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UTG INC - Quarter Report: 2011 September (Form 10-Q)

utg11q3.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


(Mark One)

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT
 
OF 1934

For the quarterly period ended September 30, 2011

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 27, 2011, was 3,806,916.





UTG, INC. AND SUBSIDIARIES
(The “Company”)

TABLE OF CONTENTS

PART 1.   FINANCIAL INFORMATION………………………............................................................................................................................................................................................................................
3
 
 
   ITEM 1.  FINANCIAL STATEMENTS...……………………………………………………………………………..……................................................................................................................................
 
 
3
 
      Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010………….……..…..............................................................................................................................
 
3
 
      Condensed Consolidated Statements of Income for the nine months ended
         September 30, 2011 and 2010……………………………………………………………………………………......…...............................................................................................................................
 
 
4
 
      Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income
 
         For the nine months ended September 30, 2011…..………..……………………………………………………......................................................................................................................................
5
 
      Condensed Consolidated Statements of Cash Flows for the nine months ended
         September 30, 2011 and 2010………………………………………………………………………..........…...............................................................................................................................................
 
 
6
 
      Notes to Condensed Consolidated Financial Statements………………………..…………………………….…….................................................................................................................................
 
7
 
   ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 
   RESULTS OF OPERATIONS…………………………………..………………………………………………….…….......................................................................................................................................
19
 
   ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.…………………..……..............................................................................................................................
 
26
 
   ITEM 4.  CONTROLS AND PROCEDURES..…………………………………………………………….…………….......................................................................................................................................
 
27
 
 
PART II.  OTHER INFORMATION…..……………………….……………………………………………………………..................................................................................................................................
 
 
27
 
 
   ITEM 1.  LEGAL PROCEEDINGS…………………………………………………………….………………………….......................................................................................................................................
 
 
27
 
   ITEM 1A. RISK FACTORS………………………………………………………………………………………………......................................................................................................................................
 
27
 
   ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS………………...…….........................................................................................................................................
 
28
 
   ITEM 3.  DEFAULTS UPON SENIOR SECURITIES…………………………………………………………………........................................................................................................................................
 
28
 
   ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS………………………………….......................................................................................................................................
 
28
 
   ITEM 5.  OTHER INFORMATION...……………………………………………………………………………………......................................................................................................................................
 
28
 
   ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K...……………………………………………………………….......................................................................................................................................
 
28
 
 
SIGNATURES...………………………………………………………………………………………………………………...................................................................................................................................
 
 
29
 
EXHIBIT INDEX...………………………………………………………………………………………………………….......................................................................................................................................
 
30



           PART 1.  FINANCIAL INFORMATION
          Item 1.  Financial Statements
           
        UTG, Inc.
          AND SUBSIDIARIES
           
          Condensed Consolidated Balance Sheets (Unaudited)
           
    ASSETS
           
     
September 30,
 
December 31,
     
2011
 
2010*
Investments:
         
   Investments available for sale:
         
      Fixed maturities, at market (amortized cost $139,310,359 and $142,948,693)
$
164,584,563
$
147,905,948
      Equity securities, at market (cost $11,364,513 and $13,940,811)
   
11,505,527
 
13,884,257
  Trading securities, at market (cost $12,756,934 and $34,183,252)
   
28,964,240
 
37,029,550
   Mortgage loans on real estate at amortized cost
   
9,428,177
 
12,411,587
   Discounted mortgage loans on real estate at cost
   
34,852,205
 
47,523,860
   Investment real estate, at cost, net of accumulated depreciation
   
76,404,217
 
53,148,755
   Policy loans
   
13,359,801
 
13,976,019
     Total investments
   
339,098,730
 
325,879,976
           
Cash and cash equivalents
   
31,625,598
 
18,483,452
Investment in unconsolidated affiliate, at fair value (cost $5,000,000 and $5,000,000)
5,188,758
 
5,137,700
Accrued investment income
   
1,238,115
 
1,609,425
Reinsurance receivables:
         
    Future policy benefits
   
65,048,489
 
67,033,539
    Policy claims and other benefits
   
4,683,442
 
4,446,940
Cost of insurance acquired
   
13,154,020
 
14,077,281
Deferred policy acquisition costs
   
505,439
 
556,958
Property and equipment, net of accumulated depreciation
   
1,558,317
 
1,478,935
Income taxes receivable
   
1,366,502
 
0
Other assets
   
2,646,494
 
2,883,893
             Total assets
 
$
466,113,904
$
441,588,099
           
           
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
         
Policy liabilities and accruals:
         
    Future policyholder benefits
 
$
302,418,698
$
307,509,531
    Policy claims and benefits payable
   
3,411,917
 
3,588,914
    Other policyholder funds
   
689,566
 
810,062
    Dividend and endowment accumulations
   
14,143,186
 
14,190,946
Income taxes payable
   
0
 
209,888
Deferred income taxes
   
18,711,594
 
13,381,278
Notes payable
   
12,026,955
 
10,372,239
Trading securities, at market (proceeds $8,717,283 and $17,387,108)
   
24,533,489
 
18,429,677
Other liabilities
   
10,349,074
 
7,967,807
              Total liabilities
   
386,284,479
 
376,460,342
           
Shareholders' equity:
         
Common stock - no par value, stated value $.001 per share, authorized 7,000,000 shares - 3,806,916 and 3,848,079 shares issued and outstanding after deducting treasury shares of 488,092 and 446,929
3,806
 
3,848
Additional paid-in capital
   
40,989,396
 
41,432,636
Retained earnings
   
6,263,813
 
6,335,072
Accumulated other comprehensive income
   
16,631,901
 
3,679,684
Total UTG shareholders' equity
   
63,888,916
 
51,451,240
Noncontrolling interest
   
15,940,509
 
13,676,517
             Total shareholders' equity
   
79,829,425
 
65,127,757
             Total liabilities and shareholders' equity
 
$
466,113,904
$
441,588,099
           
* Balance sheet audited at December 31, 2010.
         
  See accompanying notes.




UTG, Inc.
AND SUBSIDIARIES
                 
Condensed Consolidated Statements of Income (Unaudited)
                 
   
Three Months Ended
 
Nine Months Ended
   
September 30,
September 30,
September 30,
September 30,
   
       2011
 
        2010
 
         2011
 
2010
Revenues:
               
     Premiums and policy fees
$
3,367,828
$
3,624,202
$
10,769,842
$
11,657,549
     Ceded Reinsurance premiums and policy fees
 
(1,150,510)
 
(974,729)
 
(2,981,483)
 
(3,422,264)
     Net investment income (loss)
 
(4,055,513)
 
9,659,148
 
7,811,063
 
19,118,312
     Other income
 
519,190
 
443,638
 
1,520,894
 
1,382,991
         Revenues before realized gains (losses)
 
(1,319,005)
 
12,752,259
 
17,120,316
 
28,736,588
     Realized investment gains (losses), net:
               
       Other-than-temporary impairments
 
0
 
0
 
(262,067)
 
(477,386)
       Other realized investment gains, net
 
562,447
 
267,014
 
2,483,955
 
221,631
         Total realized investment gains (losses), net
 
562,447
 
267,014
 
2,221,888
 
(255,755)
           Total revenues
 
(756,558)
 
13,019,273
 
19,342,204
 
28,480,833
                 
Benefits and other expenses:
               
     Benefits, claims and settlement expenses:
               
        Life
 
6,090,616
 
5,625,387
 
15,866,565
 
17,499,942
        Ceded Reinsurance benefits and claims
 
(1,398,015)
 
(1,706,105)
 
(2,908,849)
 
(5,575,737)
        Annuity
 
282,967
 
206,598
 
806,508
 
704,659
        Dividends to policyholders
 
109,097
 
120,135
 
400,882
 
439,683
    Commissions and amortization of deferred policy acquisition costs
(246,563)
 
(328,382)
 
(678,392)
 
