UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April
30, 2004, was 3,998,002.
UNITED TRUST GROUP, INC. AND SUBSIDIARIES
(The "Company")
TABLE OF CONTENTS
Part 1. Financial Information................................................3
Item 1. Financial Statements...............................................3
Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003.....................................3
Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003..................................................4
Consolidated Statement of Changes in Shareholders' Equity
for the three months ended March 31, 2004................................5
Consolidated Statements of Cash Flows for the three months ended
March 31, 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........17
ITEM 4. CONTROLS AND PROCEDURES...........................................17
PART II. OTHER INFORMATION..................................................18
ITEM 1. LEGAL PROCEEDINGS.................................................18
ITEM 2. CHANGE IN SECURITIES..............................................18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............18
ITEM 5. OTHER INFORMATION.................................................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................18
SIGNATURES....................................................................18
EXHIBIT INDEX.................................................................21
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
March 31, December 31,
ASSETS 2004 2003*
------------------- -------------------
Investments:
Fixed maturities at amortized cost
(market $22,742,332 and $27,440,277) $ 22,150,252 $ 26,724,507
Investments held for sale:
Fixed maturities, at market (cost $96,236,926 and $139,248,547) 98,886,958 139,390,382
Equity securities, at market (cost $10,442,497 and $7,209,443) 14,234,574 9,362,165
Mortgage loans on real estate at amortized cost 24,405,277 26,715,968
Investment real estate, at cost, net of accumulated depreciation 25,198,945 24,725,824
Policy loans 12,936,430 13,226,399
Short-term investments 35,814 34,677
------------------- -------------------
197,848,250 240,179,922
Cash and cash equivalents 54,291,715 8,749,727
Securities of affiliate 4,000,000 4,000,000
Accrued investment income 1,583,247 1,961,552
Reinsurance receivables:
Future policy benefits 32,469,136 32,789,725
Policy claims and other benefits 3,842,398 4,120,299
Cost of insurance acquired 14,148,799 14,616,667
Deferred policy acquisition costs 2,069,298 2,122,643
Property and equipment, net of accumulated depreciation 2,374,607 2,450,109
Income taxes receivable, current 168,146 212,197
Other assets 226,735 354,292
------------------- -------------------
Total assets $ 313,022,331 $ 311,557,133
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 235,911,173 $ 236,192,132
Policy claims and benefits payable 2,179,571 2,541,735
Other policyholder funds 1,084,921 1,038,063
Dividend and endowment accumulations 12,615,629 12,626,515
Deferred income taxes 8,048,019 6,763,648
Notes payable 2,275,000 2,289,776
Other liabilities 4,362,809 5,557,215
------------------- -------------------
Total liabilities 266,477,122 267,009,084
------------------- -------------------
Minority interests in consolidated subsidiaries 5,058,725 4,851,410
------------------- -------------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share
Authorized 7,000,000 shares - 3,999,331 and 4,004,666 shares issued
after deducting treasury shares of 179,471 and 174,136 79,901 80,008
Additional paid-in capital 42,640,426 42,672,189
Retained earnings (5,496,150) (4,621,955)
Accumulated other comprehensive income 4,262,307 1,566,397
------------------- -------------------
Total shareholders' equity 41,486,484 39,696,639
------------------- -------------------
Total liabilities and shareholders' equity $ 313,022,331 $ 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
March 31, March 31,
2004 2003
----------------- -----------------
Revenues:
Premiums and policy fees $ 4,620,958 $ 4,567,277
Reinsurance premiums and policy fees (746,813) (684,274)
Net investment income 1,831,077 2,884,884
Realized investment gains (losses), net (92,135) 242,281
Other income 220,260 171,781
----------------- -----------------
5,833,347 7,181,949
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 4,873,078 5,451,065
Reinsurance benefits and claims (266,963) (477,644)
Annuity 280,695 277,191
Dividends to policyholders 285,232 270,308
Commissions and amortization of deferred
policy acquisition costs 25,416 173,653
Amortization of cost of insurance acquired 467,868 370,486
Operating expenses 1,397,448 1,169,440
Interest expense 25,634 41,416
----------------- -----------------
7,088,408 7,275,915
