2019 Annual Report
March 31, 2020
Dear Shareholder,
We are happy to report a record year of earnings! This is a result of investments we have
owned a very long time. Also, our stock performed very well in 2019. We have no debt
and over 20% of our assets are in cash and short-term treasuries. We have a strong balance
sheet and a great team to manage our company.
As I have said every year, our team owns a significant stake in the company and that aligns
all of our interest.
I am writing this letter for 2019 on March 31, 2020. The Dow has capped off the worst 1st
quarter on record. I am very glad our company is in good shape. Cash is a call option on
every asset class.
We pray for wisdom to manage our company well. We also pray for your good health in
this challenging time.
Thank you for the opportunity to serve you.
Sincerely,
Jesse T. Correll
Chairman
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Business Overview
UTG, Inc. (the "Registrant", “Company” or “UTG”) is an insurance holding company incorporated in
the state of Delaware in 2005. Its primary direct subsidiary is Universal Guaranty Life Insurance
Company (“UG”). The Registrant and its primary subsidiary have only one significant segment,
insurance. The Company’s dominant business is individual life insurance, which includes the
servicing of existing insurance business in-force, the acquisition of other companies in the insurance
business, and the administration processing of life insurance business for other entities.
The holding company has no significant business operations of its own and relies on fees, dividends
and other distributions from its operating subsidiary as the principal source of cash flows to meet its
obligations. Additional information regarding the cash flow and liquidity needs of the holding company
can be found in the Liquidity and Capital Resources section of the Management’s Discussion and
Analysis of Financial Conditions and Results of Operations.
UG has several wholly-owned and majority-owned subsidiaries. The subsidiaries were formed to
hold certain real estate and other investments. The investments were placed into the limited liability
companies and partnerships to provide additional protection to the policyholders and to UG.
Increased global IT security threats and more sophisticated and targeted computer crime pose a risk
to the security of systems and networks and the confidentiality, availability and integrity of data.
Although the Company makes efforts to maintain the security and integrity of the networks and
systems, there can be no assurance that the security efforts will be effective or that attempted security
breaches or disruptions would not be successful or damaging. In the event a security breach or
failure results in the disclosure of sensitive third party data or the transmission of harmful/malicious
code to third parties, the Company could be subject to liability claims. The Company does not
currently carry insurance coverage against such liabilities. Depending on their nature and scope,
such threats also could potentially lead to improper use of our systems and networks, manipulation
and destruction of data, loss of trade secrets, system downtimes and operational disruptions, which
in turn, could adversely affect our reputation, competitiveness and results of operations.
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, a Kentucky corporation, (“FSF”) 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 December 31, 2019, Mr. Correll owns or controls directly and indirectly
approximately 65.64% of UTG’s outstanding stock.
UTG’s website is: www.utgins.com. Information regarding the Company, including recent filings with
the Securities and Exchange Commission, are accessible via this website.
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”) for the
years ended December 31, 2019 and 2018. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this report.
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Cautionary Statement Regarding Forward-Looking Statements
This report on Form 10-K 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, the acquisition of blocks of
business and the administration and processing of life insurance business for other entities.
UTG, Inc. has a strong philanthropic program. The Company generally allocates a portion of its
earnings to be used for its philanthropic efforts primarily targeted to Christ-centered organizations
or organizations that help the weak or poor. The Company also encourages its staff to be involved
on a personal level through monetary giving, volunteerism and use of their talents to assist those
less fortunate than themselves. Through these efforts, the Company hopes to make a positive
difference in the local community, state, nation and world.
Critical Accounting Policies
We have identified the accounting policies below as critical to the understanding of our results of
operations and our financial condition. The application of these critical accounting policies in
preparing our consolidated financial statements requires Management to use significant judgments
and estimates concerning future results or other developments including the likelihood, timing or
amount of one or more future transactions or amounts. Actual results may differ from these
estimates under different assumptions or conditions. On an on-going basis, we evaluate our
estimates, assumptions and judgments based upon historical experience and various other
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information that we believe to be reasonable under the circumstances. For a detailed discussion
of other significant accounting policies, see Note 1 – Summary of Significant Accounting Policies
in the Notes to the Consolidated Financial Statements.
Future Policy Benefits – Because of the long-term nature of insurance contracts, the insurance
company is liable for policy benefit payments that will be made in the future. The liability for future
policy benefits is determined by standard actuarial procedures common to the life insurance
industry. The accounting policies for determining this liability are disclosed in Note 1 – Summary
of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
Cost of Insurance Acquired – The costs of acquiring blocks of insurance from other companies
or through the acquisition of other companies are deferred and recorded as deferred acquisition
costs. The deferred amounts are recorded as an asset and amortized to expense in a systematic
manner as indicated in Note 1 – Summary of Significant Accounting Policies in the Notes to the
Consolidated Financial Statements.
Valuation of Securities – The Company’s investment portfolio consists of fixed maturities, equity
securities, trading securities, mortgage loans and real estate to provide funding of future policy
contractual obligations. The Company’s fixed maturities and equity securities are classified as
available-for-sale. Available-for-sale investments are carried at fair value with unrealized gains and
losses reported in accumulated other comprehensive income (loss) in the Consolidated Balance
Sheets.
The Company’s trading securities are carried at fair value with unrealized gains and losses reported
in income in the Consolidated Statements of Operations. Fair value is the price that the Company
would expect to receive upon sale of the asset in an orderly transaction.
Mortgage loans on real estate are carried at their unpaid principal balances, adjusted for
amortization of premium or discount and valuation allowances. Valuation allowances are
established for impaired loans when it is probable that contractual principal and interest will not be
collected. A portion of the mortgage loan balance consists of discounted mortgage loans that were
purchased at deep discounts through an auction process led by the Federal Government. In
general, the discounted mortgage 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 mortgage loans at its original
purchase price adjusted for any principal receipts received.
Investment real estate held for sale is reported at the lower of cost or fair value less cost to sell.
Expenses to maintain the property are expensed as incurred.
Notes receivable are reported at their unpaid principal balances, adjusted for valuation allowances.
Valuation allowances are established for impaired loans when it is probable that contractual
principal and interest will not be collected. Interest accruals are analyzed based on the likelihood
of repayment. The Company does not utilize a specified number of days delinquent to cause an
automatic non-accrual status.
While the available-for-sale securities are generally expected to be held to maturity, they are
classified as available-for-sale and are sold periodically to manage risk. Although a majority of the
investment portfolio is classified as available-for-sale, the Company has the ability and intent to
hold the securities until maturity. See Note 2 – Investments in the Notes to the Consolidated
Financial Statements for detailed disclosures regarding the Company’s investment portfolio.
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Impairment of Investments – The Company continually monitors the investment portfolio for
investments that have become impaired in value; where fair value has declined below carrying
value. While the value of the investments in the Company’s portfolio continuously fluctuate due to
market conditions, an other-than-temporary impairment charge is recorded only when a security
has experienced a decline in fair market value which is deemed to be other than temporary. The
policies and procedures the Company uses to evaluate and account for impairments of investments
are disclosed in Note 1 – Summary of Significant Accounting Policies and Note 2 – Investments in
the Notes to the Consolidated Financial Statements. The Company makes every effort to
appropriately assess the status and value of the securities with the information available regarding
an other-than-temporary impairment. However, it is difficult to predict the future prospects of a
distressed or impaired security.
Deferred Income Taxes – The provision for deferred income taxes is based on the asset and
liability method of accounting for income taxes. Under this method, deferred income taxes are
recognized by applying enacted statutory tax rates to temporary differences between amounts
reported in the Consolidated Financial Statements and the tax basis of existing assets and
liabilities. A valuation allowance is recognized for the portion of deferred tax assets that, in
Management's judgment, is not likely to be realized.
Results of Operations
On a consolidated basis, the Company had net income attributable to common shareholders of
approximately $16.3 million and $12.4 million in 2019 and 2018, respectively. In 2019, income
before income taxes was approximately $20.2 million compared to $16.5 million in 2018. Total
revenue was approximately $44.2 million in 2019 and $41.3 million in 2018.
One-time events, primarily reflected in realized gains, comprise a substantial portion of the net
income and revenue reported by the Company during 2019 and 2018. 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.
Future earnings will be significantly negatively impacted should earnings from these one-time items
not be realizable in a future period. While Management believes there remain additional
investments with such one-time earnings, when or if realized remains uncertain.
Total benefits and other expenses paid in 2019 were approximately $24 million compared to $24.8
million in 2018.
Revenues
Premiums and policy fee revenues, net of reinsurance premiums and policy fees, were comparable
for 2019 to 2018. The Company writes very little new business. Unless the Company acquires a
new company or a block of in-force business, Management expects premium revenue to continue
to decline on the existing block of business at a rate consistent with prior experience. The
Company’s average persistency rate for all policies in-force for 2019 and 2018 was approximately
96.6% and 96.1%, respectively. Persistency is a measure of insurance in-force retained in relation
to the previous year.
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The following table summarizes the Company’s investment performance for the years ended
December 31:
Net investment income
Net investment gains (losses)
Change in net unrealized investment
gains (losses on available-for sale
securities
2019
2018
$
11,315,646 $
25,425,822
11,202,668
22,456,835
10,822,757
(7,744,899)
The following table reflects net investment income of the Company for the years ended December
31:
Fixed maturities
Equity securities
Mortgage loans
Real estate
Notes receivable
Policy loans
Cash and cash equivalents
Short-term
Total consolidated investment income
Investment expenses
Consolidated net investment income
$
$
2019
2018
5,854,031 $
1,543,904
479,841
2,934,666
1,848,314
607,537
175,917
-
13,444,210
(2,128,564)
11,315,646 $
7,273,157
1,628,649
1,234,115
2,771,348
979,742
646,993
355,276
18,159
14,907,439
(3,704,771)
11,202,668
Net investment income represented approximately 26% and 27% of the Company's total revenues
as of December 31, 2019 and 2018, respectively. When comparing current and prior year results,
net investment income was comparable in the majority of the investment categories, with the largest
variance being found in the fixed maturities, mortgage loans, and notes receivable investment
categories
Income from the fixed maturities investment portfolio is down approximately 20% when comparing
2019 and 2018 results. In the third quarter of 2018, the Company sold a substantial bond holding.
