "ID3" software system. Currently, the Company operates on the "Life
70" software system, which is no longer being supported. In addition, due to
ongoing regulatory changes and the fact the Company is repositioning itself for
future growth, the Company believes implementation of the "ID3" software system
is critical in order to proceed in the Company's new direction of TPA services.
Fiserv LIS is a unit of Fiserv, Inc. (Nasdaq: FISV) which is an independent,
full-service provider of integrated data processing and information management
systems to the financial industry, headquartered in Brookfield, Wisconsin.
(b) Expenses
Life benefits, claims and settlement expenses net of reinsurance benefits and
claims, increased 12% in the first nine months of 2003 compared to the same
period in 2002, and increased 11% for the third quarter comparison. This
increase for the first nine months is due to a reduction in reinsurance benefits
incurred year to date. The Company had fewer high face death claims that were
reinsured in the first nine months of 2003 as compared to the first nine months
of 2002. The Company reinsures its risks as to not retain more than $125,000 on
any one life. Therefore, the amount of reinsurance benefit incurred is
determined by the size of an insured's policy when a claim for benefit is made.
Aside from the effect of reinsurance, policy surrenders remained at comparable
levels when comparing the first nine months of 2003 to the same period in 2002.
A third quarter comparison revealed the Company had approximately $2,800,000
less in direct death benefits. Consequently, the reinsurance benefits and claims
received, decreased accordingly. Policy claims vary from year to year and
therefore, fluctuations in mortality are to be expected and are not considered
unusual by management. Overall, reserves continue to increase on in-force
policies as the age of the insureds increases.
Commissions and amortization of deferred policy acquisition costs decreased 55%
for the first nine months of 2003 compared to the same period in 2002, and
decreased 73% for the third quarter comparison. The most significant factor in
the decrease is attributable to the Company paying fewer commissions, since the
company writes very little new business and renewal premiums on existing
business continue to decline. Commissions paid will continue to decline as
terminated agents discontinue their association with the Company. Depending upon
the nature of the contract that the agent has with the Company, the agent may
become vested, a process which allows them to continue to receive commissions
for a certain period even after the agent has discontinued his association with
the Company. Over time, fewer and fewer agents have remained vested, further
reducing the commissions payable by the Company. Another factor of the decrease
is attributable to normal amortization of the deferred policy acquisition costs
asset. The Company reviews the recoverability of the asset based on current
trends and known events compared to the assumptions used in the establishment of
the original asset. No impairments were recorded in either of the periods
reported.
Operating expenses increased 32% in the first nine months of 2003 compared to
the same period in 2002, and increased 1% for the third quarter comparison. This
increase for the first nine months of 2003 is attributable to the establishment
of a contingent liability of $1,950,000 relating to a lawsuit (see note 5 to the
consolidated financial statements for further discussion). Excluding the
contingency established, expenses declined due to expense reductions made in the
normal course of business, as the Company simplifies its organizational
structure and continually monitors expenditures looking for savings
opportunities. In April 2003, the Company entered into an agreement with Fiserv
for the conversion of two TPA client companies to the "ID3" system. The
conversion began in May 2003 and is expected to be completed by December 2003.
The conversion is being performed utilizing Company personnel with onsite
training and guidance provided by Fiserv. The conversion is expected to cost
approximately $600,000. Through September 30, 2003, the Company has incurred
expenses of $240,000 relating to this conversion.
Interest expense decreased 41% in the first nine months of 2003 compared to the
same period in 2002, and decreased 43% for the third quarter comparison. The
Company has used dividend payments from its life insurance subsidiary UG to
reduce long term debt outstanding from $4,508,797 at September 30, 2002 to
$2,289,776 at September 30, 2003. All remaining debt was 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. The notes bear interest at the fixed rate
of 7% per annum (paid quarterly) with payments of principal to be made in five
equal annual installments. In January 2003 the balance of an advance principal
payment in the amount of $705,499 was made on these notes. The future collective
scheduled principal reductions on these notes are due as follows: $763,259 on
April 1, 2004, $763,259 on April 1, 2005 and $763,258 due on April 1, 2006.
Management believes overall sources available are adequate to service this debt.
These sources include current cash balances of UTG, existing lines of credit and
expected future dividends from its life insurance subsidiary UG.
(c) Net income
The Company had a net loss of $1,627,758 in the first nine months of 2003
compared to net income of $1,527,212 for the same period in 2002 and a net loss
of $464,142 in the third quarter of 2003 as compared to net income of $327,499
for the third quarter of 2002. The net loss in 2003 was mainly attributable to
the establishment of a contingent liability relating to a lawsuit (see note 5 to
the consolidated financial statements for further discussion). The contingent
liability resulted in a decline in net income of $1,267,500, net of tax effects.
