UTG INC - Quarter Report: 2008 September (Form 10-Q)
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 September 30,
2008
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 [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a small reporting
company. See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer [ ]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Smaller
reporting company [X]
|
|
Indicate
by check mark whether the registrant is a shell company.
|
Yes
[ ]
|
No
[X]
|
The
number of shares outstanding of the registrant’s common stock as of October 31,
2008, was 3,835,045.
UTG,
INC. AND SUBSIDIARIES
(The
“Company”)
TABLE
OF CONTENTS
| PART 1. FINANCIAL INFORMATION ……………………………………………………………………………................................................................................................. |
3
|
|
ITEM
1. FINANCIAL STATEMENTS ……………………………………………………………………….......................................................................................................….……
|
3
|
|
Consolidated Balance Sheets of
September 30, 2008 and December 31, 2007 ………….……………………….................................................................................……..
|
3
|
|
Consolidated Statements of
Operations for three and nine months ended Sept 30, 2008 and
2007 …………............................................................................................
|
4
|
|
Consolidated Statement of
Changes in Shareholder’s Equity and Comprehensive
Income
For the nine
months ended Septemher 30, 2008
.......................................................................................................................................................................................................
|
5
|
|
Consolidated
Statements of Cash Flows for the nine months ended September 30, 2008 and
2007 .......…............................................................................................…
|
6
|
|
Notes to Consolidated
Financial Statements ………………………………………………………………..............................................................................................…..….
|
7
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
…………………………………..……………………………………………….......................................................................................................…..…
|
15
|
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ………………................................................................................................…. |
21
|
| ITEM 4. CONTROLS AND PROCEDURES ………………………………………………...................................................................................................…………….……....….. |
21
|
|
PART
II. OTHER INFORMATION ……………………………………………………………………………................................................................................….......…..
|
23
|
|
ITEM 1. LEGAL PROCEEDINGS ………………………………………………………………………………..................................................................................................….
|
23
|
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS ………….......................................................................................................……. |
23
|
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES ……………………………………………………….....................................................................................................…… |
23
|
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ………………………….................................................................................................…... |
23
|
| ITEM 5. OTHER INFORMATION ………………………………………………………………..........................................................................................……………......…….. |
23
|
| ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ……………………………………………………..............................................................................................…...…….. |
24
|
|
SIGNATURES
……………………………………………………………………………………………...........................................................................................………......……..
|
24
|
|
EXHIBIT
INDEX …………………………………………...........................................................................................………………………………………………………......……...
|
26
|
|
PART
1. FINANCIAL INFORMATION
|
||||||||
|
Item
1. Financial Statements
|
||||||||
|
UTG,
Inc.
|
||||||||
|
AND
SUBSIDIARIES
|
||||||||
|
Consolidated
Balance Sheets (Unaudited)
|
||||||||
|
September
30,
|
December
31,
|
|||||||
|
ASSETS
|
2008
|
2007*
|
||||||
|
Investments:
|
||||||||
|
Fixed maturities at amortized cost
|
||||||||
|
(market
$0 and $6,330,036)
|
$
|
0
|
$
|
6,006,846
|
||||
|
Investments held for sale:
|
||||||||
|
Fixed maturities, at market (cost $203,940,968 and
$196,942,774)
|
196,838,024
|
197,974,206
|
||||||
|
Equity securities, at market (cost $23,983,921 and
$26,882,875)
|
26,779,529
|
32,678,592
|
||||||
|
Mortgage loans on real estate at amortized cost
|
46,452,074
|
45,602,147
|
||||||
|
Investment real estate, at cost, net of accumulated
depreciation
|
41,248,168
|
39,154,175
|
||||||
|
Policy loans
|
14,843,463
|
15,643,238
|
||||||
|
Short-term investments
|
933,966
|
933,967
|
||||||
|
327,095,224
|
337,993,171
|
|||||||
|
Cash
and cash equivalents
|
11,514,265
|
17,746,468
|
||||||
|
Securities
of affiliate
|
4,000,000
|
4,000,000
|
||||||
|
Accrued
investment income
|
2,554,530
|
2,485,594
|
||||||
|
Reinsurance
receivables:
|
||||||||
|
Future policy benefits
|
71,274,981
|
73,450,212
|
||||||
|
Policy claims and other benefits
|
4,792,265
|
4,657,663
|
||||||
|
Cost
of insurance acquired
|
25,311,463
|
28,337,021
|
||||||
|
Deferred
policy acquisition costs
|
888,817
|
1,009,528
|
||||||
|
Property
and equipment, net of accumulated depreciation
|
1,681,545
|
1,752,199
|
||||||
|
Other
assets
|
2,842,158
|
2,222,898
|
||||||
|
Total
assets
|
$
|
451,955,248
|
$
|
473,654,754
|
||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Policy
liabilities and accruals:
|
||||||||
|
Future
policy benefits
|
$
|
341,637,072
|
$
|
346,076,921
|
||||
|
Policy
claims and benefits payable
|
4,030,047
|
3,198,166
|
||||||
|
Other
policyholder funds
|
1,244,645
|
1,000,216
|
||||||
|
Dividend
and endowment accumulations
|
14,087,401
|
14,039,241
|
||||||
|
Income
taxes payable, current
|
342,242
|
450,626
|
||||||
|
Deferred
income taxes
|
12,376,155
|
16,502,035
|
||||||
|
Notes
payable
|
17,682,623
|
19,914,346
|
||||||
|
Other
liabilities
|
8,109,452
|
9,486,971
|
||||||
|
Total liabilities
|
399,509,637
|
410,668,522
|
||||||
|
Minority
interests in consolidated subsidiaries
|
12,177,446
|
14,231,707
|
||||||
|
Shareholders'
equity:
|
||||||||
|
Common
stock - no par value, stated value $.001 per share
|
||||||||
|
Authorized
7,000,000 shares - 3,835,391 and 3,849,533 shares issued
|
||||||||
|
after
deducting treasury shares of 398,955 and 384,813
|
3,835
|
3,849
|
||||||
|
Additional
paid-in capital
|
41,954,107
|
42,067,229
|
||||||
|
Retained
earnings
|
868,682
|
2,374,990
|
||||||
|
Accumulated
other comprehensive income
|
(2,558,459)
|
4,308,457
|
||||||
|
Total
shareholders' equity
|
40,268,165
|
48,754,525
|
||||||
|
Total liabilities and shareholders' equity
|
$
|
451,955,248
|
$
|
473,654,754
|
||||
|
*
Balance sheet audited at December 31, 2007.
