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EX-31.1 - CERTIFICATION - UTG INCexhibit311.htm
EX-32.2 - CERTIFICATION - UTG INCexhibit322.htm
EX-32.1 - CERTIFICATION - UTG INCexhibit321.htm
EX-31.2 - CERTIFICATION - UTG INCexhibit312.htm


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

FORM 10-K/A
(Amendment No. 3)
(Mark One)

[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
 
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009
 
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 Number 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, Springfield, IL
 
62703
(Address of principal executive offices)
 
(Zip code)

Registrant's telephone number, including area code: (217) 241-6300
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
       None
None

Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, stated value $.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ]  No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ]  No [X]

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 has submitted electronically and posted on its corporate Website, 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 [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10- K. [  ]

Indicate by check mark whether the registrant is large accelerated filer, an accelerator filer, a non-accelerated filer, or a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act.

Large Accelerated Filer
[  ]
Accelerated Filer
[  ]
Non Accelerated Filer
[  ]
Smaller Reporting Company
[X]

Indicate by check mark whether the registrant is a shell company, as defined by Rule 12b-2 of the act.   Yes [  ]    No [X]

As of June 30, 2009, shares of the Registrant’s common stock held by non-affiliates (based upon the price of the last sale of $6.25 per share), had an aggregate market value of approximately $7,763,919.

At March 1, 2010 the Registrant had 3,883,129 outstanding shares of Common Stock, stated value $.001 per share.

Documents incorporated by reference:  None


UTG, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2009




This Amendment replaces in its entirety the following sections of the Form 10-K of UTG, Inc. for the year ended December 31, 2009.

PART II
 
  ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS…………………………………………………………………………………………..................................................................................…
 
3
  Report of Independent Registered Public Accounting Firm………………………………………………………………………............................................................................
17
 
PART IV
 
  Signature Page…………………………………………………………………………………………………………………........................................................................................
18
  Exhibit 31.1  CERTIFICATIONS………………………………………………………………………………………………................................................................................…...
19
  Exhibit 31.2  CERTIFICATIONS……………………………………………………………………………………………………...............................................................................
20
  Exhibit 32.1  CERTIFICATAION OF CHIEF EXECUTIVE OFFICER……………………………………………………………..............................................................................
21
  Exhibit 32.2  CERTIFICATION OF CHIEF FINANCIAL OFFICER……………………………………………………………….............................................................................
22





ITEM 7.  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 for the two years ended December 31, 2009.  This analysis should be read in conjunction with the consolidated financial statements and related notes, which 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 December 31, 2009.


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.

Critical Accounting Policies

General
We have identified the accounting policies below as critical to the understanding of our results of operations and our financial position.  The application of these critical accounting policies in preparing our financial statements requires Management to use significant judgments and estimates concerning future results or other developments including the likelihood, timing or amount of one or more future transactions or amounts.  Actual results may differ from these estimates under different assumptions or conditions.  On an on-going basis, we evaluate our estimates, assumptions and judgments based upon historical experience and various other information that we believe to be reasonable under the circumstances.  For a detailed discussion of other significant accounting policies, see Note 1 to the consolidated financial statements.

DAC and Cost of Insurance Acquired
Deferred acquisition costs (DAC) and cost of insurance acquired reflect our expectations about the future experience of the existing business in-force.  The primary assumptions regarding future experience that can affect the carrying value of DAC and cost of insurance acquired balances include mortality, interest spreads and policy lapse rates.  Significant changes in these assumptions can impact amortization of DAC and cost of insurance acquired in both the current and future periods, which is reflected in earnings.

Investments
The Company accounts for its investments in debt and equity securities under SFAS No. 115 (see FASB Codification 320-10 section 5, 15, 25, 30, 35, 45, 50, and 55. And 942-10 section 50), Accounting for Certain Investments in Debt and Equity Securities. The Company has classified all of its investments as available-for-sale with the exception of certain securities classified as trading securities. Available-for-sale investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets for available-for-sale securities.  Trading securities are carried at fair value with unrealized gains and losses reported in income in the Consolidated Statements of Operations.  Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Operations, using the constant yield method over the period to maturity. Net realized gains and losses on investments are computed using the specific identification method and are reported in the Consolidated Statements of Operations.

Declines in value of securities available-for-sale that are judged to be other-than-temporary are determined based on the specific identification method and are reported in the Consolidated Statements of Operations as realized losses. The factors considered by management in determining when a decline is other-than-temporary include but are not limited to: the length of time and extent to which the fair value has been less than cost; 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, in the case of fixed maturities, the effect of changes in market interest rates); and the Company's intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value. For structured securities, such as mortgage-backed securities, an impairment loss is recognized when there has been a decrease in expected cash flows and/or a decline in the security's fair value below cost.

Deferred Income Taxes
The provision for deferred income taxes is based on the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized by applying enacted statutory tax rates to temporary differences between amounts reported in the Consolidated Financial Statements and the tax bases of existing assets and liabilities. A valuation allowance is recognized for the portion of deferred tax assets that, in Management's judgment, is not likely to be realized. The effect on deferred income taxes of a change in tax rates or laws is recognized in income tax expense in the period that includes the enactment date.

