10-Q 1 utg13q2.htm UTG13Q1(MARKED)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)

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

For the quarterly period ended June 30, 2013

OR

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

For the transition period from _____________ to ____________

Commission File No. 0-16867

 
UTG, INC.
 
 
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
 
Delaware
 
20-2907892
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
 
 
 
 
5250 SOUTH SIXTH STREET
 
 
P.O. BOX 5147
 
 
SPRINGFIELD, IL  62705
 
 
(Address of principal executive offices) (Zip Code)
 
 
 
 

Registrant's telephone number, including area code: (217) 241-6300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company.  See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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

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

The number of shares outstanding of the registrant's common stock as of July 23, 2013, was 3,789,390.


UTG, Inc.
(The "Company")

TABLE OF CONTENTS

PART I.   Financial Information
3
 
Item 1.  Financial Statements
3
 
Condensed Consolidated Balance Sheets
3
 
Condensed Consolidated Statements of Operations
4
 
Condensed Consolidated Statements of Comprehensive Income
5
 
Condensed Consolidated Statements of Cash Flows
6
 
Notes to Condensed Consolidated Financial Statements
7
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
18
 
Item 4.  Controls and Procedures
23
 
 
 
 
PART II.  Other Information
23
 
Item 1.  Legal Proceedings
23
 
Item 1A. Risk Factors
23
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
23
 
Item 3.  Defaults Upon Senior Securities
23
 
Item 4.  Mine Safety Disclosures
23
 
Item 5.  Other Information
23
 
Item 6.  Exhibits
23
 
Signatures
 
24
 
Exhibit Index
 
25



Part 1.   Financial Information.
Item 1.  Financial Statements.

Condensed Consolidated Balance Sheets

 
  
   
 
 
  
   
 
 
  
June 30,
    
December 31,
  
 
  
2013
      
2012*
 
Investments:
  
         
Investments available for sale:
  
         
Fixed maturities, at fair value (amortized cost $168,770,852 and $173,526,717)
  
$
174,183,839
    
$
187,327,285
  
Equity securities, at fair value (cost $38,010,235 and $29,497,001)
    
38,891,173
      
30,504,914
  
Trading securities, at fair value (cost $5,962,028 and $14,714,333)
    
5,786,943
      
14,018,460
  
Mortgage loans on real estate at amortized cost
    
10,103,247
      
17,671,554
  
Discounted mortgage loans on real estate at cost
    
25,043,446
      
26,336,953
  
Investment real estate
    
77,974,348
      
68,165,013
  
Policy loans
    
12,059,168
      
12,591,572
  
Short-term investments
    
0
      
6,268,320
  
Total investments
    
344,042,164
      
362,884,071
  
 
                
Cash and cash equivalents
    
22,282,466
      
23,321,246
  
Accrued investment income
    
2,306,156
      
2,444,790
  
Reinsurance receivables:
                
Future policy benefits
    
28,782,686
      
29,318,018
  
Policy claims and other benefits
    
3,955,649
      
4,492,430
  
Cost of insurance acquired
    
11,168,589
      
11,700,765
  
Deferred policy acquisition costs
    
398,002
      
426,218
  
Property and equipment, net of accumulated depreciation
    
1,261,046
      
1,344,851
  
Income tax receivable
    
1,448,723
      
20,035
  
Other assets
    
6,310,920
      
5,381,969
  
Total assets
  
$
421,956,401
    
$
441,334,393
  
 
                
 
                
 
                
Liabilities:
                
Policy liabilities and accruals:
                
Future policyholder benefits
  
$
288,982,763
    
$
293,800,162
  
Policy claims and benefits payable
    
4,692,415
      
3,371,767
  
Other policyholder funds
    
420,884
      
477,948
  
Dividend and endowment accumulations
    
14,131,312
      
14,072,513
  
Income tax payable
    
7,782
      
2,042,786
  
Deferred income taxes
    
9,325,480
      
12,301,577
  
Notes payable
    
18,655,035
      
18,857,954
  
Trading securities, at fair value (proceeds $940,602 and $8,094,787)
    
869,761
      
7,552,704
  
Other liabilities
    
10,564,189
      
9,202,354
  
Total liabilities
    
347,649,621
      
361,679,765
  
 
                
Shareholders' equity:
                
Common stock - no par value, stated value $.001 per share.  Authorized 7,000,000 shares - 3,791,262 and 3,798,871 shares outstanding
    
3,791
      
3,799
  
Additional paid-in capital
    
44,234,126
      
44,337,743
  
Retained earnings
    
21,882,114
      
21,917,318
  
Accumulated other comprehensive income
    
4,112,664
      
9,664,466
  
Total UTG shareholders' equity
    
70,232,695
      
75,923,326
  
 
 
Noncontrolling interests
    
4,074,085
      
3,731,302
  
Total shareholders' equity
    
74,306,780
      
79,654,628
  
Total liabilities and shareholders' equity
  
$
421,956,401
    
$
441,334,393
  

* Balance sheet audited at December 31, 2012.
See accompanying notes.
Condensed Consolidated Statements of Income
 
  
Three Months Ended
    
Six Months Ended
  
 
  
June 30,
    
June 30,
    
June 30,
    
June 30,
  
 
  
2013
    
2012
    
2013
    
2012
  
Revenue:
  
   
   
   
 
Premiums and policy fees
  
$
3,219,271
    
$
3,480,117
    
$
6,432,017
    
$
6,996,561
  
Ceded reinsurance premiums and policy fees
    
(769,335
)
    
(863,967
)
    
(1,545,037
)
    
(1,772,065
)
Net investment income
    
4,762,126
      
2,428,499
      
9,143,518
      
9,379,255
  
Other income
    
510,660
      
531,485
      
1,032,019
      
1,079,179
  
Revenues before realized gains
    
7,722,722
      
5,576,134
      
15,062,517
      
15,682,930
  
Realized investment gains, net:
                                
Other-than-temporary impairments
    
0
      
0
      
(26,926
)
    
0
  
Other realized investment gains, net
    
576,841
      
3,846,725
      
648,490
      
10,982,695
  
Total realized investment gains, net
    
576,841
      
3,846,725
      
621,564
      
10,982,695
  
Total revenue
    
8,299,563
      
9,422,859
      
15,684,081
      
26,665,625
  
 
                                
Benefits and other expenses:
                                
Benefits, claims and settlement expenses:
                                
