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, 2004
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
29, 2004, was 3,972,178.
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, 2004
and December 31, 2003.................................................3
Consolidated Statements of Operations for the three and nine months
ended September 30, 2004 and 2003.....................................4
Consolidated Statement of Changes in Shareholders' Equity for the
nine months ended September 30, 2004..................................5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2004 and 2003...........................................6
Notes to Consolidated Financial Statements................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........16
ITEM 4. CONTROLS AND PROCEDURES...........................................17
PART II. OTHER INFORMATION..................................................18
ITEM 1. LEGAL PROCEEDINGS.................................................18
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS..........................18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............18
ITEM 5. OTHER INFORMATION.................................................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................18
SIGNATURES....................................................................18
EXHIBIT INDEX, followed by exhibits...........................................20
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
-----------------------------------------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 2004 2003*
------------------- -------------------
Investments:
Fixed maturities, at amortized cost
(market $14,870,525 and $27,440,277) $ 14,635,898 $ 26,724,507
Investments held for sale:
Fixed maturities, at market (cost $138,625,265 and $139,248,547) 139,858,255 139,390,382
Equity securities, at market (cost $15,216,214 and $7,209,443) 20,418,810 9,362,165
Mortgage loans on real estate, at amortized cost 21,462,471 26,715,968
Investment real estate, at cost, net of accumulated depreciation 28,383,037 24,725,824
Policy loans 12,989,170 13,226,399
Short-term investments 36,285 34,677
------------------- -------------------
237,783,926 240,179,922
Cash and cash equivalents 14,954,788 8,749,727
Securities of affiliate 4,000,000 4,000,000
Accrued investment income 1,773,273 1,961,552
Reinsurance receivables:
Future policy benefits 32,442,230 32,789,725
Policy claims and other benefits 3,978,442 4,120,299
Cost of insurance acquired 13,213,805 14,616,667
Deferred policy acquisition costs 1,874,608 2,122,643
Property and equipment, net of accumulated depreciation 2,235,188 2,450,109
Income taxes receivable, current 102,289 212,197
Other assets 264,184 354,292
------------------- -------------------
Total assets $ 312,622,733 $ 311,557,133
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 235,965,512 $ 236,192,132
Policy claims and benefits payable 2,206,008 2,541,735
Other policyholder funds 1,346,652 1,038,063
Dividend and endowment accumulations 12,546,220 12,626,515
Deferred income taxes 7,213,687 6,763,648
Notes payable 0 2,289,776
Other liabilities 5,957,560 5,557,215
------------------- -------------------
Total liabilities 265,235,639 267,009,084
------------------- -------------------
Minority interests in consolidated subsidiaries 5,905,193 4,851,410
------------------- -------------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share
Authorized 7,000,000 shares - 3,961,933 and 4,004,666 shares issued
after deducting treasury shares of 216,869 and 174,136 79,159 80,008
Additional paid-in capital 42,432,719 42,672,189
Retained earnings (5,288,044) (4,621,955)
Accumulated other comprehensive income 4,258,067 1,566,397
------------------- -------------------
Total shareholders' equity 41,481,901 39,696,639
------------------- -------------------
Total liabilities and shareholders' equity $ 312,622,733 $ 311,557,133
=================== ===================
* Balance sheet audited at December 31, 2003.
