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 September 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

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):

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 October 29, 2014, was 3,704,890.

 

 

UTG, Inc.

(The "Company")

TABLE OF CONTENTS

 

Part 1.   Financial Information.

Item 1.  Financial Statements.

 

UTG, Inc.

Condensed Consolidated Balance Sheets

* Balance sheet audited at December 31, 2013.

See accompanying notes.

 

 

UTG, Inc.

 

Condensed Consolidated Statements of Operations (Unaudited)

 

See accompanying notes.

UTG, Inc.

 

See accompanying notes.

 

UTG, Inc.

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

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 consolidated financial statements, and the unaudited interim Condensed Consolidated Financial Statements include the accounts of UTG, Inc. (the "Parent" or "UTG") 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 nine month period ended September 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 UTG's largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll.  Mr. Correll holds a majority ownership of First Southern Funding, LLC ("FSF"), a Kentucky corporation, and First Southern Bancorp, Inc. ("FSBI"), a financial services holding company.  FSBI operates through its  100 % owned subsidiary bank, First Southern National Bank ("FSNB").  Banking activities are conducted through multiple locations within south-central and western Kentucky.  Mr. Correll is Chief Executive Officer and Chairman of the Board of Directors of UTG and is currently UTG's largest shareholder through his ownership control of FSF, FSBI and affiliates.  At  September 30, 2014, Mr. Correll owns or controls directly and indirectly approximately  56.57 % 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 it is 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:

 

The amortized cost and estimated market value of debt securities at September 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.

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

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

Substantially all of the unrealized losses on fixed maturities available for sale and equity securities at September 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 September 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:

The other-than-temporary impairments recognized during 2013 were due to Management's assessment of the value of the investments. The investments were 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  September 30, 2014 was $41,000 and $(107,202), 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:

Mortgage Loans

As of September 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 $26,234,213 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.

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 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.

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.

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.

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.

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 condensed consolidated 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 condensed consolidated 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 September 30, 2014 and December 31, 2013, the Company had the following outstanding debt:

The HPG Acquisitions, LLC ("HPG") 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  4.00 %. 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 Company made a principal payment of $1,800,000 on the outstanding line of credit during October of 2014. The Company is currently negotiating the renewal of this line of credit and anticipates the renewal occurring on or before the maturity date of November 20, 2014.

The UTG Avalon, LLC line of credit issued on March 28, 2013 currently carries interest at a rate of  4.00 % 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:

 

Note 6 – Shareholders' Equity

Stock Repurchase Programs

Earnings Per Share Calculations

Earnings per share are based on the weighted average number of common shares outstanding during each period.  At September 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 condensed consolidated 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 September 30, 2014 related to certain investments:

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 October of 2014, Llano called $233,000 of the unfunded commitment.

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. On October 30, 2014, the Company funded the remaining unfunded portion of this commitment.

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. During October of 2014, MM-Appalachia IV, LP called $396,000 of the unfunded commitment.

During 2014, the Company committed to invest in UGLIC, LLC, which purchases real estate tax receivables.  UGLIC, LLC makes capital calls as funds are needed for additional purchases.

 

 

Note 8 – Other Cash Flow Disclosures

 

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

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.

 

Note 10 – Subsequent Events

On November 10, 2014, the Company closed on the sale of its 74% indirect owned subsidiary, HPG Acquisitions, LLC ("HPG").  The Company projects a gain, net of taxes, of approximately $5,100,000, or $1.36 per share.  These results will be reflected in the Company's fourth quarter 2014 financial statements.

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. Management has based the forward-looking statements on current expectations and projections about future events. The 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 Management expects or anticipates 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 words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "probably," or similar expressions are used, Management is 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 Management believes 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 Management 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 Management undertakes 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 condensed consolidated 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 nine months ended September 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 net income attributable to common shareholders' of $1,594,000 for the nine month period ended September 30, 2014 and net income attributable to common shareholders' of $3,107,000 for the three month period ended September 30, 2014.  For the nine month period ended September 30, 2013, the Company reported  net income attributable to common shareholders' of $1,531,000 and for the three month period ended September 30, 2013, the Company report net income attributable to common shareholders' of $1,566,000.

