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, 2005
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, 2005, was 3,953,486.
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, 2005 and December 31, 2004....3
Consolidated Statements of Operations for the three months ended
March 31, 2005 and 2004...............................................4
Consolidated Statement of Changes in Shareholders' Equity for the
three months ended March 31, 2005......................................5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004...............................................6
Notes to Consolidated Financial Statements................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........15
ITEM 4. CONTROLS AND PROCEDURES...........................................16
PART II. OTHER INFORMATION..................................................17
ITEM 1. LEGAL PROCEEDINGS.................................................17
ITEM 2. CHANGE IN SECURITIES..............................................17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............17
ITEM 5. OTHER INFORMATION.................................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................17
SIGNATURES....................................................................18
EXHIBIT INDEX.................................................................20
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
---------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
ASSETS 2005 2004*
------------------- -------------------
Investments:
Fixed maturities at amortized cost
(market $10,508,714 and $12,097,708) $ 10,481,093 $ 11,973,415
Investments held for sale:
Fixed maturities, at market (cost $140,434,800 and $147,217,453) 139,179,791 148,193,887
Equity securities, at market (cost $15,216,214 and $15,216,214) 25,910,996 24,399,172
Mortgage loans on real estate at amortized cost 27,039,487 20,722,415
Investment real estate, at cost, net of accumulated depreciation 28,170,465 28,192,081
Policy loans 12,743,446 12,844,748
Short-term investments 39,132 39,489
------------------- -------------------
243,564,410 246,365,207
Cash and cash equivalents 8,040,924 11,859,472
Securities of affiliate 4,000,000 4,000,000
Accrued investment income 1,770,269 1,678,393
Reinsurance receivables:
Future policy benefits 32,269,999 32,422,529
Policy claims and other benefits 3,931,167 3,959,569
Cost of insurance acquired 12,281,969 12,747,532
Deferred policy acquisition costs 1,610,789 1,685,263
Property and equipment, net of accumulated depreciation 2,120,554 2,172,636
Income taxes receivable, current 230,310 181,683
Other assets 3,663,828 795,800
------------------- -------------------
Total assets $ 313,484,219 $ 317,868,084
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 235,763,374 $ 235,592,973
Policy claims and benefits payable 1,939,294 1,879,566
Other policyholder funds 1,341,992 1,323,668
Dividend and endowment accumulations 12,528,016 12,526,390
Deferred income taxes 8,261,263 8,561,010
Other liabilities 4,140,308 7,405,434
------------------- -------------------
Total liabilities 263,974,247 267,289,041
------------------- -------------------
Minority interests in consolidated subsidiaries 6,133,499 6,127,938
------------------- -------------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share
Authorized 7,000,000 shares - 3,955,002 and 3,965,533 shares issued
after deducting treasury shares of 238,160 and 227,709 79,106 79,315
Additional paid-in capital 42,530,719 42,590,820
Retained earnings (5,444,140) (4,897,572)
Accumulated other comprehensive income 6,210,788 6,678,542
------------------- -------------------
Total shareholders' equity 43,376,473 44,451,105
------------------- -------------------
Total liabilities and shareholders' equity $ 313,484,219 $ 317,868,084
=================== ===================
* Balance sheet audited at December 31, 2004.