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,
2004 2003 2004 2003
--------------- ---------------- --------------- ----------------
Revenues:
Premiums and policy fees $ 4,171,717 $ 4,462,516 $ 13,305,825 $ 13,832,708
Reinsurance premiums and policy fees (782,045) (775,932) (2,370,341) (2,169,882)
Net investment income 2,865,198 2,656,624 7,431,129 8,305,473
Realized investment gains (losses), net 24,000 168,735 (68,754) 728,893
Other income 150,432 180,653 571,993 521,469
--------------- ---------------- --------------- ----------------
6,429,302 6,692,596 18,869,852 21,218,661
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 4,440,973 5,647,392 14,788,618 16,174,507
Reinsurance benefits and claims (467,371) (658,342) (1,826,283) (1,815,565)
Annuity 272,237 298,465 841,870 864,818
Dividends to policyholders 221,174 228,709 758,142 744,827
Commissions and amortization of deferred
policy acquisition costs 76,234 35,119 140,972 281,351
Amortization of cost of insurance acquired 468,444 478,369 1,402,862 1,218,190
Operating expenses 1,319,472 1,451,973 4,148,933 6,122,220
Interest expense 27,110 40,400 77,453 121,778
--------------- ---------------- --------------- ----------------
6,358,273 7,522,085 20,332,567 23,712,126
Loss before income taxes, minority interest
and equity in earnings of investees 71,029 (829,489) (1,462,715) (2,493,465)
Income tax credit 168,114 365,347 779,274 865,707
Minority interest in (income) loss of
consolidated subsidiaries (97,879) 0 17,351 0
--------------- ---------------- --------------- ----------------
Net income (loss) $ 141,264 $ (464,142)$ (666,090)$ (1,627,758)
=============== ================ =============== ================
Basic income (loss) per share from continuing
operations and net income (loss) $ 0.04 $ (0.12)$ (0.17)$ (0.43)
=============== ================ =============== ================
Diluted income (loss) per share from continuing
operations and net income (loss) $ 0.04 $ (0.12)$ (0.17)$ (0.43)
=============== ================ =============== ================
Basic weighted average shares outstanding 3,978,944 3,993,541 3,992,858 3,784,894
=============== ================ =============== ================
Diluted weighted average shares outstanding 3,978,944 3,993,541 3,992,858 3,784,894
=============== ================ =============== ================
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the nine months ended September 30, 2004 (Unaudited)
------------------------------------------------------------------------------------------------------------------
Common stock
Balance, beginning of year $ 80,008
Issued during year 0
Retired common shares 0
Purchase treasury shares (849)
------------------
Balance, end of period 79,159
------------------
Additional paid-in capital
Balance, beginning of year 42,672,189
Issued during year 0
Retired common shares 0
Purchase treasury shares (239,470)
------------------
Balance, end of period 42,432,719
------------------
Retained earnings
Balance, beginning of year (4,621,954)
Net loss (666,090) $ (666,090)
------------------ ------------------
Balance, end of period (5,288,044)
------------------
Accumulated other comprehensive income
Balance, beginning of year 1,566,397
Other comprehensive income
Unrealized holding gain on securities net of
minority interest and reclassification adjustment 2,691,670 2,691,670
------------------ ------------------
Comprehensive income $ 2,025,580
==================
Balance, end of period 4,258,067
------------------
Total shareholders' equity, end of period $ 41,481,901
==================
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30, September 30,
2004 2003
--------------- ----------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $ (666,090)$ (1,627,758)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization/accretion of fixed maturities 422,964 777,390
Realized investment (gains) losses, net 68,754 (728,893)
Policy acquisition costs deferred (3,000) (51,000)
Amortization of deferred policy acquisition costs 251,035 341,383
Amortization of cost of insurance acquired 1,402,862 1,218,190
Depreciation 1,148,302 481,543
Minority interest 1,053,783 0
Change in accrued investment income 188,279 411,524
Change in reinsurance receivables 489,352 200,982
Change in policy liabilities and accruals 1,023,914 2,178,296
Charges for mortality and administration of
universal life and annuity products (7,003,228) (6,732,981)
Interest credited to account balances 4,044,649 4,087,999
Change in income taxes payable (889,413) (970,707)
Change in other assets and liabilities, net 490,453 1,731,222
--------------- ----------------
Net cash provided by operating activities 2,022,616 1,317,190
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 64,444,104 56,788,550
Fixed maturities matured 13,322,714 31,415,470
Equity securities 25,570 165,262
Mortgage loans 7,880,037 7,759,900
Real estate 207,010 987,675
Policy loans 2,047,253 1,873,293
Short-term 0 250,000
--------------- ----------------
Total proceeds from investments sold and matured 87,926,688 99,240,150
Cost of investments acquired:
Fixed maturities held for sale (64,159,619) (98,132,344)
Fixed maturities (1,387,598) (4,283,410)
Equity securities (8,033,053) (6,576,236)
Mortgage loans (2,626,540) (5,365,998)
Real estate (4,784,262) (1,577,323)
Policy loans (1,810,024) (1,824,238)
Short-term (322) (3,596)
--------------- ----------------
Total cost of investments acquired (82,801,418) (117,763,145)
Purchase of property and equipment (13,342) (558,602)
--------------- ----------------
Net cash provided by (used in) investing activities 5,111,928 (19,081,597)
Cash flows from financing activities:
Policyholder contract deposits 6,926,298 7,318,773
Policyholder contract withdrawals (5,325,686) (5,376,959)
Retirement of common stock 0 (258,794)
Purchase of treasury stock (240,319) (148,046)
Proceeds from notes payable 2,275,000 0
Payments of principal on notes payable (4,564,776) (705,499)
--------------- ----------------
Net cash provided by (used in) financing activities (929,483) 829,475
--------------- ----------------
Net increase (decrease) in cash and cash equivalents 6,205,061 (16,934,932)
Cash and cash equivalents at beginning of period 8,749,727 24,050,485
--------------- ----------------
Cash and cash equivalents at end of period $ 14,954,788 $ 7,115,553
=============== ================
See accompanying notes.