Life
    
5,108,457
      
5,526,152
      
10,964,778
      
11,396,960
  
Ceded Reinsurance benefits and claims
    
(599,574
)
    
(1,192,533
)
    
(1,197,353
)
    
(2,028,408
)
Annuity
    
290,892
      
218,229
      
558,431
      
478,919
  
Dividends to policyholders
    
149,077
      
125,646
      
296,299
      
266,270
  
Commissions and amortization of deferred policy acquisition costs
    
(26,906
)
    
(131,671
)
    
(50,458
)
    
(284,484
)
Amortization of cost of insurance acquired
    
266,088
      
286,375
      
532,176
      
572,750
  
Operating expenses
    
1,975,001
      
2,410,634
      
4,030,126
      
5,286,129
  
Interest expense
    
144,101
      
82,523
      
254,538
      
154,698
  
Total benefits and other expenses
    
7,307,136
      
7,325,355
      
15,388,537
      
15,842,834
  
 
                                
 
                                
Income before income taxes
    
992,427
      
2,097,504
      
295,544
      
10,822,791
  
Income tax benefit (expense)
    
79,343
      
(503,685
)
    
12,035
      
(3,729,241
)
 
                                
Net income
    
1,071,770
      
1,593,819
      
307,579
      
7,093,550
  
 
                                
Net income attributable to noncontrolling interests
    
(196,702
)
    
(153,164
)
    
(342,783
)
    
(426,378
)
 
                                
Net income (loss) attributable to common shareholders'
  
$
875,068
    
$
1,440,655
    
$
(35,204
)
  
$
6,667,172
  
 
                                
Amounts attributable to common shareholders'
                                
Basic income (loss) per share
  
$
0.23
    
$
0.38
    
$
(0.01
)
  
$
1.74
  
 
                                
Diluted income (loss) per share
  
$
0.23
    
$
0.38
    
$
(0.01
)
  
$
1.74
  
 
                                
Basic weighted average shares outstanding
    
3,792,203
      
3,814,403
      
3,794,317
      
3,825,802
  
 
                                
Diluted weighted average shares outstanding
    
3,792,203
      
3,814,403
      
3,794,317
      
3,825,802
  

See accompanying notes.

Condensed Consolidated Statements of Comprehensive Income

 
  
Three Months Ended
    
Six Months Ended
  
 
  
June 30,
    
June 30,
    
June 30,
    
June 30,
  
 
  
2013
    
2012
    
2013
    
2012
  
 
  
   
   
   
 
 
  
   
   
   
 
 
  
   
   
   
 
Net Income
  
$
1,071,770
    
$
1,593,819
    
$
307,579
    
$
7,093,550
  
 
                                
Other comprehensive income (loss), net of tax:
                                
 
                                
Unrealized holding losses arising during period
    
(5,054,177
)
    
2,438,608
      
(5,077,927
)
    
(648,458
)
Less reclassification adjustment for (gains) losses included in net income
    
(414,509
)
    
(2,494,211
)
    
(473,875
)
    
(5,810,420
)
Subtotal:  Other comprehensive loss, net of tax
    
(5,468,686
)
    
(55,603
)
    
(5,551,802
)
    
(6,458,878
)
 
                                
Comprehensive income (loss)
    
(4,396,916
)
    
1,538,216
      
(5,244,223
)
    
634,672
  
 
                                
Less comprehensive loss attributable to noncontrolling interests
    
(196,702
)
    
(153,164
)
    
(342,783
)
    
(426,378
)
 
                                
Comprehensive income (loss) attributable to UTG, Inc.
  
$
(4,593,618
)
  
$
1,385,052
    
$
(5,587,006
)
  
$
208,294
  

See accompanying notes.


Condensed Consolidated Statements of Cash Flows
 
   
 
 
  
Six Months Ended
  
 
  
June 30,
    
June 30,
  
 
  
2013
    
2012
  
 
  
   
 
Cash flows from operating activities:
  
   
 
Net income (loss) attributable to common shareholders
  
$
(35,204
)
  
$
6,667,172
  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                
Amortization (accretion) of investments
    
(1,462,254
)
    
(874,286
)
Realized investment gains, net
    
(621,564
)
    
(10,982,695
)
Unrealized trading gains (losses) included in income
    
(49,545
)
    
(167,251
)
Amortization of deferred policy acquisition costs
    
28,216
      
31,024
  
Amortization of cost of insurance acquired
    
532,176
      
572,750
  
Depreciation
    
640,571
      
638,394
  
Net income (loss) attributable to noncontrolling interest
    
342,783
      
426,378
  
Charges for mortality and administration of universal life and annuity products
    
(3,458,497
)
    
(3,541,227
)
Interest credited to account balances
    
2,662,628
      
2,551,509
  
Change in accrued investment income
    
138,634
      
(1,418,809
)
Change in reinsurance receivables
    
1,072,113
      
1,486,180
  
Change in policy liabilities and accruals
    
(2,642,960
)
    
(2,191,530
)
Change in income taxes receivable (payable)
    
(3,463,692
)
    
2,526,735
  
Change in other assets and liabilities, net
    
633,298
      
1,723
  
Net cash used in operating activities
    
(5,683,297
)
    
(4,273,933
)
 
                
Cash flows from investing activities:
                
Proceeds from investments sold and matured:
                
Fixed maturities available for sale
    
21,247,954
      
79,045,533
  
Equity securities available for sale
    
238,330
      
559,865
  
Trading securities
    
23,753,619
      
7,148,992
  
Mortgage loans
    
9,004,089
      
2,583,581
  
Discounted mortgage loans
    
3,898,888
      
3,156,105
  
Real estate
    
4,063,257
      
8,808,213
  
Policy loans
    
2,029,941
      
1,982,303
  
Total proceeds from investments sold and matured
    
64,236,078
      
103,284,592
  
Cost of investments acquired:
                
Fixed maturities available for sale
    
(16,132,719
)
    
(120,109,964
)
Equity securities available for sale
    
(8,731,875
)
    
(9,173,511
)
Trading securities
    
(22,140,303
)
    
(6,625,128
)
Mortgage loans
    
(1,435,782
)
    
(15,813,757
)
Discounted mortgage loans
    
(1,436,582
)
    
(6,040,124
)
Real estate
    
(7,829,033
)
    
(6,142,148
)
Policy loans
    
(1,497,536
)
    
(1,499,930
)
Short term
    
(25,000
)
    
0
  
Total cost of investments acquired
    
(59,228,830
)
    