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
--------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
2005 2004
----------------- -----------------
Revenues:
Premiums and policy fees $ 4,204,960 $ 4,620,958
Reinsurance premiums and policy fees (692,265) (746,813)
Net investment income 2,433,259 1,831,077
Realized investment losses, net (18,058) (92,135)
Other income 268,837 220,260
----------------- -----------------
6,196,733 5,833,347
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 4,870,047 4,873,078
Reinsurance benefits and claims (304,296) (266,963)
Annuity 250,068 280,695
Dividends to policyholders 276,007 285,232
Commissions and amortization of deferred
policy acquisition costs 17,371 25,416
Amortization of cost of insurance acquired 465,563 467,868
Operating expenses 1,256,884 1,397,448
Interest expense 13 25,634
----------------- -----------------
6,831,657 7,088,408
Loss before income taxes, minority interest
and equity in earnings of investees (634,924) (1,255,061)
Income tax credit 93,903 121,508
Minority interest in income of
consolidated subsidiaries (5,547) 259,358
----------------- -----------------
Net loss $ (546,568)$ (874,195)
================= =================
Basic loss per share from continuing
operations and net loss $ (0.14)$ (0.22)
================= =================
Diluted loss per share from continuing
operations and net loss $ (0.14)$ (0.22)
================= =================
Basic weighted average shares outstanding 3,955,082 3,999,331
================= =================
Diluted weighted average shares outstanding 3,955,082 3,999,331
================= =================
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
For the three months ended March 31, 2005 (Unaudited)
------------------------------------------------------------------------------------------------------------------------
Common stock
Balance, beginning of year $ 79,315
Issued during year 0
Retired common shares 0
Purchase treasury shares (209)
------------------
Balance, end of period 79,106
------------------
Additional paid-in capital
Balance, beginning of year 42,590,820
Issued during year 0
Retired common shares 0
Purchase treasury shares (60,101)
------------------
Balance, end of period 42,530,719
------------------
Retained earnings
Balance, beginning of year (4,897,572)
Net loss (546,568) $ (546,568)
------------------ ------------------
Balance, end of period (5,444,140)
------------------
Accumulated other comprehensive income
Balance, beginning of year 6,678,542
Other comprehensive income
Unrealized holding losses on securities
net of reclassification adjustment (467,754) (467,754)
------------------ ------------------
Comprehensive loss $ (1,014,322)
==================
Balance, end of period 6,210,788
------------------
Total shareholders' equity, end of period $ 43,376,473
==================
See accompanying notes.
UNITED TRUST GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
2005 2004
---------------- ----------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $ (546,568) $ (874,195)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization/accretion of fixed maturities 144,387 154,891
Realized investment losses 17,589 93,170
Policy acquisition costs deferred (7,000) (24,000)
Amortization of deferred policy acquisition costs 81,474 77,345
Amortization of cost of insurance acquired 465,563 467,868
Depreciation 515,885 242,616
Minority interest 5,561 259,358
Change in accrued investment income (91,876) 378,305
Change in reinsurance receivables 180,932 598,490
Change in policy liabilities and accruals 519,575 (165,425)
Charges for mortality and administration of
universal life and annuity products (2,312,073) (2,389,691)
Interest credited to account balances 1,355,719 1,367,913
Change in income taxes payable (97,919) (123,221)
Change in other assets and liabilities, net (8,466) (547,302)
---------------- ----------------
Net cash provided by (used in) operating activities 222,783 (483,878)
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 7,472,038 47,326,595
Fixed maturities matured 1,452,531 4,508,407
Mortgage loans 1,158,446 3,227,427
Policy loans 1,093,521 838,683
Short-term 357 0
---------------- ----------------
Total proceeds from investments sold and matured 11,176,893 55,901,112
Cost of investments acquired:
Fixed maturities held for sale (6,964,849) (4,497,188)
Equity securities 0 (3,233,053)
Mortgage loans (7,445,518) (916,737)
Real estate (428,586) (1,216,287)
Policy loans (992,219) (539,869)
Short-term 0 (1,137)
---------------- ----------------
Total cost of investments acquired (15,831,172) (10,404,271)
Purchase of property and equipment (13,600) (4,382)
---------------- ----------------
Net cash provided by (used in) investing activities (4,667,879) 45,492,459
Cash flows from financing activities:
Policyholder contract deposits 2,405,966 2,564,851
Policyholder contract withdrawals (1,719,108) (1,984,799)
Proceeds from line of credit 0 2,275,000
Purchase of treasury stock (60,310) (31,869)
Payments of principal on notes payable 0 (2,289,776)
---------------- ----------------
Net cash provided by financing activities 626,548 533,407
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (3,818,548) 45,541,988
Cash and cash equivalents at beginning of period 11,859,472 8,749,727
---------------- ----------------
Cash and cash equivalents at end of period $ 8,040,924 $ 54,291,715
================ ================
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,
2004.
