2. INVESTMENTS
As of June 30, 2007 and December 31, 2006, fixed maturities and fixed maturities held for sale represented 61% and 69%, respectively, of total invested assets. As prescribed by the various state insurance department statutes and regulations, the insurance companies’ investment portfolio is required to be invested in investment grade securities to provide ample protection for policyholders. In light of these statutes and regulations, and the Company’s business and investment strategy, the Company generally seeks to invest in United States government and government agency securities and other high quality low risk investments. As of June 30, 2007, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets or shareholders’ equity. The investments held for sale are carried at market, with changes in market value directly charged to shareholders’ equity. To provide additional flexibility and liquidity, the Company has categorized almost all fixed maturity investments as available for sale.
3. NOTES PAYABLE
At June 30, 2007 and December 31, 2006, the Company had $ 21,619,430 and $ 22,990,081, respectively, of long-term debt outstanding.
On December 8, 2006, UTG borrowed funds from First Tennessee Bank National Association through execution of an $ 18,000,000 promissory note. The note is secured by the pledge of 100% of the common stock of UG. The promissory note carries a variable rate of interest based on the 3 month LIBOR rate plus 180 basis points. The initial rate was 7.15%. Interest is payable quarterly. Principal is payable annually beginning at the end of the second year in five installments of $ 3,600,000. The loan matures on December 7, 2012. The Company borrowed $ 1,069,152 and has made principal payments of $450,000 during 2007. The remaining available balance can be drawn any time over the next six months and is anticipated to be utilized in the purchase of the stock put option shares as they may be presented to UTG, Inc. for purchase. At June 30, 2007, the outstanding principal balance on this debt was $ 15,619,430.
In addition to the above promissory note, First Tennessee Bank National Association also provided UTG, Inc. with a $ 5,000,000 revolving credit note. This note is for a one-year term and may be renewed by consent of both parties. The credit note is to provide operating liquidity for UTG, Inc. and replaces a previous line of credit provided by Southwest Bank. Interest bears the same terms as the above promissory note. The collateral held on the above note also secures this credit note. UTG, Inc. 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 2007, UG had borrowings from the LOC of $ 3,800,000 and repayments of $ 3,800,000. At June 30, 2007 and December 31, 2006, the Company had no outstanding borrowings attributable to this LOC.
AC and TI each have a line of credit in place through Frost National Bank for $210,000 and $160,000, respectively. These lines have been in place since 2004. The lines are for one-year terms, interest payable quarterly at a floating interest rate which is the Lender’s prime rate. Principal is due upon maturity. The lines matured during the second quarter of 2007. Management has determined these lines are no longer needed, therefore, upon maturity in 2007, these lines were not renewed. Neither of the lines have had any activity during 2007.
At December 31, 2006, Harbor Village Partners (“HVP”), a then 50% owned affiliate of the Company, had $8,000,000 of debt through various borrowings. In May 2007, the Company sold its interest in HVP to an outside third party. As a result of this sale, HVP is no longer a consolidated subsidiary of the Company.
In January 2007, UG became a 50% owner of the newly formed RLF Lexington Properties LLC (“Lexington”). The entity was formed to hold, for investment purposes, certain investment real estate acquired. As part of the purchase price of the real estate owned by Lexington, the seller provided financing through the issuance of five promissory notes totaling $6,000,000. The notes bear interest at the fixed rate of 5%. No payments are due under the terms of the notes until maturity on January 5, 2009, at which time all principal and accrued interest becomes payable.