UNITED TRUST GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying interim 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, 2003.
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, 2004 Mr. Correll owns or controls directly and
indirectly approximately 66% of UTG's outstanding stock.
At September 30, 2004, consolidated subsidiaries of United Trust Group, Inc.
were as depicted on the following organizational chart.
2. INVESTMENTS
As of September 30, 2004 and December 31, 2003, fixed maturities and fixed
maturities held for sale represented 65% and 69%, respectively, 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, 2004, 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
On December 31, 2003, the Company had $ 2,289,776 in notes payable outstanding.
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 bore interest at the fixed rate of 7% per annum (paid quarterly)
with payments of principal to be made in five equal annual installments. On
January 7, 2004, the Company paid the remaining principal balances on these
notes with proceeds from the Southwest Bank of St. Louis line of credit. On
September 30, 2004, the Company paid the entire outstanding balance on the notes
payable.
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 additional one-year or six-month terms, with a maturity date of October 30,
2004. As collateral for any draws under the line of credit, UTG pledged 100% of
the common stock of its insurance subsidiary UG. Borrowings under the LOC bear
interest at the rate of .25% in excess of Southwest Bank of St. Louis' prime
rate. At September 30, 2004, the Company had no outstanding borrowings
attributable to this LOC.
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 the line was
established, 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 additional one-year
terms, with a maturity date of November 15, 2004. 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, 2004, 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.
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. At its August 2004 meeting, the Board of Directors of UTG approved a third
offering under the plan to qualified individuals. Following the 30-day offer
period ending in October 2004, four individuals executed the appropriate
documents and acquired 14,440 shares of UTG common stock. UTG received $ 167,360
from the issuance of these shares subsequent to the balance sheet date.
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, 2004, UTG had 75,437 shares outstanding that were issued under
this program with a value of $ 11.54 per share pursuant to the above formula.
B. Stock Repurchase Program
On June 5, 2001, the Board of Directors of UTG authorized the repurchase in the
open market or in privately negotiated transactions of up to $ 1 million of
UTG's common stock. On June 16, 2004, an additional $ 1 million was authorized
for repurchased shares. Repurchased shares are available for future issuance for
general corporate purposes. Through October 29, 2004, UTG has spent $ 1,094,873
in the acquisition of 165,897 shares under this program.
C. Earnings Per Share Calculations
Earnings per share are based on the weighted average number of common shares
outstanding during each period, retroactively adjusted to give effect to all
stock splits, in accordance with Statement of Financial Accounting Standards No.
128. At September 30, 2004, diluted earnings per share were the same as basic
earnings per share since the UTG had no dilutive instruments outstanding.
5. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts which
have been returned against life and health insurers in the jurisdictions in
which the Company does business involving the insurers' sales practices, alleged
agent misconduct, failure to properly supervise agents, and other matters. Some
of the lawsuits have resulted in the award of substantial judgments against the
insurer, including material amounts of punitive damages. In some states, juries
have substantial discretion in awarding punitive damages in these circumstances.
The Company cannot predict the effect that these lawsuits may have on the
Company in the future.
Under the insurance guaranty fund laws in most states, insurance companies doing
business in a participating state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent or failed insurance companies.