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, 2005 Mr. Correll owns or controls directly and
indirectly approximately 66% of UTG's outstanding stock.
At March 31, 2005, 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, 2005 and December 31, 2004, fixed maturities and fixed
maturities held for sale represented 61% and 65%, 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, 2005, 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, 2005 and December 31, 2004, the Company had no long-term debt
outstanding.
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 LOC was for a one-year term from the date of issue. Upon maturity
the Company has 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, 2005, 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
Southwest Bank of St. Louis. The LOC expired one-year term from the date of
issue and has been renewed for additional terms. 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, 2005, 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.
During 2004 and 2003, the Board of Directors of UTG approved offerings under the
plan to qualified individuals. For the years ended December 31, 2004 and 2003,
four individuals purchased 14,440 and eight individuals purchased 58,891 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,
2005, UTG had 89,877 shares outstanding that were issued under this program with
a value of $ 11.64 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 repurchasing shares. Repurchased shares are available for future issuance
for general corporate purposes. Through April 30, 2005, UTG has spent
$ 1,201,963 in the acquisition of 184,589 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, 2005, 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.
On June 10, 2002 UTG and Fiserv formed an alliance between their respective
organizations to provide third party administration (TPA) services to insurance
companies seeking business process outsourcing solutions. Fiserv will be
responsible for the marketing and sales function for the alliance, as well as
providing the operations processing service for the Company. The Company will
staff the administration effort. To facilitate the alliance, the Company plans
to convert its existing business and TPA clients to "ID3", a software system
owned by Fiserv to administer an array of life, health and annuity products in
the insurance industry. Fiserv 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 March 31, 2005.
Also during June 2002, the Company entered into a five-year contract with Fiserv
for services related to its purchase of the "ID3" software system. Under the
contract, the Company is required to pay a minimum of $ 12,000 per month in
software maintenance costs and $ 5,000 per month in offsite data center costs
for a five-year period from the date of the signing.
In the normal course of business the Company is involved from time to time in
various legal actions and other state and federal proceedings. There were no
proceedings pending or threatened as of March 31, 2005.
6. OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $ 13 and $ 25,634 in interest expense during
the first three months of 2005 and 2004, respectively. The Company paid no
federal income tax during the first three months of 2005 and 2004, respectively.
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 $ 6,500 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, 2005 Amount or Benefit Amount
---------------------------------------------- ---------------- ----------------- ---------------
Unrealized holding losses during
period $ (691,841) $ 242,145 $ (449,696)
Less: reclassification adjustment
for losses realized in net income 27,782 (9,724) 18,058
---------------- ----------------- ---------------
Net unrealized losses (719,623) 251,869 (467,754)
---------------- ----------------- ---------------
Other comprehensive loss $ (719,623) $ 251,869 $ (467,754)
================ ================= ===============
9. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has not issued any new
pronouncements during the first quarter of 2005.
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, 2005.
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, 2004, 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 three months of 2005.
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 2005 to the same period in 2004. 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.
The Company's primary source of new business production comes from the
conservation effort implemented several years ago. This effort was an attempt to
improve the persistency rate of insurance company's policies. Several of the
customer service representatives of the Company are also 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. In 2003, the
Company replaced its original universal life product with a new universal life
contract referred to as "the Legacy". This product was designed for use with
several distribution channels including the Company's own internal agents, bank
agent/employees and through personally producing general agents "PPGA". In
addition, the Company has introduced other new and updated products in recent
periods including the Horizon Annuity and Kid Kare (as single premium, child
term policy). The company is currently working on development of a level term
and decreasing term product. Management has no current plans to increase
marketing efforts. New product development is anticipated to be utilized in
conservation efforts and sales to existing customers. Such sales are not
expected to be material.
