0000832480-14-000008.txt : 20140512 0000832480-14-000008.hdr.sgml : 20140512 20140512160839 ACCESSION NUMBER: 0000832480-14-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20140331 FILED AS OF DATE: 20140512 DATE AS OF CHANGE: 20140512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UTG INC CENTRAL INDEX KEY: 0000832480 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 202907892 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16867 FILM NUMBER: 14833507 BUSINESS ADDRESS: STREET 1: PO BOX 5147 STREET 2: 5250 SOUTH SIXTH STREET ROAD CITY: SPRINGFIELD STATE: IL ZIP: 62703 BUSINESS PHONE: 2173236300 MAIL ADDRESS: STREET 1: PO BOX 5147 STREET 2: 5250 SOUTH SIXTH STREET CITY: SPINGFIELD STATE: IL ZIP: 62705 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TRUST GROUP INC DATE OF NAME CHANGE: 20001206 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TRUST INC /IL/ DATE OF NAME CHANGE: 19920703 10-Q 1 utg14q1.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 March 31, 2014

OR

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

For the transition period from _____________ to ____________

Commission File No. 0-16867

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

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

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

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

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

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

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

The number of shares outstanding of the registrant's common stock as of April 25, 2014, was 3,768,203.

 
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
17
 
Item 4.  Controls and Procedures
20
 
 
 
 
PART II.  Other Information
21
 
Item 1.  Legal Proceedings
21
 
Item 1A. Risk Factors
21
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
21
 
Item 3.  Defaults Upon Senior Securities
21
 
Item 4.  Mine Safety Disclosures
21
 
Item 5.  Other Information
21
 
Item 6.  Exhibits
21
 
 
Signatures
 
22
 
 
Exhibit Index
 
23

 

Part 1.   Financial Information.
Item 1.  Financial Statements.
 
UTG, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
 
 
March 31,
   
December 31,
 
 
 
2014
     
2013*
 
Investments:
 
         
Investments available for sale:
 
         
Fixed maturities, at fair value (amortized cost $169,147,449 and $171,085,396)
 
$
175,911,151
   
$
174,409,824
 
Equity securities, at fair value (cost $38,479,572 and $38,625,230)
   
40,705,899
     
40,514,978
 
Trading securities, at fair value (cost $7,105,592 and $6,924,413)
   
7,206,667
     
6,614,111
 
Mortgage loans on real estate at amortized cost
   
13,935,687
     
14,454,534
 
Discounted mortgage loans on real estate at cost
   
11,419,581
     
12,830,735
 
Investment real estate
   
83,937,511
     
83,585,359
 
Policy loans
   
11,638,101
     
11,860,960
 
Short-term investments
   
184,800
     
0
 
Total investments
   
344,939,397
     
344,270,501
 
 
               
Cash and cash equivalents
   
18,515,389
     
19,838,618
 
Accrued investment income
   
2,215,115
     
2,432,939
 
Reinsurance receivables:
               
Future policy benefits
   
28,572,534
     
28,767,326
 
Policy claims and other benefits
   
3,652,857
     
3,926,736
 
Cost of insurance acquired
   
9,787,222
     
10,636,412
 
Deferred policy acquisition costs
   
356,872
     
369,786
 
Property and equipment, net of accumulated depreciation
   
1,147,139
     
1,185,108
 
Income tax receivable
   
1,293,637
     
1,296,043
 
Other assets
   
4,581,866
     
4,390,620
 
Total assets
 
$
415,062,028
   
$
417,114,089
 
 
               
 
               
 
               
Liabilities:
               
Policy liabilities and accruals:
               
Future policyholder benefits
 
$
280,179,067
   
$
286,472,435
 
Policy claims and benefits payable
   
4,328,556
     
3,283,897
 
Other policyholder funds
   
378,000
     
378,772
 
Dividend and endowment accumulations
   
14,154,130
     
14,162,510
 
Deferred income taxes
   
10,275,593
     
9,633,641
 
Notes payable
   
19,097,534
     
19,097,534
 
Trading securities, at fair value (proceeds $503,854 and $505,272)
   
153,615
     
357,439
 
Other liabilities
   
6,819,339
     
5,860,420
 
Total liabilities
   
335,385,834
     
339,246,648
 
 
               
Shareholders' equity:
               
Common stock - no par value, stated value $.001 per share.  Authorized 7,000,000 shares - 3,769,565 and 3,776,197 shares outstanding
   
3,769
     
3,776
 
Additional paid-in capital
   
43,972,782
     
44,050,778
 
Retained earnings
   
23,641,330
     
25,169,646
 
Accumulated other comprehensive income
   
6,751,519
     
3,459,401
 
Total UTG shareholders' equity
   
74,369,400
     
72,683,601
 
 
 
Noncontrolling interests
   
5,306,794
     
5,183,840
 
Total shareholders' equity
   
79,676,194
     
77,867,441
 
Total liabilities and shareholders' equity
 
$
415,062,028
   
$
417,114,089
 

* Balance sheet audited at December 31, 2013.
See accompanying notes.
 