|
||||||||
|
UTG,
Inc.
|
||||||||
|
AND
SUBSIDIARIES
|
||||||||
|
Consolidated
Statements of Operations (Unaudited)
|
||||||||
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||
|
September
30,
|
September
30,
|
September
30,
|
September
30,
|
|||||
|
2008
|
2007
|
2008
|
2007
|
|||||
|
Revenues:
|
||||||||
|
Premiums and policy fees
|
$
|
5,038,463
|
$
|
3,587,599
|
$
|
16,610,939
|
$
|
15,657,121
|
|
Reinsurance premiums and policy fees
|
(1,484,733)
|
(1,109,583)
|
(3,976,881)
|
(3,689,319)
|
||||
|
Net investment income
|
4,110,401
|
4,394,621
|
12,786,077
|
13,152,998
|
||||
|
Realized investment gains (losses), net
|
(617,750)
|
(29,739)
|
(538,867)
|
1,600,773
|
||||
|
Other income
|
486,452
|
569,237
|
1,495,248
|
1,631,986
|
||||
|
7,532,833
|
7,412,135
|
26,376,516
|
28,353,559
|
|||||
|
Benefits
and other expenses:
|
||||||||
|
Benefits, claims and settlement expenses:
|
||||||||
|
Life
|
6,285,861
|
5,333,150
|
21,051,939
|
19,624,913
|
||||
|
Reinsurance benefits and claims
|
(1,175,872)
|
(473,858)
|
(2,955,284)
|
(2,115,595)
|
||||
|
Annuity
|
313,152
|
270,433
|
876,823
|
850,130
|
||||
|
Dividends to policyholders
|
217,766
|
267,556
|
812,413
|
924,404
|
||||
|
Commissions and amortization of deferred
|
||||||||
|
policy acquisition costs
|
(469,365)
|
(500,695)
|
(1,280,416)
|
(1,293,844)
|
||||
|
Amortization of cost of insurance acquired
|
1,020,025
|
1,007,797
|
3,025,558
|
3,294,478
|
||||
|
Operating expenses
|
1,701,944
|
1,750,562
|
5,577,035
|
5,919,368
|
||||
|
Interest expense
|
195,430
|
310,731
|
699,283
|
1,042,382
|
||||
|
8,088,941
|
7,965,676
|
27,807,351
|
28,246,236
|
|||||
|
Income
(loss) before income taxes, minority interest
|
||||||||
|
and equity in earnings of investees
|
(556,108)
|
(553,541)
|
(1,430,835)
|
107,323
|
||||
|
Income
tax (expense)
|
(472,016)
|
(10,760)
|
(293,862)
|
(149,806)
|
||||
|
Minority
interest in loss of
|
||||||||
|
consolidated subsidiaries
|
77,544
|
49,596
|
218,389
|
365,999
|
||||
|
Net
income (loss)
|
$
|
(950,580)
|
$
|
(514,705)
|
$
|
(1,506,308)
|
$
|
323,516
|
|
Basic
income (loss) per share from continuing
|
||||||||
|
operations
and net income (loss)
|
$
|
(0.25)
|
$
|
(0.13)
|
$
|
(0.39)
|
$
|
0.08
|
|
Diluted
income (loss) per share from continuing
|
||||||||
|
operations
and net income (loss)
|
$
|
(0.25)
|
$
|
(0.13)
|
$
|
(0.39)
|
$
|
0.08
|
|
Basic
weighted average shares outstanding
|
3,838,678
|
3,850,213
|
3,844,582
|
3,851,979
|
||||
|
Diluted
weighted average shares outstanding
|
3,838,678
|
3,850,213
|
3,844,582
|
3,851,979
|
||||
|
UTG,
Inc.
|
|||||||
|
AND
SUBSIDIARIES
|
|||||||
|
Consolidated
Statement of Changes in Shareholders' Equity and Comprehensive
Income
|
|||||||
|
September
30, 2008 (Unaudited)
|
|||||||
|
Nine
Months Ended
|
|||||||
|
Common
stock
|
September
30, 2008
|
||||||
|
Balance,
beginning of year
|
$
|
3,849
|
|||||
|
Issued
during year
|
0
|
||||||
|
Purchase
treasury shares
|
(14)
|
||||||
|
Balance,
end of period
|
3,835
|
||||||
|
Additional
paid-in capital
|
|||||||
|
Balance,
beginning of year
|
42,067,229
|
||||||
|
Issued
during year
|
0
|
||||||
|
Purchase
treasury shares
|
(113,122)
|
||||||
|
Balance,
end of period
|
41,954,107
|
||||||
|
Retained
Earnings
|
|||||||
|
Balance,
beginning of year
|
2,374,990
|
||||||
|
Net
loss
|
(1,506,308)
|
||||||
|
Balance,
end of period
|
868,682
|
||||||
|
Accumulated
other comprehensive income
|
|||||||
|
Balance,
beginning of year
|
4,308,457
|
||||||
|
Other
comprehensive income
|
|||||||
|
Unrealized
holding losses on securities
|
|||||||
|
net
of minority interest,
|
|||||||
|
reclassification
adjustment and taxes
|
(6,866,916)
|
||||||
|
Balance,
end of period
|
(2,558,459)
|
||||||
|
Total
shareholders' equity, end of period
|
$
|
40,268,165
|
|||||
|
Comprehensive
income
|
|||||||
|
Net
loss
|
$
|
(1,506,308)
|
|||||
|
Unrealized
holding losses on securities
|
|||||||
|
net
of minority interest,
|
|||||||
|
reclassification
adjustment and taxes
|
(6,866,916)
|
||||||
|
Total
comprehensive income
|
$
|
(8,373,224)
|
|||||
See accompanying notes.