(165,404,562
)
Sale of property and equipment
    
0
      
17,440
  
Net cash provided by (used in) investing activities
    
5,007,248
      
(62,102,530
)
 
                
Cash flows from financing activities:
                
Policyholder contract deposits
    
2,884,121
      
2,990,832
  
Policyholder contract withdrawals
    
(2,940,308
)
    
(3,364,427
)
Proceeds from notes payable/line of credit
    
0
      
1,281,000
  
Payments of principal on notes payable/line of credit
    
(202,919
)
    
(1,221,425
)
Purchase of treasury stock
    
(103,625
)
    
(571,380
)
Distributions to minority interests of consolidated subsidiaries
    
0
      
(14,000
)
Net cash used in financing activities
    
(362,731
)
    
(899,400
)
 
                
Net decrease in cash and cash equivalents
    
(1,038,780
)
    
(67,275,863
)
Cash and cash equivalents at beginning of period
    
23,321,246
      
82,925,675
  
Cash and cash equivalents at end of period
  
$
22,282,466
    
$
15,649,812
  

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, 2012, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements include the accounts of UTG, Inc. (the "Parent") and its subsidiaries (collectively with the Parent, the "Company").  All significant intercompany accounts and transactions have been eliminated in consolidation.  The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 8 of regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for audited annual financial statements.  The information furnished includes all adjustments and accruals of a normal recurring nature, which in the opinion of management, are necessary for a fair presentation of the results for the interim periods.  The unaudited condensed consolidated financial statements included herein and these related notes should be read in conjunction with the Company's consolidated financial statements, and the notes thereto, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.  The Company's results of operations for the six month period ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or for any other future period.

This document at times will refer to the Registrant's largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll.  Mr. Correll holds a majority ownership of First Southern Funding LLC ("FSF"), a Kentucky corporation, and First Southern Bancorp, Inc. ("FSBI"), a financial services holding company.  FSBI operates through its 100 % owned subsidiary bank, First Southern National Bank ("FSNB").  Banking activities are conducted through multiple locations within south-central and western Kentucky.  Mr. Correll is Chief Executive Officer and Chairman of the Board of Directors of UTG and is currently UTG's largest shareholder through his ownership control of FSF, FSBI and affiliates.  At June 30, 2013, Mr. Correll owns or controls directly and indirectly approximately 56 % 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 – New Accounting Standards

Comprehensive Income - In February 2013, the Financial Accounting Standards Board ("FASB") issued an accounting standard which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. This guidance is effective for periods beginning after December 15, 2012. The adoption of this new guidance did not have a material impact on the Company's consolidated financial statements.

Intangibles-Goodwill and Other – In July 2012, FASB issued guidance on the testing of indefinite-lived intangible assets for impairment, which is intended to reduce the cost and complexity of the impairment test for indefinite-lived intangible assets by providing an entity with the option to first assess qualitatively whether it is necessary to perform the impairment test that is currently in place. An entity would not be required to quantitatively calculate the fair value of an indefinite-lived intangible asset unless the entity determines that it is more likely than not that its fair value is less than its carrying value. This guidance is effective for interim and annual impairment tests beginning after September 15, 2012, with early adoption permitted. The adoption of this new guidance did not have a material impact on the Company's consolidated financial statements.


Note 3 – Investments

Available for Sale Securities – Fixed Maturity and Equity Securities

The Company's insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments they are permitted to make, and the amount of funds that may be used for any one type of investment.

Investments in available for sale securities are summarized as follows:

June 30, 2013
  
Original or Amortized
Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Estimated
Fair
Value
  
Investments available for sale:
  
   
   
   
 
Fixed maturities
  
   
   
   
 
U.S. Government and govt. agencies and authorities
  
$
33,659,574
    
$
3,762,559
    
$
(104,398
)
  
$
37,317,735
  
States, municipalities and political subdivisions
    
140,000
      
1,674
      
0
      
141,674
  
U.S. special revenue and assessments
    
2,151,464
      
120,169
      
0
      
2,271,633
  
Collateralized mortgage obligations
    
1,580,787
      
127,752
      
0
      
1,708,539
  
Public utilities
    
399,906
      
51,013
      
0
      
450,919
  
All other corporate bonds
    
130,839,121
      
4,458,128
      
(3,003,910
)
    
132,293,339
  
 
    
168,770,852
      
8,521,295
      
(3,108,308
)
    
174,183,839
  
Equity securities
    
38,010,235
      
1,693,133
      
(812,195
)
    
38,891,173
  
Total
  
$
206,781,087
    
$
10,214,428
    
$
(3,920,503
)
  
$
213,075,012
  


December 31, 2012
  
Original or Amortized
Cost
    
Gross Unrealized Gains
    
Gross Unrealized Losses
    
Estimated
Fair
Value
  
Investments available for sale:
  
   
   
   
 
Fixed maturities
  
   
   
   
 
U.S. Government and govt. agencies and authorities
  
$
33,430,165
    
$
5,457,009
    
$
0
    
$
38,887,174
  
States, municipalities and political subdivisions
    
160,000
      
6,637
      
0
      
166,637
  
U.S. special revenue and assessments
    
2,150,070
      
153,545
      
0
      
2,303,615
  
Collateralized mortgage obligations
    
2,241,384
      
183,409
      
(8
)
    
2,424,785
  
Public utilities
    
399,900
      
63,662
      
0
      
463,562
  
All other corporate bonds
    
135,145,198
      
9,747,565
      
(1,811,251
)
    
143,081,512
  
 
    
173,526,717
      
15,611,827
      
(1,811,259
)
    
187,327,285
  
Equity securities
    
29,497,001
      
1,303,328
      
(295,415
)
    
30,504,914
  
Total
  
$
203,023,718
    
$
16,915,155
    
$
(2,106,674
)
  
$
217,832,199
  

The amortized cost and estimated market value of debt securities at June 30, 2013, by contractual maturity, is shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Fixed Maturities Available for Sale
June 30, 2013
  
Amortized
Cost
    
Estimated
Fair Value
  
 
  
   
 
Due in one year or less
  
$
947,312
    
$
966,456
  
Due after one year through five years
    
20,606,308
      
22,025,918
  
Due after five years through ten years
    
112,832,650
      
116,653,174
  
Due after ten years
    
32,628,844
      
32,651,711
  
Collateralized mortgage obligations
    
1,755,738
      
1,886,580
  
Total
  
$
168,770,852
    
$
174,183,839
  

The fair value of investments with sustained gross unrealized losses at June 30, 2013 and December 31, 2012 are as follows:

June 30, 2013
  
Less than 12 months
    
12 months or longer
    
Total
  
 
  
   
   
   
   
   
 
 
  
Fair value
    
Unrealized losses
    
Fair value
    
Unrealized losses
    
Fair value
    
Unrealized losses
  
U.S. Government and govt. agencies and authorities
  
$
4,891,795
      
(104,398
)
  
$
0
      
0
    
$
4,891,795
      
(104,398
)
All other corporate bonds
    
44,750,024
      
(1,026,652
)
    
4,130,719
      
(1,977,258
)
    
48,880,743
      
(3,003,910
)
Total fixed maturities
  
$
49,641,819
      
(1,131,050
)
  
$
4,130,719
      
(1,977,258
)
  
$
53,772,538
      
(3,108,308
)
 
                                                
Equity securities
  
$
1,243,333
      
(812,195
)
  
$
0
      
0
    
$
1,243,333
      
(812,195
)

December 31, 2012
  
Less than 12 months
    
12 months or longer
    
Total
  
 
  
   
   
   
   
   
 
 
  
Fair value
    
Unrealized losses
    
Fair value
    
Unrealized losses
    
Fair value
    
Unrealized losses
  
Collateralized mortgage obligations
  
$
4,513
      
(8
)
  
$
0
      
0
    
$
4,513
      
(8
)
All other corporate bonds
    
13,776,705
      
(245,846
)
    
385,823
      
(1,565,405
)
    
14,162,528
      
(1,811,251
)
Total fixed maturities
  
$
13,781,218
      
(245,854
)
  
$
385,823
      
(1,565,405
)
  
$
14,167,041
      
(1,811,259
)
 
                                                
Equity securities
  
$
594,081
      
(295,415
)
  
$
0
      
0
    
$
594,081
      
(295,415
)

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

 
Less than 12 months
 
12 months or longer
 
Total
As of June 30, 2013
 
 
 
 
 
Fixed maturities
32
 
4
 
36
Equity securities
6
 
0
 
6
As of December 31, 2012
 
 
 
 
 
Fixed maturities
8
 
3
 
11
Equity securities
9
 
0
 
9

Substantially all of the unrealized losses on fixed maturities available for sale at June 30, 2013 and December 31, 2012 are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase.  The unrealized losses on equity investments were primarily attributable to normal market fluctuations.  The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position.  Based upon the Company's expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company's evaluation of other relevant factors, the Company deems these securities to be temporarily impaired as of June 30, 2013 and December 31, 2012.

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

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


Based on management's review of the investment portfolio, the Company recorded the following losses for other-than-temporary impairments in the Condensed Consolidated Statements of Operations:

 
  
Three Months Ended
  
 
  
June 30,
  
 
  
2013
    
2012
  
 
  
   
 
Other than temporary impairments:
  
   
 
Real Estate
  
$
0
    
$
0
  
 
                


 
  
Six Months Ended
  
 
  
June 30,
  
 
  
2013
    
2012
  
 
  
   
 
Other than temporary impairments:
  
   
 
Real Estate
  
$
26,926
    
$
0
  
 
                

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

Trading Securities

Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in net investment income on the Condensed Consolidated Statements of Operations.  Trading securities include exchange-traded equities and exchange-traded options.  Trading securities carried as liabilities are securities sold short. A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale.  The fair value of derivatives included in trading security assets and trading security liabilities as of June 30, 2013 was $230,369 and $(869,762), respectively. The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2012 was $6,745,528 and $(6,050,344), respectively.  Earnings from trading securities are classified in cash flows from operating activities. The derivatives held by the Company are for income generation purposes only.
Trading revenue charged to net investment income from trading securities was:

 
  
Three Months Ended
  
 
  
June 30,
  
 
  
2013
    
2012
  
 
  
   
 
Net unrealized gains (losses)
  
$
346,889
    
$
(361,447
)
Net realized gains (losses)
    
129,591
      
(611,749
)
Net unrealized and realized gains (losses)
  
$
476,480
    
$
(973,196
)


 
  
Six Months Ended
  
 
  
June 30,
  
 
  
2013
    
2012
  
 
  
   
 
Net unrealized gains (losses)
  
$
49,545
    
$
167,251
  
Net realized gains (losses)
    
215,862
      
1,698,758
  
Net unrealized and realized gains (losses)
  
$
265,407
    
$
1,866,009
  

Mortgage Loans

As of June 30, 2013 and December 31, 2012, the Company's mortgage loan portfolio contained 51 and 71 mortgage loans, including discounted mortgage loans, with a carrying value of $35,146,693 and $44,008,507, 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 2012 and 2013 were the result of the loan basis already being fully paid.

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

A mortgage loan reserve is established and adjusted based on management's quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value.  The Company acquires the discounted mortgage loans at below contract value, and believes that it will fully recover its carrying value upon disposal, therefore no reserve for delinquent loans is deemed necessary.  Those loans not currently paying are being vigorously worked by management.  The current discounted commercial mortgage loan portfolio has an average price of 37.3 % of face value and management has determined that this deep discount provides a financial cushion or built in allowance for any of the loans that are not currently performing within the portfolio of loans purchased.

Note 4 – Fair Value Measurements

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

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

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

Level 3 – Valuation is based upon unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company's own assumptions about the inputs that market participants would use in pricing the asset or liability.

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

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

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

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

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

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

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

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

Securities designated as trading securities consist of bonds, exchange traded equities and exchange traded options.  These securities are primarily valued at quoted active market prices, and are therefore categorized as Level 1 in the fair value hierarchy.  The exchange traded bonds consist of corporate bonds and are classified as Level 2, consistent with the classification of the fixed maturity corporate bonds.

The following table presents the Company's assets and liabilities measured at fair value in the condensed consolidated balance sheet on a recurring basis as of June 30, 2013.


 
  
Level 1
    
Level 2
    
Level 3
    
Total
  
 
  
   
   
   
 
Assets
  
   
   
   
 
Fixed Maturities, available for sale
  
$
20,405,327
    
$
153,446,375
    
$
332,137
    
$
174,183,839
  
Equity Securities, available for sale
    
1,600,776
      
7,350,216
      
29,940,181
      
38,891,173
  
Trading Securities
    
5,786,943
      
0
      
0
      
5,786,943
  
Total
  
$
27,793,046
    
$
160,796,591
    
$
30,272,318
    
$
218,861,955
  
 
                                
Liabilities
                                
Trading Securities
  
$
869,761
    
$
0
    
$
0
    
$
869,761
  
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, 2012.