(672,567)
    Amortization of cost of insurance acquired
 
307,753
 
331,182
 
923,261
 
993,548
    Operating expenses
 
1,635,300
 
1,927,023
 
5,766,102
 
5,746,809
     Interest expense
 
99,300
 
77,289
 
239,263
 
258,566
        Total benefits and other expenses
 
6,880,455
 
6,253,127
 
20,415,340
 
19,394,903
                 
                 
Income (loss) before income taxes
 
(7,637,013)
 
6,766,146
 
(1,073,136)
 
9,085,930
Income tax (expense) benefit
 
2,345,119
 
(1,736,233)
 
961,408
 
(2,282,970)
                 
Net income (losses)
 
(5,291,894)
 
5,029,913
 
(111,728)
 
6,802,960
                 
Net income (loss) attributable to noncontrolling interest
604,734
 
(370,394)
 
40,469
 
(622,950)
                 
Net income (losses) attributable to common shareholders'
$
(4,687,160)
$
4,659,519
$
(71,259)
$
6,180,010
                 
Amounts attributable to common shareholders':
               
     Basic income per share
$
(1.23)
$
1.20
$
(0.02)
$
1.60
           
 
   
     Diluted income per share
$
(1.23)
$
1.20
$
(0.02)
$
1.60
                 
     Basic weighted average shares outstanding
 
3,807,430
 
3,872,743
 
3,815,602
 
3,865,676
                 
     Diluted weighted average shares outstanding
 
3,807,430
 
3,872,743
 
3,815,602
 
3,865,676
                 
 See accompanying notes.


 
UTG, Inc.
AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income
(Unaudited)
                             
                             
 
 
 
Period ended September 30, 2011
 
 
 
 
Common Stock
 
 
 
Additional
Paid-In Capital
 
 
 
 
Retained Earnings
 
 
Accumulated Other Comprehensive Income
 
 
 
Noncontrolling Interest
 
 
Total Shareholders' Equity
 
 
 
Comprehensive Income
                             
Balance at January 1, 2011
$
3,848
$
41,432,636
$
6,335,072
$
3,679,684
$
13,676,517
$
65,127,757
$
0
Common stock issued during year
 
0
 
0
 
0
 
0
 
0
 
0
 
0
Treasury shares acquired and retired
 
        (42)
 
            (443,240)
 
0
 
0
 
0
 
        (443,282)
 
0
Net income attributable to common shareholders
 
0
 
0
 
            (71,259)
 
0
 
0
 
          (71,259)
 
           (71,259)
Unrealized holding income on securities net of noncontrolling interest and reclassification adjustment and taxes
 
0
 
 
0
 
 
0
 
 
12,952,217
 
 
0
 
 
12,952,217
 
 
12,952,217
Contributions
 
0
 
0
 
0
 
0
 
0
 
0
 
0
Distributions
 
0
 
0
 
                    -
 
0
 
0
 
                 -
 
0
Gain attributable to noncontrolling interest
 
0
 
0
 
0
 
0
 
2,263,992
 
2,263,992
 
0
     Balance at September 30, 2011
$
3,806
 $
40,989,396
 $
6,263,813
 $
16,631,901
 $
15,940,509
 $
79,829,425
 $
12,880,958
                             
See accompanying notes.


 


UTG, Inc.
AND SUBSIDIARIES
           
Condensed Consolidated Statements of Cash Flows (Unaudited)
           
     
Nine Months Ended
     
September 30,
September 30,
 
   
2011
 
2010
           
Cash flows from operating activities:
         
   Net income (loss) attributable to common shareholders
 
$
        (71,259)
 $
     6,180,010
   Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
     Amortization (accretion) of investments
   
(3,195,015)
 
89,854
      Realized investment (gains) losses, net
   
(2,221,888)
 
255,755
      Unrealized trading (gains) loss included in income
   
1,412,630
 
(1,948,042)
     Amortization of deferred policy acquisition costs
   
51,519
 
71,426
     Amortization of cost of insurance acquired
   
923,261
 
993,548
      Depreciation
   
1,048,126
 
974,374
      Net income (loss) attributable to noncontrolling interest
   
(40,469)
 
622,950
      Charges for mortality and administration of universal life and annuity products
 
(5,547,734)
 
(5,815,192)
      Interest credited to account balances
   
3,915,979
 
3,990,800
      Change in accrued investment income
   
371,310
 
361,479
      Change in reinsurance receivables
   
1,748,548
 
1,711,615
      Change in policy liabilities and accruals
   
(3,856,527)
 
(3,739,909)
      Change in income taxes receivable/payable
   
(3,260,867)
 
1,530,805
      Change in other assets and liabilities, net
   
2,358,592
 
3,512,369
Net cash provided by (used in) operating activities
   
    (6,363,794)
 
     8,791,842
           
Cash flows from investing activities:
         
   Proceeds from investments sold and matured:
         
      Fixed maturities available for sale
   
130,999,311
 
21,589,727
      Equity securities available for sale
   
3,231,410
 
728,830
      Trading securities
   
14,209,807
 
119,229,039
      Mortgage loans
   
2,984,255
 
12,988,130
      Discounted mortgage loans
   
10,288,755
 
17,622,637
      Real estate
   
9,921,610
 
2,234,784
      Policy loans
   
3,478,803
 
2,584,784
      Short-term investments
   
0
 
700,000
   Total proceeds from investments sold and matured
   
 175,113,951
 
 177,677,931
   Cost of investments acquired:
         
      Fixed maturities available for sale
   
(125,182,803)
 
(21,844,183)
      Equity securities available for sale
   
(781,307)
 
(1,110,445)
      Trading securities
   
(4,641,579)
 
(131,279,792)
      Mortgage loans
   
(846)
 
(2,459,814)
      Discounted mortgage loans
   
(10,378,446)
 
(34,075,757)
      Real estate
   
(12,431,325)
 
(1,415,023)
      Policy loans
   
(2,862,585)
 
(2,394,625)
   Total cost of investments acquired
   
(156,278,891)
 
(194,579,639)
   Purchase of property and equipment
   
(204,475)
 
(72,291)
Net cash provided by (used in) investing activities
   
   18,630,585
 
  (16,973,999)
           
Cash flows from financing activities:
         
   Policyholder contract deposits
   
4,743,069
 
5,083,206
   Policyholder contract withdrawals
   
(4,690,873)
 
(4,760,813)
   Proceeds from notes payable/line of credit
   
5,613,000
 
0
   Payments of principal on notes payable/line of credit
   
(3,958,284)
 
(4,536,333)
   Purchase of treasury stock
   
(443,282)
 
(172,625)
   Distributions to minority interests of consolidated subsidiaries
   
(388,275)
 
(517,390)
Net cash provided by (used in) financing activities
   
       875,355
 
    (4,903,955)
           
Net increase (decrease) in cash and cash equivalents
   
13,142,146
 
(13,086,112)
Cash and cash equivalents at beginning of period
   
18,483,452
 
37,492,843
Cash and cash equivalents at end of period
   
 $31,625,598
 
 $24,406,731
           
See accompanying notes.



UTG, INC. AND SUBSIDIARIES
Notes to Condensed 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, 2010.

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.  FSBI operates through its 100% owned subsidiary bank, First Southern National Bank (“FSNB”).  Banking activities are conducted through multiple locations within south-central and western 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, 2011, Mr. Correll owns or controls directly and indirectly approximately 60.6% of UTG’s outstanding stock.


2.
INVESTMENTS

A.
Available for Sale Securities – Fixed Maturity and Equity Securities

As of September 30, 2011 and December 31, 2010, fixed maturities available for sale represented 49% and 45% of total invested assets. The Company’s insurance subsidiaries are regulated by insurance statutes and regulations as to the type of investments 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, 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.

At September 30, 2011, 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 Company has identified securities it may sell and classified them as “investments available for sale”.  Investments available for sale are carried at market, with changes in market value directly recorded to shareholders’ equity.
 
