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

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UTG, Inc.
and Subsidiaries
Consolidated Balance Sheets (Unaudited)
			June 30,		December 31,
ASSETS			2007		2006*
Investments:
Fixed maturities at amortized cost
(market $6,031,433 and $6,244,373)		$	6,131,841	$	6,274,913
Investments held for sale:
Fixed maturities, at market (cost $215,573,157 and $235,054,655)			211,500,657		233,229,129
Equity securities, at market (cost $10,946,976 and $10,031,148)			18,740,588		16,305,591
Mortgage loans on real estate at amortized cost			37,200,057		32,015,446
Investment real estate, at cost, net of accumulated depreciation			66,040,523		43,975,642
Policy loans			15,960,593		15,931,525
Short-term investments			0		47,879
			355,574,259		347,780,125
Cash and cash equivalents			10,572,439		8,472,553
Securities of affiliate			4,000,000		4,000,000
Accrued investment income			2,556,511		2,824,975
Reinsurance receivables:
Future policy benefits			74,945,569		73,770,732
Policy claims and other benefits			5,016,874		5,040,219
Cost of insurance acquired			30,333,056		32,808,159
Deferred policy acquisition costs			1,117,708		1,188,888
Property and equipment, net of accumulated depreciation			1,897,116		3,129,331
Income taxes receivable, current			0		219,956
Other assets			2,445,550		3,496,856
Total assets		$	488,459,082	$	482,731,794
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits		$	348,175,214	$	351,587,689
Policy claims and benefits payable			3,583,257		3,330,945
Other policyholder funds			1,073,962		1,124,045
Dividend and endowment accumulations			14,023,226		14,091,257
Deferred income taxes			15,710,950		16,480,068
Notes payable			21,619,430		22,990,081
Income taxes payable, current			79,894		0
Other liabilities			9,844,219		8,587,166
Total liabilities			414,110,152		418,191,251
Minority interests in consolidated subsidiaries			28,596,821		19,514,151
Shareholders' equity:
Common stock - no par value, stated value $.001 per share
Authorized 7,000,000 shares - 3,853,556 and 3,842,687 shares issued
after deducting treasury shares of 372,965 and 360,888			3,853		3,843
Additional paid-in capital			42,045,634		41,813,690
Retained earnings			1,070,592		232,371
Accumulated other comprehensive income			2,632,030		2,976,488
Total shareholders' equity			45,752,109		45,026,392
Total liabilities and shareholders' equity		$	488,459,082	$	482,731,794
* Balance sheet audited at December 31, 2006.

 

As of June 30, 2007 and December 31, 2006, fixed maturities and fixed maturities held for sale represented 61% and 69%, respectively, of total invested assets.  As prescribed by the various state insurance department statutes and regulations, the insurance companies’ investment portfolio is required to be invested in investment grade securities to provide ample protection for policyholders. In light of these statutes and regulations, and the Company’s business and investment strategy, the Company generally seeks to invest in United States government and government agency securities and other high quality low risk investments.  As of June 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 June 30, 2007 and December 31, 2006, the Company had $ 21,619,430 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 $ 1,069,152 and has made principal payments of $450,000 during 2007.  The remaining available balance can be drawn any time over the next six 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 June 30, 2007, the outstanding principal balance on this debt was $ 15,619,430.

 

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 June 30, 2007 and December 31, 2006, the Company had no outstanding borrowings attributable to this LOC.

 

AC and TI each have 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.

 

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 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 on January 5, 2009, at which time all principal and accrued interest becomes payable.

 

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

 

 

	Year		Amount
	2007	$	0
	2008		2,450,000
	2009		9,600,000
	2010		3,600,000
	2011		3,600,000

                                   

 

 

 

 

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 June 30, 2007, UTG had 101,494 shares outstanding that were issued under this program with a value of $ 14.85 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 July 27, 2007, UTG has spent $ 2,575,288 in the acquisition of 375,110 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 June 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.

 

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.

 

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 June 30, 2007.

 

 

 

On a cash basis, the Company paid $ 710,323 and $ 0 in interest expense during the first six months of 2007 and 2006, respectively.  The Company paid $ 232,189 and $ 305,250 of federal income tax during the first six months of 2007 and 2006, respectively.

 

 

 

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 $ 272,229 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.

 

 

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.

 

 

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 72% of the investment portfolio as of June 30, 2007.  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 65% of the fixed maturities owned at June 30, 2007 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 June 30, 2007:

 

 

 

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.  The Company attempts to mitigate its exposure to adverse interest rate movements through staggering the maturities of its fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations.  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 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 June 30, 2007 and December 31, 2006, there were no investments in derivative instruments.

 

The Company had no capital lease obligations, material operating lease obligations or purchase obligations outstanding as of June 30, 2007.

 

The Company has $21,619,430 in debt outstanding at June 30, 2007.

 

Future policy benefits reflected as liabilities of the Company on its balance sheet as of June 30, 2007, represent actuarial estimates of liabilities of future policy obligations such as expected death claims on the insurance policies in force as of the financial reporting date.  Due to the nature of these liabilities, maturity is event dependent and therefore, these liabilities have been classified as having an indeterminate maturity.

 

 

 

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.

 

 

 

NONE

 

 

 

NONE

 

 

 

NONE

 

 

 

NONE

 

 

 

At the Annual Meeting of Shareholders held on June 20, 2007, the following matters were submitted to the shareholders of UTG and voted on as indicated:

 

1.   To elect ten directors to serve for a term of one year and until their successors are elected and qualified:

 

 

 

 

NONE

 

 

 

 

 

 

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:   August 8, 2007                                                                                                By  /s/ James P. Rousey

                                                                                                          James P. Rousey

                                                                                                             President and Director

 

 

 

 

 

 

 

 

Date:   August 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 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