Revenues

The Company's total revenues increased by 3% when comparing the three and nine month periods ended September 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 9% or $619,000 when comparing the first nine months of 2014 to the same period in 2013.  Premium and policy fee revenues, net of reinsurance, decreased by 10% when comparing the third quarter of 2014 and 2013.  The Company writes minimal new business.  Premium and policy fee revenues, net of reinsurance, represented 26% and 29% of the Company's revenues as of September 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 51% and 64% of the Company's total revenues for the nine month period ended September 30, 2014 and 2013, respectively.  The Company reported net investment income of $13,166,000 for the nine month period ended September 30, 2014, a decrease of 18% compared to the same period in 2013.  For the three month period ended September 30, 2014, net investment income decreased 33% or $2,309,000, 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 portion, approximately 70%, of the gross investment income for the three and nine month periods ended September 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 nine month period ended September 30, 2014.

For the nine month period ended September 30, 2014, income from the discounted mortgage loan portfolio decreased 55%, compared to the same period in 2013.  During the third quarter of 2014, income from the discounted mortgage loan portfolio was 69% lower, compared to the same period in 2013. The discounted mortgage loan investment balance decreased 8% from December 31, 2013 to September 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.

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 adjusted for any principal receipts received.  Management works with the borrower to reach a settlement on the loan or they foreclose on the underlying collateral which is primarily commercial real estate.  For cash payments received during the work out process, the Company records these payments to interest income on a cash basis.  For loan settlements reached, the Company records the amount in excess of the carrying amount of the loan as a discount accretion to investment income at the closing date. 

For the nine month period ended September 30, 2014, income from the equity securities investment portfolio increased 14%, compared to the same period in 2013.  During the third quarter of 2014, income from the equity securities investment portfolio was comparable to 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 $4,482,000 and $289,000 for the nine month periods ended September 30, 2014 and 2013, respectively.  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. During the third quarter of 2014, the Company recognized a gain of $3,100,000 from the sale of real estate held by the Company.  The 2014 gains were offset by a third quarter loss of $1,171,000 on a note receivable that was deemed uncollectible as a result of the borrower going out of business.

During 2013, the Company's net gains of $1,326,000 were offset by an other-than-temporary impairment of $1,010,000 that was recognized during the third quarter of 2013.  The other-than-temporary impairment was recognized on an equity security and was based upon Management's assessment of the value of the security.  The investment was written down to better reflect the current expected market value of the security. During 2014, the Company removed this security from its portfolio as a result of the issuer going out of business.  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 third party administration services ("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 nine month periods ended September 30, 2014 and 2013, the Company reported revenues from TPA services of $1,551,000 and $1,568,000, respectively.  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 TPA contract when the contract was due for renewal in the fourth quarter of 2014.  This contract represented approximately 66% of the Company's total TPA revenues.  The contract with this TPA ended September 30, 2014.

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 $24,600,000 for the nine month period ended September 30, 2014, an increase of 9% from the same period in 2013.  For the three month period ended September 30, 2014, total benefits and other expenses decreased 4%, compared to the same quarter in 2013.  Benefits, claims and settlement expenses represented 51% and 62% of the Company's total expenses for the three and nine month periods ended September 30, 2014, respectively.  The other major expense category of the Company is operating expenses, which represented 33% and 31% of the Company's total expenses for the three and nine month periods ended September 30, 2014, respectively.