 
  
Level 1
    
Level 2
    
Level 3
    
Total
  
 
  
   
   
   
 
Assets
  
   
   
   
 
Fixed Maturities, available for sale
  
$
20,993,398
    
$
166,060,160
    
$
273,727
    
$
187,327,285
  
Equity Securities, available for sale
    
1,448,585
      
6,092,614
      
22,963,715
      
30,504,914
  
Trading Securities
    
13,903,148
      
115,312
      
0
      
14,018,460
  
Total
  
$
36,345,131
    
$
172,268,086
    
$
23,237,442
    
$
231,850,659
  
 
                                
Liabilities
                                
Trading Securities
  
$
7,552,704
    
$
0
    
$
0
    
$
7,552,704
  

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

 
  
Fixed Maturities,
Available for Sale
    
Equity Securities,
Available for Sale
    
Total
  
Balance at December 31, 2012
  
$
273,727
    
$
22,963,715
    
$
23,237,442
  
Total unrealized gain or losses:
                        
Included in other comprehensive income
    
58,410
      
(43,054
)
    
15,356
  
Purchases
    
0
      
7,019,520
      
7,019,520
  
Balance at June 30, 2013
  
$
332,137
    
$
29,940,181
    
$
30,272,318
  

The Level 3 securities include collateralized debt obligations of trust preferred securities issued by banks and insurance companies and certain equity securities with unobservable inputs.  None of the collateral is subprime or Alt-A mortgages (loans for which the typical documentation was not provided by the borrower).

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

The carrying values and estimated fair values of certain of the Company's financial instruments not recorded at fair value in the condensed consolidated balance sheets are shown below. Because the fair value for all condensed consolidated balance sheet items are not required to be disclosed, the aggregate fair value amounts presented below are not reflective of the underlying value of the Company.


 
  
June 30, 2013
    
December 31, 2012
  
 
 
Assets
  
Carrying
Amount
    
Estimated
Fair
Value
    
Carrying
Amount
    
Estimated
Fair
Value
  
Mortgage loans on real estate
  
$
10,103,247
    
$
10,173,968
    
$
17,671,554
    
$
17,803,159
  
Discounted mortgage loans
    
25,043,446
      
25,043,446
      
26,336,953
      
26,336,953
  
Investment real estate
    
77,974,348
      
77,974,348
      
68,165,013
      
68,165,013
  
Policy loans
    
12,059,168
      
12,059,168
      
12,591,572
      
12,591,572
  
Cash and cash equivalents
    
22,282,466
      
22,282,466
      
23,321,246
      
23,321,246
  
Short term investments
    
0
      
0
      
6,268,320
      
6,268,320
  
Liabilities
                                
Notes payable
    
18,655,035
      
18,655,035
      
18,857,954
      
18,857,954
  

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 been purchasing non-performing discounted mortgage loans at a deep discount through an auction process led by the federal government.  In general, the discounted loans are non-performing and there is a significant amount of uncertainty surrounding the timing and amount of cash flows to be received by the Company.  Accordingly, the Company records its investment in the discounted loans at its original purchase price, which management believes approximates fair value.  The inputs used to measure the fair value of our discounted mortgage loans are classified as Level 3 within the fair value hierarchy.

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

Policy loans are carried at the aggregate unpaid principal balances in the consolidated balance sheets which approximate fair value, and earn interest at rates ranging from 4 % to 8 %.  Individual policy liabilities in all cases equal or exceed outstanding policy loan balances.  The inputs used to measure the fair value of our policy loans are classified as Level 3 within the fair value hierarchy.

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

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

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

Note 5 – Credit Arrangements

At June 30, 2013 and December 31, 2012, the Company had the following outstanding debt:

 
  
   
Outstanding Principal Balance
  
Instrument
  
Issue Date
    
Maturity Date
    
June 30, 2013
    
December 31, 2012
  
Promissory Note:
  
   
   
   
 
HPG Acquisitions
    
2007-02-07
      
2017-11-07
    
$
0
    
$
202,919
  
HPG Acquisitions
    
2012-12-27
      
2018-03-04
      
12,000,000
      
12,000,000
  

Instrument
  
Issue Date
    
Maturity Date
    
Revolving Credit Limit
    
December 31, 2012
    
Borrowings
    
Repayments
    
June 30, 2013
  
Lines of Credit:
  
   
   
   
   
   
   
 
UTG
    
2012-11-20
      
2013-11-20
    
$
8,000,000
    
$
1,655,035
      
0
      
0
    
$
1,655,035
  
UTG Avalon
    
2011-12-28
      
2014-01-03
      
5,000,000
      
5,000,000
      
0
      
5,000,000
      
0
  
UTG Avalon
    
2013-03-28
      
2014-03-28
      
5,000,000
      
0
      
5,000,000
      
0
      
5,000,000
  
UG
    
2010-12-28
      
2013-12-06
      
15,000,000
      
0
      
0
      
0
      
0
  

The HPG Acquisitions promissory note issued on February 7, 2007 bears interest at a fixed rate of 5%. This promissory note was fully repaid during the second quarter of 2013.

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

The UTG line of credit carries interest at a fixed rate of 3.75% and is payable monthly. As collateral, UTG has pledged 100% of the common voting stock of its wholly owned subsidiary, Universal Guaranty Life Insurance Company ("UG"). The UTG line of credit was fully repaid on July 5, 2013.

The UTG Avalon line of credit issued on December 28, 2011 carried interest at a rate of 4.0% and was payable in two semi-annual payments. This line of credit was repaid during March 2013.

The UTG Avalon line of credit issued on March 28, 2013 currently carries interest at a rate of 4.0% and is payable in two semi-annual 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. 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.

UG is a member of the Federal Home Loan Bank ("FHLB").  This membership allows the Company access to additional credit up to a maximum of 50% of the total assets of UG.  To be a member of the FHLB, the Company was required to purchase shares of common stock of FHLB.  Borrowing capacity is based on 50 times each dollar of stock acquired in FHLB above the "base membership" amount.

