UTG INC - Quarter Report: 2007 September (Form 10-Q)

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UTG, Inc.
and Subsidiaries
Consolidated Balance Sheets (Unaudited)
						September 30,		December 31,
ASSETS						2007		2006*
Investments:
Fixed maturities at amortized cost
(market $6,224,456 and $6,244,373)					$	6,132,130	$	6,274,913
Investments held for sale:
Fixed maturities, at market (cost $205,662,554 and $235,054,655)						204,688,976		233,229,129
Equity securities, at market (cost $15,665,091 and $10,031,148)						25,456,352		16,305,591
Mortgage loans on real estate at amortized cost						42,774,662		32,015,446
Investment real estate, at cost, net of accumulated depreciation						66,408,577		43,975,642
Policy loans						15,783,921		15,931,525
Short-term investments						0		47,879
						361,244,618		347,780,125
Cash and cash equivalents						8,610,981		8,472,553
Securities of affiliate						4,000,000		4,000,000
Accrued investment income						2,406,866		2,824,975
Reinsurance receivables:
Future policy benefits						74,414,673		73,770,732
Policy claims and other benefits						4,675,992		5,040,219
Cost of insurance acquired						29,325,258		32,808,159
Deferred policy acquisition costs						1,061,118		1,188,888
Property and equipment, net of accumulated depreciation						1,835,280		3,129,331
Income taxes receivable, current						141,540		219,956
Other assets						2,402,480		3,496,856
	Total assets				$	490,118,806	$	482,731,794
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits					$	348,939,667	$	351,587,689
Policy claims and benefits payable						4,337,563		3,330,945
Other policyholder funds						1,043,129		1,124,045
Dividend and endowment accumulations						13,959,938		14,091,257
Deferred income taxes						17,608,251		16,480,068
Notes payable						19,039,449		22,990,081
Other liabilities						9,068,205		8,587,166
	Total liabilities					413,996,202		418,191,251
Minority interests in consolidated subsidiaries						27,797,269		19,514,151
Shareholders' equity:
Common stock - no par value, stated value $.001 per share
Authorized 7,000,000 shares - 3,852,169 and 3,842,687 shares issued
after deducting treasury shares of 382,177 and 360,888						3,852		3,843
Additional paid-in capital						42,088,314		41,813,690
Retained earnings						555,887		232,371
Accumulated other comprehensive income						5,677,282		2,976,488
	Total shareholders' equity					48,325,335		45,026,392
	Total liabilities and shareholders' equity				$	490,118,806	$	482,731,794
* Balance sheet audited at December 31, 2006

 

As of September 30, 2007 and December 31, 2006, fixed maturities and fixed maturities held for sale represented 58% and 69%, respectively, of total invested assets.  As prescribed by the various state insurance department statutes and regulations, the insurance companies’ investment portfolio is required to be invested in investment grade securities to provide ample protection for policyholders. In light of these statutes and regulations, and the Company’s business and investment strategy, the Company generally seeks to invest in United States government and government agency securities and other high quality low risk investments.  As of September 30, 2007, 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 as available for sale.

 

 

 

At September 30, 2007 and December 31, 2006, the Company had $ 19,039,449 and $ 22,990,081, respectively, of long-term debt outstanding.

 

On December 8, 2006, UTG borrowed funds from First Tennessee Bank National Association through execution of an $ 18,000,000 promissory note.  The note is secured by the pledge of 100% of the common stock of UG.  The promissory note carries a variable rate of interest based on the 3 month LIBOR rate plus 180 basis points.  The initial rate was 7.15%.  Interest is payable quarterly.  Principal is payable annually beginning at the end of the second year in five installments of $ 3,600,000.  The loan matures on December 7, 2012.  The Company borrowed $ 1,489,176 and has made principal payments of $3,450,000 during 2007.  The remaining available balance can be drawn any time over the next three months and is anticipated to be utilized in the purchase of the stock put option shares as they may be presented to UTG, Inc. for purchase.  At September 30, 2007, the outstanding principal balance on this debt was $ 13,039,449.

 

In addition to the above promissory note, First Tennessee Bank National Association also provided UTG, Inc. with a $ 5,000,000 revolving credit note.  This note is for a one-year term and may be renewed by consent of both parties.  The credit note is to provide operating liquidity for UTG, Inc. and replaces a previous line of credit provided by Southwest Bank.  Interest bears the same terms as the above promissory note.  The collateral held on the above note also secures this credit note.  UTG, Inc. has no borrowings against this note at this time.

 

On June 1, 2005, UG was extended a $ 3,300,000 line of credit from the First National Bank of Tennessee.  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.  During 2007, UG had borrowings from the LOC of $ 3,800,000 and repayments of $ 3,800,000.  At September 30, 2007 and December 31, 2006, the Company had no outstanding borrowings attributable to this LOC.

 

AC and TI each had a line of credit in place through Frost National Bank for $210,000 and $160,000, respectively.  These lines have been in place since 2004.  The lines are for one-year terms, interest payable quarterly at a floating interest rate which is the Lender’s prime rate.  Principal is due upon maturity.  The lines matured during the second quarter of 2007.  Management has determined these lines are no longer needed, therefore, upon maturity in 2007, these lines were not renewed.  Neither of the lines have had any activity during 2007.