Life benefits, claims and settlement expenses, net of reinsurance benefits and claims, increased approximately 1% in the nine month period ended September 30, 2014, compared to the same period in 2013.  For the three month period ended September 30, 2014, life benefits, claims and settlement expenses, net of reinsurance benefits and claims, decreased 20%, 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 were 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 nine month period ended September 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 21% in the nine month period ended September 30, 2014 in comparison to the same period in 2013.  Third quarter 2014 and 2013 operating expenses were comparable. The increase in operating expenses for the nine month period ended September 30, 2014 are related to aircraft repair costs incurred during the second quarter of 2014, information technology expenses related to the implementation of a new administrative system incurred throughout the year and severance expense incurred as a result of a staff reduction that occurred during the third quarter of 2014.  The staff reduction was the result of the third party administrator contract that ended on September 30, 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 82% of total assets at September 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 September 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 a net unrealized gain of $5,443,000 for the nine month period ended September 30, 2014 and a net unrealized loss of $(603,000) for the third quarter of 2014.  Changes in the market value of available for sale securities resulted in a net unrealized loss of $(4,980,000) for the nine month period ended September 30, 2013 and a net unrealized gain of $98,000 for the three month period ended September 30, 2013.

The Company's September 30, 2014 discounted mortgage loan asset balance decreased by 8% 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 September 30, 2014 investment real estate balance decreased by 11% 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 parcels during the second and third quarters of 2014. The sale of the real estate produced gains, which were discussed in the Revenues section above.

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 7% as of September 30, 2014 when 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 $5,114,000 from December 31, 2013 to September 30, 2014.  The increase in other comprehensive income is related to the unrealized gains on the company's available for sale securities.

At September 30, 2014 and December 31, 2013, the Company had $19,198,000 and $19,100,000 of debt outstanding.  During the second quarter of 2014, UTG borrowed an additional $1,600,000 on this line of credit to purchase an interest in an aircraft.  UTG made a principal payment of $1,800,000 on this outstanding line of credit during the fourth quarter of 2014.

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.  This debt was retired in full as a result of the sale of the properties securing this loan during the fourth quarter of 2014.

UTG Avalon, LLC, a wholly owned subsidiary of UG, has an outstanding line of credit in the amount of $5,000,000.  The principal balance of the note was reduced to $4,400,000 during the third quarter of 2014 as the result of the company making a principal payment of $600,000.

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 5% as of September 30, 2014 and December 31, 2013, respectively.  Fixed maturities as a percentage of total assets were approximately 43% and 42% as of September 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 $5,000,000 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 $15,000,000.  At September 30, 2014, the Company had $7,198,000 of outstanding borrowings attributable to the lines of credit.  During the fourth quarter of 2014, the Company made a principal payment of $1,800,000 on the outstanding line of credit.

Future policy benefits are primarily long-term in nature and therefore, the Company's investments are predominantly in long-term fixed maturity investments such as bonds and mortgage loans which provide sufficient return to cover these obligations.

Many of the Company's products contain surrender charges and other features which reward persistency and penalize the early withdrawal of funds.  With respect to such products, surrender charges are generally sufficient to cover the Company's unamortized deferred policy acquisition costs with respect to the policy being surrendered.

Net cash used in operating activities was approximately $4,217,000 and $5,955,000 for the nine month period ended September 30, 2014 and 2013, respectively.  The variance in the net cash used in operating activities appears reasonable given the current operating activities of the Company.

Net cash provided by investing activities was approximately $12,021,000 and $6,578,000 for the nine month period ended September 30, 2014 and 2013, respectively.  The cash provided by 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 $5,177,000 and $1,692,000 for the nine month period ended September 30, 2014 and 2013, respectively.  During the first quarter of 2014, the Company used cash of approximately $3,000,000 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 and third quarters of 2014, the Company repaid $1,500,000 on the outstanding lines of credit. During the third quarter, the Company borrowed $1,600,000 on the UTG 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 September 30, 2014, substantially all of the consolidated shareholders' equity represented 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 nine month period ended September 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. During the fourth quarter of 2014, UG paid UTG a dividend of $2,800,000. UTG used the dividends received during 2013 and 2014 to pay on its outstanding line of credit balance and purchase outstanding shares of UTG stock.

Management believes the overall sources of liquidity available will be sufficient to satisfy the Company's financial 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 Management, including the principal executive officer and principal financial officer, Management conducted an evaluation of the disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, the 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

*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.

(Registrant)

 

EXHIBIT INDEX

* Filed herewith

EXHIBIT INDEX

* Filed herewith