Although the Company cannot predict the amount of any future assessments, most
insurance guaranty fund laws currently provide that an assessment may be excused
or deferred if it would threaten an insurer's financial strength. Mandatory
assessments may be partially recovered through a reduction in future premium tax
in some states. The Company does not believe such assessments will be materially
different from amounts already provided for in the financial statements, though
the Company has no control over such assessments.
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 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 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 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. The Company began the conversion of its existing insurance business
to the "ID3" software system in February 2004. Also as part of this alliance, a
liability exists which is contingent on the completion of future TPA
arrangements. The balance remaining of this contingent liability was $ 115,000
on September 30, 2004.
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 $ 77,453 and $ 121,778 in interest expense
during the first nine months of 2004 and 2003, respectively. The Company paid
$ 100,000 and $ 105,000 in federal income tax during the first nine months of
2004 and 2003, respectively. In April 2003, the Company issued 500,000
previously unissued shares of UTG common stock to FSF.
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 $ 9,869,000 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, 2004 Amount or Benefit Amount
---------------------------------------------- ---------------- ----------------- --------------
Unrealized holding gains during
period $ 4,246,806 $ 1,486,382 $ 2,760,424
Less: reclassification adjustment
for gains realized in net income (105,775) (37,021) (68,754)
---------------- ----------------- --------------
Net unrealized gains 4,141,031 1,449,361 2,691,670
---------------- ----------------- --------------
Other comprehensive income $ 4,141,031 $ 1,449,361 $ 2,691,670
================ ================= ==============
9. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement No. 132
(revised 2003), Employers' Disclosures about Pensions and Other Postretirement
Benefits (an amendment of FASB Statements 87, 88 and 106). Statement No. 132 was
developed to address concerns of users of financial statements regarding their
need for more information about pension plan assets, obligations, benefit
payment, contributions and net benefit costs.
This statement was effective at the beginning of the first interim period
beginning after December 15, 2003. The adoption of Statement 132 (revised 2003)
did not affect the Company's financial position or results of operations, since
the Company has no such plans that meet the provisions of this statement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion of Financial Condition and Results of Operations
analyzes the consolidated financial condition, changes in financial position and
results of operations for the three months and nine months ended September 30,
2004, as compared to the same period of 2003, of UTG and its subsidiaries. The
discussion supplements Management's Discussion and Analysis in Form 10-K for the
year ended December 31, 2003, and should be read in conjunction with the interim
financial statements and notes that appear elsewhere in this report.
Cautionary Statement Regarding Forward-Looking Statements
Any forward-looking statement contained herein or in any other oral or written
statement by the Company or any of its officers, directors or employees is
qualified by the fact that actual results of the Company may differ materially
from any such statement due to the following important factors, among other
risks and uncertainties inherent in the Company's business:
1. Prevailing interest rate levels, which may affect the ability of the
Company to sell its products, the market value of the Company's
investments and the lapse ratio of the Company's policies,
notwithstanding product design features intended to enhance
persistency of the Company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the Company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for the Company's products.
4. Other factors affecting the performance of the Company, including, but
not limited to, market conduct claims, insurance industry
insolvencies, insurance regulatory initiatives and developments, stock
market performance, an unfavorable outcome in pending litigation, and
investment performance.
Update on Critical Accounting Policies
In our Form 10-K for the year ended December 31, 2003, we identified the
accounting policies that are critical to the understanding of our results of
operations and our financial position. They relate to deferred acquisition costs
(DAC), cost of insurance acquired, assumptions and judgments utilized in
determining if declines in fair values of investments are other-than-temporary,
and valuation methods for investments that are not actively traded.
We believe that these policies were applied in a consistent manner during the
first nine months of 2004.
Results of Operations
(a) Revenues
The Company experienced a 6% decrease in premiums and policy fee revenues, net
of reinsurance premiums and policy fees, when comparing the first nine months of
2004 to the same period in 2003. 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 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 designed an annuity product ("Horizon") as
well as two life products ("Legacy" and "Kid Kare") which are to be used in
marketing efforts by FSNB. The introduction of these new products is currently
not expected to produce significant premium writings. The Company is currently
looking at other types of products to compliment the existing offerings.