The consolidated scheduled principal reductions on the notes payable for the next five years are as follows:
| | Year | | Amount | |
| | 2007 | $ | 0 | |
| | 2008 | | 2,450,000 | |
| | 2009 | | 9,600,000 | |
| | 2010 | | 3,600,000 | |
| | 2011 | | 3,600,000 | |
4. CAPITAL STOCK TRANSACTIONS
A. Employee and Director Stock Purchase Program
On March 26, 2002, the Board of Directors of UTG adopted, and on June 11, 2002, the shareholders of UTG approved, the UTG, Inc. Employee and Director Stock Purchase Plan. The plan’s purpose is to encourage ownership of UTG stock by eligible directors and employees of UTG and its subsidiaries by providing them with an opportunity to invest in shares of UTG common stock. The plan is administered by the Board of Directors of UTG. A total of 400,000 shares of common stock may be purchased under the plan, subject to appropriate adjustment for stock dividends, stock splits or similar recapitalizations resulting in a change in shares of UTG. The plan is not intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code.
The purchase price of shares repurchased under the stock restriction and buy-sell agreement shall be computed, on a per share basis, equal to the sum of (i) the original purchase price(s) paid to acquire such shares from the Holding Company at the time they were sold pursuant to the Plan and (ii) the consolidated statutory net earnings (loss) per share of such shares during the period from the end of the month next preceding the month in which such shares were acquired pursuant to the plan, to the end of the month next preceding the month in which the closing sale of such shares to UTG occurs. The consolidated statutory net earnings per Share shall be computed as the net income of the Holding Company and its subsidiaries on a consolidated basis in accordance with statutory accounting principles applicable to insurance companies, as computed by the Holding Company, except that earnings of insurance companies or block of business acquired after the original plan date, November 1, 2002, shall be adjusted to reflect the amortization of intangibles established at the time of acquisition in accordance with generally accepted accounting principles (GAAP), less any dividends paid to shareholders. The calculation of net earnings per Share shall be performed on a monthly basis using the number of common shares of the Holding Company outstanding as of the end of the reporting period. The purchase price for any Shares purchased hereunder shall be paid in cash within 60 days from the date of purchase subject to the receipt of any required regulatory approvals as provided in the Agreement.
The original issue price of shares at the time this program began was established at $12.00 per share. At June 30, 2007, UTG had 101,494 shares outstanding that were issued under this program with a value of $ 14.85 per share pursuant to the above formula.
B. Stock Repurchase Program
On June 5, 2001, the Board of Directors of UTG authorized the repurchase in the open market or in privately negotiated transactions of up to $ 1 million of UTG's common stock. On June 16, 2004, an additional $ 1 million was authorized for repurchasing shares. On April 18, 2006, an additional $1 million was authorized for repurchasing shares. Repurchased shares are available for future issuance for general corporate purposes. This program can be terminated at any time. Open market purchases are generally limited to a maximum per share price of $8.00. Through July 27, 2007, UTG has spent $ 2,575,288 in the acquisition of 375,110 shares under this program.
C. Earnings Per Share Calculations
Earnings per share are based on the weighted average number of common shares outstanding during each period, retroactively adjusted to give effect to all stock splits, in accordance with Statement of Financial Accounting Standards No. 128. At June 30, 2007, diluted earnings per share were the same as basic earnings per share since the UTG had no dilutive instruments outstanding.
5. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts which have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances.
Under the insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent or failed insurance companies. Although the Company cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred if it would threaten an insurer's financial strength. Mandatory assessments may be partially recovered through a reduction in future premium tax in some states. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements, though the Company has no control over such assessments.
In June 2002, the Company entered into a five-year contract with Fiserv for services related to its purchase of the “ID3” software system. The contract was amended during 2006 for a five year period ending 2011. Under the contract, the Company is required to pay $ 8,333 per month in software maintenance costs and a per-policy charge in offsite data center costs, with a minimum of $ 14,000 per month, for a five-year period from the date of the agreement.
In December 2006, the Company entered into an agreement with the certain individual shareholders of Acap. This agreement allows the Company (through a put option arrangement) to buy up to 264 shares of common stock of Acap at any time between the date of the agreement and December 2007. The price of the share purchase was determined by a pre-set formula, which the Company believes approximates fair value, at the time such shares might be put.