 

At December 31, 2006, Harbor Village Partners (“HVP”), a then 50% owned affiliate of the Company, had $8,000,000 of debt through various borrowings.  In May 2007, the Company sold its interest in HVP to an outside third party.  As a result of this sale, HVP is no longer a consolidated subsidiary of the Company.  Further, the previous outstanding debt of HVP is no longer reflected in the financial statements of UTG, nor does UTG have any responsibility for this debt.

 

In January 2007, UG became a 50% owner of the newly formed RLF Lexington Properties LLC (“Lexington”).  The entity was formed to hold, for investment purposes, certain investment real estate acquired.  As part of the purchase price of the real estate owned by Lexington, the seller provided financing through the issuance of five promissory notes of $1,200,000 each totaling $6,000,000.  The notes bear interest at the fixed rate of 5%.  No payments are due under the terms of the notes until maturity of each note.  The notes come due beginning on January 5, 2008, and each January 5 thereafter until 2012 when the final note is repaid. 

 

The consolidated scheduled principal reductions on the notes payable for the next five years are as follows:

 

                                    Year                                                Amount

                                    2007                                         $               0

                                    2008                                             1,200,000

                                    2009                                             4,250,000

                                    2010                                             4,800,000

                                    2011                                             4,800,000

 

 

 

 

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.

 

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(s) paid to acquire such shares from the Holding Company at the time they were sold pursuant to the Plan 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 closing sale of such shares to UTG occurs.  The consolidated statutory net earnings per Share shall be computed as the net income of the Holding Company and its subsidiaries on a consolidated basis in accordance with statutory accounting principles applicable to insurance companies, as computed by the Holding Company, except that earnings of insurance companies or block of business acquired after the original plan date, November 1, 2002, shall be adjusted to reflect the amortization of intangibles established at the time of acquisition in accordance with generally accepted accounting principles (GAAP), less any dividends paid to shareholders. The calculation of net earnings per Share shall be performed on a monthly basis using the number of common shares of the Holding Company outstanding as of the end of the reporting period. The purchase price for any Shares purchased hereunder shall be paid in cash within 60 days from the date of purchase subject to the receipt of any required regulatory approvals as provided in the Agreement.

The original issue price of shares at the time this program began was established at $12.00 per share.  At September 30, 2007, UTG had 109,319 shares outstanding that were issued under this program with a value of $ 14.89 per share pursuant to the above formula.

 

 

 

 

 

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.  On April 18, 2006, an additional $1 million was authorized for repurchasing shares.  Repurchased shares are available for future issuance for general corporate purposes.  This program can be terminated at any time.  Open market purchases are generally limited to a maximum per share price of $8.00.  Through October 26, 2007, UTG has spent $ 2,641,024 in the acquisition of 383,327 shares under this program.

 

 

 

Earnings per share are based on the weighted average number of common shares outstanding during each period, retroactively adjusted to give effect to all stock splits, in accordance with Statement of Financial Accounting Standards No. 128.  At September 30, 2007, diluted earnings per share were the same as basic earnings per share since the UTG had no dilutive instruments outstanding.

 

 

 

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.

 

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.

 

In June 2002, the Company entered into a five-year contract with Fiserv for services related to its purchase of the “ID3” software system.  The contract was amended during 2006 for a five year period ending 2011.  Under the contract, the Company is required to pay $ 8,333 per month in software maintenance costs and a per-policy charge in offsite data center costs, with a minimum of $ 14,000 per month, for a five-year period from the date of the agreement.

 

In December 2006, the Company entered into an agreement with the certain individual shareholders of Acap.  This agreement allows the Company (through a put option arrangement) to buy up to 264 shares of common stock of Acap at any time between the date of the agreement and December 2007.  The price of the share purchase was determined by a pre-set formula, which the Company believes approximates fair value, at the time such shares might be put.  At September 30, 2007, there remains 66 shares of ACAP common stock outstanding subject to the put options.

 

On December 31, 2006, the Company entered into a 100% coinsurance agreement whereby the insurance subsidiaries, AC and TI, ceded all of their A&H business to an unaffiliated third party.  As part of the agreement, AC and TI remain contingently liable for claims incurred prior to the effective date of the agreement, for a period of one year.  At the end of the one year period, an accounting of these claims shall be produced.  Any difference in the actual claims to the claim reserve liability transferred shall be refunded to / paid by AC and TI.  At September 30, 2007, the Company has been notified actual claims experience has exceeded the claim reserve liability transferred by approximately $100,000.  This amount has been accrued and included in the September 30, 2007 financial results.

 

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 September 30, 2007.

 

 

On a cash basis, the Company paid $838,609 and $ 0 in interest expense during the first nine months of 2007 and 2006, respectively.  The Company paid $412,567 and $524,896 of federal income tax during the first nine months of 2007 and 2006, respectively.

 

During 2007, the Company acquired certain real estate investments that are included in the consolidated financial statements.  Minority investors contributed $14,810,000 in capital to these entities during the year.

 

 

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 $ 12,011 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.

 

 

 

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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

 

 

 

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.

 

(Registrant)

 

 

 

 

 

 

 

 

 

Date:   November 8, 2007		By  /s/ James P. Rousey
		James P. Rousey
		President and Director
Date:   November 8, 2007		By  /s/ Theodore C. Miller
		Theodore C. Miller
		Senior Vice President
		and Chief Financial Officer

 

 

 

 

 

 

 

 

31.1                             Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Secton 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