Management does not anticipate selling products through the banks until late
2005 or early 2006.
Net investment income decreased 11% when comparing the first nine months of 2004
to the same period in 2003. Although there has been a 0.75% increase in the
national prime rate during the last year, the interest rate environment has not
changed significantly for earnings on short-term funds or longer-term
investments acquired. 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 first half of 2004, the
Company liquidated approximately $ 38,212,000 of its collateralized mortgage
obligation bond portfolio in order to limit its interest rate and extension
risk. In addition, there were $ 39,555,000 in bonds that matured or were called
during the first nine months of 2004. The result of these transactions caused an
excess of cash invested in short-term money market funds during the first nine
months of 2004. The Company began reinvesting this cash during the second
quarter primarily in governmental bonds 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%. The Company has lowered all rate-adjustable products to their guaranteed
minimums. The guaranteed minimum crediting rates on these products range from 3%
to 5.5%. If interest rates 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 realized investment losses of $ 68,754 in the first nine months of
2004 compared to net realized investment gains of $ 728,893 for the same period
in 2003. The net realized loss in 2004 is primarily comprised of $ 93,969 in net
realized losses from the disposal of the collateralized mortgage obligations
previously discussed. 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
certain corporate bonds. Also in 2003, there was $ 244,608 in net realized gains
on real estate that was primarily from the sale two separate parcels of land
held for investment purposes in Springfield, Illinois.
Other income increased when comparing the first nine months of 2004 to the same
period in 2003. The Company experienced a nominal increase in commission revenue
received in REC during the first nine months of 2004. The majority of the
revenue in this line item comes from the Company performing administrative work
as a third party administrator ("TPA") for unaffiliated life insurance
companies, and as such, receives monthly fees based on policy in force counts
and certain other activity indicators such as number of premium collections
performed. During the first nine months of 2004 and 2003, the Company received
$ 444,364 and $ 347,555 respectively, for this work. During the second quarter
of 2004, the Company reached an agreement with an additional insurance provider
that should provide approximately $ 396,000 in gross annual revenue for these
services. The agreement began during the third quarter of 2004. The Company
intends to continue to pursue other TPA arrangements through its alliance with
Fiserv Life Insurance Solutions (Fiserv LIS), to provide TPA services to
insurance companies seeking business process outsourcing solutions. Fiserv LIS
is responsible for the marketing and sales function for the alliance, as well as
providing the data center operations. UTG will staff the administration effort.
Management believes this alliance with Fiserv LIS positions the Company to
generate additional revenues by utilizing the Company's current excess capacity,
administrative services, and implementation of the new Fiserv LIS "ID3" software
system. In addition, due to ongoing regulatory changes and the fact the Company
is repositioning itself for future growth; the Company believes implementation
of the "ID3" software system is critical in order to proceed in the Company's
new direction of TPA services. Fiserv LIS is a unit of Fiserv, Inc. (NASDAQ:
FISV) which is an independent, full-service provider of integrated data
processing and information management systems to the financial industry,
headquartered in Brookfield, Wisconsin.
(b) Expenses
Life benefits, claims and settlement expenses net of reinsurance benefits and
claims, decreased 9% in the first nine months of 2004 compared to the same
period in 2003. Policy claims increased $ 470,000 for the first nine months of
2004 compared to the same period in 2003. Policy claims vary from year to year
and therefore, fluctuations in mortality are to be expected and are not
considered unusual by management. Policy surrenders decreased when comparing the
first nine months of 2004 to the same period in 2003. Consequently, the rate of
change in reserves decreased due to the level of surrenders and reduction in
premium. Overall, reserves continue to increase on in-force policies as the age
of the insured increases.
Commissions and amortization of deferred policy acquisition costs decreased 50%
for the first nine months of 2004 compared to the same period in 2003. 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 decreased 32% in the first nine months of 2004 compared to
the same period in 2003. The decrease in expenses is due to the establishment of
a contingent liability of $ 1,950,000 relating to a lawsuit in 2003. Excluding
the contingency established, expenses marginally declined due to cost reductions
made in the normal course of business, as the Company simplifies its
organizational structure and continually monitors expenditures looking for
savings opportunities.
