10-Q 1 utg14q2.htm UTG13Q1(MARKED)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR

o 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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 o
Accelerated filer o
Non-accelerated filer o
Smaller reporting companyx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

The number of shares outstanding of the registrant's common stock as of July 31, 2014, was 3,757,989.

 
UTG, Inc.
(The "Company")

TABLE OF CONTENTS

PART I.   Financial Information
3
 
Item 1.  Financial Statements
3
 
Condensed Consolidated Balance Sheets
3
 
Condensed Consolidated Statements of Operations
4
 
Condensed Consolidated Statements of Comprehensive Income (Loss)
5
 
Condensed Consolidated Statements of Cash Flows
6
 
Notes to Condensed Consolidated Financial Statements
7
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
17
 
Item 4.  Controls and Procedures
22
 
 
 
 
PART II.  Other Information
23
 
Item 1.  Legal Proceedings
23
 
Item 1A. Risk Factors
23
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
23
 
Item 3.  Defaults Upon Senior Securities
23
 
Item 4.  Mine Safety Disclosures
23
 
Item 5.  Other Information
23
 
Item 6.  Exhibits
23
 
 
Signatures
 
24
 
 
Exhibit Index
 
25

 

UTG, Inc.
 

Condensed Consolidated Balance Sheets (Unaudited)
 
                                                                                                                         ASSETS
 
 
 
 
 
 
June 30,
 
December 31,
 
 
2014
 
2013*
Investments:
 
 
 
 
Investments available for sale:
 
 
 
 
Fixed maturities, at fair value (amortized cost $168,405,894 and $171,085,396)
$
178,464,064
$
174,409,824
Equity securities, at fair value (cost $38,001,406 and $38,625,230)
 
41,683,472
 
40,514,978
Trading securities, at fair value (cost $5,849,605 and $6,924,413)
 
5,778,454
 
6,614,111
Mortgage loans on real estate at amortized cost
 
15,027,772
 
14,454,534
Discounted mortgage loans on real estate at cost
 
11,327,643
 
12,830,735
Investment real estate
 
79,475,195
 
83,585,359
Policy loans
 
11,493,320
 
11,860,960
Short-term investments
 
4,832,980
 
0
Total investments
 
348,082,900
 
344,270,501
 
 
 
 
 
Cash and cash equivalents
 
17,905,873
 
19,838,618
Accrued investment income
 
2,467,562
 
2,432,939
Reinsurance receivables:
 
 
 
 
Future policy benefits
 
28,425,130
 
28,767,326
Policy claims and other benefits
 
4,043,526
 
3,926,736
Cost of insurance acquired
 
9,540,810
 
10,636,412
Deferred policy acquisition costs
 
343,958
 
369,786
Property and equipment, net of accumulated depreciation
 
1,109,171
 
1,185,108
Income tax receivable
 
1,290,149
 
1,296,043
Other assets
 
4,783,887
 
4,390,620
Total assets
$
417,992,966
$
417,114,089
                                                                                                                          LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
Policy liabilities and accruals:
 
 
 
 
Future policyholder benefits
$
278,151,057
$
286,472,435
Policy claims and benefits payable
 
3,781,544
 
3,283,897
Other policyholder funds
 
367,255
 
378,772
Dividend and endowment accumulations
 
14,186,461
 
14,162,510
Income tax payable
 
6,688
 
0
Deferred income taxes
 
12,299,481
 
9,633,641
Notes payable
 
18,197,534
 
19,097,534
Trading securities, at fair value (proceeds $532,747 and $505,272)
 
162,102
 
357,439
Other liabilities
 
8,593,016
 
5,860,420
Total liabilities
 
335,745,138
 
339,246,648
 
 
 
 
 
Shareholders' equity:
 
 
 
 
Common stock - no par value, stated value $.001 per share.  Authorized 7,000,000 shares - 3,761,454 and 3,776,197 shares outstanding
 
3,761
 
3,776
Additional paid-in capital
 
43,877,019
 
44,050,778
Retained earnings
 
23,656,189
 
25,169,646
Accumulated other comprehensive income
 
9,285,995
 
3,459,401
Total UTG shareholders' equity
 
76,822,964
 
72,683,601
 
 
Noncontrolling interests
 
 
 
5,424,864
 
 
 
5,183,840
Total shareholders' equity
 
82,247,828
 
77,867,441
Total liabilities and shareholders' equity
$
417,992,966
$
417,114,089

* Balance sheet audited at December 31, 2013.
See accompanying notes.
 
UTG, Inc.
 
Condensed Consolidated Statements of Operations (Unaudited)
 
 
 
Three Months Ended
 
 
Six  Months Ended
 
 
June 30,
 
 
June 30,
 
June 30,
 
 
June 30,
 
 
2014
 
 
2013
 
2014
 
 
2013
Revenue:
 
 
 
 
 
 
 
 
 
 
Premiums and policy fees
$
3,357,360
 
$
3,219,271
$
6,091,047
 
$
6,432,017
Ceded reinsurance premiums and policy fees
 
(827,040)
 
 
(769,335)
 
(1,608,023)
 
 
(1,545,037)
Net investment income
 
4,028,304
 
 
4,762,126
 
8,561,423
 
 
9,143,518
Other income
 
500,113
 
 
510,660
 
1,020,544
 
 
1,032,019
Revenues before realized gains
 
7,058,737
 
 
7,722,722
 
14,064,991
 
 
15,062,517
Realized investment gains, net:
 
 
 
 
 
 
 
 
 
 
Other-than-temporary impairments
 
0
 
 
0
 
0
 
 
(26,926)
Other realized investment gains, net
 
1,694,037
 
 
576,841
 
1,971,461
 
 
648,490
Total realized investment gains, net
 
1,694,037
 
 
576,841
 
1,971,461
 
 
621,564
Total revenue
 
8,752,774
 
 
8,299,563
 
16,036,452
 
 
15,684,081
 
 
 
 
 
 
 
 
 
 
 
Benefits and other expenses:
 
 
 
 
 
 
 
 
 
 
Benefits, claims and settlement expenses:
 
 
 
 
 
 
 
 
 
 
Life
 
6,445,808
 
 
5,108,457
 
13,131,855
 
 
10,964,778
Ceded Reinsurance benefits and claims
 
(1,124,076)
 
 
(599,574)
 
(2,326,546)
 
 
(1,197,353)
Annuity
 
283,662
 
 
290,892
 
562,239
 
 
558,431
Dividends to policyholders
 
130,145
 
 
149,077
 
266,317
 
 
296,299
Commissions and amortization of deferred policy acquisition costs
 
(5,927)
 
 
(26,906)
 
(107,064)
 
 
(50,458)
Amortization of cost of insurance acquired
 
246,412
 
 
266,088
 
492,824
 
 
532,176
Operating expenses
 
2,730,362
 
 
1,975,001
 
5,386,480
 
 
4,030,126
Interest expense
 
110,326
 
 
144,101
 
292,158
 
 
254,538
Total benefits and other expenses
 
8,816,712
 
 
7,307,136
 
17,698,263
 
 
15,388,537
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
(63,938)
 