Consolidated
Statements of Cash Flows for the three months ended September 30, 2008 and
2007.
|
UTG,
Inc.
|
|||||||
|
AND
SUBSIDIARIES
|
|||||||
|
Consolidated
Statements of Cash Flows (Unaudited)
|
|||||||
|
Nine
Months Ended
|
|||||||
|
September
30,
|
September
30,
|
||||||
|
2008
|
2007
|
||||||
|
Increase
(decrease) in cash and cash equivalents
|
|||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net income (loss)
|
$ (1,506,308)
|
$ 323,516
|
|||||
|
Adjustments to reconcile net income (loss) to net cash
|
|||||||
|
provided by (used in) operating activities:
|
|||||||
|
Amortization/accretion of fixed maturities
|
259,583
|
124,322
|
|||||
|
Realized investment gains
|
538,867
|
(1,600,773)
|
|||||
|
Amortization of deferred policy acquisition costs
|
120,711
|
127,770
|
|||||
|
Amortization of cost of insurance acquired
|
3,025,558
|
3,294,478
|
|||||
|
Depreciation
|
950,811
|
365,339
|
|||||
|
Minority interest
|
(218,389)
|
(365,999)
|
|||||
|
Change in accrued investment income
|
(68,936)
|
418,109
|
|||||
|
Change in reinsurance receivables
|
2,040,629
|
(279,714)
|
|||||
|
Change in policy liabilities and accruals
|
(1,272,237)
|
591,197
|
|||||
|
Charges for mortality and administration of
|
|||||||
|
universal life and annuity products
|
(6,290,398)
|
(6,539,112)
|
|||||
|
Interest credited to account balances
|
4,101,026
|
3,914,151
|
|||||
|
Change in income taxes receivable/payable
|
(576,497)
|
1,272,547
|
|||||
|
Change in other assets and liabilities, net
|
(1,735,122)
|
3,160,012
|
|||||
|
Net
cash provided by (used in) operating activities
|
(630,702)
|
4,805,843
|
|||||
|
Cash
flows from investing activities:
|
|||||||
|
Proceeds from investments sold and matured:
|
|||||||
|
Fixed maturities held for sale
|
18,235,246
|
57,420,858
|
|||||
|
Fixed maturities matured
|
0
|
1,477,045
|
|||||
|
Equity securities
|
9,490,814
|
140,389
|
|||||
|
Mortgage loans
|
4,382,574
|
6,272,781
|
|||||
|
Real estate
|
342,380
|
8,584,401
|
|||||
|
Policy loans
|
3,978,575
|
2,852,873
|
|||||
|
Short-term
|
0
|
1,312,195
|
|||||
|
Total proceeds from investments sold and matured
|
36,429,589
|
78,060,542
|
|||||
|
Cost of investments acquired:
|
|||||||
|
Fixed maturities held for sale
|
(19,913,237)
|
(28,547,262)
|
|||||
|
Fixed maturities matured
|
0
|
(1,319,429)
|
|||||
|
Equity securities
|
(6,704,121)
|
(5,774,332)
|
|||||
|
Mortgage loans
|
(5,232,501)
|
(17,031,997)
|
|||||
|
Real estate
|
(3,214,444)
|
(19,187,536)
|
|||||
|
Policy loans
|
(3,178,800)
|
(2,705,269)
|
|||||
|
Short-term
|
0
|
(1,260,000)
|
|||||
|
Total cost of investments acquired
|
(38,243,103)
|
(75,825,825)
|
|||||
|
Purchase of property and equipment
|
(102,188)
|
(19,317)
|
|||||
|
Sale of property and equipment
|
0
|
0
|
|||||
|
Net
cash provided by (used in) investing activities
|
(1,915,702)
|
2,215,400
|
|||||
|
Cash
flows from financing activities:
|
|||||||
|
Policyholder contract deposits
|
5,765,297
|
6,000,445
|
|||||
|
Policyholder contract withdrawals
|
(5,619,067)
|
(5,820,320)
|
|||||
|
Payments on notes payable
|
(2,231,723)
|
(7,250,005)
|
|||||
|
Proceeds from notes payable
|
0
|
1,489,176
|
|||||
|
Proceeds
from line of credit
|
0
|
3,800,000
|
|||||
|
Purchase of minority interest in consolidated subsidiary
|
(1,487,170)
|
(5,376,744)
|
|||||
|
Issuance of common stock
|
0
|
446,699
|
|||||
|
Purchase of treasury stock
|
(113,136)
|
(172,066)
|
|||||
|
Net
cash used in financing activities
|
(3,685,799)
|
(6,882,815)
|
|||||
|
Net
increase (decrease) in cash and cash equivalents
|
(6,232,203)
|
138,428
|
|||||
|
Cash
and cash equivalents at beginning of period
|
17,746,468
|
8,472,553
|
|||||
|
Cash
and cash equivalents at end of period
|
$ 11,514,265
|
$ 8,610,981
|
|||||
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,
2007.