UTG, Inc.
 
Condensed Consolidated Statements of Operations (Unaudited)
 
 
Three Months Ended
 
 
 
March 31,
   
March 31,
 
 
 
2014
   
2013
 
Revenue:
 
   
 
Premiums and policy fees
 
$
2,733,687
   
$
3,212,746
 
Ceded reinsurance premiums and policy fees
   
(780,983
)
   
(775,702
)
Net investment income
   
4,533,119
     
4,381,392
 
Other income
   
520,431
     
521,359
 
Revenues before realized gains
   
7,006,254
     
7,339,795
 
Realized investment gains, net:
               
Other-than-temporary impairments
   
0
     
(26,926
)
Other realized investment gains, net
   
277,424
     
71,649
 
Total realized investment gains, net
   
277,424
     
44,723
 
Total revenue
   
7,283,678
     
7,384,518
 
 
               
Benefits and other expenses:
               
Benefits, claims and settlement expenses:
               
Life
   
6,686,047
     
5,856,321
 
Ceded Reinsurance benefits and claims
   
(1,202,470
)
   
(597,779
)
Annuity
   
278,577
     
267,539
 
Dividends to policyholders
   
136,172
     
147,222
 
Commissions and amortization of deferred policy acquisition costs
   
(101,137
)
   
(23,552
)
Amortization of cost of insurance acquired
   
246,412
     
266,088
 
Operating expenses
   
2,656,118
     
2,055,125
 
Interest expense
   
181,832
     
110,437
 
Total benefits and other expenses
   
8,881,551
     
8,081,401
 
 
               
 
               
Loss before income taxes
   
(1,597,873
)
   
(696,883
)
Income tax (expense) benefit
   
192,511
     
(67,308
)
 
               
Net loss
   
(1,405,362
)
   
(764,191
)
 
               
Net income attributable to noncontrolling interests
   
(122,954
)
   
(146,081
)
 
               
Net loss attributable to common shareholders'
 
$
(1,528,316
)
 
$
(910,272
)
 
               
Amounts attributable to common shareholders'
               
Basic loss per share
 
$
(0.41
)
 
$
(0.24
)
 
               
Diluted loss per share
 
$
(0.41
)
 
$
(0.24
)
 
               
Basic weighted average shares outstanding
   
3,771,867
     
3,796,527
 
 
               
Diluted weighted average shares outstanding
   
3,771,867
     
3,796,527
 

See accompanying notes.
 
UTG, Inc.
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
 
 
Three Months Ended
 
 
 
March 31,
   
March 31,
 
 
 
2014
   
2013
 
 
 
   
 
 
 
   
 
 
 
   
 
Net loss
 
$
(1,405,362
)
 
$
(764,191
)
 
               
Other comprehensive income (loss), net of tax:
               
 
               
Unrealized holding gains (losses) arising during period
   
3,455,923
     
(23,750
)
(net of tax of $1,860,882 and $(12,788))
               
Less reclassification adjustment for gains included in net loss
   
(163,805
)
   
(59,366
)
(net of tax of $88,203 and $31,966)
               
Subtotal:  Other comprehensive income (loss), net of tax
   
3,292,118
     
(83,116
)
 
               
Comprehensive income (loss)
   
1,886,756
     
(847,307
)
 
               
Less comprehensive income attributable to noncontrolling interests
   
(122,954
)
   
(146,081
)
 
               
Comprehensive income (loss) attributable to UTG, Inc.
 
$
1,763,802
   
$
(993,388
)

See accompanying notes.

UTG, Inc.
 
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
Three Months Ended
 
 
 
March 31,
   
March 31,
 
 
 
2014
   
2013
 
 
 
   
 
Cash flows from operating activities:
 
   
 
Net loss attributable to common shareholders
 
$
(1,528,316
)
 
$
(910,272
)
Adjustments to reconcile net loss to net cash provided by used in operating activities:
               
Amortization (accretion) of investments
   
(536,311
)
   
(403,748
)
Realized investment gains, net
   
(277,424
)
   
(44,723
)
Unrealized trading (gains) losses included in income
   
(260,651
)
   
297,344
 
Amortization of deferred policy acquisition costs
   
12,914
     
14,108
 
Amortization of cost of insurance acquired
   
246,412
     
266,088
 
Depreciation
   
318,708
     
320,071
 
Net income attributable to noncontrolling interest
   
122,954
     
146,081
 
Charges for mortality and administration of universal life and annuity products
   
(1,689,689
)
   
(1,737,635
)
Interest credited to account balances
   
1,419,880
     
1,450,681
 
Change in accrued investment income
   
217,824
     
350,518
 
Change in reinsurance receivables
   
468,671
     
927,606
 
Change in policy liabilities and accruals
   
(1,207,644
)
   
(1,121,391
)
Change in income taxes receivable (payable)
   
2,406
     
(1,982,692
)
Change in other assets and liabilities, net
   
566,693
     
1,624,775
 
Net cash used in operating activities
   
(2,123,573
)
   