 
992,427
 
(1,661,811)
 
 
295,544
Income tax  benefit
 
274,876
 
 
79,343
 
467,387
 
 
12,035
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
210,938
 
 
1,071,770
 
(1,194,424)
 
 
307,579
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 
(196,079)
 
 
(196,702)
 
(319,033)
 
 
(342,783)
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common shareholders'
$
14,859
 
$
875,068
$
(1,513,457)
 
$
(35,204)
 
 
 
 
 
 
 
 
 
 
 
Amounts attributable to common shareholders'
 
 
 
 
 
 
 
 
 
 
Basic income (loss) per share
$
0.00
 
$
0.23
$
(0.40)
 
$
(0.01)
 
 
 
 
 
 
 
 
 
 
 
Diluted income (loss) per share
$
0.00
 
$
0.23
$
(0.40)
 
$
(0.01)
 
 
 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
 
3,765,354
 
 
3,792,203
 
3,768,643
 
 
3,794,317
 
 
 
 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding
 
3,765,354
 
 
3,792,203
 
3,768,643
 
 
3,794,317

See accompanying notes.


UTG, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
 
June 30,
 
June 30,
 
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
210,938
$
1,071,770
$
(1,194,424)
$
307,579
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Unrealized holding gains (losses) arising during period, pre-tax
 
3,985,260
 
(7,775,657)
 
9,302,065
 
(7,812,195)
    Tax  (expense) benefit on unrealized holding gains (losses) arising during the period
 
(1,394,841)
 
2,721,480
 
(3,255,723)
 
2,734,268
    Unrealized holding gains (losses) arising during period, net of tax
 
2,590,419
 
(5,054,177)
 
6,046,342
 
(5,077,927)
 
 
 
 
 
 
 
 
 
 
    Less reclassification adjustment for gains included in net income (loss)
 
(86,066)
 
(637,706)
 
(338,074)
 
(729,038)
    Tax expense for gains included in net income (loss)
 
30,123
 
223,197
 
118,326
 
255,163
    Reclassification adjustment for gains included in net income (loss), net of tax
 
(55,943)
 
(414,509)
 
(219,748)
 
(473,875)
      Subtotal:  Other comprehensive income (loss), net of tax
 
2,534,476
 
(5,468,686)
 
5,826,594
 
(5,551,802)
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
2,745,414
 
(4,396,916)
 
4,632,170
 
(5,244,223)
 
 
 
 
 
 
 
 
 
 
Less comprehensive income attributable to noncontrolling interests
 
(196,079)
 
(196,702)
 
(319,033)
 
(342,783)
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to UTG, Inc.
$
2,549,335
$
(4,593,618)
$
4,313,137
$
(5,587,006)
 
See accompanying notes.

 
UTG, Inc.
 
Condensed Consolidated Statements of Cash Flows
 
 
Six  Months Ended
 
 
June 30,
 
 
June 30,
 
 
2014
 
 
2013
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
Net loss attributable to common shareholders
$
(1,513,457)
 
 $
(35,204)
Adjustments to reconcile net loss to net cash provided by used in operating activities:
 
 
 
 
 
Amortization (accretion) of investments
 
(835,649)
 
 
(1,462,254)
Realized investment gains, net
 
(1,971,461)
 
 
(621,564)
Unrealized trading (gains) losses included in income
 
(15,622)
 
 
(49,545)
Amortization of deferred policy acquisition costs
 
25,828
 
 
28,216
Amortization of cost of insurance acquired
 
492,824
 
 
532,176
Depreciation
 
673,213
 
 
640,571
Net income attributable to noncontrolling interest
 
319,033
 
 
342,783
Charges for mortality and administration of universal life and annuity products
 
(3,352,060)
 
 
(3,458,497)
Interest credited to account balances
 
2,607,793
 
 
2,662,628
Change in accrued investment income
 
(34,623)
 
 
138,634
Change in reinsurance receivables
 
225,406
 
 
1,072,113
Change in policy liabilities and accruals
 
(3,004,690)
 
 
(2,642,960)
Change in income taxes receivable (payable)
 
12,582
 
 
(3,463,692)
Change in other assets and liabilities, net
 
1,852,980
 
 
633,298
Net cash used in operating activities
 
(4,517,903)
 
 
(5,683,297)
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Proceeds from investments sold and matured:
 
 
 
 
 
Fixed maturities available for sale
 
14,200,536
 
 
21,247,954
Equity securities available for sale
 
4,120,242
 
 
238,330
Trading securities
 
1,116,500
 
 
23,753,619
Mortgage loans
 
1,154,443
 
 
9,004,089
Discounted mortgage loans
 
2,609,104
 
 
3,898,888
Real estate
 
8,599,113
 
 
4,063,257
Policy loans
 
1,700,041
 
 
2,029,941
Short-term investments
 
0
 
 
0
Total proceeds from investments sold and matured
 
33,499,979
 
 
64,236,078
Cost of investments acquired:
 
 
 
 
 
Fixed maturities available for sale
 
(11,436,600)
 
 
(16,132,719)
Equity securities available for sale
 
(2,462,226)
 
 
(8,731,875)
Trading securities
 
(13,901)
 
 
(22,140,303)
Mortgage loans
 
(1,727,681)
 
 
(1,435,782)
Discounted mortgage loans
 
(16,723)
 
 
(1,436,582)
Real estate
 
(4,487,029)
 
 
(7,829,033)
Policy loans
 
(1,332,401)
 
 
(1,497,536)
Short-term investments
 
(4,832,980)
 
 
(25,000)
Total cost of investments acquired
 
(26,309,541)
 
 
(59,228,830)
Net cash provided by investing activities
 
7,190,438
 
 
5,007,248
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Policyholder contract deposits
 
2,773,092
 
 
2,884,121
Policyholder contract withdrawals
 
(3,181,015)
 
 
(2,940,308)
Payments of principal on notes payable/line of credit
 
(900,000)
 
 
0
Purchase of treasury stock
 
(173,774)
 
 
(202,919)
Non controlling contributions (distributions) of consolidated subsidiary
 
(78,009)
 
 
0
Sale of block of businees
 
(3,045,574)
 
 
(103,625)
Net cash used in financing activities
 
(4,605,280)
 
 
(362,731)
 
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(1,932,745)
 
 
(1,038,780)
Cash and cash equivalents at beginning of period
 
19,838,618
 
 
23,321,246
Cash and cash equivalents at end of period
$
17,905,873
 
 $
22,282,466

See accompanying notes.