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 (“FSF”), a
Kentucky corporation, 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 September 30, 2008 Mr. Correll owns or
controls directly and indirectly approximately 68% of UTG’s outstanding
stock.
UTG,
INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - Continued
At
September 30, 2008, consolidated subsidiaries of UTG, Inc. were as depicted on
the following organizational chart.
UTG,
INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements - Continued
|
2.
|
INVESTMENTS
|
As of
September 30, 2008 and December 31, 2007, fixed maturities and fixed
maturities held for sale represented 59% and 60%, 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, 2008, the
carrying value of fixed maturity securities in default as to principal or
interest was immaterial in the context of consolidated assets, shareholders’
equity or results from operations. The investments held for sale are
carried at market, with changes in market value directly charged to
shareholders’ equity. During the first quarter of 2008 management
decided that the remaining fixed maturity investments categorized as held to
maturity should be classified as available for sale to provide additional
flexibility and liquidity. As such, all fixed maturity investments
are available for sale.
|
3.
|
NOTES
PAYABLE
|
At
September 30, 2008 and December 31, 2007, the Company had $17,682,623 and
$19,914,346, 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 $0 and has made $1,000,000 in principal payments in 2008. At
September 30, 2008 the outstanding principal balance on this debt was
12,544,449. The next required principal payment on this debt is due in December
of 2009.
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. During 2008, UTG, Inc had no borrowings from the note and the
Company had no outstanding balance attributable to this note.
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 2008, UG had no borrowings from the LOC and the
Company had no outstanding balance attributable to this LOC.
In
November 2007, UG became a member of the FHLB. This membership allows
UG access to additional credit up to a maximum of 50% of the total assets of
UG. To be a member of the FHLB, UG was required to purchase shares of
common stock of FHLB. Borrowing capacity is based on 50 times each
dollar of stock acquired in FHLB above the “base membership”
amount. UG’s current LOC with the FHLB is
$15,000,000. During 2008, UG had borrowings of $4,000,000 and
repayments of $4,000,000. At September 30, 2008 UG has no outstanding borrowings
attributable to this LOC.
In
January 2007, UG became a 51% 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%. The notes came due beginning on
January 5, 2008, and each January 5 thereafter until 2012 when the final note is
repaid. As of September 30, 2008 the outstanding balance was
$4,800,000.
On
February 7, 2007, HPG Acquisitions (“HPG”), a 74% owned affiliate of the
Company, borrowed funds from First National Bank of Midland, through execution
of a $373,862 promissory note. The note is secured by real estate owned by HPG.
The note bears interest at a fixed rate of 5%. The first payment is due January
15, 2008. There will be 119 regular payments of $3,965 followed by one irregular
last payment estimated at $32,424. At September 30, 2008, the outstanding
balance on this debt was $338,174.
The
consolidated scheduled principal reductions on the notes payable for the next
five years are as follows:
|
Year
|
Amount
|
|
2008
|
$ 5,612
|
|
2009
|
$ 3,278,678
|
|
2010
|
$ 4,830,151
|
|
2011
|
$ 4,831,694
|
|
2012
|
$ 4,527,768
|
|
2013
|
$ 35,020
|
|
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.
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, 2008, UTG had 109,319
shares outstanding that were issued under this program with a value of
$15.60 per share pursuant to the above formula.
|
B.
|
Stock
Repurchase Program
|
On
June 5, 2001, the Board of Directors of UTG authorized the repurchase in
the open market or in privately negotiated transactions of up to $1 million of
UTG's common stock. On June 16, 2004, an additional $1 million
was authorized for repurchasing shares. 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 September 30, 2008, UTG has spent $2,766,054
in the acquisition of 398,955 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 September 30, 2008, diluted earnings per share were the
same as basic earnings per share since the Company 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.
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 is
responsible for the marketing and sales function for the alliance, as well as
providing the operations processing service for the Company. Fiserv
delivers technology, systems and services to help businesses manage and profit
from information.
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 ended 2011. Under the
contract, the Company is required to pay $8,333 per month in software
maintenance costs and a minimum charge of $14,000 per month in offsite data
center costs, for a five-year period ending in 2011.
UTG and
its subsidiaries are named as defendants in a number of legal actions arising as
a part of the ordinary course of business relating primarily to claims made
under insurance policies. Those actions have been considered in
establishing the Company’s liabilities. Management is of the opinion
that the settlement of those actions will not have a material adverse effect on
the Company’s financial position or results of operations.
|
6.
|
OTHER
CASH FLOW DISCLOSURE
|
On a cash
basis, the Company paid $719,707 and $838,609 in interest expense during
the first nine months of 2008 and 2007, respectively. The Company
paid $871,677 and $412,567 in federal income tax during the first nine
months of 2008 and 2007, 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’s cash and cash equivalents are on deposit with various domestic
financial institutions. At times, bank deposits may be in excess of federally
insured 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
|
|||||
|
September 30,
2008
|
Amount
|
or
Benefit
|
Amount
|
||||
|
Unrealized
holding losses during
|
|||||||
|
Period
|
$
|
(11,393,512)
|
$
|
3,987,729
|
$
|
(7,405,783)
|
|
|
Less:
reclassification adjustment
|
|||||||
|
for
losses realized in net income
|
829,026
|
(290,159)
|
538,867
|
||||
|
Net
unrealized losses
|
(10,564,486)
|
3,697,570
|
(6,886,916)
|
||||
|
Change
in other comprehensive income (loss)
|
$
|
(10,564,486)
|
$
|
3,697,570
|
$
|
(6,866,916)
|
|
|
9.