The bond holding was initially acquired over a period of time in 2016 at a deep discount, with an
average cost of 25% of its par value. At the time of sale, Management had determined the value of
the security had recovered sufficiently enough and the time was right to sell a majority of the
holding, realizing a gain of approximately $10 million. A portion of the sales proceeds were used to
purchase higher rated, lower yielding bonds.
Income from the mortgage loan portfolio is down approximately 61% when comparing 2019 and
2018 results. The Company’s investment in mortgage loans is down approximately 9% when
comparing 2019 and 2018 and is one factor contributing to the decline in earnings from the
mortgage loan portfolio. During 2018, two of the higher yielding mortgage loans were paid off.
Included with one of the loan payoffs was a discount payment of approximately $428,000 which
further boosted 2018 earnings in the mortgage loan portfolio. Management has a renewed focus
on the mortgage loan investment portfolio with the intent to substantially grow this specific
investment portfolio during 2020.
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Investment expenses are down approximately $1.6 million when comparing 2019 and 2018 results.
The variance is due to a one-time commission of $1.5 million paid as the result of the sale of certain
discounted bonds in the third quarter of 2018. Excluding this one-time event, investment expenses
are comparable for the 12 months ended 2019 and 2018.
The following table reflects net realized investment gains (losses) for the years ended December
31:
2019
2018
Fixed maturities available for sale
Equity securities
Real estate
Trading securities
Fixed maturities available for sale – OTTI
Real estate – OTTI
Consolidated net realized investment gains
Change in fair value of equity securities
Net investment gains
$
$
189,070 $
9,560,716
3,929,195
(132,518)
(650,956)
-
12,895,507
12,530,315
25,425,822 $
10,751,955
-
1,588,122
-
-
(300,000)
12,040,077
10,416,758
22,456,835
Net realized investment gains were up approximately 13% in 2019 as compared to 2018. As seen
in the table above, the 2019 gains were mainly attributable to the sale of certain equity securities
and real estate, which were partially offset by the recognition of an other-than-temporary
impairment on a fixed maturity on 2019 and on real estate during 2018.
During 2019, the Company sold 14,000 shares of a certain common stock holding and recognized
a gain of approximately $8.9 million. At December 31, 2019, the Company still owned 25,000
shares of this specific common stock and during the first quarter of 2020, sold an additional 3,000
shares of this stock; recognizing a gain of approximately $1.9 million. A substantial portion of this
realized gain was previously recognized as an unrealized gain in the December 31, 2019
Consolidated Statements of Operations. Therefore, this gain will have an immaterial impact on the
2020 earnings of the Company. The realized gain will be offset by the reversal of the unrealized
gain that was previously recognized by the Company at year end 2019.
During 2019, the Company sold six real estate parcels and recognized gains of approximately $3.9
million. During 2018, the Company recognized gains of approximately $1.6 million from the sale of
three real estate parcels.
The 2018 gains were a result of the sale of certain fixed maturities and real estate, which were
offset by the recognition of an other-than temporary impairment on a parcel of real estate. During
2018, the Company sold a substantial bond holding. The bond holding was initially acquired during
2016 over a period of time at a deep discount, with an average cost of 25% of its par value. During
the third quarter of 2018, the value of this security had recovered sufficiently enough that
Management determined the time was right to sell a majority of the holding, realizing a gain of
approximately $10 million. At December 31, 2018 the Company held $5 million of par value of this
security at a cost basis of $651,000. During 2019, the Company recorded an other-than-temporary
impairment of $650,956 on the remaining value of this security due to the deteriorating financial
condition of the issuing entity.
During 2019 and 2018, realized gains were partially offset by other-than-temporary impairments of
$650,956 and $300,000, respectively. The other-than-temporary impairments were taken as
a result of Management’s assessment and consideration of the length of time the securities have
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remained in an unrealized loss position and as a result of management’s analysis and
determination of value. The investments were written down to better reflect their current estimated
fair value.
Realized investment gains are the result of one-time events and are expected to vary from year to
year.
The Company has seen significant unrealized gains on its equity investments during 2018 and
2019. A significant portion of these gains are from two equity holdings, both in the area of oil and
gas. While the Company has had very strong unrealized gains during 2018 and 2019, a pullback
in the stock market, particularly in the oil and gas arena, could slow these gains or even result in
future period unrealized losses. Management believes these equity investments continue to be
solid investments for the Company and have further growth potential; however, changes in market
conditions could cause volatility in market prices.
During 2019, the Company received an offer to purchase its investments in certain music royalties
held in the form of equity investments. As a result of this event, the Company elected to change its
valuation methodology from using discounted cash flow models to estimate fair value to marking
the investment to the offer price to estimate the fair value. The change in methodology resulted in
recording an unrealized gain on investment of approximately $2.1 million during the year ended
December 31, 2019. The investments were sold during the first quarter of 2020. The Company
recognized a gain of approximately $4.2 million on the sale. The 2020 net income is unaffected by
the sale as the realized gain is offset by the unrealized gain reversal at the time of sale.
In summary, the Company’s basis for future revenue is expected to come from the following primary
sources: Conservation of business currently in-force, the maximization of investment earnings and
the acquisition of other companies or policy blocks in the life insurance business. Management has
placed a significant emphasis on the development of these revenue sources to enhance these
opportunities.
Expenses
The Company reported total benefits and other expenses of $24 million and $24.8 million for the years
ended December 31, 2019 and 2018 respectively. Benefits, claims and settlement expenses
represented approximately 63% of the Company’s total expenses for 2019 and 2018. The other major
expense category of the Company is operating expenses, which represented 33% and 34% of the
Company’s total expenses for 2019 and 2018, respectively.
Benefits, claims and settlement expenses, net of reinsurance benefits, were comparable for 2018 and
2019. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected
and are not considered unusual by Management.
Changes in policyholder reserves, or future policy benefits, also impact this line item. Reserves are
calculated on an individual policy basis and generally increase over the life of the policy as a result of
additional premium payments and acknowledgment of increased risk as the insured continues to age.
The short-term impact of policy surrenders is negligible since a reserve for future policy benefits
payable is held which is, at a minimum, equal to and generally greater than the cash surrender value
of a policy. The benefit of fewer policy surrenders is primarily received over a longer time period
through the retention of the Company’s asset base.
Operating expenses decreased approximately 6% in 2019 compared to that of the same time period
in 2018. The variance is mainly attributable to a decrease in salary expenses. Earnings in the prior
year resulted in a higher accrual for salary expense in anticipation of annual performance bonuses
for both management and staff. The significant realized gains from the sale of discounted bonds in
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the third quarter of 2018 was the primary driver of this variation. The Compensation Committee and
Management decided not to pay out all of the accrued bonus monies. The excess accrual was
released during 2019.
Effective January 1, 2017, the Company and FSNB began sharing certain services. The shared
services focuses on departments commonly utilized by both organizations such as financial
accounting, human resources and information technology. The shared services did not initially make
a noticeable difference in operating expenses, but provides a larger team, which enhances
capabilities and quality.
As mentioned above in the Overview section of the Management Discussion and Analysis, UTG has
a strong philanthropic program. The Company generally allocates a portion of its earnings to be used
for its philanthropic efforts primarily targeted to Christ-centered organizations or organizations that
help the weak or poor. Charitable contributions made by the Company are expected to vary from
year to year depending on the earnings of the Company.
Net amortization of cost of insurance acquired decreased approximately 4% when comparing current
and prior year activity. 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.
Management continues to place significant emphasis on expense monitoring and cost containment.
Maintaining administrative efficiencies directly impacts net income.
Investment Information
Financial Condition
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 they are permitted to
make, and the amount of funds that may be used for any one type of investment.
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The following table reflects, by investment category, the investments held by the Company as of
December 31:
Fixed maturities
Equity securities
Mortgage loans
Real estate
Notes receivable
Policy loans
Short-term investments
Total investments
Fixed maturities
Equity securities
Mortgage loans
Real estate
Notes receivable
Policy loans
Total investments
2019
$ 171,629,373
89,581,040
8,223,286
44,344,236
19,487,458
8,803,876
10,442,173
$ 352,511,442
2018
$ 160,960,784
79,783,099
9,069,111
52,518,577
23,717,312
9,204,222
$ 335,253,105
As a % of
Total
Investments
As a % of
Total Assets
49%
25%
2%
13%
6%
2%
3%
100%
41%
21%
2%
11%
5%
2%
2%
84%
As a % of
Total
Investments
As a % of
Total Assets
48%
24%
3%
16%
7%
2%
100%
41%
20%
2%
13%
6%
3%
85%
The Company's investments are generally managed to match related insurance and policyholder
liabilities. The comparison of investment return with insurance or investment product crediting rates
establishes an interest spread. Interest crediting rates on adjustable rate policies have been reduced
to their guaranteed minimum rates, and as such, cannot be lowered any further. Policy interest
crediting rate changes and expense load changes become effective on an individual policy basis on
the next policy anniversary. Therefore, it takes a full year from the time the change was determined
for the full impact of such change to be realized. If interest rates decline in the future, the Company
will not be able to lower rates and both net investment income and net income will be impacted
negatively.
The Company’s total investments represented 84% and 85% of the Company’s total assets as of
December 31, 2019 and 2018, respectively. Fixed maturities consistently represented a substantial
portion, 49% and 48%, respectively, of the total investments during 2019 and 2018. The overall
investment mix, as a percentage of total investments, remained fairly consistent when comparing the
investments held as of December 31, 2019 and 2018.
During 2019, the Company invested approximately $10.4 million in short-term treasury bills. The
Company was holding a significant cash balance and determined it appropriate to invest in these
short term treasuries to increase yield, while working to find longer-term quality investments to invest
in.
As of December 31, 2019, 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
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securities as "investments available for sale". Investments available for sale are carried at market
value, with changes in market value charged directly to the other comprehensive component of
shareholders' equity. Changes in the market value of available for sale securities resulted in net
unrealized gains (losses) of approximately $10.8 million and $(7.7) million as of December 31, 2019
and 2018, respectively. The variance in the net unrealized gains and losses is the result of normal
market fluctuations mainly related to changes in interest rates in the market place.