The amortized cost and estimated market values of investments in securities including investments held for sale are as follows:

September 30, 2011
 
Original or Amortized
Cost
 
 
Gross Unrealized Gains
 
 
Gross Unrealized Losses
 
Estimated Market
Value
Investments available for sale:
               
Fixed maturities
               
U.S. Government and govt. agencies and authorities
 
$
 
92,073,493
 
$
 
21,969,563
 
$
 
0
 
$
 
114,043,056
States, municipalities and political subdivisions
 
 
250,000
 
 
3,573
 
 
0
 
 
253,573
Collateralized mortgage obligations
 
2,274,326
 
24,579
 
(6,666)
 
2,292,239
Public utilities
 
399,884
 
86,240
 
0
 
486,124
All other corporate bonds
 
44,312,656
 
4,093,457
 
(896,542)
 
47,509,571
   
139,310,359
 
26,177,412
 
(903,208)
 
164,584,563
Equity securities
 
11,364,513
 
255,735
 
(114,721)
 
11,505,527
Total
$
150,674,872
$
26,433,147
$
(1,017,929)
$
176,090,090
                 
Investment in unconsolidated affiliate
$
5,000,000
$
188,758
$
0
$
5,188,758


December 31, 2010
 
Original or Amortized
Cost
 
 
Gross Unrealized Gains
 
 
Gross Unrealized Losses
 
Estimated Market
Value
Investments available for sale:
               
Fixed maturities
               
U.S. Government and govt. agencies and authorities
 
$
 
74,596,648
 
$
 
4,427,285
 
$
 
0
 
$
 
79,023,933
States, municipalities and political subdivisions
 
 
330,000
 
 
5,198
 
 
0
 
 
335,198
Collateralized mortgage obligations
 
16,170,099
 
510,840
 
(6,677)
 
16,674,262
Public utilities
 
904,139
 
82,886
 
0
 
987,025
All other corporate bonds
 
50,947,807
 
2,320,965
 
(2,383,242)
 
50,885,530
   
142,948,693
 
7,347,174
 
(2,389,919)
 
147,905,948
Equity securities
 
13,940,811
 
39,700
 
(96,254)
 
13,884,257
Total
$
156,889,504
$
7,386,874
$
(2,486,173)
$
161,790,205
                 
Investment in unconsolidated affiliate
$
5,000,000
$
137,700
$
0
$
5,137,700


The fair value of investments with sustained gross unrealized losses at September 30, 2011 and December 31, 2010 are as follows:

September 30, 2011
 
Less than 12 months
 
12 months or longer
 
Total
                   
   
Fair value
Unrealized losses
 
Fair value
Unrealized losses
 
Fair value
Unrealized losses
Collateralized mortgage obligations
$
0
0
$
94,198
(6,666)
$
94,198
(6,666)
All other corporate bonds
 
27,067
(231)
 
2,070,458
(896,311)
 
2,097,525
(896,542)
Total fixed maturity
$
27,067
(231)
$
2,164,656
(902,977)
$
2,191,723
(903,208)
                   
Equity securities
$
2,074,770
(57,937)
$
346,389
(56,784)
$
2,421,159
(114,721)



December 31, 2010
 
Less than 12 months
 
12 months or longer
 
Total
                   
   
Fair value
Unrealized losses
 
Fair value
Unrealized losses
 
Fair value
Unrealized losses
Collateralized mortgage obligations
 
$
 
0
 
0
 
$
 
104,033
 
(6,677)
 
$
 
104,033
 
(6,677)
All other corporate bonds
 
13,959,305
(413,862)
 
2,620,277
(1,969,380)
 
16,579,582
(2,383,242)
Total fixed maturity
$
13,959,305
(413,862)
$
2,724,310
(1,976,057)
$
16,683,615
(2,389,919)
                   
Equity securities
$
1,082,748
(96,254)
$
0
0
$
1,082,748
(96,254)


The unrealized losses of fixed maturity investments were primarily due to financial market participants’ perception of increased risks associated with the current market environment, resulting in higher interest rates.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the par value of the investment.  The unrealized losses of equity investments were primarily caused by normal market fluctuations in publicly traded securities.

The Company regularly reviews its investment portfolio for factors that may indicate that a decline in fair value of an investment is other than temporary.  Based on an evaluation of the issues, including, but not limited to:  intentions to sell or ability to hold the fixed maturity and equity securities with unrealized losses for a period of time sufficient for them to recover; the length of time and amount of the unrealized loss; and the credit ratings of the issuers of the investments, the Company held ten and six investments as other-than-temporarily impaired at September 30, 2011 and December 31, 2010. Other-than-temporary impairments of $262,067 and $1,478,970 were taken in the first nine months of 2011 and during the twelve months ended December 31, 2010, respectively.  The other-than-temporary impairments during 2011 were a mortgage loan impairment as a result of an appraisal valuation as well as several discounted mortgage loans and a foreclosed discounted mortgage loan which were written down to better reflect current expected market values.  The other-than-temporary impairments during 2010 were due to changes in expected future cash flows of investments in stocks as well as in bonds backed by trust preferred securities of banks.  In addition, in 2010, the Company recognized an other-than-temporary impairment in a mortgage loan as a result of its appraisal valuation.  The other-than-temporary impairments are detailed below:

September 30, 2011
 
Beginning Amortized
Cost
 
 
OTTI Credit Loss
 
 
Ending Amortized Cost
 
 
Unrealized Loss
 
 
Carrying Value
                     
Hafner & Shugarman Enterprise Loan 2
 
$
 
51,259
 
$
 
(51,259)
 
$
 
0
 
$
 
0
 
$
 
0
                     
Hafner & Shugarman Enterprise Loan 3
 
$
 
220,415
 
$
 
(95,742)
 
$
 
124,673
 
$
 
0
 
$
 
124,673
                     
Hafner & Shugarman Enterprise Loan 4
 
$
 
56,440
 
$
 
(56,440)
 
$
 
0
 
$
 
0
 
$
 
0
                     
Jarvis Development
$
769,119
$
(39,119)
$
730,000
$
0
$
730,000
                     
HJ Management Corp, Inc. Loan 1
 
$
 
2,500
 
$
 
(2,500)
 
$
 
0
 
$
 
0
 
$
 
0
                     
HJ Management Corp, Inc. Loan 2
 
$
 
3,005
 
$
 
(3,005)
 
$
 
0
 
$
 
0
 
$
 
0
                     
HJ Management Corp, Inc. Loan 3
 
$
 
2,949
 
$
 
(2,949)
 
$
 
0
 
$
 
0
 
$
 
0
                     
HJ Management Corp, Inc. Loan 4
 
$
 
4,250
 
$
 
(4,250)
 
$
 
0
 
$
 
0
 
$
 
0
                     
                     
September 30, 2011
 
Beginning Amortized
Cost
 
 
OTTI Credit Loss
 
 
Ending Amortized Cost
 
 
Unrealized Loss
 
 
Carrying Value
                     
First Pyramid Investment Group Loan 1
 
$
 
925
 
$
 
(925)
 
$
 
0
 
$
 
0
 
$
 
0
                     
First Pyramid Investment Group
$
17,313
$
(5,878)
$
11,435
$
0
$
11,435



December 31, 2010
 
Beginning Amortized
Cost
 
 
OTTI Credit Loss
 
 
Ending Amortized Cost
 
 
Unrealized Loss
 
 
Carrying Value
                     
Preferred Term Securities I
$
416,157
$
(136,935)
$
279,222
$
(206,924)
$
72,298
                     
Preferred Term Securities II
$
2,161,808
$
(473,319)
$
1,688,489
$
(1,621,946)
$
66,543
                     
Investors Heritage Capital Corp
$
618,348
$
(215,174)
$
403,174
$
0
$
403,174
                     
Jarvis Development
$
858,867
$
(128,867)
$
730,000
$
0
$
730,000
                     
SFF Royalty
$
1,934,336
$
(68,643)
$
1,865,693
$
0
$
1,865,693
                     
Amen Properties, Inc.
$
1,628,432
$
(456,032)
$
1,172,400
$
0
$
1,172,400


The amortized cost and estimated market value of debt securities at September 30, 2011, by contractual maturity, is shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