Future Policy Benefits and Expenses
The liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method.  These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on the life insurance subsidiaries’ experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations.  The Company makes these assumptions at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date.  Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 2% to 6% for life insurance and 2.5% to 9.25% for annuities.  Benefit reserves for traditional life insurance policies include certain deferred profits on limited-payment policies that are being recognized in income over the policy term.  Policy benefit claims are charged to expense in the period that the claims are incurred.  Current mortality rate assumptions are based on 1975-80 select and ultimate tables.  Withdrawal rate assumptions are based upon Linton B or Linton C, which are industry standard actuarial tables for forecasting assumed policy lapse rates.

Recognition of Revenues and Related Expenses
Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits, consist principally of whole life insurance policies, and certain annuities with life contingencies are recognized as revenues when due.  Limited payment life insurance policies defer gross premiums received in excess of net premiums, which is then recognized in income in a constant relationship with insurance in force. Accident and health insurance premiums are recognized as revenue pro rata over the terms of the policies.  Benefits and related expenses associated with the premiums earned are charged to expense proportionately over the lives of the policies through a provision for future policy benefit liabilities and through deferral and amortization of deferred policy acquisition costs.  For universal life and investment products, generally there is no requirement for payment of premium other than to maintain account values at a level sufficient to pay mortality and expense charges. Consequently, premiums for universal life policies and investment products are not reported as revenue, but as deposits.  Policy fee revenue for universal life policies and investment products consists of charges for the cost of insurance and policy administration fees assessed during the period.  Expenses include interest credited to policy account balances and benefit claims incurred in excess of policy account balances.

Results of Operations

(a)
Revenues

Premiums and policy fee revenues, net of reinsurance premiums and policy fees, increased approximately 1% when comparing 2009 to 2008.  Premiums and policy fee revenues on a gross basis decreased almost 6% in comparing 2009 to 2008.  The Company writes very little new business.  Unless the Company acquires a block of in-force business as it did in December 2006, Management expects premium revenue to continue to decline on the existing block of business at a rate consistent with prior experience. The Company’s average persistency rate for all policies in force for 2009 and 2008 was approximately 96.1% and 95.8%, respectively. Persistency is a measure of insurance in force retained in relation to the previous year.

The Company’s primary source of new business production comes from internal conservation efforts.  Several of the customer service representatives of the Company are also licensed insurance agents, allowing them to offer other products within the Company’s portfolio to existing customers.  Additionally, efforts continue to be made in policy retention through more personal contact with the customer including telephone calls to discuss alternatives and reasons for a customer’s request to surrender their policy.

Net investment income decreased almost 19% when comparing 2009 to 2008.  The overall gross investment yields for 2009 and 2008 are 5.58% and 6.35%, respectively.  This decrease is primarily due to holding fewer fixed maturity investments and high cash balances earning low rates of interest for the majority of 2009.  During 2008 and 2009, Management took steps to avoid catastrophic future losses by culling its investment portfolio.  As part of this portfolio evaluation process, certain investments were subsequently sold, particularly during the third and fourth quarters of 2008 and early 2009.  This resulted in a higher cash balance earning extremely low rates of interest which had an immediate impact on income.  With preservation of capital being of utmost concern, Management sat on this large cash balance waiting for the dust to settle and for opportunities with margin of safety to appear.  This patience has been rewarded and the Company began to deploy cash into investments deemed appropriate during the latter part of 2009.  The majority of this money has been invested in fixed maturity investments and discounted mortgage loans.  With the economy reeling, bankruptcies soaring and general credit drying-up, the banking industry has been under well-known pressure.  As bank failures increased dramatically, their loan portfolios have been auctioned off, sometimes at deep discounts.  The Company acquired approximately $35 million of these loans, primarily during the fourth quarter of 2009.  With excess cash being invested, management believes the Company is well positioned and investment income should improve during 2010.

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 be lowered 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.

Net realized investment gains (losses) were $(629,528) and $2,362,578 in 2009 and 2008, respectively.  The majority of the losses during 2009 were from bond investments.  The beginning of 2009 continued with the elimination of unwanted bonds during the portfolio evaluation process.  Losses on the sale of these bonds totaled approximately $3,500,000.  In addition to these losses, other-than-temporary impairments of just over $2,000,000 were taken on bonds backed by trust preferred securities of banks.  These losses were partially off-set from realized gains of approximately $3,800,000 from sales of mortgage backed securities at the end of 2009.  Realized gains on common stocks were mainly the result of selling the remainder of CSI for a $3,000,000 gain and the sale of another common stock realizing a $1,000,000 gain.  The gains were off-set by a loss of approximately $3,000,000 on exchange traded funds that moved inversely to the market.  During 2008, approximately $5,353,000 in realized gains was the result of common stock sales.  These gains are mostly the result of three investments.  For diversification purposes, in September 2008, 28% of the Company’s investment in CSI common stock was sold for a gain of approximately $3,059,000.  During 2008, amid growing global economic distress, the Company established a defensive posture in exchange traded funds.  These investments resulted in gains of approximately $2,946,000.   At the end of the year, SFF Production, an energy investment, was also sold resulting in realized gains of approximately $1,701,000.  With 2008 experiencing one of the largest financial crises in our nation’s history, Management has refused to sit on the sidelines hoping for a recovery and spent a significant amount of time analyzing the Company’s investment holdings and reducing risk.  As a result of this, certain investments that were deemed too risky, primarily those in financial institutions were sold, predominantly at losses.  Those losses consisted of approximately $3,100,000 on common stocks and $3,000,000 on fixed maturity investments.  Also included in these losses is an approximate $540,000 loss resulting from writing down a bond investment in Lehman Brothers to $0.

