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, 2006
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
UTG, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 20-2907892
(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, 2006, was 3,879,976.
UTG, 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, 2006 and
December 31, 2005.....................................................3
Consolidated Statements of Operations for the three months ended
March 31, 2006 and 2005...............................................4
Consolidated Statement of Changes in Shareholders' Equity and
Comprehensive Income for the three months ended March 31, 2006........5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2006 and 2005...............................................6
Notes to Consolidated Financial Statements................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........16
ITEM 4. CONTROLS AND PROCEDURES...........................................17
PART II. OTHER INFORMATION..................................................18
ITEM 1. LEGAL PROCEEDINGS.................................................18
ITEM 2. CHANGE IN SECURITIES..............................................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....................................................................19
EXHIBIT INDEX.................................................................20
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UTG, Inc.
AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
---------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
ASSETS 2006 2005*
------------------- -------------------
Investments:
Fixed maturities at amortized cost
(market $7,276,309 and $7,500,291) $ 7,388,715 $ 7,513,064
Investments held for sale:
Fixed maturities, at market (cost $127,803,612 and $127,000,657) 124,342,385 125,075,626
Equity securities, at market (cost $13,991,459 and $15,098,815) 21,200,581 24,574,259
Mortgage loans on real estate at amortized cost 36,332,326 36,781,293
Investment real estate, at cost, net of accumulated depreciation 43,632,271 42,587,982
Policy loans 12,388,624 12,644,838
Short-term investments 44,284 42,116
------------------- -------------------
245,329,186 249,219,178
Cash and cash equivalents 17,681,934 12,204,087
Securities of affiliate 4,000,000 4,000,000
Accrued investment income 1,678,190 1,538,972
Reinsurance receivables:
Future policy benefits 31,842,379 31,908,738
Policy claims and other benefits 4,188,938 4,017,833
Cost of insurance acquired 9,924,456 10,554,447
Deferred policy acquisition costs 1,355,745 1,414,364
Property and equipment, net of accumulated depreciation 2,023,372 1,921,841
Income taxes receivable, current 89,331 150,447
Other assets 1,160,835 1,901,594
------------------- -------------------
Total assets $ 319,274,366 $ 318,831,501
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 235,314,710 $ 234,959,085
Policy claims and benefits payable 2,248,128 1,950,037
Other policyholder funds 1,289,234 1,217,857
Dividend and endowment accumulations 12,622,878 12,638,713
Deferred income taxes 7,095,564 8,100,615
Other liabilities 6,344,353 4,738,809
------------------- -------------------
Total liabilities 264,914,867 263,605,116
------------------- -------------------
Minority interests in consolidated subsidiaries 11,597,285 11,908,933
------------------- -------------------
Shareholders' equity:
Common stock - no par value, stated value $.001 per share
Authorized 7,000,000 shares - 3,890,404 and 3,901,800 shares issued
after deducting treasury shares of 314,838 and 303,442 3,890 3,902
Additional paid-in capital 42,205,298 42,295,661
Accumulated deficit (1,958,042) (3,637,349)
Accumulated other comprehensive income 2,511,068 4,655,238
------------------- -------------------
Total shareholders' equity 42,762,214 43,317,452
------------------- -------------------
Total liabilities and shareholders' equity $ 319,274,366 $ 318,831,501
=================== ===================
* Balance sheet audited at December 31, 2005.
See accompanying notes.
UTG, Inc.
AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
--------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
2006 2005
----------------- -----------------
Revenues:
Premiums and policy fees $ 4,165,766 $ 4,204,960
Reinsurance premiums and policy fees (737,994) (692,265)
Net investment income 2,539,174 2,433,259
Realized investment gains (losses), net 3,163,693 (18,058)
Other income 698,650 268,837
----------------- -----------------
9,829,289 6,196,733
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 5,393,244 4,870,047
Reinsurance benefits and claims (691,225) (304,296)
Annuity 205,531 250,068
Dividends to policyholders 189,552 276,007
Commissions and amortization of deferred
policy acquisition costs (13,474) 17,371
Amortization of cost of insurance acquired 629,991 465,563
Operating expenses 1,724,197 1,256,884
Interest expense 0 13
----------------- -----------------
7,437,816 6,831,657
Income (loss) before income taxes, minority interest
and equity in earnings of investees 2,391,473 (634,924)
Income tax credit (expense) (723,827) 93,903
Minority interest in income (loss) of
consolidated subsidiaries 11,676 (5,547)
----------------- -----------------
Net income(loss) $ 1,679,322 $ (546,568)
================= =================
Basic income (loss) per share from continuing
operations and net income (loss) $ 0.43 $ (0.14)
================= =================
Diluted loss per share from continuing
operations and net income (loss) $ 0.43 $ (0.14)
================= =================
Basic weighted average shares outstanding 3,890,404 3,955,082
================= =================
Diluted weighted average shares outstanding 3,890,404 3,955,082
================= =================
See accompanying notes.
UTG, Inc.
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income
For the three months ended March 31, 2006 (Unaudited)
-----------------------------------------------------------------------------------------------------------------
Common stock
Balance, beginning of year $ 3,902
Issued during year 0
Retired common shares 0
Purchase treasury shares (12)
-------------------
Balance, end of period 3,890
-------------------
Additional paid-in capital
Balance, beginning of year 42,295,661
Issued during year 0
Retired common shares 0
Purchase treasury shares (90,363)
-------------------
Balance, end of period 42,205,298
-------------------
Accumulated deficit
Balance, beginning of year (3,637,364)
Net gain 1,679,322
-------------------
Balance, end of period (1,958,042)
-------------------
Accumulated other comprehensive income
Balance, beginning of year 4,655,238
Other comprehensive income
Unrealized holding losses on securities
net of reclassification adjustment (2,144,170)
-------------------
Comprehensive loss
Balance, end of period 2,511,068
-------------------
Total shareholders' equity, end of period $ 42,762,214
===================
Comprehensive income
Net gain $ 1,679,322
Unrealized holding losses on securities
net of reclassification adjustment (2,144,170)
-------------------
Total comprehensive income $ (464,848)
===================
See accompanying notes.
UTG, Inc.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
2006 2005
---------------- ----------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ 1,679,322 $ (546,568)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization/accretion of fixed maturities 120,865 144,387
Realized investment gains (losses) (3,163,073) 17,589
Policy acquisition costs deferred 0 (7,000)
Amortization of deferred policy acquisition costs 58,619 81,474
Amortization of cost of insurance acquired 629,991 465,563
Depreciation 590,295 515,885
Minority interest (11,676) 5,561
Change in accrued investment income (139,218) (91,876)
Change in reinsurance receivables (104,746) 180,932
Change in policy liabilities and accruals 1,344,262 519,575
Charges for mortality and administration of
universal life and annuity products (2,445,519) (2,312,073)
Interest credited to account balances 1,320,200 1,355,719
Change in income taxes payable 714,413 (97,919)
Change in other assets and liabilities, net 2,046,331 (8,466)
---------------- ----------------
Net cash provided by operating activities 2,640,066 222,783
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 1,225,614 7,472,038
Fixed maturities matured 1,422,043 1,452,531
Equity securities 4,269,674 0
Mortgage loans 1,318,967 1,158,446
Real estate 75,095 0
Policy loans 934,195 1,093,521
Short-term 0 357
---------------- ----------------
Total proceeds from investments sold and matured 9,245,588 11,176,893
Cost of investments acquired:
Fixed maturities held for sale (2,135,700) (6,964,849)
Fixed maturities matured (1,310,673) 0
Mortgage loans (870,000) (7,445,518)
Real estate (1,644,311) (428,586)
Policy loans (677,981) (992,219)
Short-term (2,168) 0
---------------- ----------------
Total cost of investments acquired (6,640,833) (15,831,172)
Purchase of property and equipment (166,914) (13,600)
---------------- ----------------
Net cash provided by (used in) investing activities 2,437,841 (4,667,879)
Cash flows from financing activities:
Policyholder contract deposits 2,234,210 2,405,966
Policyholder contract withdrawals (1,743,895) (1,719,108)
Purchase of treasury stock (90,375) (60,310)
---------------- ----------------
Net cash provided by financing activities 399,940 626,548
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 5,477,847 (3,818,548)
Cash and cash equivalents at beginning of period 12,204,087 8,040,924
---------------- ----------------
Cash and cash equivalents at end of period $ 17,681,934 $ 4,222,376
================ ================
See accompanying notes.