 
UTG, Inc.
Notes to Condensed Consolidated Financial Statements

  Note 1 – Basis of Presentation

The accompanying Condensed Consolidated Balance Sheet as of December 31, 2013, which has been derived from audited financial statements, and the unaudited interim Condensed Consolidated Financial Statements include the accounts of UTG, Inc. (the "Parent") and its subsidiaries (collectively with the Parent, the "Company").  All significant intercompany accounts and transactions have been eliminated in consolidation.  The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 8 of regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for audited annual financial statements.  The information furnished includes all adjustments and accruals of a normal recurring nature, which in the opinion of management, are necessary for a fair presentation of the results for the interim periods.  The unaudited Condensed Consolidated Financial Statements included herein and these related notes should be read in conjunction with the Company's consolidated financial statements, and the notes thereto, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.  The Company's results of operations for the six month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or for any other future period.

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 June 30, 2014, Mr. Correll owns or controls directly and indirectly approximately 56.46 % of  UTG's outstanding stock.

UTG's life insurance subsidiary, Universal Guaranty Life Insurance Company ("UG"), has several wholly-owned and majority-owned subsidiaries.  The subsidiaries were formed to hold certain real estate investments.  The real estate investments were placed into the limited liability companies and partnerships to provide additional protection to the policyholders and to UG.

Note 2 – Recently Issued Accounting Standards

Income Taxes – In July 2013, the Financial Accounting Standards Board ("FASB") issued guidance providing specific financial statement presentation requirements of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance states that an unrecognized tax benefit in those circumstances should be presented as a reduction to the deferred tax asset.  This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted.  The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
 
Note 3 – Investments

Available for Sale Securities – Fixed Maturity and Equity Securities

The Company's insurance subsidiary is 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.

Investments in available for sale securities are summarized as follows:

June 30, 2014
 
Original or Amortized
Cost
 
 
Gross Unrealized Gains
 
 
Gross Unrealized Losses
 
 
Estimated
Fair
Value
Investments available for sale:
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and govt. agencies and authorities
 
$
32,971,711
 
 
$
3,253,290
 
 
$
(60,309)
 
 
$
36,164,692
States, municipalities and political subdivisions
 
105,000
 
 
1,501
 
 
0
 
 
106,501
U.S. special revenue and assessments
 
1,703,646
 
 
79,196
 
 
(217,640)
 
 
1,565,202
Collateralized mortgage obligations
 
1,179,564
 
 
101,557
 
 
(10)
 
 
1,281,111
Public utilities
 
399,920
 
 
61,670
 
 
0
 
 
461,590
All other corporate bonds
 
132,046,053
 
 
8,358,665
 
 
(1,519,750)
 
 
138,884,968
 
 
168,405,894
 
 
11,855,879
 
 
(1,797,709)
 
 
178,464,064
Equity securities
 
38,001,406
 
 
3,682,775
 
 
(709)
 
 
41,683,472
Total
$
206,407,300
 
$
15,538,654
 
$
(1,798,418)
 
$
220,147,536


December 31, 2013
 
Original or Amortized
Cost
 
 
Gross Unrealized Gains
 
 
Gross Unrealized Losses
 
 
Estimated
Fair
Value
Investments available for sale:
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and govt. agencies and authorities
 
$
32,963,938
 
 
$
3,156,158
 
 
$
(107,550)
 
 
$
36,012,546
States, municipalities and political subdivisions
 
110,000
 
 
0
 
 
(924)
 
 
109,076
U.S. special revenue and assessments
 
2,152,892
 
 
95,763
 
 
(239,620)
 
 
2,009,035
Collateralized mortgage obligations
 
1,289,975
 
 
116,900
 
 
(13)
 
 
1,406,862
Public utilities
 
399,913
 
 
49,567
 
 
0
 
 
449,480
All other corporate bonds
 
134,168,678
 
 
3,483,229
 
 
(3,229,082)
 
 
134,422,825
 
 
171,085,396
 
 
6,901,617
 
 
(3,577,189)
 
 
174,409,824
Equity securities
 
38,625,230
 
 
1,889,748
 
 
0
 
 
40,514,978
Total
$
209,710,626
 
$
8,791,365
 
$
(3,577,189)
 
$
214,924,802
 
The amortized cost and estimated market value of debt securities at June 30, 2014, 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
June 30, 2014
 
Amortized
Cost
 
 
Estimated
Fair Value
 
 
 
 
 
 
Due in one year or less
$
2,122,904
 
$
2,184,318
Due after one year through five years
 
27,156,733
 
 
29,126,177
Due after five years through ten years
 
97,400,143
 
 
103,657,373
Due after ten years
 
40,546,550
 
 
42,215,085
Collateralized mortgage obligations
 
1,179,564
 
 
1,281,111
Total
$
168,405,894
 
$
178,464,064

The fair value of investments with sustained gross unrealized losses at June 30, 2014 and December 31, 2013 are as follows:

June 30, 2014
 
Less than 12 months
 
 
12 months or longer
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value
Unrealized losses
 
 
Fair value
Unrealized losses
 
 
Fair value
Unrealized losses
U.S. Government and govt. agencies and authorities
$
0
0
 
$
4,936,720
(60,309)
 
$
4,936,720
(60,309)
U.S. Special Revenue and Assessments
 
769,680
(217,640)
 
 
0
0
 
 
769,680
(217,640)
Collateralized mortgage obligations
 
1,851
(10)
 
 
0
0
 
 
1,851
(10)
All other corporate bonds
 
1,528,903
(3,955)
 
 
5,426,829
(1,515,795)
 
 
6,955,732
(1,519,750)
Total fixed maturities
$
2,300,434
(221,605)
 
$
10,363,549
(1,576,104)
 
$
12,663,983
(1,797,709)
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
$
13,172
(709)
 
$
0
0
 
$
13,172
(709)

December 31, 2013
 
Less than 12 months
 
 
12 months or longer
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value
Unrealized losses
 
 
Fair value
Unrealized losses
 
 
Fair value
Unrealized losses
U.S. Government and govt. agencies and authorities
$
4,889,060
(107,550)
 
$
0
0
 
$
4,889,060
(107,550)
States, municipalities and political subdivisions
 
109,076
(924)
 
 
0
0
 
 
109,076
(924)
U.S. special revenue and assessments
 
747,700
(239,620)
 
 
0
0
 
 
747,700
(239,620)
Collateralized mortgage obligations
 
1,922
(13)
 
 
0
0
 
 
1,922
(13)
All other corporate bonds
 
49,430,637
(1,481,562)
 
 
7,318,832
(1,747,520)
 
 
56,749,469
(3,229,082)
Total fixed maturities
$
55,178,395
(1,829,669)
 
$
7,318,832
(1,747,520)
 
$
62,497,227
(3,577,189)
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
$
0
0
 
$
0
0
 
$
0
0

Additional information regarding investments in an unrealized loss position is as follows:

 
Less than 12 months
 
12 months or longer
 
Total
As of June 30, 2014
 
 
 
 
 
Fixed maturities
4
 
6
 
10
Equity securities
3
 
0
 
3
As of December 31, 2013
 
 
 
 
 
Fixed maturities
30
 
5
 
35
Equity securities
0
 
0
 
0

Substantially all of the unrealized losses on fixed maturities available for sale at June 30, 2014 and December 31, 2013 are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase.  The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position.  Based upon the Company's expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company's evaluation of other relevant factors, the Company deems these securities to be temporarily impaired as of June 30, 2014 and December 31, 2013.