Although stock markets around the world have rallied sharply from an oversold position on increased liquidity and a perceived improvement in the general economy, Management continues to view the Company’s investment portfolio with utmost priority. Significant time has been spent internally researching the Company’s risk and communicating with outside investment advisors about the current investment environment and ways to ensure preservation of capital and mitigate any losses.  Management has put extensive efforts into evaluating the investment holdings.  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 that 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.

In recent periods, Management’s focus has been placed on 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 years ended 2009 and 2008, the Company received $1,875,868 and $1,810,775 for this work, respectively.  These TPA revenue fees are included in the line item “other income” on the Company’s consolidated statements of operations.  No new TPA contracts were entered into during 2009.  However, the Company intends to continue to pursue other TPA arrangements. 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.  During 2009, the Company renewed the contract of the largest TPA client for an additional five year period.

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 and products offered to enhance these opportunities.

(b)
Expenses

Benefits, claims and settlement expenses net of reinsurance benefits and claims, decreased $993,674 from 2008 to 2009.  The decrease relates primarily to changes in the Company’s death claim experience.  Death claims were approximately $370,000 less in 2009 as compared to 2008.  There is no single event that caused the mortality variances.  Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by management.

Changes in policyholder reserves, or future policy benefits, also impact this line item.  Reserves are calculated on an individual policy basis and generally increase over the life of the policy as a result of additional premium payments and acknowledgement of increased risk as the insured continues to age.  The short-term impact of policy surrenders is negligible since a reserve for future policy benefits payable is held which is, at a minimum, equal to and generally greater than the cash surrender value of a policy.  The benefit of fewer policy surrenders is primarily received over a longer time period through the retention of the Company’s asset base.

Commissions and amortization of deferred policy acquisition costs increased $1,708,239 from 2008 to 2009 mostly as a result of lower commissions offset from a reinsurance agreement in AC caused by lower profits on the block of business due to bond sales.  The AC agreement is a 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 $107,000 and $(1,244,000) for the years 2009 and 2008, respectively.  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 $19,000 and $26,000 for the years 2009 and 2008, respectively.  A liability for the original ceding commission established at the origination of the agreement and is amortized through this line item as earnings on the block of business are realized.  Going forward, this line item is expected to be more in line with prior history.  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 the periods reported.  The 2008 results for commissions and amortization of deferred policy acquisition costs also included approximately $(400,000) of commission allowances received from a reinsurance agreement that was recaptured in 2008, thus having no comparable activity to this line item in 2009.

Net amortization of cost of insurance acquired increased 3% in 2009 compared to 2008.  Cost of insurance acquired is established when an insurance company is acquired.  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.  The cost of policies purchased represents the actuarially determined present value of the projected future profits from the acquired policies.  Cost of insurance acquired is comprised of individual life insurance products including whole life, interest sensitive whole life and universal life insurance products.  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 12% discount rate on the remaining 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. Persistency is a measure of insurance in force retained in relation to the previous year.  The Company's average persistency rate for all policies in force for 2009 and 2008 has been approximately 96.1% and 95.8%, respectively.  The Company monitors these projections to determine the adequacy of present values assigned to future profits.  No impairments were recorded in the periods reported. During 2009, a block of business of UG fully amortized. Future normal amortization will be significantly lower than recent historic periods due to this block.

Operating expenses decreased about 2.6% in 2009 compared to 2008.  The decrease reflects Management’s significant emphasis on expense monitoring and cost containment.  Maintaining administrative efficiencies directly impacts net income.

Interest expense decreased approximately $420,000, or almost by half, during 2009 compared to 2008.  This decrease is the result of a lower outstanding balance of debt and paying a variable rate of interest on the majority of this balance which has gone from 4.02% at year-end 2008 to 2.06% at year-end 2009.  The Company prepaid principal due in 2009 during 2008.  The next required principal payment is due in December of 2010.  The Company anticipates aggressively repaying the current debt.

Deferred taxes are established to recognize future tax effects attributable to temporary differences between the financial statements and the tax return.  As these differences are realized in the financial statement or tax return, the deferred income tax established on the difference is recognized in the financial statements as an income tax expense or credit.

(c)
Net income

The Company had a net income (loss) of $(4,290,247) and $653,754 in 2009 and 2008 respectively.  The decrease in net income in 2009 is primarily related to realized investment losses and lower investment income as compared to 2008.  With the Company’s restructured portfolio and cash deployment, Management anticipates improvement during 2010 compared with 2009.


Financial Condition

(a)
Assets

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 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.  Some insurance companies have suffered significant losses in their investment portfolios in the last few years; however, because of the Company’s conservative investment philosophy the Company has avoided such significant losses.

At December 31, 2009, 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 held for sale".  Investments held for sale are carried at market, with changes in market value charged directly to shareholders' equity. To provide additional flexibility and liquidity, the Company has categorized all fixed maturity investments as “investments held for sale”.