Fixed Maturities Available for Sale
September 30, 2011
 
Amortized
Cost
 
Estimated
Market Value
         
Due in one year or less
$
0
$
0
Due after one year through five years
 
26,498,940
 
28,363,024
Due after five years through ten years
 
24,397,733
 
28,083,790
Due after ten years
 
86,139,360
 
105,845,509
Collateralized mortgage obligations
 
2,274,326
 
2,292,240
Total
$
139,310,359
$
164,584,563


B.
Trading Securities

Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in net investment income on the consolidated statements of operations.  Trading securities include exchange-traded equities, exchange-traded options, and exchange-traded futures.  The fair value of trading securities included in assets was $28,964,240 and $37,029,550 as of September 30, 2011 and December 31, 2010, respectively.  The fair value of trading securities included in liabilities was $(24,533,489) and $(18,429,677) as of September 30, 2011 and December 31, 2010, respectively.  Trading securities’ net unrealized gains were $391,099 and $1,803,729 as of September 30, 2011 and December 31, 2010, respectively.  Trading securities carried as liabilities are securities sold short.  A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale.  Realized gains (losses) from trading securities were $(3,192,293) and $184,546 for the nine and twelve months ended September 30, 2011 and December 31, 2010, respectively. Earnings from trading securities are classified in cash flows from operating activities. Trading revenue charged to net investment income from trading securities was:


 
Nine Months
September 30, 2011
 
Twelve Months
December 31, 2010
       
 
Net Realized and Unrealized Gains (Losses)
 
Net Realized and Unrealized Gains (Losses)
       
$
(4,604,923)
$
1,988,275


C.
Derivatives

As of September 30, 2011, the Company held derivative instruments in the form of exchange-traded options and exchange-traded futures.  The Company currently does not designate derivatives as hedging instruments.  Exchange-traded options and futures are combined with exchange-traded equity securities in the Company’s trading portfolio, with the primary objective of generating a fair return while reducing risk.  These derivatives are carried at fair value, with unrealized gains and losses recognized in net investment income.  The fair value of derivatives included in trading security assets and trading security liabilities as of September 30, 2011 was $23,181,473 and $(23,276,189), respectively. The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2010 was $2,244,478 and $(17,246,957), respectively.  Realized gains (losses) due to derivatives were $(2,260,208) and $(305,247) for the nine and twelve months ended September 30, 2011 and December 31, 2010, respectively. Unrealized gains included in income and trading security assets due to derivatives were $18,368,566 and $1,579,071 as of September 30, 2011 and December 31, 2010, respectively. Unrealized gains (losses) included in income and trading security liabilities due to derivatives were $(15,659,089) and $(3,392,010) as of September 30, 2011 and December 31, 2010, respectively.

D.
Mortgages

The Company held mortgage loans on real estate in the amount of $44,280,382 and $59,935,447 at September 30, 2011 and December 31, 2010, respectively.  Included in the amounts are discounted commercial mortgage loans with a carrying value of $34,852,205 and $47,523,860 at September 30, 2011 and December 31, 2010, respectively. 

During the first nine months of 2011, the Company acquired $62,602,810 of discounted mortgage loans at a total cost of $6,673,601, representing an average purchase price to outstanding loan of 10.66%.  Additionally, during the first nine months of 2011, the Company settled, sold, or had paid off mortgage loans totaling $23,013,435.  The Company also recorded approximately $6,431,428 in income from the discounted mortgage loan activity, including $3,177,359 in discount accruals during the first nine months of 2011.  During 2010, the Company acquired $111,258,867 of discounted mortgage loans at a total cost of $36,283,278, representing an average purchase price to outstanding loan of 32.6%.  Additionally, during 2010, the Company settled, sold or had paid off discounted mortgage loans totaling $23,607,100.  During 2010, the Company recorded approximately $12,898,000 in income from the discounted mortgage loan activity, including $7,645,258 in discount accruals.  The Company is currently projecting a very positive return from on-going mortgage loan payments from the discounted commercial mortgage loan portfolio.

While management believes the discounted loans will continue to have favorable earnings and outcomes as they are worked through, there can be no assurance this will remain true in future periods.  Changes in the current economy such as an even greater downturn than recently experienced could have a negative impact on the loans, including the financial stability of the borrowers, the borrowers’ ability to pay or to refinance, the value of the property held as collateral and the ability to find purchasers at favorable prices.  As such, management has taken a conservative approach with these investments and has classified all discounted mortgage loans held as non-accrual.  In such status, the Company is not recording any accrued interest income nor is it recording any accrual of discount on the loans held.  Discount accruals reported during 2010 and 2011 were the result of the loan basis already being fully paid.

On the remainder of the mortgage loan portfolio, interest accruals are analyzed based on the likelihood of repayment.  In no event will interest continue to accrue when accrued interest along with the outstanding principal exceeds the net realizable value of the property.  The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status.

A mortgage loan reserve is established and adjusted based on management’s quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value.  The Company acquired the discounted mortgage loans at below fair value, therefore no reserve for delinquent loans is deemed necessary.  The loan portfolio since purchase is performing very well.  Those loans not currently paying are being vigorously worked by management.  The current discounted commercial mortgage loan portfolio has an average price of 32.9% of face value and management has determined that this deep discount provides a financial cushion or built in allowance for any of the loans that are not currently performing within the portfolio of loans purchased.  The mortgage loan reserve was $0 at September 30, 2011 and December 31, 2010.

As of September 30, 2011, the Company’s discounted mortgage loan portfolio contained 108 loans with a carrying value of $34,852,205.  The loans’ payment performance since inception is shown as follows:


 
Payment Frequency
 
 
Number of Discounted Loans
 
 
Carrying Value
         
No payments
 
35
$
5,298,930
One-time payment received
 
9
 
1,284,068
Irregular payments received
 
32
 
10,902,651
Periodic payments received
 
32
 
17,366,556
Total
 
108
$
34,852,205


The following table summarizes discounted mortgage loan holdings of the Company:


Category
 
September 30, 2011
 
December 31, 2010
         
In good standing
$
7,552,563
$
9,665,059
Overdue interest over 90 days
 
11,568,404
 
16,192,815
Restructured
 
7,521,483
 
4,306,800
In process of foreclosure
 
8,209,755
 
17,359,186
Total discounted mortgage loans
$
34,852,205
$
47,523,860
         
Total foreclosed discounted mortgage loans
$
22,425,377
$
8,939,548


During the first nine months of 2011, the Company foreclosed on thirteen discounted mortgage loans with a total carrying value of $15,682,516.  Six foreclosed loans were transferred to real estate and seven were transferred to other invested assets.  Two of the foreclosed loans are now UG’s majority-owned subsidiaries, Wingate of St. Johns Holding, LLC and Northwest Florida of Okaloosa Holding, LLC.  Six of the discounted loans that were transferred to real estate during 2010 and 2011 were sold during the first nine months of 2011 resulting in a net gain of $445,602.  During 2010, the Company foreclosed on 20 discounted mortgage loans with a total carrying value of $8,939,548.  Of these foreclosures, 17 loans totaling $8,411,458 were transferred to real estate while one loan is now UG’s wholly owned subsidiary, Sand Lake, LLC.  Subsequent to the foreclosures, two foreclosed loans were sold with the Company realizing a gain of $51,949 upon the sale during 2010.

During the first nine months of 2011, the Company recognized other-than-temporary impairments of $262,066 on ten of its mortgage loans as a result of recent appraisals and management’s assessment of fair value.


3.
NOTES PAYABLE

At September 30, 2011 and December 31, 2010, the Company had $12,026,955 and $10,372,239 of long-term debt outstanding, respectively.

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.  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 had no borrowings during 2011 to date. At September 30, 2011 the outstanding principal balance on this debt was $5,621,411. The next required principal payment on this debt is due in December of 2011.  In July 2011, the Company repaid $1,270,000 on this note.