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

Year
  
Amount
  
 
  
 
2013
  
$
1,655,035
  
2014
    
5,000,000
  
2015
    
345,460
  
2016
    
478,193
  
2017
    
499,277
  

Note 6 – Shareholders' Equity

Stock Repurchase Programs

The Board of Directors of UTG authorized the repurchase in the open market or in privately negotiated transactions of up to $6 million of UTG's common stock. Repurchased shares are available for future issuance for general corporate purposes.  This program can be terminated at any time.  Open market purchases are made based on the last available market price and are generally limited to a maximum per share price of the most recent reported per share GAAP equity book value of the Company.  During the six month period ended June 30, 2013, the Company repurchased 7,609 shares through the stock repurchase program for $103,625.  Through June 30, 2013, UTG has spent $4.7 million in the acquisition of 570,299 shares under this program.

Earnings Per Share Calculations

Earnings per share are based on the weighted average number of common shares outstanding during each period.  At June 30, 2013 and June 30, 2012, diluted earnings per share were the same as basic earnings per share since the Company had no dilutive instruments outstanding.

Note 7 – Commitments and Contingencies

The insurance industry has experienced a number of civil jury verdicts which have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters.  Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages.  In some states, juries have substantial discretion in awarding punitive damages in these circumstances.  In the normal course of business, the Company is involved from time to time in various legal actions and other state and federal proceedings.  Management is of the opinion that the ultimate disposition of the matters will not have a materially adverse effect on the Company's results of operations or financial position.

Under the insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent or failed insurance companies.  Although the Company cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred if it would threaten an insurer's financial strength.  Mandatory assessments may be partially recovered through a reduction in future premium tax in some states. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements, though the Company has no control over such assessments.

As part of the Texas Imperial Life Insurance Company sale, the Company remains contingently liable for certain costs pending the outcome of an ongoing race-based audit on Texas Imperial Life Insurance Company by the Texas Department of Insurance.  Under the agreement, the Company is responsible for 100% of the first $50,000 of costs, 90% of the next $50,000, 75% of the third $50,000 and 50% of the costs above $150,000.  Management had conservatively estimated the Company's exposure and other costs at $50,000 based on information provided to date from the examination team and has established a contingent liability of $47,727 in its financial statements.  This contingency expires December 30, 2013.

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

On November 9, 2011, ACAP shareholders approved a proposed merger with UTG whereby ACAP shareholders received 233 shares of UTG for each share previously held of ACAP.  On November 14, 2011, the merger was completed.  Certain of the ACAP shareholders dissented to the merger requesting the courts determine the value of the ACAP shares.  The legal case is currently in the discovery phase.  The Company has established a contingent liability of $2,550,822 to cover the anticipated proceeds due to the dissenting shareholders and associated legal and other costs.

The following table represents the total funding commitments and the unfunded commitment as of June 30, 2013 related to certain investments:


 
  
Total Funding
    
Unfunded
  
 
  
Commitment
    
Commitment
  
RLF III, LLC
  
$
4,000,000
    
$
398,120
  
Llano Music, LLC
    
2,000,000
      
571,000
  
Marcellus III, LLP
    
1,250,000
      
281,875
  
Dew Learning, LLC
    
1,000,000
      
265,004
  
Marcellus HBPI, LLP
    
1,800,000
      
573,300
  
PBEX, LLC
    
5,625,000
      
2,818,750
  
Sovereign's Capital, LP
    
500,000
      
250,000
  

During 2006, the Company committed to invest in RLF III, LLC ("RLF"), which makes land-based investment in undervalued assets. RLF does 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 does capital calls to its investors as funds are needed to acquire the royalty rights.

During 2011, the Company committed to invest in Marcellus III, LLP, which purchases land for leasing opportunities to those looking to harvest natural resources. Marcellus III, LLC does capital calls to its investors as funds are needed for continued land purchases.

During 2012, the Company made a commitment to investment in Dew Learning, LLC ("Dew"), which is involved in the marketing and distribution of an electronic education based classroom model. Dew does capital calls to investors as funds are needed for continued development of the program.

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, LLC does 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 does capital calls to investors as funds are needed for continued land purchases.

During 2012, the Company committed to invest in Sovereign's Capital, LP ("Sovereign's"), which invests in companies in emerging markets. Sovereign's is expected to call the remaining unfunded commitment during 2013.
Note 8 – Other Cash Flow Disclosures


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

 
  
Three Months Ended
  
 
  
June 30,
  
 
  
2013
    
2012
  
 
  
   
 
Interest expense
  
$
15,643
    
$
134,399
  
Federal income tax
    
1,415,000
      
1,320,500
  


 
  
Six Months Ended
  
 
  
June 30,
  
 
  
2013
    
2012
  
 
  
   
 
Interest expense
  
$
32,041
    
$
149,613
  
Federal income tax
    
3,465,000
      
1,343,081
  

During the first quarter of 2013, 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 million 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 second quarter of 2013, UG and one of its subsidiaries, Cumberland Woodlands, LLC, entered into noncash transactions whereby short-term investments in the amount of $6.3 million were exchanged for real estate in the amount of $6.3 million.

Note 9 – Concentrations of Credit Risk

The Company maintains cash balances in financial institutions that at times may exceed federally insured limits.  The Company maintains its primary operating cash accounts with First Southern National Bank, an affiliate of the largest shareholder of UTG, Mr. Jesse Correll, the Company's CEO and Chairman.  The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.


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

The following is Management's discussion and analysis of the financial condition and results of operations of UTG, Inc. and its subsidiaries (collectively with the Parent, the "Company").  The following discussion of the financial condition and results of operations of the Company should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in the Company's annual report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

Overview

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

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ significantly from those estimates.  The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability.  The Company's critical accounting policies and the related estimates considered most significant by Management are disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.  Management has identified the accounting policies related to cost of insurance acquired, assumptions and judgments utilized in determining if declines in fair values of investments are other-than-temporary, and valuation methods for investments that are not actively traded as those, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Condensed Consolidated Financial Statements and this Management's Discussion and Analysis.

During the six months ended June 30, 2013, there were no additions to or changes in the critical accounting policies disclosed in the 2012 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 $875,000 and $1.4 million for the second quarter of 2013 and 2012, respectively.  The Company reported a net loss attributable to common shareholders' of $(35,000) and net income attributable to common shareholders' of $6.7 million for the six month period ended June 30, 2013 and 2012, respectively.  During the first six months of 2012, the Company sold certain US Treasury debt securities, recognizing gains of approximately $8.5 million on the sales. The favorable earnings reported by the Company during the first six months of 2012 were mainly attributable to the gains recognized from the sale of the debt securities. The Company did not experience similar activity during the first six months of 2013, causing a variance in the earnings, when comparing 2012 and 2013 results.