|
FAIR
VALUE MEASUREMENTS
|
Effective
January 1, 2008, the Company adopted SFAS 157 which requires enhanced
disclosures of assets and liabilities carried at fair value. SFAS 157
established a hierarchical disclosure framework based on the priority of the
inputs to the respective valuation technique. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3). An asset or liability’s classification within the fair value
hierarchy is based on the lowest level of significant input to its
valuation. SFAS 157 defines the input levels as
follows:
Level 1 –
Unadjusted quoted prices in active markets for identical assets or
liabilities. U.S. Treasuries are in Level 1 and valuation is based on
unadjusted quoted prices for identical assets in active markets that the Company
can access. Equity securities that are actively traded and exchange
listed in the U.S. are also included in Level 1. Equity security
valuation is based on unadjusted quoted prices for identical assets in active
markets that the Company can access.
Level 2 -
Quoted prices in markets that are not active or inputs that are observable
either directly or indirectly. Level 2 inputs include quoted prices for
similar assets or liabilities other than quoted prices in Level 1; quoted
prices in markets that are not active; or other inputs that are observable or
can be derived principally from or corroborated by observable market data for
substantially the full term of the assets or liabilities. Level 2
assets consist of fixed income investments valued based on quoted prices for
identical or similar assets in markets that are not active and investments
carried as equity securities that do not have an actively traded market that are
valued based on their audited GAAP book value.
Level 3 -
Unobservable inputs that are supported by little or no market activity and are
significant to the fair value of the assets or liabilities. Unobservable inputs
reflect the reporting entity’s own assumptions about the assumptions that market
participants would use in pricing the asset or liability. Level 3 assets
and liabilities include financial instruments whose values are determined using
pricing models, discounted cash flow methodologies, or similar techniques, as
well as instruments for which the determination of fair value requires
significant management judgment or estimation. The Company does not
have any Level 3 financial assets or liabilities.
The
following table presents the balances of financial assets and financial
liabilities measured at fair value on a recurring basis as of September 30,
2008.
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
|
Assets
|
||||
|
Fixed
Maturities, available for sale
|
8,330,437
|
188,507,587
|
-
|
196,838,024
|
|
Equity
Securities, available for sale
|
24,955,101
|
5,824,428
|
-
|
30,779,529
|
|
Total
Financial Assets
Carried
at Fair Value
|
$33,285,538
|
$194,332,015
|
$-
|
$227,617,553
|
|
10.
|
NEW
ACCOUNTING STANDARDS
|
The
Financial Accounting Standards Board (“FASB”) issued Statement No. 163,
Accounting for Financial Guarantee Insurance Contracts — an interpretation of
FASB Statement No. 60 Diversity exists in practice in accounting for financial
guarantee insurance contracts by insurance enterprises under FASB Statement No.
60, Accounting and Reporting
by Insurance Enterprises. That diversity results in inconsistencies in
the recognition and measurement of claim liabilities because of differing views
about when a loss has been incurred under FASB Statement No. 5, Accounting for Contingencies. This
Statement requires that an insurance enterprise recognize a claim liability
prior to an event of default (insured event) when there is evidence that credit
deterioration has occurred in an insured financial obligation. This Statement
also clarifies how Statement 60 applies to financial guarantee insurance
contracts, including the recognition and measurement to be used to account for
premium revenue and claim liabilities. Those clarifications will increase
comparability in financial reporting of financial guarantee insurance contracts
by insurance enterprises. This Statement requires expanded disclosures about
financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years. Management has determined that this
Statement will not result in a change to current practice, since the Company
does not issue Financial Guaranty contracts.
The FASB
also issued Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement is effective 60 days
after the SEC’s approval. Management has determined that this Statement will not
result in a change to current practice.
The FASB
also issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging Activities—an
amendment of FASB Statement No. 133 this Statement requires enhanced disclosures
about an entity’s derivative and hedging activities and thereby improves the
transparency of financial reporting. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. Management has determined that this
Statement will not result in a change to current practice, since the Company
does not invest in derivative instruments or hedging activities.
The FASB
also issued Statement No. 160, Non-controlling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51. This Statement applies to all
entities that prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an outstanding
non-controlling interest in one or more subsidiaries or that deconsolidate a
subsidiary. This Statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Management
is currently researching what effect if any that this Statement will have on
future reporting.
The FASB
issued Statement No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities – Including an amendment of FASB Statement No.
115. The Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The Statement is effective as of the beginning
of an entity’s first fiscal year that begins after November 15,
2007. The implementation of this Statement had no effect on the
Company.
The FASB
issued Statement No. 157, Fair
Value Measurements. The Statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. In February of 2008, the FASB
issued FASB Staff position 157-2 which delays the effective date of SFAS 157 for
non-financial assets and liabilities which are not measured at fair value on a
recurring basis (at least annually) until fiscal years beginning after November
15, 2008. Adoption of SFAS 157 did not have a material impact on the
consolidated financial position, results from operation, or cash flow of the
Company.
11.
SUBSEQUENT EVENT
Subsequent to
September 30, 2008, the credit and liquidity crisis in the United States and
throughout the global financial system continued to generate substantial
volatility in the financial markets and the banking system. Should this
enviroment and similar events continue, such subsequent events could have a
significant impact on the Company's investment portfolio. The Company has
continued to monitor this subsequent event activity and has concluded that the
assessment of other-than-temporary impairment as of September 30, 2008 has not
changed.