Loss before income taxes, minority interest
and equity in earnings of investees (1,255,061) (93,966)
Income tax (expense) credit 121,508 (265,964)
Minority interest in income of
consolidated subsidiaries 259,358 (134,194)
----------------- -----------------
Net loss $ (874,195)$ (494,124)
================= =================
Basic loss per share from continuing
operations and net loss $ (0.22)$ (0.14)
================= =================
Diluted loss per share from continuing
operations and net loss $ (0.22)$ (0.12)
================= =================
Basic weighted average shares outstanding 3,999,331 3,519,191
================= =================
Diluted weighted average shares outstanding 3,999,331 4,019,191
================= =================
See accompanying notes
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the three months ended March 31, 2004 (Unaudited)
Common stock
Balance, beginning of year $ 80,008
Issued during year 0
Retired common shares 0
Purchase treasury shares (107)
------------------
Balance, end of period 79,901
------------------
Additional paid-in capital
Balance, beginning of year 42,672,189
Issued during year 0
Retired common shares 0
Purchase treasury shares (31,763)
------------------
Balance, end of period 42,640,426
------------------
Retained earnings
Balance, beginning of year (4,621,955)
Net loss (874,195) $ (874,195)
------------------ ------------------
Balance, end of period (5,496,150)
------------------
Accumulated other comprehensive income
Balance, beginning of year 1,566,397
Other comprehensive income
Unrealized holding gain on securities
net of reclassification adjustment 2,695,910 2,695,910
------------------ ------------------
Comprehensive income $ 1,821,715
==================
Balance, end of period 4,262,307
------------------
Total shareholders' equity, end of period $ 41,486,484
==================
See accompanying notes
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31, March 31,
2004 2003
--------------- ---------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $ (874,195)$ (494,124)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization/accretion of fixed maturities 154,891 168,017
Realized investment (gains) losses 93,170 (242,281)
Policy acquisition costs deferred (24,000) (8,000)
Amortization of deferred policy acquisition costs 77,345 176,461
Amortization of cost of insurance acquired 467,868 370,486
Depreciation 242,616 121,233
Minority interest 259,358 (134,194)
Change in accrued investment income 378,305 72,908
Change in reinsurance receivables 598,490 146,578
Change in policy liabilities and accruals (165,425) 1,075,409
Charges for mortality and administration of
universal life and annuity products (2,389,691) (2,116,380)
Interest credited to account balances 1,367,913 1,381,828
Change in income taxes payable (123,221) 198,753
Change in other assets and liabilities, net (547,302) 132,995
--------------- ---------------
Net cash provided by (used in) operating activities (483,878) 849,689
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 47,326,595 12,329,492
Fixed maturities matured 4,508,407 12,136,686
Mortgage loans 3,227,427 3,643,730
Real estate 0 766,905
Policy loans 838,683 656,512
Short-term 0 51,114
--------------- ---------------
Total proceeds from investments sold and matured 55,901,112 29,584,439
Cost of investments acquired:
Fixed maturities held for sale (4,497,188) (26,771,651)
Fixed maturities 0 (3,436,538)
Equity securities (3,233,053) (4,000,000)
Mortgage loans (916,737) (2,764,230)
Real estate (1,216,287) (259,059)
Policy loans (539,869) (570,650)
Short-term (1,137) 0
--------------- ---------------
Total cost of investments acquired (10,404,271) (37,802,128)
Purchase of property and equipment (4,382) 0
--------------- ---------------
Net cash provided by (used in) investing activities 45,492,459 (8,217,689)
Cash flows provided by (used in) financing activities:
Policyholder contract deposits 2,564,851 2,658,689
Policyholder contract withdrawals (1,984,799) (1,708,399)
Proceeds from line of credit 2,275,000 0
Retirement of common stock 0 (238,800)
Purchase of treasury stock (31,869) (58,735)
Payments of principal on notes payable (2,289,776) (705,499)
--------------- ---------------
Net cash provided by (used in) financing activities 533,407 (52,744)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 45,541,988 (7,420,744)
Cash and cash equivalents at beginning of period 8,749,727 24,050,485
--------------- ---------------
Cash and cash equivalents at end of period $ 54,291,715 $ 16,629,741
=============== ===============
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,
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 March 31, 2004 Mr. Correll owns or controls directly and
indirectly approximately 65% of UTG's outstanding stock.