(803,189
)
 
               
Cash flows from investing activities:
               
Proceeds from investments sold and matured:
               
Fixed maturities available for sale
   
10,868,969
     
6,173,142
 
Equity securities available for sale
   
167,504
     
0
 
Trading securities
   
75,134
     
17,829,177
 
Mortgage loans
   
626,528
     
7,785,104
 
Discounted mortgage loans
   
2,087,795
     
1,505,565
 
Real estate
   
521,361
     
2,733,460
 
Policy loans
   
886,346
     
997,774
 
Short-term investments
   
0
     
29,383
 
Total proceeds from investments sold and matured
   
15,233,637
     
37,053,605
 
Cost of investments acquired:
               
Fixed maturities available for sale
   
(8,813,706
)
   
(8,856,558
)
Equity securities available for sale
   
0
     
(250,617
)
Trading securities
   
(257,730
)
   
(15,124,263
)
Mortgage loans
   
(107,681
)
   
(1,122,724
)
Discounted mortgage loans
   
(5,638
)
   
(1,280,456
)
Real estate
   
(1,150,682
)
   
(5,918,258
)
Policy loans
   
(663,488
)
   
(803,607
)
Short-term investments
   
(184,800
)
   
(25,000
)
Total cost of investments acquired
   
(11,183,725
)
   
(33,381,483
)
Net cash provided by investing activities
   
4,049,912
     
3,672,122
 
 
               
Cash flows from financing activities:
               
Policyholder contract deposits
   
1,489,219
     
1,521,403
 
Policyholder contract withdrawals
   
(1,615,210
)
   
(1,360,777
)
Payments of principal on notes payable/line of credit
   
0
     
(9,500
)
Purchase of treasury stock
   
(78,003
)
   
(54,048
)
Sale of block of businees
   
(3,045,574
)
   
0
 
Net cash provided by (used in)  financing activities
   
(3,249,568
)
   
97,078
 
 
               
Net increase (decrease) in cash and cash equivalents
   
(1,323,229
)
   
2,966,011
 
Cash and cash equivalents at beginning of period
   
19,838,618
     
23,321,246
 
Cash and cash equivalents at end of period
 
$
18,515,389
   
$
26,287,257
 

See accompanying notes.

 
UTG, Inc.
Notes to Condensed Consolidated Financial Statements

  Note 1 – Basis of Presentation

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

This document at times will refer to the Registrant's largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll.  Mr. Correll holds a majority ownership of First Southern Funding LLC ("FSF"), a Kentucky corporation, and First Southern Bancorp, Inc. ("FSBI"), a financial services holding company.  FSBI operates through its 100 % owned subsidiary bank, First Southern National Bank ("FSNB").  Banking activities are conducted through multiple locations within south-central and western Kentucky.  Mr. Correll is Chief Executive Officer and Chairman of the Board of Directors of UTG and is currently UTG's largest shareholder through his ownership control of FSF, FSBI and affiliates.  At March 31, 2014, 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 – Recently Issued Accounting Standards

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

Available for Sale Securities – Fixed Maturity and Equity Securities

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

Investments in available for sale securities are summarized as follows:

March 31, 2014
 
Original or Amortized
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Estimated
Fair
Value
 
Investments available for sale:
 
   
   
   
 
Fixed maturities
 
   
   
   
 
U.S. Government and govt. agencies and authorities
 
$
32,967,799
   
$
3,197,556
   
$
(94,083
)
 
$
36,071,272
 
States, municipalities and political subdivisions
   
105,000
     
513
     
0
     
105,513
 
U.S. special revenue and assessments
   
1,703,755
     
83,382
     
(227,230
)
   
1,559,907
 
Collateralized mortgage obligations
   
1,188,632
     
108,187
     
(14
)
   
1,296,805
 
Public utilities
   
399,917
     
50,438
     
0
     
450,355
 
All other corporate bonds
   
132,782,346
     
5,604,616
     
(1,959,663
)
   
136,427,299
 
 
   
169,147,449
     
9,044,692
     
(2,280,990
)
   
175,911,151
 
Equity securities
   
38,479,572
     
2,226,327
     
0
     
40,705,899
 
Total
 
$
207,627,021
   
$
11,271,019
   
$
(2,280,990
)
 
$
216,617,050
 


December 31, 2013
 
Original or Amortized
Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Estimated
Fair
Value
 
Investments available for sale:
 
   
   
   
 
Fixed maturities
 
   
   
   
 
U.S. Government and govt. agencies and authorities
 
$
32,963,938
   
$
3,156,158
   
$
(107,550
)
 
$
36,012,546
 
States, municipalities and political subdivisions
   
110,000
     
0
     
(924
)
   
109,076
 
U.S. special revenue and assessments
   
2,152,892
     
95,763
     
(239,620
)
   
2,009,035
 
Collateralized mortgage obligations
   
1,289,975
     
116,900
     
(13
)
   