On December 31, 2006, the Company entered into a 100% coinsurance agreement whereby the insurance subsidiaries, AC and TI, ceded all of their A&H business to an unaffiliated third party. As part of the agreement, AC and TI remain contingently liable for claims incurred prior to the effective date of the agreement, for a period of one year. At the end of the one year period, an accounting of these claims shall be produced. Any difference in the actual claims to the claim reserve liability transferred shall be refunded to / paid by AC and TI.
In the normal course of business the Company is involved from time to time in various legal actions and other state and federal proceedings. There were no proceedings pending or threatened as of June 30, 2007.
6. Other Cash Flow Disclosure
On a cash basis, the Company paid $ 710,323 and $ 0 in interest expense during the first six months of 2007 and 2006, respectively. The Company paid $ 232,189 and $ 305,250 of federal income tax during the first six months of 2007 and 2006, respectively.
7. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions that at times may exceed federally insured limits. The Company maintains its primary operating cash accounts with First Southern National Bank, an affiliate of UTG, and its largest shareholder, Chairman and CEO, Jesse Correll. The Company holds approximately $ 272,229 for which there are no pledges or guarantees outside FDIC insurance limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
8. COMPREHENSIVE INCOME
| | | | | | Tax | | |
| | | | Before-Tax | | (Expense) | | Net of Tax |
| | June 30, 2007 | | Amount | | or Benefit | | Amount |
| | | | | | | | |
| | Unrealized holding losses during | | | | | | |
| | Period | $ | (177,184) | $ | 62,014 | $ | (115,170) |
| | Less: reclassification adjustment | | | | | | |
| | for losses realized in net income | | (352,751) | | 123,463 | | (229,288) |
| | Net unrealized loss | | (529,935) | | 185,477 | | (344,458) |
| | Other comprehensive income | $ | (529,935) | $ | 185,477 | $ | (344,458) |
| | | | | | | | |
9. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (“FASB”) issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115. The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company will account for all qualifying financial instruments in accordance with the requirements of Statement No. 159.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's consolidated financial condition, changes in financial position and results of operations for the three months and six months ended June 30, 2007, as compared to the same period of 2006, of UTG and its subsidiaries. This discussion and analysis supplements Management’s Discussion and Analysis in Form 10-K for the year ended December 31, 2006, and should be read in conjunction with the interim financial statements and notes that appear elsewhere in this report. The Company reports financial results on a consolidated basis. The consolidated financial statements include the accounts of UTG and its subsidiaries at June 30, 2007.
Cautionary Statement Regarding Forward-Looking Statements
Any forward-looking statement contained herein or in any other oral or written statement by the Company or any of its officers, directors or employees is qualified by the fact that actual results of the Company may differ materially from any such statement due to the following important factors, among other risks and uncertainties inherent in the Company's business:
1. Prevailing interest rate levels, which may affect the ability of the Company to sell its products, the market value of the Company's investments and the lapse ratio of the Company's policies, notwithstanding product design features intended to enhance persistency of the Company's products.
2. Changes in the federal income tax laws and regulations which may affect the relative tax advantages of the Company's products.
3. Changes in the regulation of financial services, including bank sales and underwriting of insurance products, which may affect the competitive environment for the Company's products.
4. Other factors affecting the performance of the Company, including, but not limited to, market conduct claims, insurance industry insolvencies, insurance regulatory initiatives and developments, stock market performance, an unfavorable outcome in pending litigation, and investment performance.
Update on Critical Accounting Policies
In our Form 10-K for the year ended December 31, 2006, we identified the accounting policies that are critical to the understanding of our results of operations and our financial position. They relate to deferred acquisition costs (DAC), cost of insurance acquired, assumptions and judgments utilized in determining if declines in fair values of investments are other-than-temporary, and valuation methods for investments that are not actively traded.