Management continues to view the Company’s investment portfolio with utmost priority. Significant
time has been spent internally researching the Company’s risk and communicating with outside
investment advisors about the current investment environment and ways to ensure preservation of
capital and mitigate losses. Management has put extensive efforts into evaluating the investment
holdings. Additionally, members of the Company’s Board of Directors and investment committee
have been solicited for advice and provided with information. Management reviews the Company’s
entire portfolio on a security level basis to be sure all understand our holdings, potential risks and
underlying credit supporting the investments. Management intends to continue its close monitoring
of its bond holdings and other investments for possible deterioration or market condition changes.
Future events may result in Management’s determination that certain current investment holdings
may need to be sold which could result in gains or losses in future periods. Such future events could
also result in other than temporary declines in value that could result in future period impairment
losses.
There are a number of significant risks and uncertainties inherent in the process of monitoring
impairments and determining if impairment is other-than-temporary. These risks and uncertainties
related to Management’s assessment of other-than-temporary declines in value include but are not
limited to: the risk that Company's assessment of an issuer's ability to meet all of its contractual
obligations will change based on changes in the credit characteristics of that issuer; the risk that the
economic outlook will be worse than expected or have more of an impact on the issuer than
anticipated; the risk that fraudulent information could be provided to the Company's investment
professionals who determine the fair value estimates.
Liquidity
Liquidity provides the Company with the ability to meet on demand the cash commitments required
by its business operations and financial obligations. The Company’s liquidity is primarily derived from
a portfolio of marketable securities and line of credit facilities. The Company has two principal needs
for cash – the insurance company’s contractual obligations to policyholders and the payment of
operating expenses.
Parent Company Liquidity
UTG is a holding company that has no day-to-day operations of its own. Cash flows from UTG’s
insurance subsidiary, UG, are used to pay costs associated with maintaining the Company in good
standing with states in which it does business and purchasing outstanding shares of UTG stock.
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. As of December
31, 2019 and 2018, substantially all of the consolidated shareholders’ equity represents net assets of
its subsidiaries. In 2019, the Parent company received $6 million in dividends from its insurance
subsidiary and $5 million in 2018. Certain restrictions exist on the payment of dividends from the
insurance subsidiary to the Parent company. For further information regarding the restrictions on the
payment of dividends by the insurance subsidiary, see Note 9 – Shareholders’ Equity in the Notes to
the Consolidated Financial Statements. Although these restrictions exist, dividend availability from
the insurance subsidiary has historically been sufficient to meet the cash flow needs of the Parent
company.
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Insurance Subsidiary Liquidity
Sources of cash flows for the insurance subsidiary primarily consist of premium and investment
income. Cash outflows from operations include policy benefit payments, administrative expenses,
taxes and dividends to the Parent company.
Short-Term Borrowings
An additional source of liquidity to the Parent company and its subsidiaries is the line of credit facilities
extended to them. As of December 31, 2019 and 2018, the Company and its subsidiaries had
available $18 million in line of credit facilities. The Company did not utilize its available credit facilities
during 2018 or 2019. For additional information regarding the line of credit facilities, see Note 7 –
Credit Arrangements in the Notes to the Consolidated Financial Statements.
The Company expects to have readily available funds for the foreseeable future to conduct its
operations and to maintain target capital ratios in the insurance subsidiary through internally
generated cash flow and the credit facilities. In the unlikely event that more liquidity is needed, the
Company could generate additional funds through such sources as a short-term credit facility and
intercompany borrowing.
Consolidated Liquidity
Cash used in operating activities was approximately $8.6 million and $5.1 million in 2019 and 2018,
respectively. Sources of operating cash flows of the Company, as with most insurance entities, is
comprised primarily of premiums received on life insurance products and income earned on
investments. Uses of operating cash flows consist primarily of payments of benefits to policyholders
and beneficiaries and operating expenses. The Company has not marketed any significant new
products for several years. As such, premium revenues continue to decline. Management anticipates
future cash flows from operations to remain similar to historic trends.
During 2019 and 2018, the Company’s investing activities provided net cash of approximately $18.4
million and $2 million, respectively. The Company recognized proceeds of approximately $69.2
million and $107.7 million from investments sold and matured in 2019 and 2018, respectively. The
Company used approximately $50.9 million and $105.7 million to acquire investments during 2019
and 2018, respectively. The net cash provided by investing activities is expected to vary from year
to year depending on market conditions and management’s ability to find and negotiate favorable
investment contracts.
Net cash used in financing activities was approximately $1.2 million and $2.2 million during 2019 and
2018, respectively. As of December 31, 2019 and 2018, the Company had no debt outstanding with
third parties.
The Company had cash and cash equivalents of approximately $28.8 million and $20.2 million as of
December 31, 2019 and 2018, respectively. The Company has a portfolio of marketable fixed
maturities and equity securities that could be sold, if an unexpected event were to occur. These
securities had a fair value of approximately $261.2 million and $240.7 million at December 31, 2019
and 2018, respectively. However, the strong cash flows from investing activities, investment
maturities and the availability of the line of credit facilities make it unlikely that the Company would
need to sell securities for liquidity purposes. See Note 2 – Investments in the Notes to the
Consolidated Financial Statements for detailed disclosures regarding the Company’s investment
portfolio.
Management believes the overall sources of liquidity available will be sufficient to satisfy its financial
obligations.
13
Capital Resources
The Company’s capital structure consists of available short-term debt, long-term debt and
shareholders’ equity. A complete analysis and description of the short-term and long-term debt issues
available as of December 31, 2019 and 2018 are presented in Note 7 – Credit Arrangements in the
Notes to the Consolidated Financial Statements.
The Company had $0 debt outstanding as of December 31, 2019 and 2018.
The NAIC's risk-based capital requirements require insurance companies to calculate and report
information under a risk-based capital formula. The risk-based capital (RBC) formula measures the
adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset
quality, mortality and morbidity, asset and liability matching and other business factors. The RBC
formula is used by state insurance regulators as an early warning tool to identify, for the purpose of
initiating regulatory action, insurance companies that potentially are inadequately capitalized.
At December 31, 2019, UG has a ratio of approximately 5.81, which is 581% of the authorized control
level. Accordingly, the Company meets the RBC requirements.
The Board of Directors of UTG has authorized the repurchase in the open market or in privately
negotiated transactions of UTG's common stock. At a meeting of the Board of Directors in June of
2019, the Board of Directors of UTG authorized the repurchase of up to an additional $2.5 million
of UTG’s common stock, for a total repurchase of $18.5 million. Repurchased shares are available
for future issuance for general corporate purposes. Company Management has broad authority to
operate the program, including the discretion of whether to purchase shares and the ability to suspend
or terminate the program. Open market purchases are made based on the last available market price
but may be limited. During 2019, the Company repurchased 29,252 shares through the stock
repurchase program for approximately $909,368. Through December 31, 2019, UTG has spent
approximately $14.8 million in the acquisition of 1,169,358 shares under this program.
Shareholders’ equity was approximately $131 million and $106.3 million as of December 31, 2019
and 2018, respectively. Total shareholders’ equity increased approximately 23% in 2019 compared
to 2018. The increase is primarily attributable to the change in accumulated other comprehensive
income and retained earnings. As of December 31, 2019 and 2018, the Company reported
accumulated other comprehensive income of approximately $9 million and $62,000, respectively.
Effective January 1, 2018, the Company adopted ASU 2016-01. As a result equity securities are no
longer classified as available-for-sale with unrealized gains and losses recognized in other
comprehensive income; rather, all changes in the fair value of equity securities are now recognized
in net income. The Company reclassified approximately $18.3 million of unrealized gains from equity
securities from being a component of accumulated other comprehensive income to a component of
retained earnings.
At December 31, 2019, accumulated other comprehensive income was increased by approximately
$8.9 million as a result of unrealized gains on fixed maturity securities. At December 31, 2018,
accumulated other comprehensive income was reduced by approximately $14.6 million as a result of
unrealized losses on fixed maturity securities. The variance in the net realized gains and losses is the
result of normal market fluctuations mainly related to changes in interest rates in the market place.
The Company's investments 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 Consolidated
Financial Statements at their fair value.
14
New Accounting Pronouncements
See Note 1 – Summary of Significant Account Policies in the Notes to the Consolidated Financial
Statements for information regarding new accounting pronouncements.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, financing activities or other
relationships with unconsolidated entities or other persons.
Contractual Obligations
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of
Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting
obligations, and therefore does not have to provide the information required by this item.
Management’s Report on Internal Controls Over Financial Reporting
Our Management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The
Company’s internal control over financial reporting is designed to provide reasonable assurance
regarding the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.
The Company’s Management assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2019. In making the assessment, Management used the
criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
in
Based on Management’s assessment,
Management concluded that, as of December 31, 2019, the Company’s internal control over financial
reporting was effective.
Internal Control-Integrated Framework (2013).
This annual report does not include an attestation report of the Company’s independent registered
public accounting firm regarding internal control over financial reporting. Management’s report was
not subject to attestation by the Company’s independent registered public accounting firm pursuant
to rules of the Securities and Exchange Commission that permit the Company to provide only
Management’s report in this Annual Report.
Changes in Internal Controls
There have been no changes in the Company’s internal control over financial reporting since
December 31, 2019, in connection with the evaluation required by paragraph (d) of Exchange Act
Rule 13a-15(e) and 15d-15(e), that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting. The Company’s process for evaluating
controls and procedures is continuous and encompasses constant improvement of the design and
effectiveness of established controls and procedures and the remediation of any deficiencies, which
may be identified during this process.
15
16
UTG, Inc.