1,406,862
 
Public utilities
   
399,913
     
49,567
     
0
     
449,480
 
All other corporate bonds
   
134,168,678
     
3,483,229
     
(3,229,082
)
   
134,422,825
 
 
   
171,085,396
     
6,901,617
     
(3,577,189
)
   
174,409,824
 
Equity securities
   
38,625,230
     
1,889,748
     
0
     
40,514,978
 
Total
 
$
209,710,626
   
$
8,791,365
   
$
(3,577,189
)
 
$
214,924,802
 
 
The amortized cost and estimated market value of debt securities at March 31, 2014, by contractual maturity, is shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Fixed Maturities Available for Sale
March 31, 2014
 
Amortized
Cost
   
Estimated
Fair Value
 
 
 
   
 
Due in one year or less
 
$
1,324,432
   
$
1,369,862
 
Due after one year through five years
   
25,476,209
     
27,068,104
 
Due after five years through ten years
   
98,191,729
     
102,656,995
 
Due after ten years
   
42,966,447
     
43,519,385
 
Collateralized mortgage obligations
   
1,188,632
     
1,296,805
 
Total
 
$
169,147,449
   
$
175,911,151
 

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

March 31, 2014
 
Less than 12 months
   
12 months or longer
   
Total
 
 
 
   
   
   
   
   
 
 
 
Fair value
   
Unrealized losses
   
Fair value
   
Unrealized losses
   
Fair value
   
Unrealized losses
 
U.S. Government and govt. agencies and authorities
 
$
0
     
0
   
$
4,902,734
     
(94,083
)
 
$
4,902,734
     
(94,083
)
U.S. Special Revenue and Assessments
   
760,090
     
(227,230
)
   
0
     
0
     
760,090
     
(227,230
)
MBS/Collateralized mortgage obligations
   
1,884
     
(14
)
   
0
     
0
     
1,884
     
(14
)
All other corporate bonds
   
20,790,667
     
(517,325
)
   
6,571,706
     
(1,442,338
)
   
27,362,373
     
(1,959,663
)
Total fixed maturities
 
$
21,552,641
     
(744,569
)
 
$
11,474,440
     
(1,536,421
)
 
$
33,027,081
     
(2,280,990
)
 
                                               
Equity securities
 
$
0
     
0
   
$
0
     
0
   
$
0
     
0
 

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

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

 
Less than 12 months
 
12 months or longer
 
Total
As of March 31, 2014
 
 
 
 
 
Fixed maturities
13
 
7
 
20
Equity securities
0
 
0
 
0
As of December 31, 2013
 
 
 
 
 
Fixed maturities
30
 
5
 
35
Equity securities
0
 
0
 
0
 
Substantially all of the unrealized losses on fixed maturities available for sale at March 31, 2014 and December 31, 2013 are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase.  The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position.  Based upon the Company's expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company's evaluation of other relevant factors, the Company deems these securities to be temporarily impaired as of March 31, 2014 and December 31, 2013.

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

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

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
 
 
   
 
Other than temporary impairments:
 
   
 
Real estate
 
$
0
   
$
26,926
 
 
               
 
The other-than-temporary impairment recognized during 2013 was due to Management's assessment of the value of the real estate. The real estate was written down to better reflect current expected market value.

Trading Securities

Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in net investment income on the Condensed Consolidated Statements of Operations.  Trading securities include exchange-traded equities and exchange-traded options.  Trading securities carried as liabilities are securities sold short. A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale.  The fair value of derivatives included in trading security assets and trading security liabilities as of March 31, 2014 was $124,000 and $(149,956), respectively. The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2013 was $194,000 and $(353,907), respectively.  Earnings from trading securities are classified in cash flows from operating activities. The derivatives held by the Company are for income generation purposes only.
 
Trading revenue charged to net investment income from trading securities was:

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
 
 
   
 
Net unrealized gains (losses)
 
$
260,651
   
$
(297,344
)
Net realized gains (losses)
   
21,173
     
86,271
 
Net unrealized and realized gains (losses)
 
$
281,824
   
$
(211,073
)
 
Mortgage Loans

As of March 31, 2014 and December 31, 2013, the Company's mortgage loan portfolio contained 36 and 39 mortgage loans, including discounted mortgage loans, with a carrying value of $25,355,268 and $27,285,269, respectively.

Changes in the current economy could have a negative impact on the loans, including the financial stability of the borrowers, the borrowers' ability to pay or to refinance, the value of the property held as collateral and the ability to find purchasers at favorable prices.  Given the uncertainty of the current market, management has taken a conservative approach with the discounted mortgage loans and has classified all discounted mortgage loans held as non-accrual.  In such status, the Company is not recording any accrued interest income nor is it recording any accrual of discount on the loans held.  Discount accruals reported during 2014 and 2013 were the result of the loan basis already being fully paid.