At March 31, 2004, consolidated subsidiaries of United Trust Group, Inc. were as
depicted on the following organizational chart.
UNITED TRUST GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
2. INVESTMENTS
As of March 31, 2004 and December 31, 2003, fixed maturities and fixed
maturities held for sale represented 61% 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 March 31, 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
At March 31, 2004 and December 31, 2003, the Company had $ 0 and $ 2,289,776 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 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.
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 at the time was a
Director of UTG. The LOC was for a one-year term from the date of issue. Upon
maturity the Company renewed the LOC for additional one-year terms. The interest
rate on the LOC is variable and indexed to be the lowest of the U.S. prime rates
as published in the Wall Street Journal, with any interest rate adjustments to
be made monthly. At March 31, 2004, 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 additional one-year terms, with a maturity date of April 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 March 31, 2004, the Company had $ 2,275,000 outstanding borrowings
attributable to this LOC, which were used to repay the outstanding principal
balances on the notes payable.
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.
During 2003 and 2002, the Board of Directors of UTG approved offerings under the
plan to qualified individuals. For the years ended December 31, 2003 and 2002,
eight individuals purchased 58,891 and three individuals purchased 16,546 shares
of UTG common stock, respectively. Each participant under the plan executed a
"stock restriction and buy-sell agreement", which among other things provides
UTG with a right of first refusal on any future sales of the shares acquired by
the participant under this plan.
The purchase price of shares repurchased under the stock restriction and
buy-sell agreement shall be computed, on a per share basis, equal to the sum of
(i) the original purchase price paid to acquire such shares from UTG and (ii)
the consolidated statutory net earnings (loss) per share of such shares during
the period from the end of the month next preceding the month in which such
shares were acquired pursuant to the plan, to the end of the month next
preceding the month in which the sale of such shares to UTG occurs. At March 31,
2004, UTG had 75,437 shares outstanding that were issued under this program with
a value of $ 11.63 per share pursuant to the above formula.
B. Stock Repurchase Program
On June 5, 2001, the Board of Directors of UTG authorized the repurchase in the
open market or in privately negotiated transactions of up to $ 1 million of
UTG's common stock. Repurchased shares are available for future issuance for
general corporate purposes. Through April 30, 2004, UTG has spent $ 873,199 in
the acquisition of 125,633 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 March 31, 2004, diluted earnings per share were the same as basic
earnings per share since the UTG had no dilutive instruments outstanding. At
March 31, 2003, UTG had an obligation to issue to FSF or its assigns 500,000
shares of UTG common stock, as a result of a failed earnings covenant. As such,
the computation of diluted earnings per share differs from basic earnings per
share at March 31, 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 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.
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 $ 25,634 and $ 41,416 in interest expense
during the first three months of 2004 and 2003, respectively. The Company paid
no federal income tax during the first three months of 2004 and 2003,
respectively. In April 2003, the Company issued 500,000 previously unissued
shares of UTG common stock to FSF. At March 31, 2003, the Company had acquired
$ 19,775 in equity securities for which the cash had not yet been paid. The
payable for these securities was included in the line item other liabilities on
the balance sheet.
7. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions that at times may
exceed federally insured limits. The Company maintains its primary operating
cash accounts with First Southern National Bank, an affiliate of UTG, and its
largest shareholder, Chairman and CEO, Jesse Correll. The Company holds
approximately $ 20,000,000 for which there are no pledges or guarantees outside
FDIC insurance limits. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
8. COMPREHENSIVE INCOME
Tax
Before-Tax (Expense) Net of Tax
March 31, 2004 Amount or Benefit Amount
---------------------------------------------- ---------------- ----------------- ---------------
Unrealized holding gains during
period $ 4,289,300 $ (1,501,255) $ 2,788,045
Less: reclassification adjustment
for gains realized in net income (141,746) (49,611) (92,135)
---------------- ----------------- ---------------
Net unrealized gains 4,147,554 (1,451,644) 2,695,910
---------------- ----------------- ---------------
Other comprehensive income $ 4,147,554 $ (1,451,644) $ 2,695,910
================ ================= ===============
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
The purpose of this section is to discuss and analyze the Company's consolidated
results of operations, financial condition and liquidity and capital resources.