Consolidated Balance Sheets
As of December 31, 2019 and 2018
ASSETS
Investments:
Investments available for sale:
Fixed maturities, at fair value (amortized cost $159,959,855 and
$160,895,869)
Equity securities, at fair value (Cost $32,578,862 and $34,885,107)
Equity securities, at cost
Mortgage loans on real estate at amortized cost
Investment real estate, net
Notes receivable
Policy loans
Short-term investments
Total investments
Cash and cash equivalents
Accrued investment income
Reinsurance receivables:
Future policy benefits
Policy claims and other benefits
Cost of insurance acquired
Property and equipment, net of accumulated depreciation
Income taxes receivable
Other assets
Total assets
2019
2018
$
$
$
171,629,373
78,661,793
10,919,247
8,223,286
44,344,236
19,487,458
8,803,876
10,442,173
352,511,442
28,787,629
1,679,783
25,665,161
4,142,142
4,846,321
427,736
-
695,517
418,745,731 $
160,960,784
67,664,482
12,118,617
9,069,111
52,518,577
23,717,312
9,204,222
-
335,253,105
20,150,162
2,119,882
26,117,936
4,053,882
5,622,227
688,567
279,333
1,263,242
395,548,336
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits
Policy claims and benefits payable
Other policyholder funds
Dividend and endowment accumulations
Income taxes payable
Deferred income taxes
Other liabilities
Total liabilities
$
249,264,308 $
3,631,666
404,177
14,626,475
313,662
13,222,604
5,785,933
287,248,825
253,852,368
4,267,481
372,072
14,608,838
-
9,113,480
6,257,387
288,471,626
Shareholders' equity:
Common stock - no par value, stated value $0.001 per share. Authorized
7,000,000 shares -3,277,830 and 3,295,870 shares issued and outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total UTG shareholders' equity
Noncontrolling interest
Total shareholders' equity
Total liabilities and shareholders' equity
$
3,279
36,012,401
85,979,678
8,977,914
130,973,272
523,634
131,496,906
418,745,731 $
3,296
36,567,865
69,708,901
62,495
106,342,557
734,153
107,076,710
395,548,336
See accompanying notes.
17
UTG, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2019 and 2018
Revenue:
Premiums and policy fees
Ceded reinsurance premiums and policy fees
Net investment income
Other income
Revenues before net investment gains (losses)
$
Net investment gains (losses):
Other-than-temporary impairments
Other realized investment gains, net
Change in fair value of equity securities
Total net investment gains
Total revenues
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life
Ceded reinsurance benefits and claims
Annuity
Dividends to policyholders
Commissions
Amortization of cost of insurance acquired
Operating expenses
Total benefits and other expenses
Income before income taxes
Income tax expense (benefit)
Net income
2019
2018
$
9,601,612
(2,535,980)
11,315,646
388,340
18,769,618
(650,956)
13,546,463
12,530,315
25,425,822
44,195,440
16,191,227
(2,233,585)
1,039,604
359,147
(130,828)
775,906
8,006,748
24,008,219
20,187,221
3,591,301
10,076,351
(2,862,701)
11,202,668
400,034
18,816,352
(300,000)
12,340,077
10,416,758
22,456,835
41,273,187
16,751,922
(2,610,586)
1,044,397
390,368
(147,922)
806,065
8,531,113
24,765,357
16,507,830
3,907,536
16,595,920
12,600,294
Net income attributable to noncontrolling interest
(325,143)
(209,177)
Net income attributable to common shareholders
$
16,270,777
$
12,391,117
Amounts attributable to common shareholders:
Basic income per share
Diluted income per share
$
$
4.95
$
4.95
$
3.75
3.75
Basic weighted average shares outstanding
3,285,813
3,307,448
Diluted weighted average shares outstanding
3,285,813
3,307,448
See accompanying notes.
18
UTG, Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2019 and 2018
2019
2018
Net income
$
16,595,920
$
12,600,294
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during period, pre-tax
Tax (expense) benefit on unrealized holding gains (losses)
10,822,757
(7,744,899)
arising during the period
(2,272,779)
1,626,429
Unrealized holding gains (losses) arising during period, net of
tax
8,549,978
(6,118,470)
Less reclassification adjustment for (gains) losses included in net
income
Tax expense (benefit) for gains included in net income
Reclassification adjustment for gains included in net income, net
of tax
Subtotal: Other comprehensive income (loss), net of tax
Comprehensive income (loss)
462,584
(97,143)
365,441
8,915,419
25,511,339
(10,751,955)
2,257,911
(8,494,044)
(14,612,514)
(2,012,220)
Less comprehensive income attributable to noncontrolling
interests
(325,143)
(209,177)
Comprehensive income (loss) attributable to UTG, Inc.
$
25,186,196
$
(2,221,397)
See accompanying notes.
19
See accompanying notes.
20
UTG, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2019 and 2018
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash used in operating
activities:
Amortization (accretion) of investments
Other-than-temporary impairments
Realized investment gains, net
Change in fair value of equity securities
Realized trading (gains) losses included in income
Amortization of cost of insurance acquired
Depreciation
Stock-based compensation
Charges for mortality and administration of universal life and annuity
products
Interest credited to account balances
Change in accrued investment income
Change in reinsurance receivables
Change in policy liabilities and accruals
Change in income taxes receivable (payable)
Change in other assets and liabilities, net
Net cash used in operating activities
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities available for sale
Equity securities
Mortgage loans
Real estate
Notes receivable
Policy loans
Short-term investments
Total proceeds from investments sold and matured
Cost of investments acquired:
Fixed maturities available for sale
Equity securities
Trading securities
Mortgage loans
Real estate
Notes receivable
Policy loans
Short-term investments
Total cost of investments acquired
Net cash provided by investing activities
Cash flows from financing activities:
Policyholder contract deposits
Policyholder contract withdrawals
Purchase of treasury stock
Noncontrolling contributions/(distributions) of consolidated
subsidiary
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
See accompanying notes.
21
2019
2018
$
16,595,920
$
12,600,294
136,991
650,956
(13,678,981)
(12,530,315)
132,518
775,906
1,039,453
353,887
(5,211,485)
4,088,309
440,099
374,515
(4,331,160)
592,995
1,988,577
(8,581,815)
14.390,181
14,385,393
5,283,749
13,283,895
20,261,459
1,635,686
-
69,240,363
(14,634,233)
(2,092,304)
(132,518)
(4,367,644)
(1,958,982)
(16,031,605)
(1,235,340)
(10,403,628)
(50,856,254)
18,384,109
4,669,825
(4,389,622)
(909,368)
(535,662)
(1,164,827)
8,637,467
20,150,162
28,787,629
(142,519)
300,000
(12,340,077)
(10,416,758)
-
806,065
1,067,297
360,812
(6,602,846)
4,221,969
870,839
198,575
(2,237,947)
270,518
5,985,699
(5,058,079)
66,408,611
2,169,989
8,878,073
14,341,204
6,783,702
1,599,896
7,549,076
107,730,551
(56,940,883)
(12,687,839)
-
(91,954)
(15,704,151)
(11,496,998)
(1,244,976)
(7,549,076)
(105,715,877)
2,014,674
4,696,980
(5,234,212)
(1,329,148)
(374,252)
(2,240,632)
(5,284,037)
25,434,199
20,150,162
$
Notes to Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Business – UTG, Inc. is an insurance holding company. The Company’s dominant business is
individual life insurance, which includes the servicing of existing insurance in-force and the
acquisition of other companies in the life insurance business. UTG and its subsidiaries are
collectively referred to as the “Company”.
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 December 31, 2019, Mr. Correll owns or controls directly
and indirectly approximately 66% of UTG’s outstanding stock.
UTG’s life insurance subsidiary has several wholly-owned and majority-owned subsidiaries. The
subsidiaries were formed to hold certain real estate and other investments. The investments were
placed into the limited liability companies and partnerships to provide additional protection to the
policyholders and to UG.
Basis of Presentation – The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the United States of
America (“GAAP”), under guidance issued by the Financial Accounting Standards Board (“FASB”).
The preparation of financial statements in accordance with GAAP requires Management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Principles of Consolidation – The accompanying consolidated financial statements include the
accounts of the Registrant and its wholly and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated during consolidation.
Business Segments – The Company has only one business segment – life insurance.
Investments – The Company reports its investments as follows:
Fixed Maturity Investments – The Company classifies its fixed maturity investments, which include
bonds, as available for sale. Investments classified as available for sale are carried at fair value
with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other
comprehensive income. Premiums and discounts on debt securities purchased at other than par
value are amortized and accreted, respectively, to interest income in the Consolidated Statements
of Operations, using the constant yield method over the period to maturity. Net realized gains and
losses on sales of available for sale securities, and unrealized losses considered to be other-than-
temporary, are recorded to net realized investment gains (losses) in the Consolidated Statements
of Operations.
Equity Securities at Fair Value – Investments in equity securities, which include common and
preferred stocks, are reported at fair value with unrealized gains and losses reported as a
component of net income (loss).
22
Equity Securities at Cost – These investments are reported at their cost basis, minus impairment,
if any, plus or minus changes resulting from observable price changes in orderly transactions for
the identical or a similar investment of the same issuer. The Company adopted ASU 2016-01 during
2018 and transferred equity securities of $12,118,617, that do not have a readily determinable fair
value, from equity securities at fair value to equity securities at cost on the financial statements.
There was no impact to the Consolidated Statements of Operations or net Shareholders’ Equity as
a result of the change.
Mortgage Loans on Real Estate – Mortgage loans on real estate are reported at their unpaid
principal balances, adjusted for amortization of premium or discount and valuation allowances.
Valuation allowances are established for impaired loans when it is probable that contractual
principal and interest will not be collected. Included in the mortgage loans balance is discounted
mortgage loans on real estate. Discounted mortgage loans on real estate are loans that the
Company purchased at a deep discount through an auction process led by the Federal Government
or other intermediary. In general, the discounted loans are non-performing and there is a significant
amount of uncertainty surrounding the timing and amount of cash flows to be received by the
Company. Accordingly, the Company records its investment in the discounted loans at its original
purchase price adjusted for any principal receipts. Management works with the borrower to reach
a settlement on the loan or they foreclose on the underlying collateral which is primarily commercial
real estate. For cash payments received during the work out process, the Company records these
payments to interest income on a cash basis. For loan settlements reached, the Company records
the amount in excess of the carrying amount of the loan as a discount accretion to investment
income at the closing date. Management reviews the discount loan portfolio regularly for
impairment. If an impairment is identified (after consideration of the underlying collateral), the
Company records an impairment to earnings in the period the information becomes known.