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

A mortgage loan reserve is established and adjusted based on management's quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value.  The Company acquires the discounted mortgage loans at below contract value, and believes that it will fully recover its carrying value upon disposal, therefore no reserve for delinquent loans is deemed necessary.  Those loans not currently paying are being vigorously worked by management.  The current discounted commercial mortgage loan portfolio has an average price of 33.1 % of face value and management has determined that this deep discount provides a financial cushion or built in allowance for any of the loans that are not currently performing within the portfolio of loans purchased.

Note 4 – Fair Value Measurements

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

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

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

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

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

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

The Company periodically reviews the pricing service provider's policies and procedures for valuing securities.  The assumptions underlying the valuations from external service providers, including unobservable inputs, are generally not readily available as this information is often deemed proprietary.  Accordingly, the Company is unable to obtain comprehensive information regarding these assumptions and methodologies.
The Company's investments in fixed maturity securities available for sale, equity securities available for sale and trading securities assets and liabilities are carried at fair value.  The following are the Company's methodologies and valuation techniques for assets and liabilities measured at fair value.

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

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

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

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

Securities designated as trading securities consist of exchange traded equities and exchange traded options.  These securities are primarily valued at quoted active market prices, and are therefore categorized as Level 1 in the fair value hierarchy.
 
The following table presents the Company's assets and liabilities measured at fair value in the Condensed Consolidated Balance Sheet on a recurring basis as of March 31, 2014.


 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
 
   
   
   
 
Assets
 
   
   
   
 
Fixed Maturities, available for sale
 
$
19,384,352
   
$
156,225,114
   
$
301,685
   
$
175,911,151
 
Equity Securities, available for sale
   
1,669,042
     
6,764,208
     
32,272,649
     
40,705,899
 
Trading Securities
   
7,206,667
     
0
     
0
     
7,206,667
 
Total
 
$
28,260,061
   
$
162,989,322
   
$
32,574,334
   
$
223,823,717
 
 
                               
Liabilities
                               
Trading Securities
 
$
153,615
   
$
0
   
$
0
   
$
153,615
 
The following table presents the Company's assets and liabilities measured at fair value in the Condensed Consolidated Balance Sheet on a recurring basis as of December 31, 2013.
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
 
 
   
   
   
 
Assets
 
   
   
   
 
Fixed Maturities, available for sale
 
$
19,407,301
   
$
154,688,710
   
$
313,813
   
$
174,409,824
 
Equity Securities, available for sale
   
1,643,803
     
6,774,589
     
32,096,586
     
40,514,978
 
Trading Securities
   
6,614,111
     
0
     
0
     
6,614,111
 
Total
 
$
27,665,215
   
$
161,463,299
   
$
32,410,399
   
$
221,538,913
 
 
                               
Liabilities
                               
Trading Securities
 
$
357,439
   
$
0
   
$
0
   
$
357,439
 

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

 
 
Fixed Maturities,
Available for Sale
   
Equity Securities,
Available for Sale
   
Total
 
Balance at December 31, 2013
 
$
313,813
   
$
32,096,586
   
$
32,410,399
 
Total unrealized gains or (losses):
                       
Included in realized gains/(losses)
   
82,287
     
0
     
82,287
 
Included in other comprehensive income
   
53,128
     
176,063
     
229,191
 
Sales
   
(147,543
)
   
0
     
(147,543
)
Balance at March 31, 2014
 
$
301,685
   
$
32,272,649
   
$
32,574,334
 

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

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

The carrying values and estimated fair values of certain of the Company's financial instruments not recorded at fair value in the Condensed Consolidated Balance Sheets are shown below. Because the fair value for all Condensed Consolidated Balance Sheet items are not required to be disclosed, the aggregate fair value amounts presented below are not reflective of the underlying value of the Company.
 
 
 
March 31, 2014
   
December 31, 2013
 
 
 
Assets
 
Carrying
Amount
   
Estimated
Fair
Value
   
Carrying
Amount
   
Estimated
Fair
Value
 
Mortgage loans on real estate
 
$
13,935,687
   
$
14,171,392
   
$
14,454,534
   
$
14,734,756
 
Discounted mortgage loans
   
11,419,518
     
11,419,581
     
12,830,735
     
12,830,735
 
Investment real estate
   
83,937,511
     
83,937,511
     
83,585,359
     
83,585,359
 
Policy loans
   
11,638,101
     
11,638,101
     
11,860,960
     
11,860,960
 
Cash and cash equivalents
   
18,515,389
     
18,515,389
     
19,838,618
     
19,838,618
 
Short term investments
   
184,800
     
184,800
     
0
     
0
 
Liabilities
                               
Notes payable
   
19,097,534
     
19,097,534
     
19,097,534
     
19,097,534
 

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

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

The Company has 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 March 31, 2014 and December 31, 2013, the Company had the following outstanding debt:

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

Instrument
 
Issue Date
   
Maturity Date
   
Revolving Credit Limit
   
December 31, 2013
   
Borrowings
   
Repayments
   
March 31, 2014
 
Lines of Credit:
 
   
   
   
   
   
   
 
UTG
   
2013-11-20
     
2014-11-20
   
$
8,000,000
   
$
2,097,534
     
0
     
1,655,035
   
$
2,097,534
 
UTG Avalon
   
2013-03-28
     
2015-03-28
     
5,000,000
     
5,000,000
     
0
     
0
     
5,000,000
 
UG
   
2010-12-28
     
2014-12-05
     
15,000,000
     
0
     
0
     
0
     
0
 


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

The UTG line of credit carries interest at a fixed rate of  3.75% and is payable monthly. As collateral, UTG has pledged 100% of the common voting stock of its wholly owned subsidiary, Universal Guaranty Life Insurance Company ("UG"). .In April 2014, the Company repaid $900,000 in principal on this line of credit.