At December 31, 2009, the Company held a fixed maturity security with a carrying value of $10,000 that was guaranteed by a third party.  The security did not have a credit rating.  The Company had no significant concentration in a guarantor either directly or indirectly as of December 31, 2009.



The following table summarizes the Company's fixed maturities distribution at December 31, 2009 and 2008 by ratings category as issued by Standard and Poor's, a leading ratings analyst.

Fixed Maturities
Rating
% of Portfolio
 
2009
 
2008
Investment Grade
     
AAA
76%
 
84%
AA
4%
 
2%
A
13%
 
10%
BBB
6%
 
2%
Below investment grade
1%
 
2%
 
100%
 
100%


Mortgage loan investments represent 14% and 9% of total assets of the Company at year-end 2009 and 2008, respectively.  A significant portion of the Company’s mortgage loan investments result from opportunities available through FSNB, an affiliate of Mr. Jesse T. Correll.  Mr. Correll is the CEO and Chairman of the Board of Directors of UTG, and directly and indirectly through affiliates, its largest shareholder.  FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market.  During 2009 and 2008 the Company issued or purchased approximately $36,221,000 and $5,242,000 in new mortgage loans, respectively.  These new loans were funded by the Company through participation agreements with FSNB.  FSNB services all the mortgage loans of the Company.  The majority of this amount was in the form of loans purchased at a discount from failed banks.  The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan.  UG paid $74,153 and $93,572 in servicing fees and $384,931 and $19,283 in origination fees to FSNB during 2009 and 2008, respectively.

During the fourth quarter of 2009, the Company began purchasing discounted commercial mortgage loans.  As of December 31, 2009, the Company had acquired $118,368,661 of mortgage loans at a total cost of $35,224,022, representing an average purchase price to outstanding loan of 29.8%.  As of December 31, 2009, the Company has already recorded approximately $1,000,000 in income from this loan activity.  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 cashflows 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.

Sub-prime mortgage lending has received significant attention in recent months.  Default rates have risen sharply on these loans causing a negative impact in the economy in general.  While the Company does not have a material direct exposure to sub-prime mortgage loans, the Company could still be negatively impacted indirectly primarily through fixed maturity holdings in financial institutions that do have sub-prime loan exposures.  Declines in values relating to such entities will negatively impact the Company through unrealized investment losses, should any of these entities declare bankruptcy, the Company would then report a realized loss on its investment.  Management monitors events relating to this topic.

Total investment real estate holdings represent approximately 10.5% and 9% of the total assets of the Company, net of accumulated depreciation, at year-end 2009 and 2008 respectively. The Company has made several investments in real estate in recent years.  Expected returns on these investments exceed those available in fixed income securities.  However, these returns may not always be as steady or predictable.

Cash and cash equivalents decreased by approximately $2,500,000 comparing 2009 to 2008.  As already discussed above, Management has taken the current economic crisis very seriously refusing to sit on the sidelines and not using hope as an investment strategy.  As Management put extensive efforts into evaluating each investment holding, many were sold resulting in cash balances being over $60,000,000 during 2009.  Much of this cash was deployed during the fourth quarter of 2009.

Equity securities decreased approximately $17,300,000 during 2009.  The decrease is attributable to Management’s ongoing portfolio evaluation process amidst the steep economic downturn and credit crisis.

As part of the investment portfolio restructuring, a portion of the Company’s funds has been dedicated to an experienced team of market professionals with the goal of grinding out a reasonable return, primarily through cash flows, with lower overall volatility and reduced risk.  The portfolio contains exchange traded equities and options and has been classified as trading securities on the balance sheet.

Policy loans remained consistent for the periods presented.  Industry experience for policy loans indicates that few policy loans are ever repaid by the policyholder other than through termination of the policy.  Policy loans are systematically reviewed to ensure that no individual policy loan exceeds the underlying cash value of the policy.

Deferred policy acquisition costs decreased 20% in 2009 compared to 2008.  Deferred policy acquisition costs, which vary with, and are primarily related to producing new business, are referred to as DAC.  DAC consists primarily of commissions and certain costs of policy issuance and underwriting, net of fees charged to the policy in excess of ultimate fees charged.  To the extent these costs are recoverable from future profits, the Company defers these costs and amortizes them with interest in relation to the present value of expected gross profits from the contracts, discounted using the interest rate credited by the policy.  The Company had $0 in policy acquisition costs deferred, $8,000 in interest accretion and $173,944 in amortization in 2009, and had $0 in policy acquisition costs deferred, $9,000 in interest accretion and $196,058 in amortization in 2008.

Cost of insurance acquired decreased approximately $8,900,000 in 2009 compared to 2008.  When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition.  The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies.  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.  In 2009 and 2008, amortization decreased the asset by $4,176,539 and $4,043,107, respectively.  The additional decrease of approximately $4,700,000 was due to the sale of a subsidiary, Texas Imperial Life Insurance Company.  No impairments of this asset were recorded for the periods presented.

On December 30, 2009, the Company sold a 73% owned subsidiary, Texas Imperial Life Insurance Company.  The transaction was entered into to further streamline operations of the affiliated group.  Texas Imperial was a stipulated premium company, a unique status under Texas rules.  Consolidation of this entity was not practical due to this status.  The sale resulted in a decrease of approximately 4% in total assets.