Investment Real Estate – Investment real estate held for sale is reported at the lower of cost or fair
value less cost to sell. Expenses to maintain the property are expensed as incurred.
Notes Receivable – Notes receivable are reported at their unpaid principal balances, adjusted for
valuation allowances. Valuation allowances are established for impaired loans when it is probable
that contractual principal and interest will not be collected. Interest accruals are analyzed based on
the likelihood of repayment. The Company does not utilize a specified number of days delinquent
to cause an automatic non-accrual status.
Policy Loans – Policy loans are reported at their unpaid balances, including accumulated interest,
but not in excess of the cash surrender value of the related policy.
Short-Term Investments – Short-term investments have remaining maturities exceeding three
months and under 12 months at the time of purchase and are state at amortized cost, which
approximates fair value.
Gains and Losses – Realized gains and losses include sales of investments and investment
impairments. If any, other-than-temporary impairments in fair value are recognized in net income
on the specific identification basis.
Fair Value – Fair values for cash, short-term investments, short-term debt, receivables and
payables approximate carrying value. Fair values for fixed maturities, equity securities and certain
other assets are determined in accordance with specific accounting guidance. Fair values are
based on quoted market prices, where available. Otherwise, fair values are based on quoted
market prices of comparable instruments in active markets, quotes in inactive markets, or other
observable criteria. Mortgage loans on real estate are estimated using discounted cash flow
analyses. Discounted mortgage loans on real estate are reported at original purchase price,
which Management believes approximates fair value. For more specific information regarding the
23
Company’s measurements and procedures in valuing financial instruments, see Note 3 – Fair Value
Measurements.
Impairment of Investments – The Company evaluates its investment portfolio for other-than-
temporary impairments as described in Note 2 – Investments. If a security is deemed to be other-
than-temporarily impaired, the cost basis of the security is written down to fair value and is treated
as a realized loss.
Current accounting guidance states that if an entity intends to sell or if it is more likely than not that
it will be required to sell an impaired security prior to recovery of its cost basis, the security is to be
considered other-than-temporarily impaired and the full amount of impairment must be charged to
earnings. Otherwise, losses on fixed maturities which are other-than-temporarily impaired are
separated into two categories, the portion of the loss which is considered credit loss and the portion
of the loss which is due to other factors. The credit loss portion is charged to earnings while the
loss due to other factors is charged to other comprehensive income.
Cash Equivalents – Cash equivalents consist of money market accounts and investments with
maturities of three months or less when purchased.
Cash – Cash consists of balances on hand and on deposit in banks and financial institutions.
Reinsurance - In the normal course of business, the Company seeks to limit its exposure to loss
on any single insured and to recover a portion of benefits paid by ceding reinsurance to other
insurance enterprises or reinsurers under excess coverage and coinsurance contracts. The
Company retains a maximum of $125,000 of coverage per individual life.
Reinsurance receivables are recognized in a manner consistent with the liabilities relating to the
underlying reinsured contracts. The cost of reinsurance related to long-duration contracts is
accounted for over the life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
Cost of Insurance Acquired - When an insurance company is acquired, the Company assigns a
portion of its cost to the right to receive future cash flows from insurance contracts existing at the
date of the acquisition. The cost of policies purchased represents the actuarially determined
present value of the projected future profits from the acquired policies. Cost of insurance acquired
is amortized with interest in relation to expected future profits, including direct charge-offs for any
excess of the unamortized asset over the projected future profits. The amortization is adjusted
retrospectively when estimates of current or future gross profits to be realized from a group of
products are revised.
Property and Equipment - Company-occupied property, data processing equipment and furniture
and office equipment are stated at cost less accumulated depreciation of $5,916,424 and
$5,655,593 at December 31, 2019 and 2018, respectively. Depreciation is computed on a straight-
line basis for financial reporting purposes using estimated useful lives of 3 to 30 years. Depreciation
expense was $260,831 and $430,260 for the years ended December 31, 2019 and 2018,
respectively.
Future Policy Benefits and Expenses - The liabilities for traditional life insurance and accident
and health insurance policy benefits are computed using a net level method. These liabilities
include assumptions as to investment yields, mortality, withdrawals, and other assumptions based
on the life insurance subsidiary’s experience adjusted to reflect anticipated trends and to include
provisions for possible unfavorable deviations. The Company makes these assumptions at the time
the contract is issued or, in the case of contracts acquired by purchase, at the purchase date.
Future policy benefits for individual life insurance and annuity policies are computed using interest
rates ranging from 2.0% to 6.0% for life insurance and 2.5% to 7.5% for annuities. Benefit reserves
24
for traditional life insurance policies include certain deferred profits on limited-payment policies that
are being recognized in income over the policy term. Policy benefit claims are charged to expense
in the period that the claims are incurred. The mortality rate assumptions for policies currently
issued by the Company are based on 2001 select and ultimate tables. Withdrawal rate
assumptions are based upon Linton B or C, which are industry standard actuarial tables for
forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life insurance products are
computed under a retrospective deposit method and represent policy account balances before
applicable surrender charges. Policy benefits and claims that are charged to expense include
benefit claims in excess of related policy account balances. Interest crediting rates for universal
life and interest sensitive products range from 3.0% to 6.0% as of December 31, 2019 and 2018.
Policy Claims and Benefits Payable - Policy and contract claims include provisions for reported
claims in process of settlement, valued in accordance with the terms of the policies and contracts,
as well as provisions for claims incurred and unreported. The estimate of incurred and unreported
claims is based on prior experience. The Company makes an estimate after careful evaluation of
all information available to the Company. There is no certainty the stated liability for policy claims
and benefits payable, including the estimate for incurred but unreported claims, will be the
Company’s ultimate obligation.
Income Taxes – Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax impact attributable to differences between
the financial statement book values and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. More information
concerning income taxes is provided in Note 6 – Income Taxes.
Earnings Per Share – The objective of both basic earnings per share (“EPS”) and diluted EPS is
to measure the performance of an entity over the reporting period. The Company presents basic
and diluted EPS on the face of the Consolidated Statements of Operations. Basic EPS is computed
by dividing income available to common shareholders by the weighted average common shares
outstanding for the period. Diluted EPS is calculated by adding to shares outstanding the additional
net effect of potentially dilutive securities or contracts, such as stock options, which could be
exercised or converted into common shares.
Recognition of Revenues and Related Expenses - Premiums for traditional life insurance
products, which include those products with fixed and guaranteed premiums and benefits, consist
principally of whole life insurance policies, and certain annuities with life contingencies are
recognized as revenues when due. Limited payment life insurance policies defer gross premiums
received in excess of net premiums, which is then recognized in income in a constant relationship
with insurance in-force. Accident and health insurance premiums are recognized as revenue pro
rata over the terms of the policies. Benefits and related expenses associated with the premiums
earned are charged to expense proportionately over the lives of the policies through a provision for
future policy benefit liabilities and through deferral and amortization of deferred policy acquisition
costs. For universal life and investment products, generally there is no requirement for payment of
premium other than to maintain account values at a level sufficient to pay mortality and expense
charges. Consequently, premiums for universal life policies and investment products are not
reported as revenue, but as deposits. Policy fee revenue for universal life policies and investment
products consists of charges for the cost of insurance and policy administration fees assessed
during the period. Expenses include interest credited to policy account balances and benefit claims
incurred in excess of policy account balances.
25
Recently Issued Accounting Standards
In January of 2020, the FASB issued Accounting Standards Update No. 2020-01, Investments -
Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and
Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323,
and Topic 815 or ASU 2020-01. ASU 2020-01 clarifies the interaction between accounting
standards related to equity securities, equity method investments, and certain derivatives. The ASU
is effective for fiscal years beginning after December 15, 2020, including interim periods within
those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that
the adoption of this guidance will have on its consolidated financial statements.
In December of 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes
(Topic 740): Simplifying the Accounting for Income Taxes or ASU 2019-12. ASU 2019-12 is
expected to reduce the cost and complexity related to the accounting for income taxes. The ASU
removes specific exceptions to the general principles in Topic 740 and improves the financial
statement preparer's application of income tax related guidance. The ASU is effective for fiscal
years beginning after December 15, 2020, including interim periods within those fiscal years. Early
adoption is permitted. The Company is currently evaluating the impact that the adoption of this
guidance will have on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value
Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for
Fair Value Measurement or ASU 2018-13. ASU 2018-13 modifies certain disclosure requirements
related to fair value measurements including requiring disclosures on changes in unrealized gains
and losses in other comprehensive income for recurring Level 3 fair value measurements and a
requirement to disclose the range and weighted average of significant unobservable inputs used to
develop Level 3 fair value measurements. The ASU is effective for fiscal years beginning after
December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted.
The Company is currently evaluating the impact that the adoption of this guidance will have on its
consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-12, Financial Services-
Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts or
ASU 2018-12. ASU 2018-12 significantly changes how insurers account for long-duration
insurance contracts. The new guidance will require insurers to review and update, if necessary, the
assumptions used to measure insurance liabilities periodically, rather than retain assumptions used
at contract inception. The updated guidance also changes the recognition and measurement of
deferred acquisition costs (DAC) and created a new category of benefit features called market risk
benefits (MRB) that will be measured at fair value. The guidance also significantly expands the
disclosure requirements for long-duration contracts. The ASU was originally effective for fiscal
years, and interim periods within those years, for years beginning after December 15, 2020 and
early adoption is permitted. The guidance on measuring the liabilities for future policy benefits and
DAC will be adopted on a modified retrospective basis as of the earliest period presented in the
year of adoption. The guidance on MRB will be adopted on a retrospective basis as of the earliest
period presented in the year of adoption. In November of 2019, the FASB issued ASU 2019-09,
which delayed the effective date of ASU 2018-12 to fiscal years beginning after December 15, 2023
for smaller reporting companies. The Company is currently evaluating the impact that the adoption
of this guidance will have on its consolidated financial statements.