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. This potential is in the very early states of consideration.
Management will proceed cautiously and may even determine not to proceed. The
introduction of new products is not expected to produce significant premium
writings. The Company is currently looking at other types of products to
compliment the existing offerings.
Net investment income increased 33% when comparing the first three months of
2005 to the same period in 2004. There are two primary factors that are driving
the overall change in investment income from 2004 to 2005. The first factor is
the decrease in the bond income. Gross investment income from bonds actually
decreased approximately 11% from 2004 to 2005. 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 was an excess of cash invested in short-term money market
funds. The Company began reinvesting this cash during the second quarter of 2004
primarily in governmental and agency bonds at current lower yields. Although
this hurt investment earnings in the short run, the Company did not have to
write off any investment losses due to excessive risk.
More significant than the change in bond income was the performance of the
Company's real estate investments during the first quarter of 2005 compared to
2004. Net income from the Company's primary real estate holding improved more
than $ 400,000 in comparing the first quarter of 2005 to 2004. The improvement
in real estate investment income is principally due to a higher occupancy rate
in Hampshire Plaza.
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 $ 18,058 in the first three months
of 2005 compared to net realized investment losses of $ 92,135 for the same
period in 2004. The net realized losses are primarily comprised of net realized
losses from the disposal of fixed maturity securities.
On April 15, 2005, UG completed an agreement for the sale of 2,216,776 shares of
common stock owned of BNL Financial Corporation ("BNL"). These shares
represented approximately 10.57% of the current outstanding shares of BNL and
represent all shares owned by UG. The shares were reacquired by the issuing
entity for an agreed upon sales price of $ 2,300,000. The Company will recognize
a realized gain, net of taxes, of approximately $ 1,268,750, or $ 0.32 per
common share outstanding during the second quarter.
Other income increased 22% when comparing the first three months of 2005 to the
same period in 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 three months of
2005 and 2004, the Company received $ 215,448 and $ 138,140 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 less than 1% in the first three months of 2005 compared to the
same period in 2004. 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 32%
for the first three months of 2005 compared to the same period in 2004. 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 10% in the first three months of 2005 compared to
the same period in 2004. Expenses decreased 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 100% in the first three months of 2005 compared to
the same period in 2004. The Company repaid all outside debt in 2004, through
operating cash flows and dividends received from its subsidiary UG. At March 31,
2005, UTG had no debt outstanding.
(c) Net income
The Company had a net loss of $ (546,568) in the first three months of 2005
compared to a net loss of $ (874,195) for the same period in 2004. The net loss
in 2005 was mainly attributable to the decrease in income from subsidiaries.
Financial Condition
Total shareholders' equity decreased approximately $ 1,075,000 as of March 31,
2005 compared to December 31, 2004. The decrease is attributable to a decline in
market value of the debt investments of $ 473,000, 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
$ 60,310, which also decreased shareholders' equity.
Investments represent approximately 78% of total assets at March 31, 2005 and
December 31, 2004, 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, 2005, 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 two principal needs for cash - the insurance companies'
contractual obligations to policyholders and the payment of operating expenses.
Cash and cash equivalents as a percentage of total assets were approximately 3%
and 4% as of March 31, 2005, and December 31, 2004, respectively. Fixed
maturities as a percentage of total assets were approximately 48% and 50% as of
March 31, 2005 and December 31, 2004, 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 $ 222,783 and
$ (483,878) for the three months ending March 31, 2005 and 2004, respectively.
The net cash provided by operating activities plus net policyholder contract
deposits after the payment of policyholder withdrawals equaled $ 909,641 for the
first three months of 2005 and $ 96,174 the same period in 2004. 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 $ (4,667,879) and
$ 45,492,459 for the three-month periods ending March 31, 2005 and 2004,
respectively. The most significant aspect of cash provided by (used in)
investing activities is the fixed maturity transactions. Fixed maturities of
$ 8,924,569 and $ 51,835,002 were either sold or matured in the first three
months of 2005 and 2004, respectively. In addition, the Company purchased
$ 6,964,849 and $ 4,497,188 of fixed maturities in 2005 and 2004, respectively.