The Company regularly reviews its investment securities for factors that may indicate that a decline in fair value of an investment is other than temporary.  The factors considered by management in its regular review to identify and recognize other-than-temporary impairment losses on fixed maturities include, but are not limited to: the length of time and extent to which the fair value has been less than cost; the Company's intent to sell, or be required to sell, the debt security before the anticipated recovery of its remaining amortized cost basis; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; subordinated credit support, whether the issuer of a debt security has remained current on principal and interest payments; current expected cash flows; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions, including the effect of changes in market interest rates.  If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security's amortized cost basis and its fair value at the balance sheet date would be recognized by a charge to other-than-temporary losses in the Condensed Consolidated Statements of Operations.

Equity securities may experience other-than-temporary impairments in the future based on the prospects for full recovery in value in a reasonable period of time and the Company's ability and intent to hold the security to recovery.  If a decline in fair value is judged by management to be other-than-temporary or management does not have the intent or ability to hold a security, a loss is recognized by a charge to other-than-temporary impairment losses in the Condensed Consolidated Statements of Operations
Based on management's review of the investment portfolio, the Company recorded the following losses for other-than-temporary impairments in the Condensed Consolidated Statements of Operations:

 
 
Three Months Ended
 
 
June 30,
 
 
2014
 
 
2013
 
 
 
 
 
 
Other than temporary impairments:
 
 
 
 
 
Real estate
$
0
 
$
0
 
 
 
 
 
 


 
 
Six Months Ended
 
 
June 30,
 
 
2014
 
2013
 
 
 
 
 
Other than temporary impairments:
 
 
 
 
    Real estate
$
0
$
26,926

The other-than-temporary impairment recognized during 2013 was due to Management's assessment of the value of the real estate. The real estate was written down to better reflect current expected market value.

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 Condensed Consolidated Statements of Operations.  Trading securities include exchange-traded equities and exchange-traded options.  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.  The fair value of derivatives included in trading security assets and trading security liabilities as   of June 30, 2014 was $37,500 and $(158,214), respectively. The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2013 was $194,000 and $(353,907), respectively.  Earnings from trading securities are classified in cash flows from operating activities. The derivatives held by the Company are for income generation purposes only.
 
Trading revenue charged to net investment income from trading securities was:

 
 
Three Months Ended
 
 
June 30,
 
 
2014
 
 
2013
 
 
 
 
 
 
Net unrealized gains (losses)
$
(245,029)
 
$
346,889
Net realized gains (losses)
 
150,365
 
 
129,591
Net unrealized and realized gains (losses)
$
(94,664)
 
$
476,480


 
 
Six Months Ended
 
 
June 30,
 
 
2014
 
 
2013
 
 
 
 
 
 
Net unrealized gains (losses)
$
15,622
 
$
49,545
Net realized gains (losses)
 
171,538
 
 
215,862
Net unrealized and realized gains (losses)
$
187,160
 
$
265,407

Mortgage Loans

As of  June 30, 2014 and December 31, 2013, the Company's mortgage loan portfolio contained 35 and 39 mortgage loans, including discounted mortgage loans, with a carrying value of $26,355,415 and $27,285,269, respectively.

Changes in the current economy 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.  Given the uncertainty of the current market, management has taken a conservative approach with the discounted mortgage loans 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 2014 and 2013 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 acquires the discounted mortgage loans at below contract value, and believes that it will fully recover its carrying value upon disposal, therefore no reserve for delinquent loans is deemed necessary.  Those loans not currently paying are being vigorously worked by management.  The current discounted commercial mortgage loan portfolio has an average price  of 33.24 % 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.

Note 4 – Fair Value Measurements

The Company measures its assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets based on the framework set forth in the GAAP fair value accounting guidance.  The framework establishes a fair value hierarchy of three levels based upon the transparency of information used in measuring the fair value of assets or liabilities as of the measurement date.  The fair value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into three categories.

Level 1 – Valuation is based upon quoted prices for identical assets or liabilities in active markets that the Company is able to access.  Level 1 fair value is not subject to valuation adjustments.

Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active. In addition, the Company may use various valuation techniques or pricing models that use observable inputs to measure fair value.

Level 3 – Valuation is based upon 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 Company's own assumptions about the inputs that market participants would use in pricing the asset or liability.

The Company determines the existence of an active market for an asset or liability based on its judgment as to whether transactions for the asset or liability occur in such market with sufficient frequency and volume to provide reliable pricing information.  If the Company concludes that there has been a significant decrease in the volume and level of activity for an investment in relation to normal market activity for such investment, adjustments to transactions and quoted prices are made to estimate fair value.

The inputs used in the valuation techniques employed by the Company are provided by nationally recognized pricing services, external investment managers and internal resources.  To assess these inputs, the Company's review process includes, but is not limited to, quantitative analysis including benchmarking, initial and ongoing evaluations of methodologies used by external parties to calculate fair value, and ongoing evaluations of fair value estimates based on the Company's knowledge and monitoring of market conditions.

The Company periodically reviews the pricing service provider's policies and procedures for valuing securities.  The assumptions underlying the valuations from external service providers, including unobservable inputs, are generally not readily available as this information is often deemed proprietary.  Accordingly, the Company is unable to obtain comprehensive information regarding these assumptions and methodologies.

The Company's investments in fixed maturity securities available for sale, equity securities available for sale and trading securities assets and liabilities are carried at fair value.  The following are the Company's methodologies and valuation techniques for assets and liabilities measured at fair value.

Fixed maturities available for sale mainly consist of U.S. treasury securities and corporate debt securities. The Company employs a market approach to the valuation of securities where there are sufficient market transactions involving identical or comparable assets. If sufficient market data is not available for identical or comparable assets, the Company uses an income approach to valuation. The majority of the financial instruments included in fixed maturity securities available for sale are evaluated utilizing observable inputs; accordingly, they are categorized in either Level 1 or Level 2 of the fair value hierarchy. However, in instances where significant inputs utilized in valuation of the securities are unobservable, the securities are categorized in Level 3 of the fair value hierarchy.

Corporate securities primarily include fixed rate corporate bonds. Inputs utilized in connection with the Company's valuation techniques relating to this class of securities include recently executed transactions, market price quotations, benchmark yields and issuer spreads. Corporate securities are categorized in Level 2 of the fair value hierarchy.

U.S. treasury securities are based on quoted prices in active markets and are generally categorized in Level 1 of the fair value hierarchy.