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 September 30, 2008.
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, 2007, 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
nine months of 2008.
Results of
Operations
|
(a)
|
Revenues
|
The
Company experienced an increase of approximately $666,000 in premiums and policy
fee revenues, net of reinsurance premiums and policy fees, when comparing the
first nine months of 2008 to the same period in 2007 and an increase of
approximately $1,076,000 for the third quarter comparison. The
increase primarily relates to the timing of reinsurance premiums paid during the
quarter and the termination of TI’s reinsurance agreement in
April. The Company currently writes little new
business. Unless the Company acquires a block of in-force business
management expects premium revenue to continue to decline on the existing block
of business at a rate consistent with prior experience.
The
Company’s primary source of new business production comes from internal
conservation efforts. 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, efforts continue to be 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.
The
Company has introduced new and updated products in recent periods including the
First Annuity, Kid Kare, Full Circle Term and Sentinel
Term. Management is currently exploring the feasibility of marketing
certain products through its affiliated bank, First Southern National
Bank. It is anticipated such marketing efforts would include products
such as the new term products and an annuity product. Sales would be
supported through the use of the web with Company personnel providing the
prospective customer support. Final details have not been completely
worked out yet, but launch of this program is anticipated sometime during late
2008 or early 2009. Management anticipates insignificant sales under
this program initially. Currently the Company has no other 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.
Net
investment income decreased approximately 3% when comparing the first nine
months of 2008 to the same period in 2007 and decreased approximately 6% in
comparing third quarter results. This decrease is primarily related
to the Company holding fewer fixed maturity investments and carrying cash
balances earning lower rates of interest compared to a year ago. An
increase in mortgage loan interest and dividends from oil and gas investments
helped offset the decline. Management anticipates a decline in
investment income in coming periods as a result of recent declines in interest
rates in the marketplace. Interest earned on cash balances will have
an immediate impact on the Company with continued pressure on reinvestment rates
of current investments as they mature.
The
Company continues to leverage its affiliation with FSNB through the investment
in mortgage loans. 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. A
portion of the mortgage loan portfolio contains floating interest
rates. With the current state of the U.S. economy and general
interest rate cuts in 2008, management anticipates yields of its floating rate
investments to decline during 2008.
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%. Interest crediting rates on
adjustable rate policies have been reduced to their guaranteed minimum rates,
and as such, cannot lower them any further. Policy interest crediting
rate changes and expense load changes become effective on an individual policy
basis on the next policy anniversary. Therefore, it takes a full year
from the time the change was determined for the full impact of such change to be
realized. If interest rates decline in the future, the Company won’t
be able to lower rates and both net investment income and net income will be
impacted negatively.
The
Company had realized investment losses of $(538,867) in the first nine months of
2008 compared to net realized investment gains of $1,600,773 for the same period
in 2007. The majority of the net realized loss resulted during the third
quarter of 2008, when it was determined to be in the best interest of the
Company to sell certain publicly traded holdings in financial institution common
stocks and certain fixed maturity investments amid continued deterioration in
the global economy. Realized losses on these sales totaled
$(3,633,919). For diversification purposes the Company decided to
reduce its common stock investment in Computer Services, Inc. This
sale resulted in a gain of $3,058,939. In 2007, the net realized gains
were primarily originated from the sale of a real estate holding.
With the
continued malaise in financial markets and general decline of the economy,
Management continues to view the Company’s investment portfolio with utmost
priority. Significant time has been spent internally researching the Company’s
risk and communicating with outside investment advisors about the current
investment environment and ways to ensure preservation of capital and mitigate
any losses. Management has put extensive efforts into evaluating the
investment holdings. Additonally, members of the Company's board of
directors and investment committee have been solicited for advice and provided
with information. Management has reviewed the Company's entire portfolio
on a security level basis to be sure all understand our holdings, potential
risks and underlying credit supporting the investments. Although the
Company currently has approximately $(7,103,000) in unrealized losses on fixed
maturity investments, it does not expect to suffer significant realized
losses. Although these investments are categorized as available for sale,
the Company has the forward ability and historic record to hold to
maturity. Management intends to continue its close monitoring of its bond
holdings and other investments for additional deterioration or market condition
changes. Future events may result in Management's determination certain
current investment holdings may need to be sold which could result in gains
or losses in future periods. Such future events could also result in
other than temporary declines in value that could result in future period
impairment losses.
There are a number of significant risks and uncertainties inherent
in the process of monitoring impairments and determining if an impairment is
other-than-temporary. These risks and uncertainies related to management's
assessment of other than temporary declines in value include but are not limited
to:
The risk that Company's assessment of an issuer's ability to meet
all of its contractual obligations will change based on changes in the credit
characteristics of that issuer; The risk that the economic outlook will be worse
than expected or have more of an impact on the issuer than anticipated; The risk
that fraudulent information could be provided to the Company's investment
professionals who determine the fair value estimates.
During
October, Management determined it in the best long-term interests of the Company
to sell certain corporate bonds that were determined high risk and tied to
finance and commercial real estate. The sales resulted in a loss of
approximately $(875,000). Due to defensive posturing by the Company,
investment gains of approximately $2,767,000 were also realized during
October. The sales will be reflected in the Company’s fourth quarter
results. As mentioned, the possibility of loss should be expected
going forward as Management continues to take steps to adjust its risk profile
to maintain long-term company stability.