(b)
Liabilities

The largest liability, by far, is future policy benefits.  The decrease from 2008 to 2009 in this line item was approximately 8%.  Excluding the sale of Texas Imperial Life Insurance Company, the decrease was approximately 1.5%.  This decrease is attributable primarily to a decrease in the total future policy benefits held.  As policies in force terminate, the corresponding reserve liability held for those policies is released.

At December 31, 2009, the Company has outstanding notes payable of $14,402,889 as compared to $15,616,766 a year ago.  Approximately $10,500,000 of this debt is related to the acquisition of ACAP Corporation and the majority remaining is attributable to borrowings of a subsidiary, Lexington, relating to a real estate investment.  The Company has two lines of credit available for operating liquidity or acquisitions of additional lines of business.  There are no outstanding balances on any of these lines of credit as of the balance sheet date.  The Company's long-term debt is discussed in more detail in Note 11 to the consolidated financial statements.

As part of the investment portfolio restructuring, a portion of the Company’s funds has been dedicated to an experienced team of market professionals with the goal of grinding out a reasonable return, primarily through cash flows, with lower overall volatility and reduced risk.  The portfolio contains exchange traded equities and options and has been classified as trading securities on the balance sheet.

(c)
Shareholders' Equity

Total shareholders' equity decreased approximately 9% in 2009 compared to 2008.  This decrease is primarily due to the net loss of $(4,290,247) for the year.

Each year, the NAIC calculates financial ratio results (commonly referred to as IRIS ratios) for each insurance company.  These ratios compare key financial data pertaining to the statutory balance sheet and income statement.  The results are then compared to pre-established normal ranges determined by the NAIC.  Results outside the range typically require explanation to the domiciliary insurance department.  At year-end 2009, UG had three ratios outside the normal range and AC had two items outside of the normal range.  All variances reported were anticipated by Management.  These ratios are discussed in more detail in the Regulatory Environment discussion included in this Item 7.

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 servicing its outstanding debt.  Cash and cash equivalents as a percentage of total assets were 9% as of December 31, 2009 and 2008.  Fixed maturities as a percentage of total invested assets were 47% and 58% as of December 31, 2009 and 2008, respectively.

The Company's investments are predominantly in fixed maturity investments such as bonds and mortgage loans, which provide sufficient return to cover future obligations. The Company carries all of its fixed maturity holdings as held for sale which are reported in the financial statements at their market value.

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.

Cash provided by (used in) operating activities was $(4,248,484) and $1,195,231 in 2009 and 2008, respectively.  Reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows.

Sources of operating cash flows of the Company, as with most insurance entities, is comprised primarily of premiums received on life insurance products and income earned on investments.  Uses of operating cash flows consist primarily of payments of benefits to policyholders and beneficiaries and operating expenses.

Cash provided by investing activities was $2,904,973 and $25,952,559 for 2009 and 2008, respectively.  Equity and fixed maturity investments sold increased $79,286,665 comparing 2009 to 2008, as the Company evaluated its investment portfolio.  However, in total, approximately $171,000,000 was reinvested in bonds, stocks and mortgage loans as opportunities presented themselves.

Net cash used in financing activities was $ (1,159,521) and $(4,898,383) for 2009 and 2008, respectively.  Cash used in financing activities during both years was mostly the result of debt reduction.

Net policyholder contract deposits decreased by almost $1,000,000 in 2009 compared to 2008.  Management anticipates continued moderate declines in contract deposits.  Policyholder contract withdrawals increased by 50% in 2009 compared to 2008.  The change in policyholder contract withdrawals is not attributable to any one significant event.  Factors that influence policyholder contract withdrawals are fluctuation of interest rates, competition and other economic factors.

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.  During 2009, no payments were made, as the Company had prepaid the 2009 principal due during 2008. The Company made principal payments of $3,049,995 during 2008.  At December 31, 2009, the outstanding principal balance on this debt was $10,491,762.

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

On June 1, 2005, UG was extended a $3,300,000 line of credit from the First National Bank of Tennessee.  The LOC is for a one-year term from the date of issue.  The interest rate on the LOC is variable and indexed to be the lowest of the U.S. prime rates as published in the Wall Street Journal, with any interest rate adjustments to be made monthly.  During 2009 and 2008, UG had borrowings and repayments from the LOC of $0.  At December 31, 2009, and 2008 the Company had no outstanding borrowings attributable to this LOC. This LOC was determined to be no longer needed and was discontinued during 2009.

In November 2007, the Company became a member of the 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 2009, the Company had borrowings of $2,000,000 and repayments of $2,000,000.  During 2008, the Company had borrowings of $4,000,000 and repayments of $4,000,000.  At December 31, 2009, the Company had no outstanding borrowings attributable to this LOC.

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

UTG 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.  On December 31, 2009, 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.

UG is an Ohio domiciled insurance company, which requires five days prior notification to the insurance commissioner for the payment of an ordinary dividend.  Ordinary dividends are defined as the greater of:  a) prior year statutory earnings or b) 10% of statutory capital and surplus.  At December 31, 2009, UG statutory shareholders' equity was $27,349,870.  At December 31, 2009, UG statutory net income was $203,629.  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 ordinary dividends of $3,000,000 to UTG during 2008 and $0 during 2009.