UTG, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by UTG,
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, 2005.
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, 2006 Mr. Correll owns or controls directly and
indirectly approximately 67% of UTG's outstanding stock.
At March 31, 2006, consolidated subsidiaries of UTG, Inc. were as depicted on
the following organizational chart.
2. INVESTMENTS
As of March 31, 2006 and December 31, 2005, fixed maturities and fixed
maturities held for sale represented 54% and 53%, 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, 2006, 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, 2006 and December 31, 2005, 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 Tennessee ("FNBT") located in Livingston, Tennessee.
The LOC was for a one-year term from the date of issue. Upon maturity the
Company had renewed the LOC for additional terms until June 1, 2005. The
interest rate on the LOC was 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. In order to provide greater operational
flexibility, this LOC was transferred to the Company's wholly-owned insurance
subsidiary, UG, upon the June 1, 2005 maturity.
On June 1, 2005, UG was extended a $ 3,300,000 line of credit from the FNBT. The
LOC is for a one-year term from the date of issue. 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, 2006, the Company had no outstanding borrowings attributable to
this LOC.
On April 1, 2002, UTG was extended a $ 5,000,000 line of credit from Southwest
Bank of St. Louis. The LOC expired one-year from the date of issue and was
renewed. 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, 2006, 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 UTG, 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 2005 and 2004, the Board of Directors of UTG approved offerings under the
plan to qualified individuals. For the years ended December 31, 2005 and 2004,
two individuals purchased 12,000 shares and four individuals purchased 14,440
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,
2006, UTG had 101,877 shares outstanding that were issued under this program
with a value of $ 13.83 per share pursuant to the above formula.
B. Stock Repurchase Program
In 2001 and 2004, the Board of Directors of UTG authorized the repurchase in the
open market or in privately negotiated transactions of up to a total of $ 2
million of UTG's common stock. On April 18, 2006, an additional $ 1 million, for
a total of $ 3 million, was authorized for repurchasing shares at the Company's
option. Repurchased shares are available for future issuance for general
corporate purposes. Through April 30, 2006, UTG has spent $ 1,836,345 in the
acquisition of 270,099 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, 2006, 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 and as of
March 31, 2006, all but one small block has been converted to the ID3. 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, 2006.
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 $ 12,000 per month in software
maintenance costs and a per-policy charge in offsite data center costs, with a
minimum of $ 12,000 per month, for a five-year period from the date of the
agreement.
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, 2006.
6. OTHER CASH FLOW DISCLOSURE
On a cash basis, the Company paid $ 0 and $ 13 in interest expense during the
first three months of 2006 and 2005, respectively. The Company paid $ 150,000
and $ 0 in federal income tax during the first three months of 2006 and 2005,
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 $ 12,672,000 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, 2006 Amount or Benefit Amount
---------------------------------------------- ---------------- ----------------- ---------------
Unrealized holding losses during
Period $ (8,165,943) $ 2,858,080 $ (5,307,863)
Less: reclassification adjustment
for losses realized in net income 4,867,220 (1,703,527) 3,163,693
---------------- ----------------- ---------------
Net unrealized losses (3,298,723) 1,154,553 (2,144,170)
---------------- ----------------- ---------------
Change in other comprehensive income (loss) 1,154,553
$ (3,298,723) $ $ (2,144,170)
================ ================= ===============
9. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") issued Statement No. 155,
Accounting for Certain Hybrid Financial Instruments - An amendment of FASB
Statements No. 133 and 140. The statement improves the financial reporting by
eliminating the exemption from applying Statement 133 to interest in securitized
financial assets so that similar instruments are accounting for similarly
regardless of the form of the instrument. The statement is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The Company will account
for all qualifying financial instruments in accordance with the requirements of
Statement No. 155.