Equity securities available for sale consist of common and preferred stocks mainly in private equity investments, financial institutions and insurance companies. Equity securities for which there is sufficient market data are categorized as Level 1 or 2 in the fair value hierarchy.  For the equity securities in which quoted market prices are not available, the transaction price is used as the best estimate of fair value at inception.  When evidence is believed to support a change to the carrying value from the transaction price, adjustments are made to reflect the expected exit values. The Company performs ongoing reviews of the underlying investments. The reviews consist of the evaluations of expected cash flows, material events and market data. These investments are included in Level 3 of the fair value hierarchy.

Securities designated as trading securities consist of exchange traded equities and exchange traded options.  These securities are primarily valued at quoted active market prices, and are therefore categorized as Level 1 in the fair value hierarchy.

The following table presents the Company's assets and liabilities measured at fair value in the Condensed Consolidated Balance Sheet on a recurring basis as of June 30, 2014.


 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturities, available for sale
$
19,415,175
 
$
158,725,550
 
$
323,339
 
$
178,464,064
Equity Securities, available for sale
 
4,813,626
 
 
6,889,588
 
 
29,980,258
 
 
41,683,472
Trading Securities
 
5,778,454
 
 
0
 
 
0
 
 
5,778,454
Total
$
30,007,255
 
$
165,615,138
 
$
30,303,597
 
$
225,925,990
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Trading Securities
$
162,102
 
$
0
 
$
0
 
$
162,102
 
The following table presents the Company's assets and liabilities measured at fair value in the Condensed Consolidated Balance Sheet on a recurring basis as of December 31, 2013.

 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturities, available for sale
$
19,407,301
 
$
154,688,710
 
$
313,813
 
$
174,409,824
Equity Securities, available for sale
 
1,643,803
 
 
6,774,589
 
 
32,096,586
 
 
40,514,978
Trading Securities
 
6,614,111
 
 
0
 
 
0
 
 
6,614,111
Total
$
27,665,215
 
$
161,463,299
 
$
32,410,399
 
$
221,538,913
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Trading Securities
$
357,439
 
$
0
 
$
0
 
$
357,439

The following table provides reconciliations for Level 3 assets measured at fair value on a recurring basis. Transfers into and out of Level 3 are recognized as of the end of the quarter in which they occur.

 
 
Fixed Maturities,
Available for Sale
 
 
Equity Securities,
Available for Sale
 
 
 
Total
Balance at December 31, 2013
$
313,813
 
$
32,096,586
 
$
32,410,399
Total unrealized gains or (losses):
 
 
 
 
 
 
 
 
Included in realized gains/(losses)
 
82,287
 
 
971,664
 
 
1,053,951
Included in other comprehensive income
 
74,782
 
 
668,258
 
 
743,040
Sales
 
(147,543)
 
 
(3,756,250)
 
 
(3,903,793)
Balance at June 30, 2014
$
323,339
 
$
29,980,258
 
$
30,303,597

The Level 3 securities include collateralized debt obligations of trust preferred securities issued by banks and insurance companies and certain equity securities with unobservable inputs.  The Company computed fair value of Level 3 investments based on a review of current financial information, earnings trends and similar companies in the same industries.

Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans and policy loans. Accordingly such investments are only included in the fair value hierarchy disclosure when the investment is subject to re-measurement at fair value after initial recognition and the resulting re-measurement is reflected in the Condensed Consolidated Financial Statements.

The carrying values and estimated fair values of certain of the Company's financial instruments not recorded at fair value in the Condensed Consolidated Balance Sheets are shown below. Because the fair value for all Condensed Consolidated Balance Sheet items are not required to be disclosed, the aggregate fair value amounts presented below are not reflective of the underlying value of the Company.


 
 
June 30, 2014
 
 
December 31, 2013
 
 
Assets
 
 
Carrying
Amount
 
 
Estimated
Fair
Value
 
 
 
Carrying
Amount
 
 
Estimated
Fair
Value
Mortgage loans on real estate
$
15,027,772
 
$
15,279,440
 
$
14,454,534
 
$
14,734,756
Discounted mortgage loans
 
11,327,643
 
 
11,327,643
 
 
12,830,735
 
 
12,830,735
Investment real estate
 
79,475,195
 
 
79,475,195
 
 
83,585,359
 
 
83,585,359
Policy loans
 
11,493,320
 
 
11,493,320
 
 
11,860,960
 
 
11,860,960
Cash and cash equivalents
 
17,905,873
 
 
17,905,873
 
 
19,838,618
 
 
19,838,618
Short term investments
 
4,832,980
 
 
4,832,980
 
 
0
 
 
0
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Notes payable
 
18,197,534
 
 
18,197,534
 
 
19,097,534
 
 
19,097,534

The above estimated fair value amounts have been determined based upon the following valuation methodologies. Considerable judgment was required to interpret market data in order to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange.  The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts.

The fair values of mortgage loans on real estate are estimated using discounted cash flow analyses and interest rates being offered for similar loans to borrowers with similar credit ratings.  The inputs used to measure the fair value of our mortgage loans on real estate are classified as Level 3 within the fair value hierarchy.

The Company has purchased non-performing discounted mortgage 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, which management believes approximates fair value.  The inputs used to measure the fair value of our discounted mortgage loans are classified as Level 3 within the fair value hierarchy.

Investment real estate is recorded at the lower of the net investment in the real estate or the fair value of the real estate less costs to sell.  The determination of fair value assessments are performed on a periodic, non-recurring basis by external appraisal and assessment of property values by management.  The inputs used to measure the fair value of our investment real estate are classified as Level 3 within the fair value hierarchy.

Policy loans are carried at the aggregate unpaid principal balances in the consolidated balance sheets which approximate 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.  The inputs used to measure the fair value of our policy loans are classified as Level 3 within the fair value hierarchy.

The carrying amount of cash and cash equivalents in the financial statements approximates fair value given the highly liquid nature of the instruments.  The inputs used to measure the fair value of our cash and cash equivalents are classified as Level 1 within the fair value hierarchy.

The carrying amount of short term investments in the financial statements approximates fair value.  The inputs used to measure the fair value of our short term investments are classified as Level 3 within the fair value hierarchy.

The carrying value is a reasonable estimate of fair value for notes payable subject to floating rates of interest.  The fair value of notes payable with fixed rate borrowings is determined based on the borrowing rates currently available to the Company for loans with similar terms and average maturities.  The inputs used to measure the fair value of our notes payable are classified as Level 2 within the fair value hierarchy.