In addition, total revenues decreased approximately $1,727,000, which was
primarily attributable to a 16% decrease in investment income and a 4% decrease
in premium revenues. Partially offsetting the above-mentioned decreases to net
income, was the minority interest in earnings of approximately $264,000 at
September 30, 2002. All minority interests were retired with the merger of First
Commonwealth Corporation (a then 82% owned subsidiary of UTG) with and into UTG
on June 12, 2002.
Financial Condition
The financial condition of the Company has declined since December 31, 2002.
Total shareholders' equity decreased approximately $2,988,000 as of September
30, 2003 compared to December 31, 2002. The decrease is mainly attributable to
the accrual of a contingent liability of $1,267,500, net of taxes, relating to a
lawsuit (see note 5 to the consolidated financial statements for further
discussion) that was included in the net loss of $1,627,758. Unrealized gains on
investments carried at market value declined $903,609 net of deferred taxes
during the current period. In addition, the Company purchased treasury shares
and retired common stock in the amount of $406,840, which also decreased
shareholders' equity. At September 30, 2003, the Company implemented FAS 150
regarding the accounting for certain financial instruments with characteristics
of both liabilities and equity. This implementation resulted in a reclass of
$49,635 from equity to other liabilities on the financial statement.
Investments represent approximately 77% and 71% of total assets at September 30,
2003 and December 31, 2002, respectively. Accordingly, investments are the
largest asset group of the Company. The Company's insurance subsidiaries are
regulated by insurance statutes and regulations as to the type of investments
that they are permitted to make and the amount of funds that may be used for any
one type of investment. In light of these statutes and regulations, the majority
of the Company's investment portfolio is invested in high quality, low risk
investments.
As of September 30, 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 since 2000 as available for sale.
Liquidity and Capital Resources
The Company has three principal needs for cash - the insurance companies'
contractual obligations to policyholders, the payment of operating expenses and
the servicing of its long-term debt. Cash and cash equivalents as a percentage
of total assets were approximately 2% and 8% as of September 30, 2003, and
December 31, 2002, respectively. Fixed maturities as a percentage of total
invested assets were approximately 74% as of September 30, 2003 and December 31,
2002.
Future policy benefits are primarily long-term in nature and therefore, the
Company's investments are predominantly in long-term fixed maturity investments
such as bonds and mortgage loans which provide sufficient return to cover these
obligations. The Company has the ability and intent to hold these investments to
maturity; consequently, the Company's investment in fixed maturities held to
maturity is reported in the financial statements at their amortized cost.
Many of the Company's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to cover
the Company's unamortized deferred policy acquisition costs with respect to the
policy being surrendered.
Net cash provided by operating activities was $1,317,190 and $784,432 for the
nine-month periods ending September 30, 2003 and September 30, 2002,
respectively. The net cash provided by operating activities plus net
policyholder contract deposits after the payment of policyholder withdrawals
equaled $3,259,004 for the first nine months of 2003 and $2,413,477 for the same
period in 2002. Management utilizes this measurement of cash flows as an
indicator of the performance of the Company's insurance operations, since
reporting regulations require cash inflows and outflows from universal life
insurance products to be shown as financing activities when reporting on cash
flows. Net cash used in investing activities was $19,081,597 and $252,437, for
the nine-month periods ending September 30, 2003 and September 30, 2002,
respectively. The most significant aspect of cash used in investing activities
is the fixed maturity transactions. Fixed maturities account for 87% and 80% of
the total cost of investments acquired in the first nine months of 2003 and for
the same period in 2002, respectively.
Net cash provided by (used in) financing activities was $829,475 and $(255,403)
for the nine month periods ending September 30, 2003 and September 30, 2002,
respectively. Policyholder contract deposits decreased 7% in the first nine
months of 2003 compared to the same period in 2002. Policyholder contract
withdrawals decreased 13% in the first nine months of 2003 compared to the same
period in 2002. In addition, as of September 30, 2003, the Company had purchased
$148,046 in treasury stock under its stock repurchase program and retired
$258,794 in common stock that was originally issued under the employee and
director stock purchase program.
At September 30, 2003, the Company had a total of $2,289,776 in long-term debt
outstanding. 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 remaining principal payments of $763,259 due
annually in 2004 and 2005 and $763,258 due in 2006. Management believes overall
sources available are more than adequate to service this debt. These sources
include current cash balances of UTG, expected future operating cashflows and
payment of dividends from the Company's life subsidiary, UG. In January 2003,
UTG paid the balance of an advance principal payment in the amount of $705,499
completing the remaining 2003 principal payment.