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

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

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

Year
 
Amount
 
 
 
 
2014
 
$
2,097,534
 
2015
   
5,345,459
 
2016
   
478,193
 
2017
   
499,278
 
2018
   
10,677,070
 
Note 6 – Shareholders' Equity
Stock Repurchase Programs

The Board of Directors of UTG authorized the repurchase in the open market or in privately negotiated transactions of up to $6 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 three month period ended March 31, 2014, the Company repurchased 6,632 shares through the stock repurchase program for $78,003.  Through March 31, 2014, UTG has spent $5.0 million in the acquisition of 595,158 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 March 31, 2014 and 2013, diluted earnings per share were the same as basic earnings per share since the Company had no dilutive instruments outstanding.

Note 7 – Commitments and Contingencies

The insurance industry has experienced a number of civil jury verdicts which have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters.  Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages.  In some states, juries have substantial discretion in awarding punitive damages in these circumstances.  In the normal course of business, the Company is involved from time to time in various legal actions and other state and federal proceedings.  Management is of the opinion that the ultimate disposition of the matters will not have a materially adverse effect on the Company's results of operations or financial position.
 
Under the insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent or failed insurance companies.  Although the Company cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred if it would threaten an insurer's financial strength.  Mandatory assessments may be partially recovered through a reduction in future premium tax in some states. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements, though the Company has no control over such assessments.

Within the Company's trading accounts, certain trading securities carried as liabilities represent securities sold short.  A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale.
 
The following table represents the total funding commitments and the unfunded commitment as of March 31, 2014 related to certain investments:


 
 
Total Funding
   
Unfunded
 
 
 
Commitment
   
Commitment
 
RLF III, LLC
 
$
4,000,000
   
$
398,120
 
Llano Music, LLC
   
4,000,000
     
517,000
 
Marcellus HBPI, LLP
   
1,800,000
     
141,300
 
PBEX, LLC
   
5,600,000
     
2,818,750
 
Sovereign's Capital, LP
   
500,000
     
250,000
 
MM-Appalachia IV, LP
   
2,475,000
     
1,056,000
 

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

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

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

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

During 2012, the Company committed to invest in Sovereign's Capital, LP ("Sovereign's"), which invests in companies in emerging markets. Sovereign's makes capital calls to investors as funds are needed.

During 2013, the Company committed to invest in MM-Appalachia IV, LP, which purchases land for leasing opportunities to those looking to harvest natural resources. MM-Appalachia IV, LP makes capital calls to investors as funds are needed for continued land purchases.
 
Note 8 – Other Cash Flow Disclosures
 
On a cash basis, the Company paid the following expenses:

 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2014
   
2013
 
 
 
   
 
Interest expense
 
$
19,672
   
$
16,398
 
Federal income tax
   
0
     
2,050,000
 

 
During the first quarter of 2013 and 2014, UG's wholly-owned subsidiary, UTG Avalon, LLC, entered into a noncash transaction whereby the subsidiary obtained a new line of credit in the amount of $5 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 first quarter of 2014, the Company sold a block of life insurance business.  As a result of this transaction, the Company transferred approximately $3,100,000.0 million in cash to purchaser.  The transaction also resulted in a reduction of approximately $3.7 million of future policyholder benefits and approximately $600,000 of cost of insurance acquired.
 
Note 9 – Concentrations of Credit Risk

The Company maintains cash balances in financial institutions that at times may exceed federally insured limits.  The Company maintains its primary operating cash accounts with First Southern National Bank, an affiliate of the largest shareholder of UTG, Mr. Jesse Correll, the Company's CEO and Chairman.  The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

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

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

Overview

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

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ significantly from those estimates.  The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability.  The Company's critical accounting policies and the related estimates considered most significant by Management are disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.  Management has identified the accounting policies related to cost of insurance acquired, assumptions and judgments utilized in determining if declines in fair values of investments are other-than-temporary, and valuation methods for investments that are not actively traded as those, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Condensed Consolidated Financial Statements and this Management's Discussion and Analysis.

During the three months ended March 31, 2014, there were no additions to or changes in the critical accounting policies disclosed in the 2013 Form 10-K, except for recently adopted accounting standards discussed in Note 2 of the Notes to the Condensed Consolidated Financial Statements.
 