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 or b) 10% of statutory capital and surplus.  At December 31, 2009, AC statutory shareholders' equity was $9,781,305.  At December 31, 2009, AC statutory net income was $4,070,586.  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 ordinary dividends to ACAP of $0 during 2008 and 2009.

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

Regulatory Environment

The Company's current and merged insurance subsidiaries are assessed contributions by life and health guaranty associations in almost all states to indemnify policyholders of failed companies.  In several states the company may reduce premium taxes paid to recover a portion of assessments paid to the states' guaranty fund association.  This right of "offset" may come under review by the various states, and the company cannot predict whether and to what extent legislative initiatives may affect this right to offset.  In addition, some state guaranty associations have adjusted the basis by which they assess the cost of insolvencies to individual companies.  The Company believes that its reserve for future guaranty fund assessments is sufficient to provide for assessments related to known insolvencies.  This reserve is based upon management's current expectation of the availability of this right of offset, known insolvencies and state guaranty fund assessment bases.  However, changes in the basis whereby assessments are charged to individual companies and changes in the availability of the right to offset assessments against premium tax payments could materially affect the company's results.

Currently, the insurance subsidiaries are subject to government regulation in each of the states in which they conduct business.  Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including the power to:  (i) grant and revoke licenses to transact business;  (ii) regulate and supervise trade practices and market conduct;  (iii) establish guaranty associations;  (iv) license agents;  (v) approve policy forms;  (vi) approve premium rates for some lines of business;  (vii) establish reserve requirements;  (viii) prescribe the form and content of required financial statements and reports;  (ix) determine the reasonableness and adequacy of statutory capital and surplus; and  (x) regulate the type and amount of permitted investments.  Insurance regulation is concerned primarily with the protection of policyholders.  The Company cannot predict the impact of any future proposals, regulations or market conduct investigations.  UG is domiciled in the state of Ohio.  AC is domiciled in the state of Texas.

The insurance regulatory framework continues to be scrutinized by various states, the federal government and the National Association of Insurance Commissioners (NAIC).  The NAIC is an association whose membership consists of the insurance commissioners or their designees of the various states.  The NAIC has no direct regulatory authority over insurance companies.  However, its primary purpose is to provide a more consistent method of regulation and reporting from state to state.  This is accomplished through the issuance of model regulations, which can be adopted by individual states unmodified, modified to meet the state's own needs or requirements, or dismissed entirely.

Most states also have insurance holding company statutes, which require registration and periodic reporting by insurance companies controlled by other corporations licensed to transact business within their respective jurisdictions.  The insurance subsidiaries are subject to such legislation and registered as controlled insurers in those jurisdictions in which such registration is required.  Statutes vary from state to state but typically require periodic disclosure, concerning the corporation that controls the registered insurers and all subsidiaries of such corporation. In addition, prior notice to, or approval by, the state insurance commission of material inter-corporate transfers of assets, reinsurance agreements, management agreements (see Note 9 to the consolidated financial statements), and payment of dividends (see Note 2 to the consolidated financial statements) in excess of specified amounts by the insurance subsidiaries, within the holding company system, are required.

Each year, the NAIC calculates financial ratio results (commonly referred to as IRIS ratios) for each company.  These ratios measure various statutory balance sheet and income statement financial information.  The results are then compared to pre-established normal ranges determined by the NAIC.  Results outside the range typically require explanation to the domiciliary insurance department.

At year-end 2009, UG had three ratios outside the normal range.  AC had two ratios outside the normal range.  Each of the ratios outside the normal range was anticipated by Management.  UG’s ratio relates to the Company’s affiliated investments, investment income and change in premium.  The Company has made investments in real estate projects, which have been consolidated into these financial statements through limited liability companies.  The limited liability companies were created to provide additional risk protection to the Company.  While this negatively impacts this ratio, the Company believes that this structure is in the best interest of the Company and these investments will have a positive long-term impact on the Company.  Additionally, the newly acquired ACAP Corporation is a subsidiary of UG.  Due to the tough economy and the Company holding large cash balances and fewer bonds, the adequacy of investment income ratio was expected to fall out of the normal range.  However, due to the change in the portfolio at the end of 2009, management expects to see this ratio move back into the normal range.  The Company has not actively marketed life products in the past several years.  Management currently placed little emphasis on new business production, believing resources could be better utilized in other ways.  Current sales primarily represent sales to existing customers through additional insurance needs or conservation efforts.  AC’s ratios outside the normal range relate to change in reserves and adequacy of investment income.  AC ,like UG, has not actively marketed life products in the past several years.  Management currently places little emphasis on new business production, believing resources could be better utilized in other ways.  Also like UG, AC held large cash balances and fewer bonds during the year.  AC’s investment income should also improve due to portfolio changes.

The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula.  The risk-based capital (RBC) formula measures the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching and other business factors.  The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized.  In addition, the formula defines new minimum capital standards that supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis.  Regulatory compliance is determined by a ratio of the insurance company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC.  Insurance companies below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action.  The levels and ratios are as follows:

 
Ratio of Total Adjusted Capital to
 
Authorized Control Level RBC
Regulatory Event
(Less Than or Equal to)
   
Company action level
2*
Regulatory action level
1.5
Authorized control level
1
Mandatory control level
0.7

 
* Or, 2.5 with negative trend.