UTG is a holding company that has no day-to-day operations of its own. Funds
required to meet its expenses, generally costs associated with maintaining the
company in good standing with states in which it does business, are primarily
provided by its subsidiaries. On a parent only basis, UTG's cash flow is
dependent on management fees received from its subsidiaries and earnings
received on cash balances. At September 30, 2003, substantially all of the
consolidated shareholders equity represents net assets of its subsidiaries. The
Company's insurance subsidiaries have maintained adequate statutory capital and
surplus and have not used surplus relief or financial reinsurance, which have
come under scrutiny by many state insurance departments. The payment of cash
dividends to shareholders is not legally restricted. However, the state
insurance department regulates insurance company dividend payments where the
company is domiciled.
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,
2002 UG's total statutory capital and surplus amounted to $16,030,200. At
December 31, 2002, UG had a statutory gain from operations of $2,062,744.
Extraordinary dividends (amounts in excess of ordinary dividend limitations)
require prior approval of the insurance commissioner and are not restricted to a
specific calculation. UG paid an ordinary dividend of $600,000 to UTG in April
2003.
Management believes the overall sources of liquidity available will be
sufficient to satisfy the Company's financial obligations.
Accounting Developments
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk relates, broadly, to changes in the value of financial instruments
that arise from adverse movements in interest rates, equity prices and foreign
exchange rates. The Company is exposed principally to changes in interest rates,
which affect the market prices of its fixed maturities available for sale and
its variable rate debt outstanding. The Company's exposure to equity prices and
foreign currency exchange rates is immaterial. The information presented below
is in U.S. dollars, the Company's reporting currency.
Interest rate risk
The Company could experience economic losses if it were required to liquidate
fixed income securities available for sale during periods of rising and/or
volatile interest rates. The Company attempts to mitigate its exposure to
adverse interest rate movements through a staggering of the maturities of its
fixed maturity investments and through maintaining cash and other short term
investments to assure sufficient liquidity to meet its obligations and to
address reinvestment risk considerations.
Tabular presentation
The following table provides information about the Company's long term debt that
is sensitive to changes in interest rates. The table presents principal cash
flows and related weighted average interest rates by expected maturity dates.
The Company has no derivative financial instruments or interest rate swap
contracts.
September 30, 2003
Expected maturity date
2003 2004 2005 2006 2007 Thereafter Total Fair value
Long term debt
Fixed rate 0 763,259 763,259 763,258 0 0 2,289,776 2,401,326
Avg. int. rate 0 7.0% 7.0% 7.0% 0 0 7.0% 0
Variable rate 0 0 0 0 0 0 0 0
Avg. int. rate 0 0 0 0 0 0 0 0
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this quarterly report, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the President and Chief Executive Officer (the
"CEO") and the Chief Financial Officer (the "CFO"), of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective
in alerting them on a timely basis to material information relating to the
Company required to be included in the Company's periodic reports filed or
submitted under the Securities Exchange Act of 1934, as amended. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to the date of the
evaluation.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
NONE
ITEM 2. CHANGE IN SECURITIES.
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
ITEM 5. OTHER INFORMATION.
Effective September 30, 2003, Mr. Robert W. Teater resigned from the Boards of
United Trust Group, Inc and Universal Guaranty Life Insurance Company citing
health issues.
At the September 17, 2003 Board of Directors Meeting, Mr. Joseph A. Brinck, II
was unanimously approved and appointed as a member of Board of Directors for
both United Trust Group, Inc and Universal Guaranty Life Insurance Company. Mr.
Brink is the CEO of Stelter & Brinck, LTD as well as the President of Superior
Thermal, LTD.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
31.1 Certification of Jesse T. Correll, Chief Executive Officer and Chairman of
the Board of UTG, as required pursuant to Section 302
31.2 Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice
President and Corporate Secretary of UTG, as required pursuant to Section
302
32.1 Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of
the Board of UTG, as required pursuant to 18 U.S.C. Section 1350
32.2 Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice
President and Corporate Secretary of UTG, as required pursuant to 18 U.S.C.
Section 1350
99.P Code of Ethical Conduct for Senior Financial Officers
(b) REPORTS ON FORM 8-K
On September 17, 2003, UTG filed a report on Form 8-K regarding Item 5, Other
Events and Regulation FD Disclosure. The information reported in the 8-K
discussed the amendment of the Company's Employee and Director Stock Purchase
Plan due to the issuance of FAS 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity".
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED TRUST GROUP, INC.
(Registrant)
Date: November 10, 2003 By /s/ Randall L. Attkisson
Randall L. Attkisson
President, Chief Operating Officer
and Director
Date: November 10, 2003 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
EXHIBIT INDEX
Exhibit Number Description
31.1 Certification of Jesse T. Correll, Chief Executive Officer and Chairman of
the Board of UTG, as required pursuant to Section 302
31.2 Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice
President and Corporate Secretary of UTG, as required pursuant to Section
302
32.1 Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of
the Board of UTG, as required pursuant to 18 U.S.C. Section 1350
32.2 Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice
President and Corporate Secretary of UTG, as required pursuant to 18 U.S.C.
Section 1350