Other
income has remained consistent over the periods presented. Other
income primarily represents revenues received relating to the performance of
administrative work as a TPA for unaffiliated life insurance
companies. The Company receives monthly fees based on policy in force
counts and certain other activity indicators such as number of policies
issued. The Company has not had any substantial change in its TPA
client base or activity related fees of existing clients during the periods
presented in the financial statements. Management remains committed
to the pursuit of additional TPA clients and believes this area continues to
show potential for growth.
|
(b)
|
Expenses
|
Life
benefits, claims and settlement expenses net of reinsurance benefits and claims,
increased approximately 3% in the first nine months of 2008 compared to the same
period in 2007 and increased approximately 5% during the third quarter
comparison. Policy claims vary from period to period 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 average age of the insured increases.
Commissions
and amortization of deferred policy acquisition costs decreased approximately 1%
for the first nine months of 2008 compared to the same period in 2007 and
decreased approximately 6% during the third quarter. AC and TI
reinsurance agreements that are in place with outside companies drive the
majority of this number. TI’s reinsurance agreement terminated in
April of this year. Another significant factor in the continuing
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. Most of the Company’s agent agreements
contained vesting provisions, which provide for continued compensation payments
to agents upon their termination subject to certain minimums and often limited
to a specific period of time. 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
any of the periods presented.
Operating
expenses decreased 6% in the first nine months of 2008 compared to the same
period in 2007 and decreased approximately 3% during the third
quarter. The Company continually monitors expenditures looking for
savings opportunities. Management places significant emphasis on
expense monitoring and cost containment. Maintaining administrative
efficiencies directly impacts net income.
|
(c)
|
Net
income
|
The
Company had a net loss of $(1,506,308) in the first nine months of 2008 compared
to a net gain of $323,516 for the same period in 2007. The decrease
over the same period last year is mainly attributable to realized investment
losses during the current quarter compared to substantial realized investment
gains during the same period in 2007. The Company had a net loss of
$(950,580) during the current quarter compared to a net loss of $(514,705) for
the same period in 2007. The decrease over the same period last year
is also mainly attributable to realized investment losses.
Financial
Condition
Total
shareholders’ equity decreased approximately $(8,486,000) as of
September 30, 2008 compared to December 31, 2007. The
decrease is primarily attributable to a decrease in the market value of the
Company’s fixed maturity investments that was included in the accumulated other
comprehensive income and the current net loss.
Investments
represent approximately 72% and 71% of total assets at September 30, 2008
and December 31, 2007, 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.
While
certain of the Company’s bond portfolio holdings have suffered recent credit
rating downgrades, the portfolio remains over 99% invested in investment grade
securities, with 92% being of the highest quality. The possibility of
further rating declines should be expected, especially regarding corporate
holdings.
As of
September 30, 2008, the carrying value of fixed maturity securities in
default as to principal or interest was immaterial in the context of
consolidated assets, shareholders’ equity or results from
operations. To provide additional flexibility and liquidity, the
Company has identified all fixed maturity securities as "investments held for
sale". Investments held for sale are carried at market, with changes
in market value charged directly to shareholders' equity.
Liquidity and Capital
Resources
The
Company has three principal needs for cash - the insurance companies'
contractual obligations to policyholders, the payment of operating expenses and
debt service. Cash and cash equivalents as a percentage of total
assets were approximately 3% and 4% as of September 30, 2008, and
December 31, 2007, respectively. Fixed maturities as a
percentage of total assets were approximately 44% and 43% as of
September 30, 2008 and December 31, 2007, respectively.
The
Company currently has access to funds for operating liquidity. UTG
has a $5,000,000 revolving credit note with First Tennessee Bank National
Association. UG has a $3,300,000 line of credit with First National
Bank of Tennessee. In addition, UG is also a member of the FHLB which
allows UG access to credit. UG’s current line of credit with the FHLB
is $15,000,000. At September 30, 2008, there were no outstanding
borrowings attributable to the lines of credit.
Financial
institution solvency has received significant attention as default rates have
risen sharply on mortgage loans contributing to a decline in the general
economy. As of September 30, 2008, the Company held investments in
certain financial institution bonds whose market values have declined as a
result of these factors and have impacted the Company through unrealized
investment losses. Most of these holdings have significant unrealized
losses and may be difficult to sell in the current economic
climate.
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.
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 (used in) operating activities was $(630,702) and $4,805,843 for the
nine months ending September 30, 2008 and 2007, respectively.
Net cash
provided by (used in) investing activities was $(1,915,702) and $2,215,400 for
the nine month periods ending September 30, 2008 and 2007,
respectively. The most significant aspects of cash used in investing
activities are the fixed maturity transactions. The Company had fixed
maturities in the amount of $18,235,246 and $58,897,903 that sold and matured in
the first nine months of 2008 and 2007, respectively. In addition,
the Company purchased $19,913,237 and $29,866,691 of fixed maturities in 2008
and 2007, respectively. Also during 2008, the Company increased its
mortgage loan and real estate investments.
Net cash
(used in) financing activities was $(3,685,799) and $(6,882,815) for the nine
month period ending September 30, 2008 and 2007,
respectively. Policyholder contract deposits decreased approximately
4% in the first nine months of 2008 compared to the same period in
2007. Policyholder contract withdrawals decreased approximately 3% in
the first nine months of 2008 compared to the same period in
2007. Payments on notes payable of $2,231,723 were also a significant
factor in cash used in financing activities in the current period.
On June
30, 2008, the Company made a $1,000,000 principal reduction payment on debt
outstanding. The Company remains ahead of schedule on debt
repayment. At September 30, 2008, the Company had $17,682,623 of
long-term debt outstanding. The debt is mainly attributable to the
acquisition of Acap at the end of 2006.