At December 31, 2009, UG has a ratio of approximately 3.9, which is 390% of the authorized control level.  AC’s ratio is approximately 9.3, which is 930% of the authorized control level.  Accordingly, both companies meet the RBC requirements.

On July 30, 2002, President Bush signed into law the “SARBANES-OXLEY” Act of 2002 (“the Act”).  This Law, enacted in response to several high-profile business failures, was developed to provide meaningful reforms that protect the public interest and restore confidence in the reporting practices of publicly traded companies.  The implications of the Act to public companies, (which includes UTG) are vast, widespread, and evolving.  The Company has implemented requirements affecting the current reporting period, and is continually monitoring, evaluating, and planning implementation of requirements that will need to be taken into account in future reporting periods.  As part of the implementing these requirements, the Company has developed a compliance plan, which includes documentation, evaluation and testing of key financial reporting controls.

The “USA PATRIOT” Act of 2001 (“the Patriot Act”), enacted in response to the terrorist attacks of September 11, 2001, strengthens our Nation’s ability to combat terrorism and prevent and detect money-laundering activities.  Under Section 352 of the Patriot Act, financial institutions (definition includes insurance companies) are required to develop an anti-money laundering program.  The practices and procedures implemented under the program should reflect the risks of money laundering given the entity’s products, methods of distribution, contact with customers and forms of customer payment and deposits.  In addition, Section 326 of the Patriot Act creates minimum standards for financial institutions regarding the identity of their customers in connection with the purchase of a policy or contract of insurance.  The Company has instituted an anti-money laundering program to comply with Section 352, and has communicated this program throughout the organization.  In addition, all new business applications are regularly screened through the Medical Information Bureau.  The Company regularly updates the information provided by the Office of Foreign Asset Control, U.S. Treasury Department in order to remain in compliance with the Patriot Act and will continue to monitor this issue as changes and new proposals are made.

Accounting Developments

The Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Update (“ASU”) No. 2010-10 Consolidation (Topic 810), Amendments for Certain Investment Funds. The amendments to the consolidation requirements of Topic 810 resulting from the issuance of Statement 167 are deferred for a reporting entity’s interest in an entity (1) that has all the attributes of an investment company or (2) for which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies. The deferral does not apply in situations in which a reporting entity has the explicit or implicit obligation to fund losses of an entity that could potentially be significant to the entity. The deferral also does not apply to interests in securitization entities, asset-backed financing entities, or entities formerly considered qualifying special purpose entities. In addition, the deferral applies to a reporting entity’s interest in an entity that is required to comply or operate in accordance with requirements similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. An entity that qualifies for the deferral will continue to be assessed under the overall guidance on the consolidation of variable interest entities in Subtopic 810-10 (before the Statement 167 amendments) or other applicable consolidation guidance, such as the guidance for the consolidation of partnerships in Subtopic 810-20. The amendments in this Update also clarify that for entities that do not qualify for the deferral, related parties should be considered when evaluating each of the criteria in paragraph 810-10-55-37, as amended by Statement 167, for determining whether a decision maker or service provider fee represents a variable interest. In addition, the requirements for evaluating whether a decision maker’s or service provider’s fee is a variable interest are modified to clarify the Board’s intention that a quantitative calculation should not be the sole basis for this evaluation. The amendments in this update are effective as of the beginning of a reporting entity’s first annual period that begins after November 15, 2009, and for interim periods within that first annual reporting period.  Management has determined that this Statement will not result in a change to current practice.

In February 2010, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-09, Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements, which amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-09 is effective upon issuance. The adoption of ASU 2010-09 did not have a material impact on the Company's consolidated financial statements.

In January 2010, FASB issued ASU 2010-06, Improving Disclosures about Fair Measurements, which provides amendments to subtopic 820-10 that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements for Level 3 fair value measurements. Additionally, ASU 2010-06 provides amendments to subtopic 820-10 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques. ASU 2010-06 is effective for financial statements issued for interim and annual periods ending after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for interim and annual periods ending after December 15, 2010. The Company does not expect the adoption of ASU 2010-06 to have a material impact on its consolidated financial statements.

In January 2010, FASB issued ASU 2010-02, Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification, which addresses the accounting for noncontrolling interests and changes in ownership interests of a subsidiary. ASU 2010-02 is effective for the interim or annual reporting periods ending on or after December 15, 2009, and must be applied retrospectively to interim or annual reporting periods beginning on or after December 15, 2008. The adoption of ASU 2010-02 did not have an impact on the Company's consolidated financial statements.

In December 2009, FASB issued ASU 2009-17,Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASU 2009-17 also requires additional disclosures about an enterprise's involvement in variable interest entities. ASU 2009-17 is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009. The Company does not expect the adoption of ASU 2009-17 to have a material impact on its consolidated financial statements.

In December 2009, FASB issued ASU 2009-16, Transfers and Servicing, which improves financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. ASU 2009-16 is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009. The Company does not expect the adoption of ASU 2009-16 to have a material impact on its consolidated financial statements.

In August 2009, FASB issued ASU 2009-05, Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value, which provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of liabilities. ASU 2009-05 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value. ASU 2009-05 is effective for the first reporting (including interim periods) beginning after issuance. The adoption of ASU 2009-05 did not have a material impact on the Company's consolidated financial statements.