Net cash provided by (used in) financing activities was $ 626,548 and $ 533,407
for the three month periods ending March 31, 2005 and 2004, respectively.
Policyholder contract deposits decreased 6% in the first three months of 2005
compared to the same period in 2004. Policyholder contract withdrawals also
decreased 13% in the first three months of 2005 compared to the same period in
2004.
At March 31, 2005, the Company had no short-term debt outstanding, compared to
$ 2,275,000 outstanding at March 31, 2004.
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,
2004, UG's total statutory capital and surplus amounted to $ 21,860,401. At
December 31, 2004, UG had a statutory loss from operations of $ 762,152.
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.
Regulatory Environment
In March 2005, UTG's Board of Directors adopted a proposal to change the state
of incorporation of UTG from Illinois to Delaware by merging UTG with and into a
wholly-owned Delaware subsidiary (the "reincorporation merger"). The Board of
Directors and management of UTG believe that reincorporation in Delaware would
be beneficial to the Company because Delaware corporate law is more
comprehensive, widely used and extensively interpreted than other state
corporate laws, including Illinois corporate law. The reincorporation merger
would effect only a change in UTG's legal domicile and certain other changes of
a legal nature. It would not result in any change in UTG's business, management,
fiscal year, assets or liabilities or location of its principal facilities. The
Board of Directors intends to submit the reincorporation proposal to its
shareholders for approval at the 2005 annual meeting of shareholders to be held
on June 15, 2005. If approved by shareholders, UTG expects that the
reincorporation merger would be effected as soon as reasonably practicable
following the annual meeting.
Accounting Developments
The Financial Accounting Standards Board ("FASB") has not issued any new
pronouncements during the first quarter of 2005.
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 results from a significant
holding of fixed maturity investments and mortgage loans on real estate, all of
which comprised approximately 73% of the investment portfolio as of March 31,
2005. 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
80% of the fixed maturities we owned at March 31, 2005 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 March 31, 2005:
Decreases in Interest Rates Increases in Interest Rates
200 Basis 100 Basis 100 Basis 200 Basis 300 Basis
Points Points Points Points Points
----------------------- ------------------ ----------------- ---------------------- -----------------------
$ 6,261,000 $ 3,756,000 $ (7,813,000) $ (13,981,000) $ (19,785,000)
----------------------- ------------------ ----------------- ---------------------- -----------------------
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 March 31, 2005 and December 31, 2004, 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. 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.
In March 2005, UTG's Board of Directors adopted a proposal to change the state
of incorporation of UTG from Illinois to Delaware by merging UTG with and into a
wholly-owned Delaware subsidiary (the "reincorporation merger"). The Board of
Directors and management of UTG believe that reincorporation in Delaware would
be beneficial to the Company because Delaware corporate law is more
comprehensive, widely used and extensively interpreted than other state
corporate laws, including Illinois corporate law. The reincorporation merger
would effect only a change in UTG's legal domicile and certain other changes of
a legal nature. It would not result in any change in UTG's business, management,
fiscal year, assets or liabilities or location of its principal facilities. The
Board of Directors intends to submit the reincorporation proposal to its
shareholders for approval at the 2005 annual meeting of shareholders to be held
on June 15, 2005. If approved by shareholders, UTG expects that the
reincorporation merger would be effected as soon as reasonably practicable
following the annual meeting.
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
On March 21, 2005, UTG filed a report on Form 8-K regarding Item 1.01 Entry into
a Material Definitive Agreement. The information reported in the 8-K discussed
the agreement for the sale of 2,216,776 shares of common stock owned of BNL
Financial Corporation.
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 12, 2005 By /s/ Randall L. Attkisson
Randall L. Attkisson
President, Chief Operating Officer
and Director
Date: May 12, 2005 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