In addition to the above promissory note, First Tennessee Bank National Association also provided UTG, Inc. with a $5,000,000 revolving credit note.  During 2011 at the renewal of the note, Management decided to increase the note amount from $2,750,000 to $5,000,000 to provide for additional operating liquidity and flexibility for current operations. 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. The promissory note carries a variable rate of interest based on the 90 day LIBOR rate plus 2.75 percentage points, but at no time will the rate be less than 3.25%. The collateral held on the above note also secures this credit note.  During 2011, the Company had borrowings of $613,000 and made $670,000 in principal payments.  At September 30, 2011, the outstanding principal balance on this debt was $233,000.

On April 6, 2011, UTG was extended a credit note from First National Bank of Tennessee in the amount of $5,000,000.  This note is for a one year term and may be renewed by consent of both parties.  The promissory note carries interest at a rate of 4.0%.  During 2011, the Company had borrowings of $5,000,000 against this note.  The funds from this borrowing were used to purchase an investment.  At September 30, 2011, the outstanding principal balance on this debt was $5,000,000.

In November 2007, UG became a member of the Federal Home Loan Bank (“FHLB”).  This membership allows the Company access to additional credit up to a maximum of 50% of the total assets of UG.  To be a member of the FHLB, the Company 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.  The Company’s current LOC with the FHLB is $15,000,000.  During 2011, the Company had repayments of $2,000,000 against this LOC. At September 30, 2011 the Company had no outstanding principal balance 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.  At September 30, 2011 the outstanding principal balance was $914,505.

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 was due January 15, 2008. There will be 119 regular payments of $3,965 followed by one irregular last payment estimated at $44,125. At September 30, 2011, the outstanding principal balance on this debt was $258,039.

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

Year
 
Amount
     
2011
$
2,580,898
2012
 
9,235,123
2013
 
31,586
2014
 
34,154
2015
 
36,935



4.
SHAREHOLDERS’ EQUITY

A.
Stock Repurchase Program

The Board of Directors of UTG has authorized the repurchase in the open market or in privately negotiated transactions of up to $5 million of UTG's common stock.  Repurchased shares are available for future issuance for general corporate purposes.  This program can be terminated at any time.  Open market purchases are made based on the last available market price and are generally limited to a maximum per share price of the most recent reported per share GAAP equity book value of the Company.  Through September 2011, UTG has spent $3,650,524 in the acquisition of 488,092 shares under this program.



B.
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 ASC 260-10, Earnings Per Share.  At September 30, 2011 and September 30, 2010, 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.  In the normal course of business, the Company is involved from time to time in various legal actions and other state and federal proceedings.  Management is of the opinion that the ultimate disposition of the matters will not have a materially adverse effect on the Company’s results of operations or financial position.

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.

As part of the Texas Imperial Life Insurance Company sale, the Company remains contingently liable for certain costs pending the outcome of an ongoing race-based audit on Texas Imperial Life Insurance Company by the Texas Department of Insurance.  Under the agreement, the Company is responsible for 100% of the first $50,000 of costs, 90% of the next $50,000, 75% of the third $50,000 and 50% of the costs above $150,000.  Management has conservatively estimated the Company’s exposure and other costs at $50,000 based on information provided to date from the examination team and has established a contingent liability in its financial statements of this amount.  This contingency expires December 30, 2013.

Within the Company’s trading accounts, certain trading securities carried as liabilities represent securities sold short.  A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale.

During 2010, the Company committed to invest up to $2,000,000 in Llano Music, LLC (“Llano”), which invests in music royalties.  Llano does capital calls as funds are needed to acquire the royalty rights.  At September 30, 2011, the Company has $1,646,000 committed that has not been requested by Llano.


6.
OTHER CASH FLOW DISCLOSURES

On a cash basis, the Company paid $230,840 and $247,122 in interest expense during the first nine months of 2011 and 2010, respectively.  The Company paid $2,299,459 and $752,298 in federal income tax during the first nine months of 2011 and 2010, 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 the largest shareholder of UTG, Mr. Jesse Correll, the Company’s CEO and Chairman.  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
 
 
 
Nine Months Ended September 30, 2011
 
 
 
Before Tax Amount
 
Tax
(Expense)
or Benefit
 
 
 
Net of Tax Amount
 
                 
 
Unrealized holding gains during period
$
23,344,777
$
(8,170,672)
$
15,174,105
 
 
Less: reclassification adjustment for gains (losses) realized in net income
 
 
(3,418,289)
 
 
1,196,401
 
 
(2,221,888)
 
 
Other comprehensive income (loss)
$
19,926,488
$
(6,974,271)
$
12,952,217
 


9.
FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted ASC 820, Fair Value Measurements and Disclosures, which requires enhanced disclosures of assets and liabilities carried at fair value.  ASC 820 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.  ASC 820 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 and options 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 level within the hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis as of September 30, 2011.

   
Level 1
 
Level 2
 
Level 3
 
Total
                 
Assets
               
Fixed Maturities, available for sale
$
97,359,069
$
67,225,494
$
0
$
164,584,563
Equity Securities, available for sale
 
0
 
16,694,285
 
0
 
16,694,285
Trading Securities
 
28,964,240
 
0
 
0
 
28,964,240
Total
$
126,323,309
$
83,919,779
$
0
$
210,243,088
                 
   
Level 1
 
Level 2
 
Level 3
 
Total
                 
Liabilities
               
Trading Securities
$
24,533,489
$
0
$
0
$
24,533,489


The financial statements include various estimated fair value information at September 30, 2011 and December 31, 2010, as required by ASC 820.  Such information, which pertains to the Company's financial instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments required to be valued by ASC 820 for which it is practicable to estimate that value:

(a)  Cash and cash equivalents

The carrying amount in the financial statements approximates fair value because of the relatively short period of time between the origination of the instruments and their expected realization.

(b)  Fixed maturities and investments available for sale

The Company utilized a pricing service to estimate fair value measurements for its fixed maturities and public common and preferred stocks.  The pricing service utilizes market quotations for securities that have quoted market prices in active markets.  Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing.  As the fair value estimates of most fixed maturity investments are based on observable market information rather than market quotes, the estimates of fair value other than U.S. Treasury securities are included in Level 2 of the hierarchy.  U.S. Treasury securities are included in the amount disclosed in Level 1 as the estimates are based on unadjusted prices.  The Company’s Level 2 investments include obligations of U.S. government agencies, municipal bonds, corporate debt securities and other mortgage backed securities.

(c)  Trading securities

Securities designated as trading securities are reported at fair value using market quotes, with gains or losses resulting from changes in fair value recognized in earnings.  Trading securities include exchange-traded equities, exchange-traded equity long and short options, and exchange-traded equity long and short futures.

(d)  Mortgage loans on real estate

The fair values of mortgage loans are estimated using discounted cash flow analyses and interest rates being offered for similar loans to borrowers with similar credit ratings.

(e)  Discounted mortgage loans

The Company has been purchasing non-performing loans at a deep discount through an auction process led by the federal government.  In general, the discounted loans are non-performing and there is a significant amount of uncertainty surrounding the timing and amount of cash flows to be received by the Company.  Accordingly, the Company records its investment in the discounted loans at its original purchase price.  Management has determined the fair value to be too difficult to calculate but believes it approximates the carrying value of these investments.  Management works the loans with the borrower to reach a settlement on the loan or they foreclose on the underlying collateral which is primarily commercial real estate.  For cash payments received during the work out process, the Company records these payments to interest income on a cash basis.  For loan settlements reached, the Company records the amount in excess of the carrying amount of the loan as a discount accretion to investment income at the closing date.  Management reviews the discount loan portfolio regularly for impairment.  If an impairment is identified (after consideration of the underlying collateral), the Company records an impairment to earnings in the period the information becomes known.