Accounting Standards Update (ASU 2016-13), Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments – The amendments included in ASU 2016-
13 require the measurement of all expected credit losses for financial assets held at the reporting
date based on historical experience, current conditions, and reasonable and supportable forecasts.
Financial institutions and other organizations will now use forward-looking information to better
evaluate their credit loss estimates. Many of the loss estimation techniques applied today will still
26
be permitted, although the inputs to those techniques will change to reflect the full amount of
expected credit losses. In addition, the ASU amends the accounting for credit losses on available-
for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was
originally effective for public companies for fiscal years beginning after December 15, 2019. In
November of 2019, the FASB issued Accounting Standards Update No. 2019-10, which delayed
the implementation of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller
reporting companies. The Company is currently evaluating the impact that the adoption of this
guidance will have on its consolidated financial statements.
Note 2 – Investments
Available for Sale Securities – Fixed Maturity and Equity Securities
The following tables provide a summary of fixed maturities available for sale by original or amortized
cost and estimated fair value:
December 31, 2019
Investments available for sale:
Fixed maturities
U.S. Government and govt. agencies
and authorities
U.S. special revenue and assessments
All other corporate bonds
Total
Original or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
$
402,832
35,761,440
$
$
14,371,263
832,100
109,827,152 10,470,115
159,959,855 $ 11,705,047 $
(35,529)
$ 36,128,743
-
15,203,363
- 120,297,267
(35,529) $ 171,629,373
December 31, 2018
Investments available for sale:
Fixed maturities
U.S. Government and govt. agencies and
authorities
U.S. special revenue and assessments
All other corporate bonds
Total
Original or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
$
$ 149,006
25,649,410
$
16,350,486
334,300
118,895,973 2,569,287
160,895,869 $ 3,052,593 $
(138,222)
(4,406)
$ 25,660,194
16,680,380
(2,845,050) 118,620,210
(2,987,678) $ 160,960,784
The following table provides a summary of fixed maturities by contractual maturity as of December
31, 2019. Actual maturities could differ from contractual maturities due to call or prepayment
provisions:
Fixed Maturities Available for Sale
December 31, 2019
Amortized
Cost
Estimated
Fair Value
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
11,286,769
50,028,712
50,866,597
47,777,777
159,959,855
$
$
11,461,374
51,609,109
56,224,286
52,334,604
171,629,373
$
$
27
By insurance statute, the majority of the Company's investment portfolio is invested in investment
grade securities to provide ample protection for policyholders.
Below investment grade debt securities generally provide higher yields and involve greater risks
than investment grade debt securities because their issuers typically are more highly leveraged
and more vulnerable to adverse economic conditions than investment grade issuers. In addition,
the trading market for these securities is usually more limited than for investment grade debt
securities. Debt securities classified as below-investment grade are those that receive a Standard
& Poor's rating of BB+ or below.
The Company held below investment grade investments with an estimated market value of
$1,031,570 and $2,618,594 as of December 31, 2019 and December 31, 2018, respectively. The
investments are all classified as “All other corporate bonds”.
The fair value of investments with sustained gross unrealized losses at December 31, 2019 and
2018 are as follows:
December 31, 2019
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
Total fixed maturities
$
$
6,059,380
6,059,380
(35,529)
(35,529)
$
$
-
-
-
-
$
$
6,059,380
6,059,380
(35,529)
(35,529)
December 31, 2018
Less than 12 months
12 months or longer
Total
U.S. Government and govt.
agencies and authorities
U.S. special revenue and
assessments
All other corporate bonds
Total fixed maturities
Unrealized
Unrealized
Fair value
losses
Fair value
losses
Fair value
Unrealized
losses
$
6,429,700
(49,904)
$ 1,592,679
(88,318)
$
8,022,379
(138,222)
4,023,920
49,270,729
$ 59,724,349
(4,406)
(2,033,507)
(2,087,817)
-
15,337,739
$ 16,930,418
-
(811,543)
(899,861)
$
4,023,920
64,608,468
76,654,767
(4,406)
(2,845,050)
(2,987,678)
The following table provides additional information regarding the number of securities that were in
an unrealized loss position for greater than or less than twelve months:
Less than
12 months
12 months
or longer
As of December 31, 2019
Fixed maturities
As of December 31, 2018
Fixed maturities
3
30
-
10
Total
3
40
Substantially all of the unrealized losses on fixed maturities available for sale at December 31,
2019 and 2018 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 December 31, 2019 and 2018.
28
Cost Method Investments
The Company held equity investments with an aggregate cost of $10,919,247 and $12,118,617 at
December 31, 2019 and 2018, respectively. These equity investments were not reported at fair
value because it is not practicable to estimate their fair values due to insufficient information being
available. Management did not identify any events or changes in circumstances that might have a
significant adverse effect on the reported value of those investments. Based on Management's
evaluation of the expected cash flow of the investments, and the Company's ability and intent to
hold the investments for a reasonable period of time, the Company does not deem an other-than-
temporary impairment necessary at December 31, 2019.
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 Consolidated Statements of
Operations. Trading Securities included exchange-traded equities and exchange-traded options.
Trading securities carried as liabilities were securities sold short. A gain, limited to the price at
which the security was sold short, or a loss, potentially unlimited in size, was recognized upon the
termination of the short sale. Earnings from trading securities were classified in cash flows from
operating activities. The Company did not hold any trading securities at December 31, 2019 or
2018.
The following table reflects trading securities revenue charged to net investment income for the
periods ended December 31:
2019
2018
Net unrealized gains (losses)
Net realized gains (losses)
Net unrealized and realized gains
(losses)
$
$
-
(132,518)
(132,518)
$
-
-
-
Mortgage Loans on Real Estate
The Company, from time to time, acquires mortgage loans through participation agreements with
FSNB. FSNB has been able to provide the Company with additional expertise and experience in
underwriting commercial and residential mortgage loans, which provide more attractive yields than
the traditional bond market. The Company is able to receive participations from FSNB for three
primary reasons: 1) FSNB has already reached its maximum lending limit to a single borrower, but
the borrower is still considered a suitable risk; 2) the interest rate on a particular loan may be fixed
for a long period that is more suitable for UG given its asset-liability structure; and 3) FSNB’s loan
growth might at times outpace its deposit growth, resulting in FSNB participating such excess loan
growth rather than turning customers away. For originated loans, the Company’s Management is
responsible for the final approval of such loans after evaluation. Before a new loan is issued, the
applicant is subject to certain criteria set forth by Company Management to ensure quality control.
These criteria include, but are not limited to, a credit report, personal financial information such as
outstanding debt, sources of income, and personal equity. Once the loan is approved, the
Company directly funds the loan to the borrower. The Company bears all risk of loss associated
with the terms of the mortgage with the borrower.
29
During 2019 and 2018, the Company acquired $4,367,644 and $91,954 in mortgage loans,
respectively. FSNB services the majority of the Company’s mortgage loan portfolio. The Company
pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of
the original loan cost to cover costs incurred by FSNB relating to the processing and establishment
of the loan.
During 2019 and 2018, the maximum and minimum lending rates for mortgage loans were:
2019
2018
Maximum
rate
Minimum
Maximum
Minimum
rate
rate
rate
Farm Loans
Commercial Loans
Residential Loans
5.00 %
7.50 %
5.50 %
5.00 %
4.82 %
5.50 %
5.00 %
7.50 %
8.00 %
5.00 %
4.00 %
8.00 %
Most mortgage loans are first position loans. Loans issued are generally limited to no more than
80% of the appraised value of the property.
The Company has in place a monitoring system to provide Management with information regarding
potential troubled loans. Letters are sent to each mortgagee when the loan becomes 30 days or
more delinquent. Management is provided with a monthly listing of loans that are 60 days or more
past due. All loans 90 days or more past due are placed on a non-performing status and classified
as delinquent loans. Quarterly, coinciding with external financial reporting, the Company reviews
each delinquent loan and determines how each delinquent loan should be classified. Management
believes the current internal controls surrounding the mortgage loan selection process provide a
quality portfolio with minimal risk of foreclosure and/or negative financial impact.
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. 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 mortgage loan reserve was
$0 at December 31, 2019 and December 31, 2018.
The following table summarizes the mortgage loan holdings of the Company for the periods ended
December 31:
2019
2018
In good standing
Overdue interest over 90 days
Total mortgage loans
Total foreclosed loans during the year
$
$
$
8,223,286
-
8,223,286
234,044
$
$
$
7,169,272
1,899,839
9,069,111
-
30
Investment Real Estate
Investment real estate held for sale is reported at the lower of cost or fair value less cost to sell.
Investment Real estate acquired through foreclosure, consisting of properties obtained through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual
asset basis at the lower of cost or fair value, less disposal costs. Fair value is determined on the
basis of current appraisals, comparable sales, and other estimates of value obtained principally
from independent sources. When properties are acquired through foreclosure, any excess of the
loan balance at the time of foreclosure over the fair value of the real estate held as collateral is
recognized and charged
the Consolidated Statements of Operations. Based upon
Management’s evaluation of the real estate acquired through foreclosure, additional expense is
recorded when necessary in an amount sufficient to reflect any declines in estimated fair value.
to
The Company's investment real estate portfolio includes ownerships in oil and gas royalties. As of
December 31, 2019 and 2018, investments in oil and gas royalties represented 44% and 43%,
respectively, of the total investment real estate portfolio.
Gains and losses recognized on the disposition of the properties are recorded as realized gains
and losses in the Consolidated Statements of Operations. During 2019 and 2018, the Company
acquired $1,958,982 and $15,704,151 of investment real estate, respectively.
Notes Receivable
Notes receivable represent collateral loans and promissory notes issued by the Company and are
reported at their unpaid principal balances, adjusted for valuation allowances. Valuation allowances
are established for impaired loans when it is probable that contractual principal and interest will not
be collected. The valuation allowance as of December 31, 2019 and 2018 was $0. Interest accruals
are analyzed based on the likelihood of repayment. The Company does not utilize a specified
number of days delinquent to cause an automatic non-accrual status. During 2019 and 2018, the
Company acquired $16,031,605 and $11,496,998 of notes receivable, respectively.