We believe that these policies were applied in a consistent manner during the first six months of 2007.
Acquisition of Company
In December 2006, the Company completed an acquisition transaction whereby it acquired a controlling interest in Acap Corporation, which owns two life insurance subsidiaries (AC and TI). The acquisition resulted in an increase of approximately $90,000,000 in invested assets, $160,000,000 in total assets and 200,000 additional policies to administer. The acquisition had a material impact on many of the balance sheet and income statement line items. The income statement for the period and quarter ended June 30, 2006 does not reflect the operating results of the acquired entities. The following analysis and discussion considers the overall changes when comparing 2007 results to 2006 and the impact of the new entities to the Company.
Results of Operations
(a) Revenues
The Company experienced an increase of approximately $ 2,500,000 in premiums and policy fee revenues, net of reinsurance premiums and policy fees, when comparing the first six months of 2007 to the same period in 2006 and an increase of approximately $952,000 for the second quarter comparison. The majority of this increase, $1,751,000 for the six months and $1,076,000 for the second quarter, is related to the acquisition of the two life insurance subsidiaries at the end of 2006. The remaining change relates to the timing of reinsurance premiums paid during the reporting period. The Company currently writes little new business. Unless the Company acquires a block of in-force business or significantly increases its marketing, management expects premium revenue to continue to decline at a rate consistent with prior experience.
The Company’s primary source of new business production comes from the conservation effort implemented several years ago. This effort was an attempt to improve the persistency rate of insurance company’s policies. 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, stronger efforts have been 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. Previously, the Company’s agency force was primarily responsible for conservation efforts. Management will continue to monitor these efforts and make adjustments as seen appropriate to enhance the future success of the program. The Company has introduced new products and updated other products in recent periods including the Horizon Annuity, Kid Kare (a single premium, child term policy) and a limited number of other traditional whole life policies. The company is currently working on development of a level term and decreasing term product. These products are utilized primarily in conservation efforts and sales to existing customers. Such sales are not expected to be material.
The Company has considered the feasibility of a marketing opportunity with First Southern National Bank (FSNB) an affiliate of UTG’s largest shareholder, Chairman and CEO, Mr. Jesse T. Correll. Management has considered various products including annuity type products, mortgage protection products and existing insurance products, as potential products that could be marketed to banking customers. This marketing opportunity has potential and is believed to be a viable niche. This potential is in the very early states of consideration. Management will proceed cautiously and may even determine not to proceed. The introduction of new products is not expected to produce significant premium writings. The Company is currently looking at other types of products to compliment the existing offerings.
Net investment income increased 64% when comparing the first six months of 2007 to the same period in 2006 and increased 59% in comparing second quarter results. Excluding the acquired companies, net investment income increased 19% on the year to date comparison and increased 23% in the second quarter comparison. In recent periods, the marketplace has seen an increase in yields on fixed maturity investments. This has resulted in an increase in investment earnings on the fixed maturity portfolio as current holdings mature and are re-invested. Additionally, since 2004, the Company has begun lengthening the bond portfolio. Generally, longer term investments carry a higher yield than shorter term investments in the marketplace. The Company continues to leverage its affiliation with FSNB through the investment in mortgage loans. Mortgage loans provide a more attractive investment yield than generally found in the bond market. The Company is able to acquire these loans utilizing FSNB personnel and expertise. A significant portion of the mortgage loan portfolio contains floating interest rates that has further enhanced earnings in recent periods as interest rates have crept higher.
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%. The Company has lowered all rate-adjustable products to their guaranteed minimums. The guaranteed minimum crediting rates on these products range from 3% to 5.5%. If interest rates were to decline, the Company won’t be able to lower rates, and both net investment income and net income will be impacted negatively.