Note 5 – Credit Arrangements

At June 30, 2014 and December 31, 2013, the Company had the following outstanding debt:

 
 
 
Outstanding Principal Balance
Instrument
 
Issue Date
 
Maturity Date
 
 
June 30, 2014
 
 
December 31, 2013
Promissory Note:
 
 
 
 
 
 
 
 
 
 
HPG Acquisitions
 
2012-12-27
 
2018-03-04
 
 
12,000,000
 
 
12,000,000

Instrument
 
Issue Date
 
Maturity Date
 
 
Revolving Credit Limit
 
 
December 31, 2013
 
Borrowings
 
Repayments
 
 
June 30, 2014
Lines of Credit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
UTG
 
2013-11-20
 
2014-11-20
 
$
8,000,000
 
$
2,097,534
 
0
 
900,000
 
$
1,197,534
UTG Avalon
 
2013-03-28
 
2015-03-28
 
 
5,000,000
 
 
5,000,000
 
0
 
0
 
 
5,000,000
UG
 
2010-12-28
 
2014-12-05
 
 
15,000,000
 
 
0
 
0
 
0
 
 
0


The HPG Acquisitions promissory note issued on December 27, 2012 is secured by real estate owned by HPG. The promissory note bears interest at a fixed rate of 4%. Interest is payable monthly. Principal is payable monthly beginning in the third year of the note.

The UTG line of credit carries interest at a fixed rate of   3.75% and is payable monthly. As collateral, UTG has pledged  100% of the common voting stock of its wholly owned subsidiary, Universal Guaranty Life Insurance Company ("UG"). During July of 2014, the Company borrowed an additional $1,600,000 on the line of credit. The proceeds were used to purchase an interest in an aircraft.

The UTG Avalon line of credit issued on March 28, 2013 currently carries interest at a rate of  4.0% with monthly interest payments. The interest rate is a variable rate that will be  0.50% above the lowest of the U.S. Prime Rates as published in the money section of the Wall Street Journal with a floor rate of 4%. The interest rate is subject to change monthly and changes in the interest rate will take effect on the first day of the month following the rate change.  This line of credit was renewed on March 28, 2014.

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

Year
 
Amount
 
 
 
2014
$
1,197,534
2015
 
5,345,460
2016
 
478,193
2017
 
499,277
2018
 
10,677,070
Note 6 – Shareholders' Equity

Stock Repurchase Programs

The Board of Directors of UTG authorized the repurchase in the open market or in privately negotiated transactions of up to $6,000,000 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.  During the six month period ended  June 30, 2014, the Company repurchased 14,743 shares through the stock repurchase program for $173,774.  Through June 30, 2014, UTG has spent $5,100,000 in the acquisition of 603,269 shares under this program.
Earnings Per Share Calculations

Earnings per share are based on the weighted average number of common shares outstanding during each period.  At June 30, 2014 and 2013, diluted earnings per share were the same as basic earnings per share since the Company had no dilutive instruments outstanding.

Note 7 – 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.

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.


The following table represents the total funding commitments and the unfunded commitment as of June 30, 2014 related to certain investments:


 
 
Total Funding
 
 
Unfunded
 
 
Commitment
 
 
Commitment
RLF III, LLC
$
4,000,000
 
$
398,120
Llano Music, LLC
 
4,000,000
 
 
2,137,000
Marcellus HBPI, LLP
 
1,800,000
 
 
141,300
PBEX, LLC
 
5,600,000
 
 
1,400,000
Sovereign's Capital, LP
 
500,000
 
 
250,000
MM-Appalachia IV, LP
 
2,475,000
 
 
1,056,000

During 2006, the Company committed to invest in RLF III, LLC ("RLF"), which makes land-based investments in undervalued assets. RLF makes capital calls as funds are needed for continued land purchases.

During 2010, the Company made a commitment to invest in Llano Music, LLC ("Llano"), which invests in music royalties. Llano makes capital calls to its investors as funds are needed to acquire the royalty rights.  During 2014, the commitment amount increased by $2,000,000.

During 2012, the Company committed to invest in Marcellus HBPI, LLP, which purchases land for leasing opportunities to those looking to harvest natural resources. Marcellus HPBI, LLP makes capital calls to investors as funds are needed for continued land purchases.

During 2012, the Company committed to invest in PBEX, LLC, which purchases land for leasing opportunities to those looking to harvest natural resources. PBEX, LLC makes capital calls to investors as funds are needed for continued land purchases.

During 2012, the Company committed to invest in Sovereign's Capital, LP ("Sovereign's"), which invests in companies in emerging markets. Sovereign's makes capital calls to investors as funds are needed.
During 2013, the Company committed to invest in MM-Appalachia IV, LP, which purchases land for leasing opportunities to those looking to harvest natural resources. MM-Appalachia IV, LP makes capital calls to investors as funds are needed for continued land purchases.
 
Note 8 – Other Cash Flow Disclosures


On a cash basis, the Company paid the following expenses:

 
 
Three Months Ended
 
 
June 30,
 
 
2014
 
 
2013
 
 
 
 
 
 
Interest expense
$
14,648
 
$
15,643
Federal income tax
 
0
 
 
1,415,000

 

 
 
Six Months Ended
 
 
June 30,
 
 
2014
 
2013
Interest expense
$
34,320
$
32,041
Federal income tax
 
0
 
3,465,000
 
 
 
 
 

During the first quarter of 2013 and 2014, UG's wholly-owned subsidiary, UTG Avalon, LLC, entered into a noncash transaction whereby the subsidiary obtained a new line of credit in the amount of  $5,000,000 and utilized the line of credit to repay the prior line of credit. The terms of the new line of credit are consistent with the terms of the prior line of credit.

During the first quarter of 2014, the Company sold a block of life insurance business.  As a result of this transaction, the Company transferred approximately $3,100,000 in cash to the purchaser.  The transaction also resulted in a reduction of approximately $3,700,000  of future policyholder benefits and approximately $600,000 of cost of insurance acquired.
.

Note 9 – Concentrations 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.



Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is Management's discussion and analysis of the financial condition and results of operations of UTG, Inc. and its subsidiaries (collectively with the Parent, the "Company").  The following discussion of the financial condition and results of operations of the Company should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in the Company's annual report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.

Cautionary Statement Regarding Forward-Looking Statements

This report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "probably," or similar expressions, we are making forward-looking statements.

Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur.  Our forward-looking statements speak only as of the date made, and we undertake no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments, unless the securities laws require us to do so.

Overview

UTG, Inc., a Delaware corporation, is a life insurance holding company.  The Company's dominant business is individual life insurance, which includes the servicing of existing insurance policies in force, the acquisition of other companies in the life insurance business and the administration and processing of life insurance business for other entities.  The Company's focus for the future includes growing the administrative portion of the business.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ significantly from those estimates.  The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability.  The Company's critical accounting policies and the related estimates considered most significant by Management are disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.  Management has identified the accounting policies related to 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 as those, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Condensed Consolidated Financial Statements and this Management's Discussion and Analysis.

During the six months ended June 30, 2014, there were no additions to or changes in the critical accounting policies disclosed in the 2013 Form 10-K, except for recently adopted accounting standards discussed in Note 2 of the Notes to the Condensed Consolidated Financial Statements.

Results of Operations

On a consolidated basis, the Company reported a net loss attributable to common shareholders' of $(1,500,000) for the six month period ended June 30, 2014 and net income attributable to common shareholders' of $14,900 for the three month period ended June 30, 2014.  For the six month period ended June 30, 2013, the Company reported a net loss attributable to common shareholders' of $(35,200) and for the three month period ended June 30, 2013, the Company report net income attributable to common shareholders' of $875,100.