During the second quarter of 2013 and 2012, the Company reported total revenues of $8.3 million and $9.4 million, respectively. Total revenues reported by the Company were $15.7 million during the six month period ended June 30, 2013 compared to $26.7 million during the six month period ended June 30, 2012.  The variance in total revenues, when comparing the three and six month periods ended June 30, 2013 and 2012 are also attributable to the 2012 realized investment gains.

The magnitude of realized investment gains and losses in a given year is a function of the timing of trades of investments relative to the markets themselves as well as the recognition of any impairments on investments.  One-time events, primarily reflected in realized gains, comprised a substantial portion of net income of the Company during 2012.  While Management believes there remain additional investments with such one-time earnings, when or if realized remains uncertain.

Total benefits and other expenses paid during the second quarter of 2013 and 2012 were $7.3 million.  Total benefits and other expenses paid during the six months ended June 30, 2013 and 2012 were $15.4 million and $15.8 million, respectively.

Revenues

The Company's premium and policy fee revenues, net of reinsurance, were approximately $2.4 million for the second quarter of 2013, a decrease of approximately 6% compared to the same quarter in 2012 and approximately $4.9 for the six month period ended June 30, 2013, a decrease of approximately 6% compared to the corresponding period ended in 2012. The Company writes very little new business.  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.

The Company reported net investment income of approximately $4.8 million during the second quarter 2013 and approximately $9.1 million for the six month period ended June 30, 2013.  The Company reported net investment income of approximately $2.4 million during the second quarter 2012 and approximately $9.4 million for the six month period ended June 30, 2012. Net investment income for the six month period ended June 30, 2013 is comparable to the same period in 2012. However, net investment income for the second quarter 2013 is approximately 96% higher than for the same period in 2012.

The variance in 2013 and 2012 investment income results, when comparing the second quarter 2012 and 2013, are mainly attributable to activity in the trading securities portfolio, the fixed maturities portfolio and the discounted mortgage loan portfolio.

During the second quarter of 2013, the Company reported income of approximately $480,000 in the trading securities portfolio while during the second quarter 2012 the Company recorded a loss of approximately $(518,000) from the trading securities investment portfolio.  In March 2013, Management determined it had other investment opportunities to deploy a portion of the trading account monies into and reduced the funds to be used for trading activities going forward. Volatility as well as possible losses should be expected in the trading securities portfolio. Management's target return on the trading securities portfolio is 6% to 8%.

Income from fixed maturities increased approximately 12% or $201,000 when comparing the second quarter 2013 to the second quarter 2012 and by 32% or $954,000 when comparing the six month period ended June 30, 2013 and 2012. The increase in income from fixed maturities is attributable to the higher yield earned on the BBB and BB bonds the Company began investing in during 2012. In early 2012, the Company sold a significant portion of its US Treasury bonds, recognizing large gains. The proceeds from the sale of the US Treasury bonds were used to purchase BBB and BB rated bonds, which produce higher investment yields.

Income from the discounted mortgage loan portfolio increased approximately 21% or $454,000 when comparing the second quarter 2013 to the second quarter 2012 and by 27% or $615,000 when comparing the six month period ended June 30, 2013 and 2012. The increase in income from the discounted mortgage loan portfolio is mainly attributable to two discounted mortgage loans that were fully repaid during the second quarter 2013.

The Company reported net realized investment gains of approximately $577,000 and $3.8 million for the second quarter of 2013 and 2012, respectively and approximately $622,000 and $11 million for the six month period ended June 30, 2013 and 2012, respectively. The decrease in net realized gains in 2013, in comparison to 2012, is mainly attributable to the sale of fixed maturity investments during 2012.

During the first half of 2012, the Company took advantage of the unusually high price spreads on U.S. government treasury securities relative to other types of bonds in the marketplace, by selling certain U.S. treasury holdings.  The Company has redeployed a majority of its excess cash balances into BBB and BB rated corporate debt issues.  Included in fixed maturity purchases, the Company purchased approximately $66,509,000 and $22,325,000 of BBB and BB rated corporate debt issues, respectively.  These corporate debt issues have an average interest yield of 5.03%.  Interest spreads on these investments are higher than historic trends and Management believes this is an opportunity to enhance yield and provide more recurring investment income.  Lower rated bonds are viewed by the marketplace to inherently hold more default risk.  The trade-off on this risk is a higher interest yield.  Each investment is analyzed prior to acquisition to determine if Management is comfortable with the increased risk relative to the yield.  Management believes there are opportunities currently available in this area where certain corporate bond issues have been more harshly impacted by the marketplace than may really be justified.  It is this type of bond Management is primarily searching for to invest in.

Other income primarily represented revenues received relating to the performance of administrative work as a TPA for unaffiliated life insurance companies, which has remained consistent over the periods presented.  The Company receives monthly fees based on policy in force counts and certain other activity indicators such as number of policies issued.  Management remains committed to the pursuit of additional TPA clients and believes this area continues to show potential for growth.

Expenses

Life benefits, claims and settlement expenses, net of reinsurance benefits and claims, increased approximately 5% in the six month period ended June 30, 2013 compared to the same period in 2012 and by 6% for the second quarter 2013 compared to the same quarter in 2012.  Policy claims vary from period to period and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.

Net amortization of cost of insurance acquired decreased approximately 7% in the six month period ended June 30, 2013 compared to the same period in 2012 and by 7% for the second quarter 2013, compared to the same quarter in 2012.  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 decreased approximately 24% in the six month period ended June 30, 2013 in comparison to the same period in 2012 and by approximately 18% for the second quarter 2013 in comparison to the same quarter in 2012.  The decrease in 2013 expenses, in comparison to 2012, is primarily attributable to a decrease in legal expenses and charitable contributions.

The Company's legal expenses decreased by approximately 95% when comparing the six month period ended June 30, 2013 to the same period in 2012 and decreased by approximately 85% when comparing the second quarter of 2013 to the second quarter of 2012.  During 2012, the Company's legal expenses were higher as a result of legal expenses incurred related to the merger of American Capitol and the ACAP dissenters' lawsuit.

The Company's charitable contributions decreased by approximately 91% when comparing the six month period ended June 30, 2013 to the same period in 2012 and by 75% when comparing the second quarter of 2013 to the second quarter of 2012. Charitable contributions made by the Company are tied to the earnings of the Company.

Management continues to place significant emphasis on expense monitoring and cost containment.  Maintaining administrative efficiencies directly impacts net income.