The Company realized investment gains of $ 1,630,512 in the first six months of 2007 compared to net realized investment gains of $ 3,042,558 for the same period in 2006. The net realized gains in 2007 are primarily the result of two sales. In May 2007, the Company sold its 50% interest in Harbor Village Partners LLC, realizing a loss of approximately $643,000. Management determined the project was not performing as desired and that it was in the Company’s best long-term interest to divest of its equity investment. As part of the sale, UG is entitled to receive a 10% profit share of future earnings of the development project up to $1,400,000. This future potential was not considered in the current calculation of loss on the sale. Should any future profits be received by the Company from this project, they will be recorded as income in the period received. In June 2007, the Company completed the sale of a real estate holding identified as Drs. Hospital. The Company reported a gain on the sale of approximately $2,600,000. The net realized gains in 2006 are primarily comprised of net realized gains from the disposal of certain equity securities during the first quarter of 2006.
Other income has remained consistent over the periods presented. Other income primarily represents revenues received relating to the performance of administrative work as a third party administrator (“TPA”) for unaffiliated life insurance companies. The Company receives monthly fees based on policy in force counts and certain other activity indicators such as number of policies issued. The Company has not had any substantial change in its TPA client base or activity related fees of existing clients during the periods presented in the financial statements. Management remains committed to the pursuit of additional TPA clients and believes this area continues to show potential for growth.
(b) Expenses
Life benefits, claims and settlement expenses net of reinsurance benefits and claims, increased 22% in the first six months of 2007 compared to the same period in 2006 and increased 5% during the second quarter comparison. Excluding the results of the acquired companies, this line item increased 2% for the six month period and decreased 12% for the second quarter when comparing 2007 results to 2006 results. This variance is primarily the result of changes in mortality experience. Mortality was $444,000 more in the six-month period of 2007 compared to 2006, but $605,000 less in the second quarter 2007 compared to 2006. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by management. Overall, reserves continue to increase on in-force policies as the age of the insured increases.
Amortization of cost of insurance acquired has increased substantially during the six months and second quarter only when comparing 2007 to 2006. This is the result of the acquisition of the insurance subsidiaries in December 2006. The value placed on the in-force business of the acquired companies is amortized consistent with the expected future profits of the policies over their projected lives. The Company reviews the recoverability of the asset based on current trends and known events compared to the assumptions used in the establishment of the original asset. No impairments were recorded in any of the periods presented.
Operating expenses increased 34% the first six months of 2007 compared to the same period in 2006 and increased 48% when comparing the second quarter results of 2007 and 2006. The increase in operating expenses is primarily related to the increase in activity related to the new companies acquired at the end of 2006. These costs include such items as new staff, postage and supplies. The increase in expenses is consistent with Management’s expectations relating to the acquisition. The Company continually monitors expenditures looking for savings opportunities. Management places significant emphasis on expense monitoring and cost containment. Maintaining administrative efficiencies directly impacts net income.
The Company has reported interest expense during the periods presented for 2007 while showing none for the same periods in 2006. Through June 30, 2006, the Company had no outstanding debt. In December 2006, the Company borrowed funds as part of the proceeds relating to the acquisition of the new insurance subsidiaries. Management intends to aggressively work to retire its outstanding debt. In July 2007, the Company made a $3,000,000 principal reduction to this debt. See note 3 to the financial statements for a more complete description of the Company’s outstanding debt.
(c) Net income
The Company had a net gain of $ 838,221 in the first six months of 2007 compared to a net gain of $ 881,196 for the same period in 2006. Realized gains in both periods significantly enhanced the net income of the Company. Operating results of the acquired companies have also contributed to improved current period earnings compared to the prior year.
Financial Condition
Total shareholders’ equity increased approximately $ 726,000 as of June 30, 2007 compared to December 31, 2006. The change in equity for the current period is comprised primarily of net income of $838,000, partially offset by an unrealized loss in value of $(344,000) on investments held. In addition, the Company received $328,000 from the issuance of additional shares of common stock under the Employee and Director Stock Purchase Plan, and repurchased $96,000 of its common stock in the open market.