The FASB also issued Statement No. 156, Accounting for Servicing of Financial
Assets - an amendment of FASB Statement No. 140. The statement requires that all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if possible. The statement permits, but does not
require, the subsequent measurement of servicing assets and liabilities at fair
value. The statement is effective for fiscal years beginning after September 15,
2006. The Company will account for all separately recognized servicing assets
and servicing liabilities in accordance with the requirements of Statement No.
156.
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, 2006.
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, 2005, 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 2006.
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 2006 to the same period in 2005. 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 4% when comparing the first three months of 2006
to the same period in 2005. While there has been a significant increase in the
national prime rate during the last several months, from 4.00% to 7.75%, this
has not been the driving factor in the stability of the Company's overall net
investment income. Interest rates on long-term bonds available in the
marketplace have not increased as significantly as prevailing bank prime rates.
During 2004, management began to lengthen the Company's portfolio while
maintaining a conservative investment philosophy. During 2005, management
continued to lengthen the life of the bond portfolio and monitor interest and
extension risk. Although this temporarily impacted investment earnings in the
short run, the Company has not had to write off any investment losses due to
excessive risk.
Also in response to the interest rate environment in the bond market, the
Company has increased its investment in mortgage loans. The balance of mortgage
loan investments increased from approximately $ 20,722,000 at December 31, 2004
to $ 36,781,000 at December 31, 2005. This has allowed the Company to obtain
higher yields than available in the bond market, lengthen the overall portfolio
average life and still maintain a conservative investment portfolio. The
mortgage loan inventory has remained level during the first three months of
2006. These loans have an average loan to value rate of 50% and an average yield
of 7.02%.
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 short-term interest rates continue to rise, the Company does not
expect to increase guaranteed crediting rates, which will improve both net
investment income and net income.
The Company had realized investment gains of $ 3,163,693 in the first three
months of 2006 compared to net realized investment losses of $ 18,058 for the
same period in 2005. The net realized gains are primarily comprised of net
realized gains from the disposal of certain equity securities.
Other income increased 160%, or $429,813, when comparing the first three months
of 2006 to the same period in 2005. 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 2006 and 2005, the Company received $ 444,519 and $ 215,448
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, increased less than 1% in the first three months of 2006 compared to the
same period in 2005. 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 178%
for the first three months of 2006 compared to the same period in 2005. 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 37% in the first three months of 2006 compared to
the same period in 2005. The increase in operating expenses is related to an
increase in information technology costs and additional personnel costs
associated with the increase in TPA revenues, equipment maintenance and rental,
additional office supplies. Also, the Company has accrued additional charitable
giving expenses in related to the gain realized on the sale of its equity
securities. In addition, 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.
(c) Net income
The Company had a net gain of $ 1,679,322 in the first three months of 2006
compared to a net loss of $ (546,568) for the same period in 2005. The net gain
in 2006 was mainly attributable to the sale of certain equity securities and
increased TPA revenues.
Financial Condition
Total shareholders' equity decreased approximately $ 555,000 as of March 31,
2006 compared to December 31, 2005. The decrease is attributable to a decline in
market value of the debt investments of approximately $ 2,144,000, 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 $ 90,375, which also decreased shareholders' equity. Partially
offsetting these declines was the Company's current period positive earnings.
Investments represent approximately 77% and 78% of total assets at March 31,
2006 and December 31, 2005, 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, 2006, 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 6%
and 4% as of March 31, 2006, and December 31, 2005, respectively. Fixed
maturities as a percentage of total assets were approximately 41% and 42% as of
March 31, 2006 and December 31, 2005, respectively.