Interest expense decreased 36% in the first nine months of 2004 compared to the
same period in 2003. In January 2004, the Company utilized a line of credit to
repay the remaining debt 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 bore interest at the fixed rate of 7% per
annum. The line of credit bore interest at the rate of .25% in excess of
Southwest Bank of St. Louis' prime rate. This line of credit was repaid on
September 30, 2004. As of September 30, 2004, the Company has no borrowed money
outstanding.
(c) Net income
The Company had a net loss of $ (666,090) in the first nine months of 2004
compared to a net loss of $ (1,627,758) for the same period in 2003. The net
loss in 2004 was mainly attributable to the decrease in investment income and
premium income. The net loss in 2003 was mainly attributable to the
establishment of a contingent liability relating to a lawsuit.
Financial Condition
The financial condition of the Company has improved since December 31, 2003.
Total shareholders' equity increased approximately $ 1,785,000 as of
September 30, 2004 compared to December 31, 2003. The increase is attributable
to the performance of the equity investments of $ 2,692,000, net of deferred
taxes, that was included in the accumulated other comprehensive income. The
Company purchased treasury shares in the amount of $ 240,319, which decreased
shareholders' equity.
Investments represent approximately 76% and 77% of total assets at September 30,
2004 and December 31, 2003, 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, 2004, 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 5% and 3% as of September 30, 2004, and
December 31, 2003, respectively. Fixed maturities as a percentage of total
assets were approximately 49% and 53% as of September 30, 2004 and December 31,
2003, respectively.
Future policy benefits are primarily long-term in nature and therefore, the
Company's investments are predominantly in long-term fixed maturity investments
such as bonds and mortgage loans which provide sufficient return to cover these
obligations. The Company has the ability and intent to hold these investments to
maturity; consequently, the Company's investment in 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 $ 2,022,616 and $ 1,317,190 for
the nine months ending September 30, 2004 and 2003, respectively. The net cash
provided by operating activities plus net policyholder contract deposits after
the payment of policyholder withdrawals equaled $ 3,623,228 for the first nine
months of 2004 and $ 3,259,004 the same period in 2003. Management utilizes this
measurement of cash flows as an indicator of the performance of the Company's
insurance operations, since reporting regulations require cash inflows and
outflows from universal life insurance products to be shown as financing
activities when reporting on cash flows.
Net cash provided by (used in) investing activities was $ 5,111,928 and
$ (19,081,597) for the nine-month periods ending September 30, 2004 and 2003,
respectively. The most significant aspect of cash provided by (used in)
investing activities is the fixed maturity transactions. The Company had fixed
maturities in the amount of $ 64,444,104 and $ 56,788,550 that sold and matured
in the first nine months of 2004 and 2003, respectively. This is in addition to
the $ 13,322,714 and $ 31,415,470 of the held to maturity securities that
matured in the first nine months of 2004 and 2003, respectively. In addition,
the Company purchased $ 65,547,217 and $ 102,415,754 of fixed maturities in 2004
and 2003, respectively.
Net cash provided by (used in) financing activities was $ (929,483) and
$ 829,475 for the nine month periods ending September 30, 2004 and 2003,
respectively. Policyholder contract deposits decreased 5% in the first nine
months of 2004 compared to the same period in 2003. Policyholder contract
withdrawals had a nominal decrease in the first nine months of 2004 compared to
the same period in 2003. In addition to these activities, the Company repaid the
outstanding balance, $ 2,275,000, of its short-term debt during the first nine
months of 2004. In addition, the Company retired $ 258,794 in common stock and
reduced notes payable by $ 705,499 in the first nine months of 2003.
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, 2004, substantially all of the
consolidated shareholders equity represents net assets of its subsidiaries. The
Company's insurance subsidiary has maintained adequate statutory capital and
surplus and has not used surplus relief or financial reinsurance, which have
come under scrutiny by many state insurance departments. The payment of cash
dividends to shareholders is not legally restricted. However, the state
insurance department regulates insurance company dividend payments where the
company is domiciled.