Results of Operations

On a consolidated basis, the Company reported a net loss attributable to common shareholders' of $(1.5) million and $(910,000) for the three month period ended March 31, 2014 and 2013, respectively.  During the three month period ended March 31, 2014 and 2013, the Company reported a net loss before income taxes of $(1.6) million and $(697,000), respectively.

The Company reported total revenues of $7.3 million and $7.4 million for the three month period ended March 31, 2014 and 2013, respectively.  Total benefits and other expenses reported by the Company for the three month period ended March 31, 2014 and 2013 were $8.9 million and $8.1 million, respectively.

Revenues

The Company's premium and policy fee revenues, net of reinsurance, were approximately $2 million for the first quarter of 2014, a decrease of approximately 20% compared to the same quarter in 2013. The Company writes minimal 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 $4.5 million and $4.4 million during the first quarter of 2014 and 2013, respectively.  Net investment income increased slightly, when comparing the first quarter of 2014 to the same quarter in 2013.  Income from the bond portfolio and the preferred stock portfolio was slightly higher in 2014, compared to 2013.  Also, the Company reported income of approximately $282,000 in the trading security portfolio during 2014 and a loss of approximately $(221,000) during 2013.

The Company reported a net realized investment gain of $277,000 and $45,000 during the first quarter of 2014 and 2013, respectively.  The 2014 net realized investment gains are mainly the result of the sale of fixed maturity securities.  During 2014 and 2013, the Company recognized $252,000 and $91,000, respectively, in net gains from the sale of fixed maturity securities.  During 2013, realized investment gains were reduced by realized losses of $47,000 from the sale of real estate and an other-than-temporary impairment.  Similar losses were not recognized during the first quarter of 2014.

Expenses

Life benefits, claims and settlement expenses, net of reinsurance benefits and claims, increased approximately 4% in the three month period ended March 31, 2014, compared to the same period in 2013.  Policy claims vary from period to period and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.

In early 2013, the Company began a proactive analysis of its in-force business to try to reconnect with lost customers and verify its customers are not deceased.  In some instances, the Company found that the customer was indeed deceased, but no notification or claim was presented to the Company.  During 2013, the Company paid approximately $2.9 million in death claim benefits as a result of this action.  During the first quarter of 2014, the Company paid approximately $1 million in death claim benefits.  This process remains ongoing with a target completion date of May of 2014.

Net amortization of cost of insurance acquired decreased approximately 7% during the three month period ended March 31, 2014 compared to the same period in 2013.  Cost of insurance acquired is established when an insurance company is acquired or when the Company acquires a block of in-force business.  The Company assigns a portion of its cost to the right to receive future profits from insurance contracts existing at the date of the acquisition.  Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates may vary due to risk analysis performed at the time of acquisition on the business acquired. The Company utilizes a 12% discount rate on the remaining unamortized business.  The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.  Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force.  This expense is expected to decrease, unless the Company acquires a new block of business.

Operating expenses increased approximately 29% in the three month period ended March 31, 2014 in comparison to the same period in 2013.  The increase in expenses is primarily attributable to an increase in information technology expenses incurred during the first quarter of 2014.
 
Following an extensive analysis of current administrative systems available in the market place, early in 2014 the Company determined it would change its administrative system.  Management anticipates it will be year-end 2015 before fully converted to the new system.  Management believes this system change will well position the Company for the future by providing a more modern and flexible operating system while reducing ongoing operating costs.

Financial Condition

Investment Information

Investments represent approximately 83% and 82% of total assets at March 31, 2014 and December 31, 2013, respectively.  Accordingly, investments are the largest asset group of the Company.  The Company's insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments that it is permitted to make and the amount of funds that may be used for any one type of investment.  In light of these statutes and regulations, the majority of the Company's investment portfolio is invested in a diverse set of securities.

As of March 31, 2014, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets, shareholders' equity or results from operations.  To provide additional flexibility and liquidity, the Company has identified all fixed maturity securities as "investments held for sale".  Investments held for sale are carried at market, with changes in market value charged directly to shareholders' equity.  Changes in the market value resulted in net unrealized gains of approximately $3.5 million during the first quarter of 2014.

The trading securities investment portfolio increased by 9% when comparing March 31, 2014 to December 31, 2013.  The increase in the portfolio balance is the result of Management's decision to purchase additional securities.

The Company's March 31, 2014 discounted mortgage loan asset balance decreased by approximately 11% in comparison to the December 31, 2013 balance.  The decrease in the discounted mortgage loan balance is mainly attributable to a mortgage loan being fully repaid during 2014.

Capital Resources

Total shareholders' equity increased by approximately 2% as of March 31, 2014 compared to December 31, 2013. The increase in shareholders' equity is mainly attributable to the change in accumulated other comprehensive income.

At March 31, 2014 and December 31, 2013, the Company had $19.1 million of debt outstanding.  Approximately $2.1 million of this debt is related to the ACAP dissenters' settlement that occurred during the fourth 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.