This analysis should be read in conjunction with the consolidated financial
statements and related notes that appear elsewhere in this report. The Company
reports financial results on a consolidated basis. The consolidated financial
statements include the accounts of UTG and its subsidiaries at March 31, 2004.
Cautionary Statement Regarding Forward-Looking Statements
Any forward-looking statement contained herein or in any other oral or written
statement by the Company or any of its officers, directors or employees is
qualified by the fact that actual results of the Company may differ materially
from any such statement due to the following important factors, among other
risks and uncertainties inherent in the Company's business:
1. Prevailing interest rate levels, which may affect the ability of the
Company to sell its products, the market value of the Company's
investments and the lapse ratio of the Company's policies,
notwithstanding product design features intended to enhance
persistency of the Company's products.
2. Changes in the federal income tax laws and regulations which may
affect the relative tax advantages of the Company's products.
3. Changes in the regulation of financial services, including bank sales
and underwriting of insurance products, which may affect the
competitive environment for the Company's products.
4. Other factors affecting the performance of the Company, including, but
not limited to, market conduct claims, insurance industry
insolvencies, insurance regulatory initiatives and developments, stock
market performance, an unfavorable outcome in pending litigation, and
investment performance.
Critical Accounting Policies
General
We have identified the accounting policies below as critical to the
understanding of our results of operations and our financial position. The
application of these critical accounting policies in preparing our financial
statement requires management to use significant judgments and estimates
concerning future results or other developments including the likelihood, timing
or amount of one or more future transactions or amounts. Actual results may
differ from these estimates under different assumptions or conditions. On an
on-going basis, we evaluate our estimates, assumptions and judgments based upon
historical experience and various other information that we believe to be
reasonable under the circumstances.
DAC and Cost of Insurance Acquired
Deferred acquisition costs (DAC) and cost of insurance acquired reflect our
expectations about the future experience of the existing business in-force. The
primary assumptions regarding future experience that can affect the carrying
value of DAC and cost of insurance acquired balances include mortality, interest
spreads and policy lapse rates. Significant changes in these assumptions can
impact amortization of DAC and cost of insurance acquired in both the current
and future periods, which is reflected in earnings.
Investments
We regularly monitor our investment portfolio to ensure that investments that
may be other than temporarily impaired are identified in a timely manner and
properly valued, and that any impairments are charged against earnings in the
proper period.
Valuing our investment portfolio involves a variety of assumptions and
estimates, particularly for investments that are not actively traded. We rely on
external pricing sources for highly liquid publicly traded securities. Many
judgments are involved in timely identifying and valuing securities, including
potentially impaired securities. Inherently, there are risks and uncertainties
involved in making these judgments. Changes in circumstances and critical
assumptions such as a continued weak economy, a more pronounced economic
downturn or unforeseen events which affect one or more companies, industry
sectors or countries could result in write downs in future periods for
impairments that are deemed other than temporary.
Results of Operations
(a) Revenues
The Company experienced a nominal decrease in premiums and policy fee revenues,
net of reinsurance premiums and policy fees, when comparing the first three
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. Among
these being considered is a child product and term life insurance.
Net investment income decreased 37% when comparing the first three months of
2004 to the same period in 2003. Although there has been no significant change
in the national prime rate during the last year, the decline in the interest
rate environment has resulted in lower earnings on short-term funds as well as
on 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 quarter 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 $ 12,420,000 in bonds that matured or
were called during the first three months of 2004. The result of these
transactions is an excess of cash invested in short-term money market funds. The
Company is currently looking to other short-term investment vehicles as changes
in the interest rate environment take effect. The Company has also reinvested in
a limited number of bonds at current lower yields during the quarter. 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 had realized investment losses of $ 92,135 in the first three months
of 2004 compared to net realized investment gains of $ 242,281 for the same
period in 2003. The net realized loss in 2004 is primarily comprised of $ 93,170
in net realized losses from the disposal of fixed maturity securities. The net
realized gains in 2003 consist of a $ 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.