UG is an Ohio domiciled insurance company, which requires five days prior
notification to the insurance commissioner for the payment of an ordinary
dividend. Ordinary dividends are defined as the greater of: a) prior year
statutory earnings or b) 10% of statutory capital and surplus. At December 31,
2003, UG's total statutory capital and surplus amounted to $ 13,008,198. At
December 31, 2003, UG had a statutory loss from operations of $ (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. On September 30, 2004, UG paid $ 2,275,000 in dividends to
its parent UTG. This dividend was comprised of $ 1,300,820 in ordinary dividends
and $ 974,180 in extraordinary dividends. Necessary regulatory approvals were
received from the Ohio Department of Insurance prior to payment.
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. 132
(revised 2003), Employers' Disclosures about Pensions and Other Postretirement
Benefits (an amendment of FASB Statements 87, 88 and 106). Statement No. 132 was
developed to address concerns of users of financial statements regarding their
need for more information about pension plan assets, obligations, benefit
payment, contributions and net benefit costs.
This statement was effective at the beginning of the first interim period
beginning after December 15, 2003. The adoption of Statement 132 (revised 2003)
did not affect the Company's financial position or results of operations, since
the Company has no such plans that meet the provisions of this statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk relates, broadly, to changes in the value of financial instruments
that arise from adverse movements in interest rates, equity prices and foreign
exchange rates. The Company is exposed principally to changes in interest rates,
which affect the market prices of its fixed maturities available for sale and
its variable rate debt outstanding. The Company's exposure to equity prices and
foreign currency exchange rates is immaterial. The information presented below
is in U.S. dollars, the Company's reporting currency.
Interest rate risk
The Company's exposure to interest rate changes result from a significant
holding of fixed maturity investments and mortgage loans on real estate, all of
which comprised approximately 74% of the investment portfolio as of
September 30, 2004. These investments are mainly exposed to changes in treasury
rates. The fixed maturities investments include U.S. government bonds,
securities issued by government agencies, mortgage-backed bonds and corporate
bonds. Approximately 35% of the fixed maturities we owned at September 30, 2004
are instruments of the United States government or are backed by U.S. government
agencies or private corporations carrying the implied full faith and credit
backing of the U.S. government.
To manage interest rate risk, the Company performs periodic projections of asset
and liability cash flows to evaluate the potential sensitivity of the
investments and liabilities. Management assesses interest rate sensitivity with
respect to the available-for-sale fixed maturities investments using
hypothetical test scenarios that assume either upward or downward 100-basis
point shifts in the prevailing interest rates. The following tables set forth
the potential amount of unrealized gains (losses) that could be caused by
100-basis point upward and downward shifts on the available-for-sale fixed
maturities investments as of August 31, 2004:
Decreases in Interest Rates Increases in Interest Rates
--------------------------- ---------------------------
----------------------- ------------------ ----------------- ---------------------- -----------------------
200 Basis 100 Basis 100 Basis 200 Basis 300 Basis
Points Points Points Points Points
------ ------ ------ ------ ------
----------------------- ------------------ ----------------- ---------------------- -----------------------
$ 8,036,000 $ 5,402,000 $ (3,239,000) $ (8,778,000) $ (14,057,000)
----------------------- ------------------ ----------------- ---------------------- -----------------------
While the test scenario is for illustrative purposes only and does not reflect
our expectations regarding future interest rates or the performance of
fixed-income markets, it is a near-term change that illustrates the potential
impact of such events. Due to the composition of the Company's book of insurance
business, management believes it is unlikely that the Company would encounter
large surrender activity due an interest rate increase that would force the
disposal of fixed maturities at a loss.
There are no fixed maturities or other investment that management classifies as
trading instruments. At September 30, 2004 and December 31, 2003, there were no
investments in derivative instruments.
The Company currently has no debt outstanding.
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.
Disclosure controls and procedures, no matter how well designed and implemented,
can provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These limitations
include the fact that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human failures such as
simple error or mistakes or because of intentional circumvention of the
established process.
During the period covered by this report, there have been no significant changes
in the Company's internal controls over financial reporting or in other factors
that could significantly affect internal controls over financial reporting
subsequent to the date of the evaluation.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
NONE
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
ITEM 5. OTHER INFORMATION.
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10. 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
11. REPORTS ON FORM 8-K
NONE
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, 2004 By /s/ Randall L. Attkisson
Randall L. Attkisson
President, Chief Operating Officer
and Director
Date: November 10, 2004 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