In June 2009, FASB issued Accounting Standards Codification ("ASC") 105, Generally Accepted Accounting Principles, which establishes the Codification as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. All guidance contained in the Codification carries an equal level of authority. Following this statement, FASB will not issue new standards in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve only to: (1) update the Codification; (2) provide background information about the guidance; and (3) provide the bases for conclusions on the change(s) in the Codification. ASC 105 was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all existing non-SEC accounting and reporting standards. The adoption of ASC 105 did not have an impact on the Company's consolidated financial statements.

In June 2009, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 111, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities.  SAB No. 111 clarifies the SEC's position related to other-than-temporary impairments of debt and equity securities and was issued in order to make the relevant interpretive SEC guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB No. 111 did not have an impact on the Company's consolidated financial statements.

In April 2009, FASB issued amendments to ASC 320-10, Investments—Debt and Equity Securities, which provides greater clarity about the credit and noncredit component of an other-than-temporary impairment event and more effectively communicates when an other-than-temporary impairment event has occurred. ASC 320-10 amends the other-than-temporary impairment model for debt securities. The impairment model for equity securities was not affected. Under ASC 320-10, another-than-temporary impairment must be recognized through earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. This standard was effective for interim periods ending after June 15, 2009. The adoption of the amendments to ASC 320-10 did not have a material impact on the Company's consolidated financial statements.

In April 2009, FASB issued amendments to ASC 820-10, Fair Value Measurements and Disclosures, which provides amendments to guidelines for making fair value measurements more consistent and provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed. The amendments are applied to all assets and liabilities (i.e., financial and non-financial) and requires enhanced disclosures. The amendments are effective for periods ending after June 15, 2009. The adoption of the ASC 820-10 amendments did not have an impact on the Company's consolidated financial statements.

In April 2009, FASB issued amendments to ASC 825-10, Financial Instruments, which require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. The amendments are effective for interim periods ending after June 15, 2009. The adoption of these amendments did not have an impact on the Company's consolidated financial statements.

In June 2008, FASB issued amendments to ASC 260-10, Earnings Per Share, which requires unvested share based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. These amendments were effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years and require retrospective application. The adoption of these amendments did not have an impact on the Company's consolidated financial statements.

In September 2006, FASB issued ASC 820-10, Fair Value Measurements and disclosures. In February 2008, the FASB provided a one year deferral for implementation of the standard for non-recurring, non-financial assets and liabilities. The adoption of this partially deferred portion of ASC 820-10 did not have an impact on the Company's consolidated financial statements.

The FASB also issued Statement No. 163, (See FASB Codification 944- Subtopics: 20, 40, 310, and 605) Accounting for Financial Guarantee Insurance Contracts — an interpretation of FASB Statement No. 60 Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. That diversity results in inconsistencies in the recognition and measurement of claim liabilities because of differing views about when a loss has been incurred under FASB Statement No. 5, Accounting for Contingencies. This Statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. Those clarifications will increase comparability in financial reporting of financial guarantee insurance contracts by insurance enterprises. This Statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the Statement will improve the quality of information provided to users of financial statements. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years.  The adoption did not have a material impact on its consolidated financial condition or results of operations.





Report of Independent Registered Public Accounting Firm


Board of Directors and Shareholders
UTG, Inc.
Springfield, Illinois


We have audited the accompanying consolidated balance sheets of UTG, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of UTG, Inc. and subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their consolidated cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We have also audited Schedule I as of December 31, 2009, and the Schedules II, IV and V as of December 31, 2009 and 2008, of UTG, Inc. and subsidiaries and Schedules II, IV and V for the years then ended.  In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.


/s/ Brown Smith Wallace, L.L.C.

St. Louis, Missouri
March 30, 2010





SIGNATURES

Pursuant to the requirements of Section 13 or 15(D) of the Securities Exchange Act of 1934, UTG, Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

UTG, Inc.


By: __/s/ Jesse T. Correll_________
Jesse T. Correll,
Chairman and Chief Executive Officer and Director


By: __/s/ Theodore C. Miller________
Theodore C. Miller
Senior Vice President, Chief Financial Officer and Secretary
(principal financial and accounting officer)

Date: February 23, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


By:  /s/ John S. Albin
 
By:  /s/ Daryl J. Heald
John S. Albin
Director
 
Daryl J. Heald
Director
     
By:  /s/ Randall L. Attkisson
 
By:  /s/ Howard L. Dayton
Randall L. Attkisson
Director
 
Howard L. Dayton
Director
     
By:  /s/ Joseph A. Brinck
 
By:  /s/ Peter L. Ochs
Joseph A. Brinck
Director
 
Peter L. Ochs
Director
     
By:  /s/ Jesse T. Correll
 
By:  /s/ William W. Perry
Jesse T. Correll
Chairman of the Board, Chief Executive Officer and Director
 
William Perry
Director
     
By:  /s/ Ward F. Correll
 
By:  /s/ James R. Rousey
Ward F. Correll
Director
 
James R. Rousey
President and Director
     
By:  /s/ Thomas F. Darden
 
By:  /s/ Theodore C. Miller
Thomas F. Darden
Director
 
Theodore C. Miller
Corporate Secretary and Chief Financial Officer