Future policy benefits are primarily long-term in nature and therefore, the
Company's investments are predominantly in long-term fixed maturity investments
such as bonds and mortgage loans which provide sufficient return to cover these
obligations. The Company has the ability and intent to hold these investments to
maturity; consequently, the Company's investment in fixed maturities held to
maturity is reported in the financial statements at their amortized cost.
Many of the Company's products contain surrender charges and other features
which reward persistency and penalize the early withdrawal of funds. With
respect to such products, surrender charges are generally sufficient to cover
the Company's unamortized deferred policy acquisition costs with respect to the
policy being surrendered.
Net cash provided by operating activities was $ 2,640,066 and $ 222,783 for the
three months ending March 31, 2006 and 2005, respectively.
Net cash provided by (used in) investing activities was $ 2,437,841 and
$ (4,667,879) for the three-month periods ending March 31, 2006 and 2005,
respectively. The most significant aspects of cash provided by (used in)
investing activities are the sale of certain equity securities and the fixed
maturity transactions. During the current quarter, the Company sold $ 4,269,674
of certain equity securities for a net gain of $3,163,693. Fixed maturities of
$ 2,647,657 and $ 8,924,569 were either sold or matured in the first three
months of 2006 and 2005, respectively. In addition, the Company purchased
$ 3,446,373 and $ 6,964,849 of fixed maturities in 2006 and 2005, respectively.
Net cash provided by (used in) financing activities was $ 399,940 and $ 626,548
for the three month periods ending March 31, 2006 and 2005, respectively.
Policyholder contract deposits decreased 7% in the first three months of 2006
compared to the same period in 2005. Policyholder contract withdrawals increased
1% in the first three months of 2006 compared to the same period in 2005.
At March 31, 2006 and 2005, the Company had no short-term debt outstanding,
respectively.
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, 2006, 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. No dividends were paid to shareholders in 2005.
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,
2005, UG's total statutory capital and surplus amounted to $ 25,645,716. At
December 31, 2005, UG had a statutory gain from operations of $ 5,113,557.
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") issued Statement No. 155,
Accounting for Certain Hybrid Financial Instruments - An amendment of FASB
Statements No. 133 and 140. The statement improves the financial reporting by
eliminating the exemption from applying Statement 133 to interest in securitized
financial assets so that similar instruments are accounting for similarly
regardless of the form of the instrument. The statement is effective for all
financial instruments acquired or issued after the beginning of an entity's
first fiscal year that begins after September 15, 2006. The Company will account
for all qualifying financial instruments in accordance with the requirements of
Statement No. 155.
The FASB also issued Statement No. 156, Accounting for Servicing of Financial
Assets - an amendment of FASB Statement No. 140. The statement requires that all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if possible. The statement permits, but does not
require, the subsequent measurement of servicing assets and liabilities at fair
value. The statement is effective for fiscal years beginning after September 15,
2006. The Company will account for all separately recognized servicing assets
and servicing liabilities in accordance with the requirements of Statement No.
156.
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 69% of the investment portfolio as of March 31,
2006. 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, 2006 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, 2006:
Decreases in Interest Rates Increases in Interest Rates
----------------------- ------------------ ----------------- ---------------------- -----------------------
200 Basis 100 Basis 100 Basis 200 Basis 300 Basis
Points Points Points Points Points
----------------------- ------------------ ----------------- ---------------------- -----------------------
$ 4,699,000 $ 1,470,000 $ (8,518,000) $ (13,289,000) $ (18,016,000)
----------------------- ------------------ ----------------- ---------------------- -----------------------
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 to a significant interest rate increase. Such an
increase would force the Company to dispose fixed maturities at a loss.
There are no fixed maturities or other investments that management classifies as
trading instruments. At March 31, 2006 and December 31, 2005, 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.
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.
UTG, INC.
(Registrant)
Date: May 10, 2006 By /s/ Randall L. Attkisson
Randall L. Attkisson
President, Chief Operating Officer
and Director
Date: May 10, 2006 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