(f)  Policy loans

Policy loans are carried at the aggregate unpaid principal balances in the consolidated balance sheets which approximates fair value, and earn interest at rates ranging from 4% to 8%.  Individual policy liabilities in all cases equal or exceed outstanding policy loan balances.

(g)  Short-term investments

Quoted market prices, if available, are used to determine the fair value.  If quoted market prices are not available, management estimates the fair value based on the quoted market price of a financial instrument with similar characteristics.
 
(h)  Notes payable

For borrowings subject to floating rates of interest, carrying value is a reasonable estimate of fair value.  For fixed rate borrowings fair value is determined based on the borrowing rates currently available to the Company for loans with similar terms and average maturities.

The estimated fair values of the Company's financial instruments required to be valued by ASC 820 are as follows:

   
September 30, 2011
 
December 31, 2010
 
 
Assets
 
 
Carrying
Amount
 
Estimated
Fair
Value
 
 
Carrying
Amount
 
Estimated
Fair
Value
Fixed maturities available for sale
$
164,584,563
$
164,584,563
$
147,905,948
$
147,905,948
Equity securities
 
11,505,527
 
11,505,527
 
13,884,257
 
13,884,257
Trading securities
 
29,964,240
 
28,964,240
 
37,029,550
 
37,029,550
Securities of affiliate
 
5,188,758
 
5,188,758
 
5,137,700
 
5,137,700
Mortgage loans on real estate
 
9,428,177
 
9,441,811
 
12,411,587
 
12,524,140
Discounted mortgage loans
 
34,852,205
 
34,852,205
 
47,523,860
 
47,523,860
Policy loans
 
13,359,801
 
13,359,801
 
13,976,019
 
13,976,019
                 
Liabilities
               
Notes payable
 
12,026,955
 
11,876,201
 
10,372,239
 
10,136,433
Trading securities
 
24,533,489
 
24,533,489
 
18,429,677
 
18,429,677


10.
NEW ACCOUNTING STANDARDS

In September 2011, Accounting Standards Board (“FASB”) issued the Accounting Standards Update (“ASU”) No. 2011-08 Intangibles – Goodwill and Other (Topic 350) Testing Goodwill for Impairment. Under the amendments in this Update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, as described in paragraph 350-20-35-9.  Under the amendments in this Update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-08 to have a material impact on its consolidated financial statements.

In June 2011, the FASB issued the ASU No. 2011-05 Comprehensive Income (Topic 220) Presentation of Comprehensive Income. Under the amendments to Topic 220, Comprehensive Income, in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this Update should be applied retrospectively. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a material impact on its consolidated financial statements.

In May 2011, Accounting Standards Board (“FASB”) issued the Accounting Standards Update (“ASU”) No. 2011-04 Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this Update are effective prospectively during interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material impact on its consolidated financial statements.

In April 2011, the FASB issued the ASU No. 2011-03 Transfers and Servicing (Topic 860) Reconsideration of Effective Control for Repurchase Agreements. The amendments in this Update removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this Update. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011. The Company does not expect the adoption of ASU 2011-03 to have a material impact on its consolidated financial statements.

In April 2011, the FASB issued the Accounting Standards Update ASU No. 2011-02 Receivables (Topic 310) A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  The amendments in this Update give additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring.  The Company does not expect the adoption of ASU 2011-02 to have a material impact on its consolidated financial statements.

In January 2011, the FASB issued the ASU No. 2011-01 Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No 2010-10. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The Company does not expect the adoption of ASU 2011-01 to have a material impact on its consolidated financial statements.

In October 2010, the FASB issued the ASU No. 2010-26 Consolidations (Topic 944) Financial Services-Insurance. The amendments in this Update specify that the following costs incurred in the acquisition of new and renewal contracts should be capitalized in accordance with the amendments in this Update: 1. Incremental direct costs of contract acquisition. Incremental direct costs are those costs that result directly from and are essential to the contract transaction(s) and would not have been incurred by the insurance entity had the contract transaction(s) not occurred. 2. Certain costs related directly to Underwriting, policy issuance and processing, medical and inspection, and sales force contract selling performed by the insurer for the contract. The costs related directly to those activities include only the portion of an employee’s total compensation (excluding any compensation that is capitalized as incremental direct costs of contract acquisition) and payroll-related fringe benefits related directly to time spent performing those activities for actual acquired contracts and other costs related directly to those activities that would not have been incurred if the contract had not been acquired. All other acquisition-related costs—including costs incurred by the insurer for soliciting potential customers, market research, training, administration, unsuccessful acquisition or renewal efforts, and product development—should be charged to expense as incurred. Administrative costs, rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and should be charged to expense as incurred. If the initial application of the amendments in this Update results in the capitalization of acquisition costs that had not been capitalized previously by an entity, the entity may elect not to capitalize those types of costs. The amendments in this Update do not affect the guidance in paragraphs 944-30-25-4 through 25-5, which prohibits the capitalization of certain costs incurred in obtaining universal life-type contracts. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The amendments in this update should be applied prospectively upon adoption. The Company does not expect the adoption of ASU 2010-26 to have a material impact on its consolidated financial statements.

In July 2010, the FASB issued the ASU No. 2010-20 Consolidations (Topic 310) Receivables. The main objective in developing this Update is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. This Update is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Currently, a high threshold for recognition of credit impairments impedes timely recognition of losses. ASU 2010-20 is effective for annual reporting periods ending on or after December 15, 2011. The Company does not expect the adoption of ASU No 2010-20 to have a material impact on its consolidated financial statements.


11.
PROPOSED MERGER

The UTG and ACAP boards of directors have approved a merger proposal of the two entities whereby the shareholders of ACAP would receive shares of UTG in exchange for their current ACAP shares.  ACAP is currently a 73% owned subsidiary of UG.  The merger would reduce the corporate structure and provide certain efficiencies and economies to the Companies.  If the merger is completed, ACAP shareholders, other than UTG or UG, will have the right to receive 233 shares of UTG common stock for each share of ACAP common stock they own at closing. Based on the number of shares of ACAP common stock outstanding on the record date of the ACAP shareholder meeting, UTG expects to issue 179,876 shares of UTG common stock to ACAP shareholders in the merger.  All necessary regulatory approvals have been received.  Completion of this proposal is dependent on ACAP shareholder approval.  A special meeting of the ACAP shareholders is scheduled for November 9, 2011 to vote on the merger proposal.


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, 2011.

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, 2010, 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 2011.


Results of Operations

(a)
Revenues

The Company experienced a decrease of approximately $(447,000) in premiums and policy fee revenues, net of reinsurance premiums and policy fees, when comparing the first nine months of 2011 to the same period in 2010 and a decrease of approximately $(432,000) for the third quarter comparison.  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, which has been immaterial, 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.

Net investment income decreased approximately 59% when comparing the first nine months of 2011 to the same period in 2010.  When comparing third quarter results, the Company had a loss of approximately $(4,056,000) in 2011 compared to income of approximately $9,659,000 in 2010.  The majority of the decrease in investment income is from the shift in the Company’s trading securities during the third quarter.  The Company reported a loss of approximately $(7,120,000) related to the trading securities during the quarter.  Trading securities are discussed in more detail below.

The Company received less income from mortgage loans, including discounted mortgage loans, during the first three quarters of 2011 compared to the same period in 2010.  During the first nine months of 2011, the Company recorded approximately $6,943,000 in income from mortgage loans compared to approximately $11,000,000 during the first nine months of 2010.  During third quarter 2011 only, the Company received approximately $1,762,000 from mortgage loans compared to approximately $5,550,000 earned during third quarter 2010 only due to fewer settlements.  Should any of the factors change, such as the ability to acquire additional loans at such a large discount due to increased competition or insufficient supply, the ability of borrowers to settle loans mainly through refinancing, another decline in the overall economy, and other such factors, the performance of this type of investment could abruptly end, directly affecting future net income.  While management believes the current portfolio would remain profitable in another downturn, with no source of new acquisitions of discounted loans, the future profit stream from this activity would be limited.  Alternatively, should the Company need to look at fixed maturities for additional investment if discounted loans were no longer a viable option, the rate of return would be significantly lower given the low interest rate environment also resulting in substantially lower income.