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 and the servicing
of its debt, are primarily provided by its subsidiaries. On a parent
only basis, UTG's cash flow is dependent on management fees received from its
insurance subsidiaries, stockholder dividends from its subsidiaries and earnings
received on cash balances. At September 30, 2008, 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. The payment of cash dividends
to shareholders by UTG 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 2007
or the first nine months of 2008.
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, 2007 UG statutory shareholders'
equity was $30,130,717. At December 31, 2007, UG statutory net
income was $4,661,648. Extraordinary dividends (amounts in excess of
ordinary dividend limitations) require prior approval of the insurance
commissioner and are not restricted to a specific calculation. UG
paid dividends to UTG in the amount of $1,000,000 during 2008.
AC and TI
are Texas domiciled insurance companies, which requires eleven 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, 2007 AC and TI statutory
shareholders' equity was $8,165,775 and $2,432,191, respectively. At
December 31, 2007, AC and TI statutory net income was $999,329 and
$289,642, respectively. Extraordinary dividends (amounts in excess of
ordinary dividend limitations) require prior approval of the insurance
commissioner and are not restricted to a specific calculation. There
were no dividends paid during 2008.
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. 163, Accounting for Financial Guarantee
Insurance Contracts — an interpretation of FASB Statement No. 60
Diversity exists in practice in accounting for financial guarantee insurance
contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by
Insurance Enterprises. That diversity results in inconsistencies in the
recognition and measurement of claim liabilities because of differing views
about when a loss has been incurred under FASB Statement No. 5, Accounting for Contingencies. This
Statement requires that an insurance enterprise recognize a claim liability
prior to an event of default (insured event) when there is evidence that credit
deterioration has occurred in an insured financial obligation. This Statement
also clarifies how Statement 60 applies to financial guarantee insurance
contracts, including the recognition and measurement to be used to account for
premium revenue and claim liabilities. Those clarifications will increase
comparability in financial reporting of financial guarantee insurance contracts
by insurance enterprises. This Statement requires expanded disclosures about
financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years. Management has determined that this
Statement will not result in a change to current practice, since the Company
does not issue Financial Guaranty contracts.
The FASB
also issued Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement is effective 60 days
after the SEC’s approval. Management has determined that this Statement will not
result in a change to current practice.
The FASB
also issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging Activities—an
amendment of FASB Statement No. 133 this Statement requires enhanced disclosures
about an entity’s derivative and hedging activities and thereby improves the
transparency of financial reporting. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. Management has determined that this
Statement will not result in a change to current practice, since the Company
does not invest in derivative instruments or hedging activities.
The FASB
also issued Statement No. 160, Non-controlling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51. This Statement applies to all
entities that prepare consolidated financial statements, except not-for-profit
organizations, but will affect only those entities that have an outstanding
non-controlling interest in one or more subsidiaries or that deconsolidate a
subsidiary. This Statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Management
is currently researching what effect if any that this Statement will have on
future reporting.
The
Financial Accounting Standards Board (“FASB”) issued Statement No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities – Including an
amendment of FASB Statement No. 115. The Statement permits entities
to choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The Statement is effective as of
the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The implementation of this Statement had no
effect on the Company.
The FASB
issued Statement No. 157, Fair
Value Measurements. The Statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. In February of 2008, the FASB
issued FASB Staff position 157-2 which delays the effective date of SFAS 157 for
non-financial assets and liabilities which are not measured at fair value on a
recurring basis (at least annually) until fiscal years beginning after November
15, 2008. Adoption of SFAS 157 did not have a material impact on the
consolidated financial position, results from operation, or cash flow of the
Company.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Market
risk relates, broadly, to changes in the value of financial instruments that
arise from adverse movements in interest rates, equity prices and foreign
exchange rates. The Company is exposed principally to changes in
interest rates, which affect the market prices of its fixed maturities available
for sale and its variable rate debt outstanding. The Company’s
exposure to equity prices and foreign currency exchange rates is
immaterial. The information presented below is in U.S. dollars, the
Company’s reporting currency.
Interest
rate risk
The
Company’s exposure to interest rate changes results from a significant holding
of fixed maturity investments and mortgage loans on real estate, all of which
comprised approximately 73% of the investment portfolio as of September 30,
2008. 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 69% of the fixed maturities we owned at
September 30, 2008 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 September 30, 2008:
|
Decreases in Interest Rates
|
Increases in Interest
Rates
|
|||
|
200
Basis
Points
|
100
Basis
Points
|
100
Basis
Points
|
200
Basis
Points
|
|
|
$ 11,780,000
|
$ 5,320,000
|
$ (12,533,000)
|
$ (21,304,000)
|
|
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 September 30, 2008 and December 31, 2007, there were
no investments in derivative instruments.
The
Company had no capital lease obligations, material operating lease obligations
or purchase obligations outstanding as of September 30, 2008.
The
Company currently has $17,682,623 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.
ITEM
4T. CONTROLS AND PROCEDURES
Not
applicable at this time.
PART
II. OTHER INFORMATION.
ITEM
1. LEGAL PROCEEDINGS.
NONE
ITEM
1A. RISK FACTORS.
NONE
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
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
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
|
REPORTS
ON FORM 8-K
The
Company filed a Form 8-K on July 2, 2008 relating to the retirement of the Chief
Operating Officer of the Company Mr. Randall Attkisson.
The
Company filed a Form 8-K on September 19, 2008 relating to the appointment of
Mr. Daryl Heald as a member of the Board of Directors of the
Company.
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:
|
November
12, 2008
|
By
|
/s/ James P. Rousey | |
|
James
P. Rousey
|
||||
|
President,
and Director
|
|
Date:
|
November
12, 2008
|
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
|