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

Liquidity

The Company has three principal needs for cash - the insurance company's contractual obligations to policyholders, the payment of operating expenses and debt service.  Cash and cash equivalents as a percentage of total assets were approximately 4% and 5% as of March 31, 2014 and December 31, 2013.  Fixed maturities as a percentage of total assets were approximately 40% and 42% as of March 31, 2014 and December 31, 2013, respectively.

The Company currently has access to funds for operating liquidity.  UTG has an $8 million revolving credit note with Illinois National Bank.  UTG Avalon, LLC also has a $5 million revolving credit note.  UG is a member of the FHLB which allows UG access to credit.  UG's current line of credit with the FHLB is $15 million.  At March 31, 2014, the Company had $7.1 million of outstanding borrowings attributable to the lines of credit.  In April 2014, the Company paid $900,000 in principal on the UTG revolving credit note.

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 $2.1 million and $803,000 for the three month period ended March 31, 2014 and 2013, respectively.  The variance in cash used in operating activities, when comparing March 31, 2014 and March 31, 2013 activity, is mainly attributable to the net loss recognized by the Company during the current year. During the first quarter of 2014, the Company did not recognize any substantial positive one-time events, but did recognize an increase in operating expenses related to information technology.

Net cash provided by investing activities was approximately $4 million and $3.7 million for the three month period ended March 31, 2014 and 2013, respectively.  The cash provided by and used in investing activities is expected to vary from quarter to quarter depending on market conditions and Management's ability to find and negotiate favorable investment contracts.

Net cash provided by (used in) financing activities was approximately $(3.2) million and $97,000 for the three month period ended March 31, 2014 and 2013, respectively.  During 2014, the Company used cash of approximately $3 million in the settlement of the sale of a small block of life insurance business.  The sale of this block of business was approved by the Ohio Department of Insurance during the first quarter of 2014.

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 March 31, 2014, substantially all of the consolidated shareholders equity represents net assets of its subsidiary.  The Company's insurance subsidiary has maintained adequate statutory capital and surplus.  The payment of cash dividends to shareholders by UTG is not legally restricted.  However, the state insurance department regulates insurance company dividend payments where the company is domiciled.  No dividends were paid to shareholders in 2013 or the three month period ended March 31, 2014.

UG is an Ohio domiciled insurance company, which requires notification within five business days to the insurance commissioner following the declaration of any ordinary dividend and at least ten calendar days prior to payment of such dividend.  Ordinary dividends are defined as the greater of:  a) prior year statutory net income or b) 10% of statutory capital and surplus.  For the year ended December 31, 2013, UG had statutory net income of $4.8 million.  At December 31, 2013 UG's statutory capital and surplus amounted to $34.9 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 2013, UG paid UTG ordinary dividends of $2.7 million.  UTG used the dividends to pay on its outstanding line of credit balance. UG has not paid UTG any ordinary dividends during 2014.

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








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

 
EXHIBIT INDEX



Exhibit Number
Description


*10.22
Promissory Note dated March 28, 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







EX-101.PRE 2 utgn-20140331_pre.xml XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE EX-31.1 3 exhibit311.htm CERTIFICATION
Exhibit 31.1
CERTIFICATIONS
 
 
I, Jesse T. Correll, Chairman of the Board and Chief Executive Officer of UTG, Inc., certify that:
 
1.
 
I have reviewed this quarterly report on Form 10-Q of the registrant, UTG, Inc.;
 
 
 
 
 
 
 
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
 
 
 
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
 
4.
 
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)) for the registrant and have:
 
 
 
 
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
 
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
 
 
 
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
 
 
 
 
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
 
 
 
5.
 
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
 
 
 
 
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
 
 
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
 
 
 
 

Date:
May 12, 2014
By
/s/ Jesse T. Correll
 
 
Chairman of the Board and
 
 
Chief Executive Officer
EX-31.2 4 exhibit312.htm CERTIFICATION

Exhibit 31.2
CERTIFICATIONS
 
 
I, Theodore C. Miller,  Senior Vice President, Corporate Secretary and Chief Financial Officer of UTG, Inc., certify that:
 
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of the registrant, UTG, Inc.;
 
 
 
 
 
 
 
2.
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
 
 
 
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
 
4.
 
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)) for the registrant and have:
 
 
 
 
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
 
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
 
 
 
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
 
 
 
 
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
 
 
 
5.
 
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
 
 
 
 
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
 
 
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
 
 
 
 

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

EX-32.1 5 exhibit321.htm CERTIFICATION

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of UTG, Inc. (the "Company") for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the "Report") I, Jesse T. Correll, Chairman of the Board and Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company


Date:
May 12, 2014
By:
/s/ Jesse T. Correll
 
 
 
Jesse T. Correll
 
 
 
Chairman of the Board and
 
 
 
Chief Executive Officer

EX-32.2 6 exhibit322.htm CERTIFICATION

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of UTG, Inc. (the "Company") for the period ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the "Report") I, Theodore C. Miller, Senior Vice President, Corporate Secretary and Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company


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