Management has extensive background and experience in the analysis and valuation of commercial real estate and believes there are significant opportunities currently available in this arena.  Experienced personnel of FSNB have also been utilized in the analysis phase.  This experience dates back to discounted loans during the Resolution Trust days where such loans were being sold from defunct savings and loans in the early 1990’s.  The discounted loans are available through the FDIC sale of assets of closed banks and from banks wanting to reduce their loan portfolios.  The loans are available on a loan by loan bid process.  Prior to placing a bid, each loan is reviewed to determine interest level utilizing such information as type of collateral, location of collateral, interest rate, current loan status and available cash flows or other sources of repayment.  Once it is determined interest in the loan remains, the collateral is physically inspected.  Following physical inspection, if interest still remains, a bid price is determined and a bid is submitted.  Once a loan has been acquired, contact is made with the appropriate individuals to begin a dialog with a goal of determining the borrower’s willingness to work together.  There are generally three paths a discounted loan will take: the borrower pays as required; a settlement is reached with the loan being paid off at a discounted value; or the loan is foreclosed.

During the fourth quarter of 2009, the Company began purchasing discounted commercial mortgage loans.  As of September 30, 2011, the Company held about $106,000,000 of these loans at a total cost of approximately $35,000,000, representing an average purchase price to outstanding loan of about 33%.  During the first nine months of the year, the Company has recognized approximately $6,431,000 in income from these loans.  The Company is currently projecting a very positive return from on-going mortgage loan payments from the discounted commercial mortgage loan portfolio.

While management believes the discounted loans will continue to have favorable earnings and outcomes as they are worked through, there can be no assurance this will remain true in future periods.  Changes in the current economy such as an even greater downturn than recently experienced could have a negative impact on the loans, including the financial stability of the borrowers, the borrowers’ ability to pay or to refinance, the value of the property held as collateral and the ability to find purchasers at favorable prices. As such, management has taken a conservative approach with these investments and has classified all discounted mortgage loans held as non-accrual.  In such status, the Company is recording interest income on a cash basis and is recording any accrual of discount on the loans held when realized.  Discount accruals reported were the result of the loan basis already being fully paid.

During 2009, the Company also contributed approximately $20,000,000 to a professionally managed trading account as another way to combat the current low rate environment.  The accounts were established to generate a fair return.  Securities designated as trading are reported at fair value with gains or losses resulting from changes in fair value recognized in net investment income.  Through the first nine months of the year, approximately $(2,406,000) of investment loss was due to this trading portfolio.  Volatility should be expected, as well as possible losses.  Management’s target return on these accounts is 8%.

In mid August, the investment market took a sudden sharp decline.  The U.S. debt ratings were lowered and concerns of European nations’ debt and potential defaults were in the forefront.  During this time, certain of the Company’s trading securities were also negatively impacted resulting in losses of approximately $7.1 million.  These losses primarily resulted from holdings relating to market volatility and options relating to U.S. Treasury securities.  The Company had a positive earnings track record in its trading securities accounts up until this point.

With the sudden market shift, historic correlations between investments ceased to function pursuant to historical norms.  For example, as U.S. Treasury yields shift, other debt securities such as corporate bonds typically follow.  In this period, U.S. Treasury securities saw a dramatic and sudden shift in value, while corporate debt remained relatively unchanged.  Indexes reflecting market volatility experienced historic increases over a three day period in August when U.S. Treasury debt was downgraded.

The Company has reduced its holdings in these investments with a corresponding reduction in market exposure.  Management still believes its trading activities remain a viable and integral part of its overall investment strategy in the current economy.  Management is currently reviewing alternatives on how to better manage its exposure to such radical market shifts.

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 net realized investment gains of $2,221,888 in the first nine months of 2011 compared to net realized investment losses of $(255,755) for the same period in 2010.  During the second quarter of 2011, other-than-temporary impairments of approximately $262,000 were taken on several discounted mortgage loans and one foreclosed discounted mortgage loan in order to better reflect current expected market values.  These losses were off-set from realized gains on bond sales of approximately $2,165,000.  During the first quarter of 2010, an impairment was recognized on a fixed income investment backed with trust preferred securities of approximately $(477,000).

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.  Additionally, 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.  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 impairment is other-than-temporary. These risks and uncertainties 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.

Other income primarily represented revenues received relating to the performance of administrative work as a TPA for unaffiliated life insurance companies, which has remained consistent over the periods presented.  The Company receives monthly fees based on policy in force counts and certain other activity indicators such as number of policies issued.  During 2010, the Company obtained an additional contract for these services, which should provide approximately $300,000 in additional revenues annually.  Administration for this block of business began March 1, 2011.  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 8% in the first nine months of 2011 compared to the same period in 2010 and increased approximately 20% in 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.

Commissions and amortization of deferred policy acquisition costs increased approximately $6,000 in the first nine months of 2011 compared to the same period in 2010 and decreased approximately $82,000 in the third quarter comparison.  The majority of this number is driven by an AC financial reinsurance agreement.  The earnings on the block of business covered by this agreement are utilized to re-pay the original borrowed amount.  The commission allowance reported each period from this agreement represents the net earnings on the identified policies covered by the agreement in each reporting period.  Results from this agreement included in this line item were approximately $(563,000) and $(549,000) in the first nine months of 2011 compared to the same period in 2010.  As financial reinsurance, all financial results relating to this block of business are utilized to repay the outstanding borrowed amount from the reinsurer.  Securities are specifically identified and segregated in a trust account relative to this arrangement.  Should a gain or loss occur on one of these identified securities in the trust account, the results are included in the calculation of the current period financial results of the treaty with the reinsurer.    While the agreement may result in variances in this line item, this arrangement has no material impact on net income.  The overall impact to net income was $10,000 and $17,000 in the first nine months of 2011 compared to the same period in 2010.  A liability for the original ceding commission was established at the origination of the agreement and is amortized through this line item as earnings on the block of business are realized.  Another significant factor 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 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.

Net amortization of cost of insurance acquired decreased approximately 7%, or $70,000, in the first nine months of 2011 compared to the same period in 2010 and decreased approximately 7%, or $23,000, in the third quarter comparison.  Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits.  The Company utilizes a 12% discount rate on the remaining unamortized business.  The interest rates vary due to risk analysis performed at the time of acquisition on the business acquired. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force.

Operating expenses increased approximately $19,000 in the first nine months of 2011 compared to the same period in 2010.  Third quarter 2011 expenses are down approximately $300,000.  Management continues to place significant emphasis on expense monitoring and cost containment.  Maintaining administrative efficiencies directly impacts net income.

Interest expense decreased approximately 7% in the first nine months of 2011 compared to the same period in 2010 due to the general decline in interest rates.  The interest rate is variable on the majority of the Company’s debt.

(c)
Net Income/Loss

The Company had a net loss of $(71,259) in the first nine months of 2011 compared to net income of $6,180,010 for the same period in 2010 and a net loss of $(4,687,160) during the third quarter of 2011 compared to net income of $4,659,519 in the same period in 2010.  The current net loss compared to last year’s net income is mainly attributable to lower investment income.


Financial Condition

Total shareholders’ equity increased approximately $14,702,000 as of September 30, 2011 compared to December 31, 2010.  The increase is primarily attributable to accumulated other comprehensive income.

Investments represent approximately 73% and 74% of total assets at September 30, 2011 and December 31, 2010, respectively.  Accordingly, investments are the largest asset group of the Company.  The Company's insurance subsidiaries are regulated by insurance statutes and regulations as to the type of investments that they are permitted to make and the amount of funds that may be used for any one type of investment.  In light of these statutes and regulations, the majority of the Company’s investment portfolio is invested in high quality, low risk investments.