Interest expense increased by approximately 65% during the six months period ended June 30, 2013 compared to the same period in 2012 and increased by approximately 75% when comparing the second quarter 2013 to the same quarter in 2012. During the fourth quarter of 2012, a majority owned subsidiary of UG, HPG Acquisitions, LLC ("HPG") obtained a $12 million note. HPG borrowed money to return capital to its investors.

Financial Condition

Investment Information

Investments represent approximately 82% of total assets at June 30, 2013 and December 31, 2012, respectively.  Accordingly, investments are the largest asset group of the Company.  The Company's insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments that it is permitted to make and the amount of funds that may be used for any one type of investment.  In light of these statutes and regulations, the majority of the Company's investment portfolio is invested in a diverse set of securities.

As of June 30, 2013, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets, shareholders' equity or results from operations.  To provide additional flexibility and liquidity, the Company has identified all fixed maturity securities as "investments held for sale".  Investments held for sale are carried at market, with changes in market value charged directly to shareholders' equity.

During the first quarter of 2013, the Company sold a substantial portion of its trading security assets and liabilities. The trading securities asset balance decreased by 59% or $8.2 million when comparing the June 30, 2013 balance to the December 31, 2012 balance.  The trading securities liability balance decreased by 88% or $6.7 million when comparing the June 30, 2013 balance to the December 31, 2012 balance.  The sale of the trading security assets and liabilities were the result of Management's decision to reduce the Company's investment risk and reduce the volatility in the investment earnings of the Company.  The proceeds from the sales of the trading securities will be used to purchase new investments that are deemed to be of less risk and which will provide more stable and predictable earnings for the Company.

Capital Resources

Total shareholders' equity decreased by approximately 7% as of June 30, 2013 compared to December 31, 2012. The decrease in shareholders' equity is mainly attributable to the change in accumulated other comprehensive income.  The change in accumulated other comprehensive income was mainly due to the overall increase in interest rates during the second quarter of 2013, which resulted in unrealized losses on fixed maturity investments available for sale.

At June 30, 2013, the Company had $18.7 million of debt outstanding.  At December 31, 2012, the Company had $18.9 million of debt outstanding.  Approximately $1.6 million of this debt is related to the acquisition of ACAP Corporation, which was fully repaid during the third quarter of 2013.  Approximately $12 million of this debt is related to credit facilities extended to a majority owned subsidiary of UTG, HPG Acquisitions, LLC ("HPG"), during 2012. HPG borrowed money to return capital to its investors.  UTG Avalon, LLC, a wholly owned subsidiary of UG, has an outstanding line of credit in the amount of $5 million.

Liquidity

The Company has three principal needs for cash - the insurance companies' contractual obligations to policyholders, the payment of operating expenses and debt service.  Cash and cash equivalents as a percentage of total assets were approximately 5% as of June 30, 2013 and December 31, 2012.  Fixed maturities as a percentage of total assets were approximately 41% and 42% as of June 30, 2013 and December 31, 2012, respectively.

The Company currently has access to funds for operating liquidity.  UTG has an $8 million revolving credit note with Illinois National Bank.  On April 6, 2011, UTG Avalon was extended a credit note from First National Bank of Tennessee for $5 million. The UTG Avalon line of credit was fully repaid during March 2013 and UTG Avalon obtained a new line of credit in the amount of $5 million from a different financing source.  UG is a member of the FHLB which allows UG access to credit.  UG's current line of credit with the FHLB is $15 million.  At June 30, 2013, the Company had approximately $6.6 million of outstanding borrowings attributable to the lines of credit.

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

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

Net cash used in operating activities was approximately $5.7 million and $4.3 million for the six month period ended June 30, 2013 and 2012, respectively.

Net cash provided by (used in) investing activities was approximately $5 million and $(62.1) million for the six month period ended June 30, 2013 and 2012, respectively.  During the first six months of 2012, more emphasis was placed on the sale of U.S. treasury holdings and re-deploying the cash through the purchase of BBB and BB rated corporate bonds.

Net cash used in financing activities was approximately $363,000 and $899,000 for the six month period ended June 30, 2013 and 2012, respectively.

UTG is a holding company that has no day-to-day operations of its own.  Funds required to meet its expenses, generally costs associated with maintaining the company in good standing with states in which it does business and the servicing of its debt, are primarily provided by its subsidiaries.  On a parent only basis, UTG's cash flow is dependent on management fees received from its insurance subsidiary, stockholder dividends from its subsidiary and earnings received on cash balances.  At June 30, 2013, substantially all of the consolidated shareholders equity represents net assets of its subsidiary.  The Company's insurance subsidiary has maintained adequate statutory capital and surplus.  The payment of cash dividends to shareholders by UTG is not legally restricted.  However, the state insurance department regulates insurance company dividend payments where the company is domiciled.  No dividends were paid to shareholders in 2012 or the first six months of 2013.

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, 2012, UG had statutory net income of $6.9 million.  At December 31, 2012 UG's statutory capital and surplus amounted to $32.2 million.  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 the first six months of 2013, UG paid no ordinary dividends to UTG. During the third quarter 2013, UG paid UTG an ordinary dividend of $1.7 million. During 2012, UG paid UTG ordinary dividends of approximately $3.3 million. UTG used the dividends to pay off its line of credit.

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 our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

NONE


ITEM 1A.  RISK FACTORS

NONE

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NONE

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

NONE

ITEM 4.  MINE SAFETY DISCLOSURES

NONE

ITEM 5.  OTHER INFORMATION

NONE

ITEM 6.  EXHIBITS

*10.22
Promissory Note dated March 28, 2013 between UTG Avalon, LLC and First Southern Funding
*31.1
Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as
required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2
Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1
Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2
Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**101
Interactive Data File

*Filed herewith

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


UTG, INC.
(Registrant)


Date:
August 9, 2013
 
By
/s/ James P. Rousey
 
 
 
 
James P. Rousey
 
 
 
 
President and Director








Date:
August 9, 2013
 
By
/s/ Theodore C. Miller
 
 
 
 
Theodore C. Miller
 
 
 
 
Senior Vice President
 
 
 
 
   and Chief Financial Officer


EXHIBIT INDEX



Exhibit Number
Description


*10.22
Promissory Note dated March 28, 2013 between UTG Avalon, LLC and First Southern Funding
*31.1
Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as
required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2
Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1
Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2
Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**101
Interactive Data File

* Filed herewith