Revenues

The Company's total revenues increased by 5% when comparing the three and six month periods ended June 30, 2014 to the same periods in 2013.  The increase was mainly attributable to realized investment gains recognized by the Company during 2014.

Premium and policy fee revenues, net of reinsurance, decreased 8% or $404,000 when comparing the first six months of 2014 to the same period in 2013.  Premium and policy fee revenues, net of reinsurance, were comparable for the second quarter of 2014 and 2013.  The Company writes minimal new business.  Premium and policy fee revenues, net of reinsurance, represented 28% and 31% of the Company's revenues as of June 30, 2014 and 2013, respectively.  Unless the Company acquires a new insurance company or a block of in-force business, Management expects premium revenue to continue to decline on the existing blocks of business at a rate consistent with prior experience.

Net investment income represented 53% and 58% of the Company's total revenues as of June 30, 2014 and 2013, respectively.  The Company reported net investment income of $8,561,000 for the six month period ended June 30, 2014, a decrease of 13% compared to the same period in 2013.  For the three month period ended June 30, 2014, net investment income decreased 15% or $734,000, compared to the same quarter in 2013.  Investment income from the fixed maturities investment portfolio and the real estate investment portfolio consistently represented a substantial, at least 60%, of the gross investment income for the three and six month periods ended June 30, 2014 and 2013.

While income from the fixed maturities and real estate investment portfolios remained consistent, when comparing 2013 and 2014 activity, the Company reported less income from the discounted mortgage loan investment portfolio, which was partially offset by an increase in income from the equity securities investment portfolio for the three and six month periods ended June 30, 2014.

For the six month period ended June 30, 2014, income from the discounted mortgage loan portfolio decreased 42%, compared to the same period in 2013.  During the second quarter of 2014 income from discounted mortgage loan portfolio was 44% lower, compared to the same period in 2013. The discounted mortgage loan investment balance decreased 12% from December 31, 2013 to June 30, 2014 and is expected to continue trending downward as the Company does not anticipate acquiring any additional discounted loan portfolios in the near term.

For the six month period ended June 30, 2014, income from the equity securities investment portfolio increased 25%, compared to the same period in 2013.  During the second quarter of 2014, income from the equity securities investment portfolio was 76% higher than for the same period in 2013.  During the second quarter of 2014, the interest rate on one of the company's preferred stocks increased substantially, according to the terms of the contractual agreement, causing the increase in the equity securities income recognized by the Company.  The Company also realized a gain from the sale of a portion of this security during the second quarter of 2014, as discussed in the following paragraph.

The Company reported net realized investment gains of $2,000,000 and $622,000 for the six month periods ended June 30, 2014 and 2013, respectively.  The majority, 86%, of the 2014 realized investment gains were earned during the second quarter of 2014.  During the second quarter of 2014, the Company recognized a gain of $972,000 from the redemption of a portion of a preferred stock the Company holds in the equity investment portfolio. Realized investment gains and losses are expected to vary depending on the investing activities of the Company.

In recent periods, Management's focus has been directed towards promoting and growing TPA services to unaffiliated life insurance companies.  The Company receives monthly fees based on policy in-force counts and certain other activity indicators, such as number of premium collections performed, or services performed.  For the six month periods ended June 30, 2014 and 2013, the Company reported revenues from TPA services of $1,100,000.  Revenues from TPA fees are included in the line item "other income" on the Company's Condensed Consolidated Statements of Operations.  The Company intends to continue to pursue other TPA arrangements as well. The Company provides TPA services to insurance companies seeking business process outsourcing solutions.  Management believes the Company is positioned to generate additional revenues by utilizing the Company's current excess capacity and administrative services.

In the fourth quarter of 2013, Management made the determination to not renew its largest third party administration ("TPA") contract when the contract is due for renewal in the fourth quarter of 2014.  The TPA client has been notified of this decision to allow the client ample planning and transition time.  This contract represents approximately 66% of the Company's total TPA revenues.

Management made this determination due to the thin profit margin associated with this contract coupled with its labor intensity.  The non-renewal of this contract is not expected to have a material financial impact to net income as Management anticipates operating expense reductions close to the lost revenues.  The Company has no current plans to terminate any other TPA arrangements and intends to continue to pursue new clients.

In summary, the Company's basis for future revenue growth is expected to come from the following primary sources: expansion of TPA revenues, conservation of business currently in-force, the maximization of investment earnings and the acquisition of other companies or policy blocks in the life insurance business.  Management has placed a significant emphasis on the development of these revenue sources to enhance these opportunities.

Expenses

The Company reported total benefits and other expenses of $17,700,000 for the six month period ended June 30, 2014, an increase of 29% from the same period in 2013.  For the three month period ended June 30, 2014, total benefits and other expenses increased 21%, compared to the same quarter in 2013.  Benefits, claims and settlement expenses represented 60% of the Company's total expenses for the three and six month periods ended June 30, 2014.  The other major expense category of the Company is operating expenses, which represented 30% of the Company's total expenses for the three and six month periods ended June 30, 2014.

Life benefits, claims and settlement expenses, net of reinsurance benefits and claims, increased approximately 10% in the six month period ended June 30, 2014, compared to the same period in 2013.  For the three month period ended June 30, 2014, life benefits, claims and settlement expenses, net of reinsurance benefits and claims, increased 16%, compared to the same quarter in 2013.  Policy claims vary from period to period and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.

In early 2013, the Company began a proactive analysis of its in-force business to try to reconnect with lost customers and verify its customers are not deceased.  In some instances, the Company found that the customer was indeed deceased, but no notification or claim was presented to the Company.  During 2013, the Company paid approximately $2,900,000 in death claim benefits as a result of this action.  During 2014, the Company paid approximately $1,200,000 in death claim benefits as a result of this action. This project was completed during the second quarter of 2014.

Net amortization of cost of insurance acquired decreased approximately 7% during the six month period ended June 30, 2014 compared to the same period in 2013.  Cost of insurance acquired is established when an insurance company is acquired or when the Company acquires a block of in-force business.  The Company assigns a portion of its cost to the right to receive future profits from insurance contracts existing at the date of the acquisition.  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 interest rates may vary due to risk analysis performed at the time of acquisition on the business acquired. The Company utilizes a 12% discount rate on the remaining unamortized business.  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.  This expense is expected to decrease, unless the Company acquires a new block of business.

Operating expenses increased approximately 34% in the six month period ended June 30, 2014 in comparison to the same period in 2013.  Second quarter 2014 operating expenses are 38% higher than operating expenses reported in the second quarter of 2013. The increase in operating expenses for the three and six month periods ended June 30, 2014 are related to aircraft repair costs paid during the second quarter of 2014 and information technology expenses related to the implementation of a new administrative system, which were paid during both the first and second quarters of 2014.