Before a new note is issued, the applicant is subject to certain criteria set forth by Company
Management to ensure quality control. Once the note is approved, the Company directly funds the
note to the borrower. Several of the notes have participation agreements in place, whereas the
Company has reduced its investment in the note receivable by participating a portion of the note to
a third party.
Similar to the mortgage loans, FSNB services several of the notes receivable. The Company, and
the participants in the notes, share in the risk of loss associated with the terms of the note with the
borrower, based upon their ownership percentage in the note. The Company has in place a
monitoring system to provide Management with information regarding potential troubled loans.
31
Analysis of Investment Operations
The following table reflects the Company’s net investment income for the periods ended December
31:
Fixed maturities
Equity securities
Mortgage loans
Real estate
Notes receivable
Policy loans
Cash and cash equivalents
Short-term
Total consolidated investment income
Investment expenses
Consolidated net investment income
2019
2018
$
5,854,031
1,543,904
497,841
2,934,666
1,848,314
7,273,157
1,628,649
1,234,115
2,771,348
979,742
607,537
175,917
-
13,444,210
(2,128,564)
11,315,646
$
646,993
355,276
18,159
14,907,439
(3,704,771)
11,202,668
$
$
The following table presents the Company’s net realized investments gains (losses) and the change
in net unrealized gains on available-for-sale investments for the periods ended December 31:
Realized gains on available-for-sale investments:
Sales of fixed maturities
Sales of equity securities
Sales of real estate
Other
Total realized gains
Realized losses on available-for-sale
investments:
Sales of fixed maturities
Sales of equity securities
Sales of real estate
Other-than-temporary impairments
Other
Total realized losses
Net realized investment gains (losses)
Change in fair value of equity securities:
Change in fair value of equity securities held at
the end of the period
Change in fair value of equity securities
Net investment gains (losses)
Change in net unrealized gains (losses) on
available-for-sale investments included in other
comprehensive income:
Fixed maturities
Net increase (decrease)
$
2019
2018
331,322
9,560,716
3,929,195
-
13,821,233
(142,252)
-
-
(650,956)
(132,518)
(925,726)
12,895,507
$
11,708,320
-
1,588,122
-
13,296,442
(956,365)
-
-
(300,000)
-
(1,256,365)
12,040,077
12,530,315
12,530,315
25,425,822
10,416,758
10,416,758
22,456,835
$
$
$
$
10,822,757
10,822,757
$
$
(7,744,899)
(7,744,899)
32
Other-Than-Temporary Impairments
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.
Management regularly reviews its real estate portfolio in comparison to appraisal valuations and
current market conditions for indications of other-than-temporary impairments. If a decline in value
is judged by Management to be other-than-temporary, a loss is recognized by a charge to other-
than-temporary impairment losses in the Consolidated Statements of Operations.
The other-than-temporary impairments recognized during 2018 and 2019 were taken as a result of
Management's assessment and determination of value of the investments. The investments were
written down to better reflect their current expected value.
Based on Management’s review of the investment portfolio, the Company recorded the following
losses for other-than-temporary impairments in the Consolidated Statements of Operations for the
periods ended December 31:
2019
2018
Other than temporary impairments:
Fixed Maturities
Real Estate
Total other than temporary
impairments
$
$
650,956
-
$
-
300,000
650,956
$
300,000
Investments on Deposit
The Company had investments with a fair value of $8,371,827 and $8,317,514 on deposit with
various state insurance departments as of December 31, 2019 and 2018, respectively.
Note 3 – Fair Value Measurements
The Company measures its assets and liabilities recorded at fair value in the 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.
33
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, 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.
34
Equity securities consist of common and preferred stocks mainly in private equity investments,
financial institutions and publicly traded corporations. 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 Company uses industry standard pricing
methodologies, including discounted cash flow models that may incorporate various inputs such as
payment expectations, risk of the investment, market data, and health of the underlying company.
The inputs are based upon Management's assumptions and available market information. When
evidence is believed to support a change to the carrying value from the transaction price,
adjustments are made to reflect the expected cash flows, material events and market data. These
investments are included in Level 3 of the fair value hierarchy.
During 2019, the Company received an offer to purchase its investments in certain music royalties
held in the form of Level 3 equity investments. As a result of this event, the Company elected to
change its valuation methodology from using discounted cash flow models to estimate fair value to
marking the investment do the offer price to estimate the fair value. The change in methodology
resulted in recording an unrealized gain on investment of approximately $2.1 million during the year
ended December 31, 2019. The investments were sold during the first quarter of 2020. The
Company recognized a gain of approximately $4.2 million on the sale. The 2020 net income is
unaffected by the sale as the realized gain is offset by the unrealized gain reversal at the time of
sale.
The following table presents the Company’s assets and liabilities measured at fair value in the
consolidated balance sheet on a recurring basis as of December 31, 2019.
Level 1
Level 2
Level 3
Total
Assets
Fixed Maturities,
available for sale
Equity Securities
Total
$ 36,128,743
$ 135,500,630
$
-
$ 171,629,373
29,888,281
$ 66,017,024
14,258,750
$ 149,759,380
34,514,762
$ 34,514,762
78,661,793
$ 250,291,166
The following table presents the Company’s assets and liabilities measured at fair value in the
consolidated balance sheet on a recurring basis as of December 31, 2018.
Level 1
Level 2
Level 3
Total
Assets
Fixed Maturities,
available for sale
Equity Securities
Total
$ 25,660,194
$ 134,865,746
$
434,844
$ 160,960,784
27,634,283
$ 53,294,477
10,557,031
$ 145,422,777
29,473,168
$ 29,908,012
67,664,482
$ 228,625,266
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.
35
Fixed Maturities,
Available for Sale
Equity Securities
$
434,844 $
29,473,168 $
Balance at December 31, 2018
Transfers in to Level 3
Transfers out of Level 3
Total unrealized gains (losses):
Included in net income (loss)
Included in other comprehensive income
Purchases
Sales
Balance at December 31, 2019
-
-
-
(422,927)
-
(11,917)
$
- $
Total
29,908,012
-
-
-
-
6,461,670
-
1,038,220
(2,458,296)
34,514,762 $
6,461,670
(422,927)
1,038,220
(2,470,213)
34,514,762
Change in fair value of equity securities included in net
income (loss) relation to assets held
$
6,461,670
$ 4,633,751
December 31, 2019
December 31, 2018
The Level 3 securities include one fixed maturity and certain equity securities with unobservable
inputs. The Company computed fair value of Level 3 equity investments based on a review of
current financial information, earnings trends and similar companies in the same industries.
The Company did not transfer any assets in or out of Level 3 during 2019. The Company transferred
certain cost method investments out of Level 3 during 2018. Transfers occur when there is a lack
of observable market information.
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 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 Consolidated Balance Sheets are shown below. Because the fair value
for all 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.
December 31, 2019
December 31, 2018
Assets
Equity securities
Mortgage loans on real estate
Investment real estate
Notes receivable
Policy loans
Short-term investments
Cash and cash equivalents
Carrying
Amount
$ 10,919,247
8,223,286
44,344,236
19,487,458
8,803,876
10,442,173
28,787,629
Estimated
Fair
Value
Carrying
Amount
10,919,247 $ 12,118,617 $
8,223,286
44,344,236
19,487,458
8,803,876
10,422,173
28,787,629
9,069,111
52,518,577
23,717,312
9,204,222
-
20,150,162
Estimated
Fair
Value
12,118,617
9,069,111
52,518,577
23,717,312
9,204,222
-
20,150,162
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.
36
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.
A portion of the mortgage loans balance consists of discounted mortgage loans. The Company has
historically purchased non-performing discounted mortgage loans at a deep discount through an
auction process led by the Federal Government. In general, the discounted loans are non-
performing and there is a significant amount of uncertainty surrounding the timing and amount of
cash flows to be received by the Company. Accordingly, the Company records its investment in
the discounted loans at its original purchase price, which Management believes approximates fair
value. The inputs used to measure the fair value of our discounted mortgage loans are classified
as Level 3 within the fair value hierarchy.
Investment real estate, including the Company’s investment in oil and gas royalties, 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.
Notes receivable are carried at their unpaid principal balances, which approximates fair value. The
inputs used to measure the fair value of the loans are classified as Level 3 within the fair value
hierarchy.
Policy loans are carried at the aggregate unpaid principal balances in the Consolidated Balance
Sheets which approximate fair value, and earn interest at rates ranging from 4% to 8%. Individual
policy liabilities in all cases equal or exceed outstanding policy loan balances. The inputs used to
measure the fair value of our policy loans are classified as Level 3 within the fair value hierarchy.
Short-term investments are stated at amortized costs, which approximated fair value.
The carrying amount of cash and cash equivalents in the Consolidated Balance Sheets 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.
Note 4 - Reinsurance
As is customary in the insurance industry, the insurance subsidiary cedes insurance to, and
assumes insurance from, other insurance companies under reinsurance agreements. Reinsurance
agreements are intended to limit a life insurer's maximum loss on a large or unusually hazardous
risk or to obtain a greater diversification of risk. The ceding insurance company remains primarily
liable with respect to ceded insurance should any reinsurer be unable to meet the obligations
assumed by it. However, it is the practice of insurers to reduce their exposure to loss to the extent
that they have been reinsured with other insurance companies. The Company sets a limit on the
amount of insurance retained on the life of any one person. The Company will not retain more than
$125,000, including accidental death benefits, on any one life. At December 31, 2019, the Company
had gross insurance in-force of $1.1 billion of which approximately $214 million was ceded to
reinsurers. At December 31, 2018, the Company had gross insurance in-force of $1.1 billion of
which approximately $228 million was ceded to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The Company monitors the
solvency of its reinsurers in seeking to minimize the risk of loss in the event of a failure by one of
the parties. The Company is primarily liable to the insureds even if the reinsurers are unable to
meet their obligations. The primary reinsurers of the Company are large, well-capitalized entities.
37
Most recently, UG utilized reinsurance agreements with Optimum Re Insurance Company
(“Optimum”), and Swiss Re Life and Health America Incorporated (“SWISS RE”). Optimum and
SWISS RE currently hold an “A” (Excellent) and "A+" (Superior) rating, respectively, from A.M.