Investments represent approximately 73% and 72% of total assets at June 30, 2007 and December 31, 2006, respectively. Accordingly, investments are the largest asset group of the Company. The Company's insurance subsidiaries are regulated by insurance statutes and regulations as to the type of investments that they are permitted to make and the amount of funds that may be used for any one type of investment. In light of these statutes and regulations, the majority of the Company’s investment portfolio is invested in high quality, low risk investments.
As of June 30, 2007, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets or shareholders' equity. 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. Most all of the Company’s fixed maturity holdings are classified as available for sale and carried at current market value.
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 the servicing of outstanding debt. Cash and cash equivalents as a percentage of total assets were approximately 2% as of June 30, 2007, and December 31, 2006, respectively. Fixed maturities as a percentage of total assets were approximately 45% and 50% as of June 30, 2007 and December 31, 2006, respectively.
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. The Company has the ability and intent to hold these investments to maturity; consequently, the Company's investment in fixed maturities held to maturity is reported in the financial statements at their amortized cost.
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 $(118,610) and $(838,852) for the six months ending June 30, 2007 and 2006, respectively.
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.
Net cash used in investing activities was $(6,426,801) and $(2,250,523) for the six-month periods ending June 30, 2007 and 2006, respectively. The most significant aspect of cash used in investing activities is the fixed maturity transactions. The Company had fixed maturities in the amount of $43,759,591 and $5,673,288 that sold and matured in the first six months of 2007 and 2006, respectively. This is in addition to the $1,465,713 and $2,802,824 of the held to maturity securities that matured in the first six months of 2007 and 2006, respectively. In addition, the Company purchased $26,092,765 and $12,723,471 of fixed maturities in 2007 and 2006, respectively. Also during 2007, the Company acquired $42,344,110 in real estate investments. Most of these real estate investments were acquired through the establishment of new LLC entities with the Company holding a 50% interest.
Net cash provided by financing activities was $8,645,297 and $756,261 for the six month periods ending June 30, 2007 and 2006, respectively. A significant portion of the activity during 2007 relates to the real estate LLC entities and the minority shareholder cash contributions.
At June 30, the Company had $ 21,619,430 of long-term debt outstanding. The acquisition of Acap Corporation in late 2006 accounts for a majority of the current outstanding debt. (See note 3 for a more detailed description of the Company’s current outstanding debt). At June 30, 2007, the Company had no short-term debt outstanding.
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, are primarily provided by its subsidiaries. On a parent only basis, UTG's cash flow is dependent on management fees received from its subsidiaries and earnings received on cash balances. At June 30, 2007, 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 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 2006 or the first six months of 2007.
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, 2006, UG’s total statutory capital and surplus amounted to $ 31,209,934. At December 31, 2006, UG had a statutory gain from operations of $ 5,162,322. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation.
Management believes the overall sources of liquidity available will be sufficient to satisfy the Company’s financial obligations.
Accounting Developments
Market risk relates, broadly, to changes in the value of financial instruments that arise from adverse movements in interest rates, equity prices and foreign exchange rates. The Company is exposed principally to changes in interest rates, which affect the market prices of its fixed maturities available for sale and its variable rate debt outstanding. The Company’s exposure to equity prices and foreign currency exchange rates is immaterial. The information presented below is in U.S. dollars, the Company���s reporting currency.
Interest rate risk
The Company’s exposure to interest rate changes results from a significant holding of fixed maturity investments and mortgage loans on real estate, all of which comprised approximately 72% of the investment portfolio as of June 30, 2007. These investments are mainly exposed to changes in treasury rates. The fixed maturities investments include U.S. government bonds, securities issued by government agencies, mortgage-backed bonds and corporate bonds. Approximately 65% of the fixed maturities owned at June 30, 2007 are instruments of the United States government or are backed by U.S. government agencies or private corporations carrying the implied full faith and credit backing of the U.S. government.