Following an extensive analysis of current administrative systems available in the market place, early in 2014 the Company determined it would change its administrative system.  Management anticipates it will be year-end 2015 before fully converted to the new system.  Management believes this system change will well position the Company for the future by providing a more modern and flexible operating system while reducing ongoing operating costs.

Financial Condition

Investment Information

Investments represent approximately 83% and 82% of total assets at June 30, 2014 and December 31, 2013, respectively.  Accordingly, investments are the largest asset group of the Company.  The Company's insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments that it is 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 a diverse set of securities.

As of June 30, 2014, 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 available for sale".  Investments available for sale are carried at market, with changes in market value charged directly to shareholders' equity.  Changes in the market value of available for sale securities resulted in net unrealized gains of $6,000,000 for the six month period ended June 30, 2014 and $2,600,000 for the second quarter of 2014.  Changes in the market value of available for sale securities resulted in net unrealized losses of $(5,100,000) for the three and six month periods ended June 30, 2013.

The Company's June 30, 2014 discounted mortgage loan asset balance decreased by 12% in comparison to the December 31, 2013 balance.  The decrease in the discounted mortgage loan balance is mainly attributable to a mortgage loan being fully repaid during the first quarter of 2014. The Company expects this investment balance to continue trending downward as the Company does not anticipate acquiring any additional discounted loan portfolios in the near term.

The Company's June 30, 2014 investment real estate balance decreased by 5% compared to the December 31, 2013 balance. The decline in the investment real estate balance is attributable to the sale of a certain real estate parcel during the second quarter of 2014.

During the second quarter of 2014, the Company issued three short term notes that are classified as short term investments as the notes mature in one year or less. One of the notes was fully repaid during July of 2014.

Capital Resources

Total shareholders' equity increased by approximately 6% as of June 30, 2014 compared to December 31, 2013. The increase in shareholders' equity is mainly attributable to the change in accumulated other comprehensive income.  The balance in accumulated other comprehensive income has increased $5,800,000 from December 31, 2013 to June 30, 2014.  The increase in other comprehensive income is related to the unrealized gains on the company's available for sale securities.

At June 30, 2014 and December 31, 2013, the Company had $18,200,000 and $19,100,000 of debt outstanding.  Approximately $1,200,000 of this debt is related to the ACAP dissenters' settlement that occurred during the fourth quarter of 2013.  Approximately $12,000,000 of this debt is related to credit facilities extended to a majority owned subsidiary of UTG, HPG Acquisitions, LLC ("HPG"), during 2012. HPG borrowed money to return capital to its investors.  UTG Avalon, LLC, a wholly owned subsidiary of UG, has an outstanding line of credit in the amount of $5,000,000.

The Company's investments are predominately in fixed maturity investments such as bonds, which provide sufficient return to cover future obligations.  The Company carries all of its fixed maturity holdings as available for sale, which are reported in the Condensed Consolidated Financial Statements at their market value.

Liquidity

The Company has three principal needs for cash - the insurance company's contractual obligations to policyholders, the payment of operating expenses and debt service.  Cash and cash equivalents as a percentage of total assets were approximately 4% and 5% as of June 30, 2014 and December 31, 2013, respectively.  Fixed maturities as a percentage of total assets were approximately 43% and 42% as of June 30, 2014 and December 31, 2013, respectively.

The Company currently has access to funds for operating liquidity.  UTG has an $8,000,000 revolving credit note with Illinois National Bank.  UTG Avalon, LLC also has a $5 million revolving credit note.  UG is a member of the FHLB which allows UG access to credit.  UG's current line of credit with the FHLB is $15 million.  At June 30, 2014, the Company had $6,200,000 of outstanding borrowings attributable to the lines of credit.  In July of 2014, the Company borrowed an additional $1,600,000 on the UTG line of credit. The proceeds were used to purchase an interest in an aircraft.

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 used in operating activities was approximately $4,500,000 and $5,680,000 for the six month period ended June 30, 2014 and 2013, respectively.  The variance in cash used in operating activities, when comparing June 30, 2014 and June 30, 2013 activity, is mainly attributable to the net loss recognized by the Company during the current year.

Net cash provided by investing activities was approximately $7,200,000 and $5,000,000 for the six month period ended June 30, 2014 and 2013, respectively.  The cash provided by and used in investing activities is expected to vary from quarter to quarter depending on market conditions and Management's ability to find and negotiate favorable investment contracts.

Net cash used in financing activities was approximately $4,610,000 and $363,000 for the six month period ended June 30, 2014 and 2013, respectively.  During the first quarter of 2014, the Company used cash of approximately $3 million in the settlement of the sale of a small block of life insurance business.  The sale of this block of business was approved by the Ohio Department of Insurance during the first quarter of 2014. During the second quarter of 2014, the Company repaid $900,000 on the outstanding line of credit.

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 subsidiary, stockholder dividends from its subsidiary and earnings received on cash balances.  At June 30, 2014, substantially all of the consolidated shareholders equity represents net assets of its subsidiary.  The Company's insurance subsidiary has 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 2013 or the six month period ended June 30, 2014.

UG is an Ohio domiciled insurance company, which requires notification within five business days to the insurance commissioner following the declaration of any ordinary dividend and at least ten calendar days prior to payment of such dividend.  Ordinary dividends are defined as the greater of:  a) prior year statutory net income or b) 10% of statutory capital and surplus.  For the year ended December 31, 2013, UG had statutory net income of $4,800,000.  At December 31, 2013 UG's statutory capital and surplus amounted to $34,900,000.  Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation.  During 2013, UG paid UTG ordinary dividends of $2,700,000.  During the second quarter of 2014, UG paid UTG a dividend of $1,000,000. UTG used the dividends received during 2013 and 2014 to pay on its outstanding line of credit balance.

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

ITEM 4.  CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In addition, the disclosure controls and procedures ensure that information required to be disclosed is accumulated and communicated to management, including the principal executive officer and principal financial officer, allowing timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

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.  MINE SAFETY DISCLOSURES

NONE

ITEM 5.  OTHER INFORMATION

NONE


ITEM 6.  EXHIBITS

*10.22
Promissory Note dated March 28, 2014 between UTG Avalon, LLC and First Southern Funding
*31.1
Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as
required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2
Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1
Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2
Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**101
Interactive Data File

*Filed herewith




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:
August 12, 2014
 
By
/s/ James P. Rousey
 
 
 
 
James P. Rousey
 
 
 
 
President and Director








Date:
August 12, 2014
 
By
/s/ Theodore C. Miller
 
 
 
 
Theodore C. Miller
 
 
 
 
Senior Vice President
 
 
 
 
   and Chief Financial Officer

 
EXHIBIT INDEX



Exhibit Number
Description


*10.22
Promissory Note dated March 28, 2014 between UTG Avalon, LLC and First Southern Funding
*31.1
Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as
required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2
Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1
Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2
Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**101
Interactive Data File

* Filed herewith