As of September 30, 2011, 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 7% and 4% as of September 30, 2011, and December 31, 2010, respectively.  Fixed maturities as a percentage of total assets were approximately 35% and 34% as of September 30, 2011 and December 31, 2010, 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.  The revolving credit note was increased at renewal, during 2011, to provide for additional operating liquidity and flexibility for current operations.  On April 6, 2011, UTG was extended a credit note from First National Bank of Tennessee for $5,000,000.  During 2011, the Company had borrowings of $5,000,000 against this note to purchase an investment.  UG is 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, 2011, the Company had $5,233,000 of outstanding borrowings attributable to the lines of credit.

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 $(6,363,794) and $8,791,842 for the nine months ending September 30, 2011 and 2010, respectively.

Net cash provided by (used in) investing activities was $18,630,585 and $(16,973,999) for the nine month period ending September 30, 2011 and 2010, respectively.  During 2010, more emphasis was placed on the trading securities and discounted mortgage loans.  The Company’s trading portfolio involved frequent activity and also accounted for a large portion of investing activity.  The trading portfolio is designed to provide a reasonable return with an emphasis on risk management.

Net cash provided by (used in) financing activities was $875,355 and $(4,903,955) for the nine month period ending September 30, 2011 and 2010, respectively.

At September 30, 2011, the Company had $12,026,955 of long-term debt outstanding.  At December 31, 2010, the Company had $10,372,239 of debt outstanding.  The debt is primarily 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, 2011, 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 2010 or the first nine months of 2011.

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 net income or b) 10% of statutory capital and surplus.  At December 31, 2010 UG statutory capital and surplus was $30,442,880.  At December 31, 2010, UG statutory net income was $4,796,439.  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 UTG no ordinary dividends during the first six months of 2011.  In July 2011, UG paid UTG ordinary dividends of $1,600,000.

AC is a Texas domiciled insurance company, 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 from operations or b) 10% of statutory surplus.  At December 31, 2010 AC statutory surplus was $8,434,448.  At December 31, 2010, AC statutory earnings from operations was $2,024,641.  Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation.  AC paid ACAP ordinary dividends of $600,000 during the first nine months of 2011.

Management believes the overall sources of liquidity available will be sufficient to satisfy the Company’s financial obligations.


Accounting Developments

In September 2011, Accounting Standards Board (“FASB”) issued the Accounting Standards Update (“ASU”) No. 2011-08 Intangibles – Goodwill and Other (Topic 350) Testing Goodwill for Impairment. Under the amendments in this Update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, as described in paragraph 350-20-35-9.  Under the amendments in this Update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-08 to have a material impact on its consolidated financial statements.

In June 2011, the FASB issued the ASU No. 2011-05 Comprehensive Income (Topic 220) Presentation of Comprehensive Income. Under the amendments to Topic 220, Comprehensive Income, in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this Update should be applied retrospectively. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a material impact on its consolidated financial statements.

In May 2011, Accounting Standards Board (“FASB”) issued the Accounting Standards Update (“ASU”) No. 2011-04 Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this Update are effective prospectively during interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material impact on its consolidated financial statements.

In April 2011, the FASB issued the ASU No. 2011-03 Transfers and Servicing (Topic 860) Reconsideration of Effective Control for Repurchase Agreements. The amendments in this Update removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this Update. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011. The Company does not expect the adoption of ASU 2011-03 to have a material impact on its consolidated financial statements.

In April 2011, the FASB issued the Accounting Standards Update ASU No. 2011-02 Receivables (Topic 310) A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.  The amendments in this Update give additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring.  The Company does not expect the adoption of ASU 2011-02 to have a material impact on its consolidated financial statements.

In January 2011, the FASB issued the ASU No. 2011-01 Receivables (Topic 310) Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No 2010-10. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The Company does not expect the adoption of ASU 2011-01 to have a material impact on its consolidated financial statements.

In October 2010, the FASB issued the ASU No. 2010-26 Consolidations (Topic 944) Financial Services-Insurance. The amendments in this Update specify that the following costs incurred in the acquisition of new and renewal contracts should be capitalized in accordance with the amendments in this Update: 1. Incremental direct costs of contract acquisition. Incremental direct costs are those costs that result directly from and are essential to the contract transaction(s) and would not have been incurred by the insurance entity had the contract transaction(s) not occurred. 2. Certain costs related directly to Underwriting, policy issuance and processing, medical and inspection, and sales force contract selling performed by the insurer for the contract. The costs related directly to those activities include only the portion of an employee’s total compensation (excluding any compensation that is capitalized as incremental direct costs of contract acquisition) and payroll-related fringe benefits related directly to time spent performing those activities for actual acquired contracts and other costs related directly to those activities that would not have been incurred if the contract had not been acquired. All other acquisition-related costs—including costs incurred by the insurer for soliciting potential customers, market research, training, administration, unsuccessful acquisition or renewal efforts, and product development—should be charged to expense as incurred. Administrative costs, rent, depreciation, occupancy, equipment, and all other general overhead costs are considered indirect costs and should be charged to expense as incurred. If the initial application of the amendments in this Update results in the capitalization of acquisition costs that had not been capitalized previously by an entity, the entity may elect not to capitalize those types of costs. The amendments in this Update do not affect the guidance in paragraphs 944-30-25-4 through 25-5, which prohibits the capitalization of certain costs incurred in obtaining universal life-type contracts. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The amendments in this update should be applied prospectively upon adoption. The Company does not expect the adoption of ASU 2010-26 to have a material impact on its consolidated financial statements.

In July 2010, the FASB issued the ASU No. 2010-20 Consolidations (Topic 310) Receivables. The main objective in developing this Update is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. This Update is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. Currently, a high threshold for recognition of credit impairments impedes timely recognition of losses. ASU 2010-20 is effective for annual reporting periods ending on or after December 15, 2011. The Company does not expect the adoption of ASU No 2010-20 to have a material impact on its consolidated financial statements.


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.  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 62% of the investment portfolio as of September 30, 2011.  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 66% of the fixed maturities owned at September 30, 2011 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, 2011:

Decrease in Interest Rates
 
Increase in Interest Rates
     
200 Basis
Points
100 Basis
Points
 
100 Basis
Points
200 Basis
Points
 
$ 46,742,000
 
$ 21,890,000
 
 
$ (18,104,000)
 
$ (33,081,000)


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.  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 meets 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.

At September 30, 2011, $28,964,240 of assets and $(24,533,489) of liabilities were classified as trading instruments carried at fair value.  Included in these amounts are derivative investments with a fair value of $23,181,473 and $(23,276,189) in trading security assets and trading security liabilities, respectively.  At December 31, 2010, $37,029,550 of assets and $(18,429,677) of liabilities were classified as trading instruments carried at fair value.  Included in these amounts are derivative investments with a fair value of $2,244,478 and $(17,246,957) in trading security assets and trading security liabilities, respectively.

The Company had no capital lease obligations, material operating lease obligations or purchase obligations outstanding as of September 30, 2011.

The Company currently has $12,026,955 of debt outstanding.

Equity risk

Equity risk is the risk that the Company will incur economic losses due to adverse fluctuations in a particular stock.  As of September 30, 2011 and December 31, 2010, the fair value of our equity securities classified as available for sale was $11,505,527 and $13,884,257, respectively.  As of September 30, 2011, a 10% decline in the value of the equity securities would result in an unrealized loss of $1,150,553, as compared to an estimated unrealized loss of $1,388,426 as of December 31, 2010.  The selection of a 10% unfavorable change in the equity markets should not be construed as a prediction by the Company of future market events, but rather as an illustration of the potential impact of such an event.


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.

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
 
101
 
XBRL Interactive Data File

REPORTS ON FORM 8-K

The Company filed an 8-K Form on September 8, 2011 relating to entry into a material definitive agreement.


 


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 11, 2011
 
By
/s/ James P. Rousey
       
James P. Rousey
       
President and Director








Date:
November 11, 2011
 
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
 
101
 
XBRL Interactive Date File