To manage interest rate risk, the Company performs periodic projections of asset and liability cash flows to evaluate the potential sensitivity of the investments and liabilities. Management assesses interest rate sensitivity with respect to the available-for-sale fixed maturities investments using hypothetical test scenarios that assume either upward or downward 100-basis point shifts in the prevailing interest rates. The following tables set forth the potential amount of unrealized gains (losses) that could be caused by 100-basis point upward and downward shifts on the available-for-sale fixed maturities investments as of June 30, 2007:
Decreases in Interest Rates | Increases in Interest Rates |
200 Basis Points | 100 Basis Points | 100 Basis Points | 200 Basis Points | 300 Basis Points |
| $ 15,058,000 | $ 6,287,000 | $ (7,954,000) | $ (23,862,000) | $ (32,831,000) |
While the test scenario is for illustrative purposes only and does not reflect our expectations regarding future interest rates or the performance of fixed-income markets, it is a near-term change that illustrates the potential impact of such events. The Company attempts to mitigate its exposure to adverse interest rate movements through staggering the maturities of its fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. Due to the composition of the Company’s book of insurance business, management believes it is unlikely that the Company would encounter large surrender activity due to an interest rate increase that would force the disposal of fixed maturities at a loss.
There are no fixed maturities or other investment that management classifies as trading instruments. At June 30, 2007 and December 31, 2006, there were no investments in derivative instruments.
The Company had no capital lease obligations, material operating lease obligations or purchase obligations outstanding as of June 30, 2007.
The Company has $21,619,430 in debt outstanding at June 30, 2007.
Future policy benefits reflected as liabilities of the Company on its balance sheet as of June 30, 2007, represent actuarial estimates of liabilities of future policy obligations such as expected death claims on the insurance policies in force as of the financial reporting date. Due to the nature of these liabilities, maturity is event dependent and therefore, these liabilities have been classified as having an indeterminate maturity.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this quarterly report, an evaluation was performed under the supervision and with the participation of the Company's management, including the President and Chief Executive Officer (the "CEO") and the Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective in alerting them on a timely basis to material information relating to the Company required to be included in the Company’s periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation.
NONE
NONE
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
NONE
NONE
At the Annual Meeting of Shareholders held on June 20, 2007, the following matters were submitted to the shareholders of UTG and voted on as indicated:
1. To elect ten directors to serve for a term of one year and until their successors are elected and qualified:
DIRECTOR | FOR | WITHHELD | AGAINST |
| John S. Albin | 2,923,064 | 647 | 9,466 |
| Randall L. Attkisson | 2,923,294 | 647 | 9,236 |
| Joseph A. Brinck II | 2,923,336 | 647 | 9,194 |
| Jesse T. Correll | 2,923,114 | 647 | 9,416 |
| Ward F. Correll | 2,922,514 | 647 | 10,016 |
| Thomas F. Darden II | 2,922,839 | 647 | 9,691 |
| Howard L. Dayton Jr | 2,923,336 | 647 | 9,194 |
| Peter L Ochs | 2,923,336 | 647 | 9,194 |
| William W. Perry | 2,923,586 | 647 | 8,944 |
| James P. Rousey | 2,923,264 | 647 | 9,266 |
NONE
Exhibit Number Description
31.1 Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 302
31.2 Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required
pursuant to Section 302
32.1 Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to 18 U.S.C.
Section 1350
32.2 Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required
pursuant to 18 U.S.C. Section 1350
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UTG, INC.
(Registrant)
Date: August 8, 2007 By /s/ James P. Rousey
James P. Rousey
President and Director
Date: August 8, 2007 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
EXHIBIT INDEX
Exhibit Number Description
31.1 Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 302
31.2 Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required
pursuant to Section 302
32.1 Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to 18 U.S.C. Section 1350
32.2 Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to 18 U.S.C. Section 1350