Other income increased 28% when comparing the first three months of 2004 to the
same period in 2003. 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 three months of
2004 and 2003, the Company received $ 112,227 and $ 117,259 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 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 6% in the first three months of 2004 compared to the same
period in 2003. This decrease for the first three 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 three months of 2004 as compared
to the first three months of 2003. 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 three months of 2004 to
the same period in 2003. 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 insured increases.
Commissions and amortization of deferred policy acquisition costs decreased 85%
for the first three 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 increased 19% in the first three months of 2004 compared to
the same period in 2003. Expenses increased due to expenses incurred in the
normal course of business. The Company continues to simplify its organizational
structure and monitor expenditures looking for savings opportunities.
Interest expense decreased 38% in the first three 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 bears interest at the rate of .25% in excess of
Southwest Bank of St. Louis' prime rate. Management believes overall sources
available are more than adequate to service this debt. These sources include
current cash 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 $ (874,195) in the first three months of 2004
compared to a net loss of $ (494,124) for the same period in 2003. The net loss
in 2004 was mainly attributable to the decrease in investment income
Financial Condition
The financial condition of the Company has improved since December 31, 2003.
Total shareholders' equity increased approximately $ 1,790,000 as of March 31,
2004 compared to December 31, 2003. The increase is attributable to the
performance of the equity investments of $ 2,696,000, net of deferred taxes,
that was included in the accumulated other comprehensive income. In addition,
the Company purchased treasury shares and retired common stock in the amount of
$ 31,870, which also decreased shareholders' equity. At March 31, 2004, the
Company implemented FAS 150 regarding the accounting for certain financial
instruments with characteristics of both liabilities and equity. This
implementation resulted in reclassifying $ 49,635 from equity to other
liabilities on the financial statement.
Investments represent approximately 63% and 77% of total assets at March 31,
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 March 31, 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 17% and 3% as of March 31, 2004, and
December 31, 2003, respectively. Fixed maturities as a percentage of total
invested assets were approximately 38% and 53% as of March 31, 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 (used in) provided by operating activities was $ (483,878) and
$ 849,689 for the three months ending March 31, 2004 and 2003, respectively. The
net cash provided by operating activities plus net policyholder contract
deposits after the payment of policyholder withdrawals equaled $ 96,174 for the
first three months of 2004 and $ 1,799,979 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 $ 45,492,459 and
$ (8,217,689) for the three-month periods ending March 31, 2004 and 2003,
respectively. The most significant aspect of cash provided by (used in)
investing activities is the fixed maturity transactions. The Company sold
$ 51,835,002 and $ 24,466,178 of fixed maturities in the first three months of
2004 and 2003, respectively. In addition, the Company purchased $ 4,497,188 and
$ 30,208,189 of fixed maturities in 2004 and 2003, respectively.
Net cash provided by (used in) financing activities was $ 533,407 and $ (52,744)
for the three month periods ending March 31, 2004 and 2003, respectively.
Policyholder contract deposits decreased 4% in the first three months of 2004
compared to the same period in 2003. Policyholder contract withdrawals increased
16% in the first three months of 2004 compared to the same period in 2003. In
addition, as of March 31, 2004, the Company had retired $238,800 in common
stock.
At March 31, 2004, the Company had a total of $2,275,000 in short-term debt
outstanding. Management believes overall sources available are more than
adequate to service this debt. These sources include current cash balances of
UTG, expected future operating cash flows and payment of dividends from the
Company's life subsidiary, UG.
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 March 31, 2004, 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,
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.
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 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.
March 31, 2004
Expected maturity date
2004 2005 2006 2007 2008 Thereafter Total Fair value
Long term debt
Fixed rate 0 0 0 0 0 0 0 0
Avg. int. rate 0 0 0 0 0 0 0 0
Variable rate 2,275,000 0 0 0 0 0 2,275,000 2,275,000
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.
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: May 10, 2004 By /s/ Randall L. Attkisson
Randall L. Attkisson
President, Chief Operating Officer
and Director
Date: May 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