Best, an industry rating company. The reinsurance agreements were effective December 1, 1993,
and covered most new business of UG. Under the terms of the agreements, UG cedes risk
amounts above its retention limit of $100,000 with a minimum cession of $25,000. Ceded amounts
are shared equally between the two reinsurers on a yearly renewable term (“YRT”) basis, a
common industry method. The treaty is self-administered; meaning the Company records the
reinsurance results and reports them to the reinsurers.
Also, Optimum is the reinsurer of 100% of the accidental death benefits (“ADB”) in force of UG.
This coverage is renewable annually at the Company’s option. Optimum specializes in reinsurance
agreements with small to mid-size carriers such as UG.
UG entered into a coinsurance agreement with Park Avenue Life Insurance Company (“PALIC”)
effective September 30, 1996. Under the terms of the agreement, UG ceded to PALIC substantially
all of its then in-force paid-up life insurance policies. Paid-up life insurance generally refers to non-
premium paying life insurance policies. Under the terms of the agreement, UG sold 100% of the
future results of this block of business to PALIC through a coinsurance agreement. UG continues
to administer the business for PALIC and receives a servicing fee through a commission allowance
based on the remaining in-force policies each month. PALIC has the right to assumption reinsure
the business, at its option, and transfer the administration. The Company is not aware of any such
plans. PALIC’s ultimate parent, The Guardian Life Insurance Company of America (“Guardian”),
currently holds an "A++" (Superior) rating from A.M. Best. The PALIC agreement accounts for
approximately 64% and 63% of UG’s reinsurance reserve credit, as of December 31, 2019 and
2018, respectively.
The Company does not have any short-duration reinsurance contracts. The effect of the
Company's long-duration reinsurance contracts on premiums earned in 2019 and 2018 were as
follows:
2019
Premiums Earned
2018
Premiums Earned
Direct
Assumed
Ceded
Net Premiums
$
$
9,601,259
353
(2,535,980)
7,065,632
$
$
10,074,892
1,459
(2,862,701)
7,213,650
Note 5 – Cost of Insurance Acquired
When an insurance company is acquired, the Company assigns a portion of its cost to the right to
receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of
policies purchased represents the actuarially determined present value of the projected future profits
from the acquired policies. Cost of insurance acquired is amortized with interest in relation to
expected future profits, including direct charge-offs for any excess of the unamortized asset over the
projected future profits. The interest rates utilized may vary due to differences in the blocks of
business. The interest rate utilized in the amortization calculation of the remaining cost of insurance
acquired is 12%. The amortization is adjusted retrospectively when estimates of current or future
gross profits to be realized from a group of products are revised.
38
Cost of insurance acquired, beginning of year
$
Interest accretion
Amortization
Net amortization
Cost of insurance acquired, end of year
$
2019
2018
5,622,227
769,612
(1,545,518)
(775,906)
4,846,321
$
$
6,428,292
866,339
(1,672,404)
(806,065)
5,622,227
Estimated net amortization expense of cost of insurance acquired for the next five years is as
follows:
2020
2021
2022
2023
2024
Interest
Accretion
676,503
587,120
501,324
418,722
339,372
Amortization
1,421,353
1,302,090
1,189,672
1,079,979
975,187
Net
Amortization
744,850
714,970
688,348
661,257
635,815
Note 6 – Income Taxes
UTG and UG file separate federal income tax returns.
Income tax expense (benefit) consists of the following components:
2019
2018
Current tax
Deferred tax
Income tax expense
$
$
1,698,995
1,892,306
3,591,301
$
$
1,922,542
1,984,994
3,907,536
The expense for income taxes differed from the amounts computed by applying the applicable
United States statutory rate of 21% and 21% as of December 31, 2019 and 2018, respectively,
before income taxes as a result of the following differences:
Tax computed at statutory rate
Changes in taxes due to:
Non-controlling interest
Dividend received deduction
Other
Income tax expense
2019
2018
$
4,239,316
$
3,466,644
(68,280)
(175,866)
(403,869)
3,591,301
$
(43,927)
(170,690)
655,509
3,907,536
$
39
The following table summarizes the major components that comprise the deferred tax liability as
reflected in the balance sheets:
2019
2018
Investments
Cost of insurance acquired
Management/consulting fees
Future policy benefits
Deferred gain on sale of subsidiary
Other assets (liabilities)
Reserves adjustment
Federal tax DAC
Deferred tax liability
$
$
10,983,955
1,017,727
(9,147)
(460,923)
1,387,490
197,876
288,320
(182,694)
13,222,604
$
$
6,939,758
1,180,668
(15,724)
(1,670,814)
1,387,490
65,573
1,426,205
(199,676)
9,113,480
At December 31, 2019 and 2018, the Company had gross deferred tax assets of $1,359,230 and
$2,723,053, respectively, and gross deferred tax liabilities of $14,581,834 and $11,836,533,
respectively, resulting from temporary differences primarily related to the life insurance subsidiary.
A valuation allowance is to be provided when it is more likely than not that deferred tax assets will
not be realized by the Company. No valuation allowance has been recorded (except as noted
below) relating to the Company’s deferred tax assets since, in Management’s judgment, the
Company will more likely than not have sufficient taxable income in future periods to fully realize
its existing deferred tax assets.
The Company also has a deferred tax asset of $0 and $43,717 relating to an AMT tax carryforward
as of December 31, 2019 and 2018, respectively. As a result of the changes to the Alternative
Minimum Tax and corresponding credits resulting from the Tax Cuts and Jobs Act ("TCJA"),
Management has determined that an allowance against this asset is no longer required.
The Company’s Federal income tax returns are periodically audited by the Internal Revenue
Service (“IRS”). There are currently no examinations in process, nor is Management aware of any
pending examination by the IRS. The Company follows the accounting guidance for uncertainty in
income taxes using the provisions of Financial Accounting Standards Board (“FASB”) ASC 740,
Income Taxes. Using that guidance, tax positions initially need to be recognized in the financial
statements when it is more-likely-than-not the position will be sustained upon examination by the
tax authorities. Such tax positions initially and subsequently need to be measured as the largest
amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement with the tax authority assuming full knowledge of the position and relevant facts. The
Company has evaluated its tax positions, expiring statutes of limitations, changes in tax law and
new authoritative rulings and believes that no disclosure relative to a provision of income taxes is
necessary, at this time, to cover any uncertain tax positions. Tax years that remain subject to
examination are the years ended December 31, 2016, 2017, 2018 and 2019.
The Company classifies interest and penalties on underpayment of income taxes as income tax
expense. No interest or penalties were included in the reported income taxes for the years
presented. The Company is not aware of any potential or proposed changes to any of its tax filings.
40
Note 7 – Credit Arrangements
At December 31, 2019 and 2018, the Company had the following lines of credit available:
Instrument
Issue Date
Maturity
Date
Revolving
Credit Limit
December 31,
2018
Borrowings
Repayments
December
31, 2019
Lines of Credit:
UTG
UG
11/20/2013
11/20/2020 $
8,000,000 $
6/2/2015
5/8/2020
10,000,000
-
-
-
-
- $
-
-
-
The UTG line of credit carries interest at a fixed rate of 4.040% and is payable monthly. As collateral,
UTG has pledged 100% of the common voting stock of its wholly owned subsidiary, Universal
Guaranty Life Insurance Company ("UG").
During May of 2019, the Federal Home Loan Bank approved UG’s Cash Management Advance
Application (“CMA”). The CMA gives the Company the option of selecting a variable rate of interest
for up to 90 days or a fixed rate for a maximum of 30 days. The variable rate CMA is prepayable at
any time without a fee, while the fixed CMA is not prepayable prior to maturity.
Note 8 – Commitments and Contingencies
The insurance industry has experienced a number of civil jury verdicts which have been returned
against life and health insurers in the jurisdictions in which the Company does business involving
the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and
other matters. Some of the lawsuits have resulted in the award of substantial judgments against
the insurer, including material amounts of punitive damages. In some states, juries have
substantial discretion in awarding punitive damages in these circumstances. In the normal course
of business, the Company is involved from time to time in various legal actions and other state and
federal proceedings. Management is of the opinion that the ultimate disposition of the matters will
not have a materially adverse effect on the Company’s results of operations or financial position.
Under the insurance guaranty fund laws in most states, insurance companies doing business in a
participating state can be assessed up to prescribed limits for policyholder losses incurred by
insolvent or failed insurance companies. Although the Company cannot predict the amount of any
future assessments, most insurance guaranty fund laws currently provide that an assessment may
be excused or deferred if it would threaten an insurer's financial strength. Mandatory assessments
may be partially recovered through a reduction in future premium tax in some states. The Company
does not believe such assessments will be materially different from amounts already provided for
in the condensed consolidated financial statements, though the Company has no control over such
assessments.
Within the Company’s trading accounts, certain trading securities carried as liabilities represent
securities sold short. A gain, limited to the price at which the security was sold short, or a loss,
potentially unlimited in size, will be recognized upon the termination of the short sale.
41
The following table represents the total funding commitments and the unfunded commitment as of
December 31, 2019 related to certain investments:
Total Funding
Commitment
Unfunded
Commitment
RLF III, LLC
Sovereign’s Capital, LP Fund I
Sovereign's Capital, LP Fund II
Sovereign’s Capital, LP Fund III
Barton Springs Music, LLC
$
$
4,000,000
500,000
1,000,000
1,000,000
1,750,000
398,120
20,000
158,596
800,000
302,250
During 2006, the Company committed to invest in RLF III, LLC (“RLF”), which makes land-based
investments in undervalued assets. RLF makes capital calls as funds are needed for continued
land purchases.
During 2012, the Company committed to invest in Sovereign’s Capital, LP Fund I (“Sovereign’s”),
which invests in companies in emerging markets. Sovereign’s makes capital calls to investors as
funds are needed.
During 2015, the Company committed to invest in Sovereign’s Capital, LP Fund II (“Sovereign’s
II”), which invests in companies in emerging markets. Sovereign’s II makes capital calls to investors
as funds are needed.
During 2018, the Company committed to invest in Sovereign’s Capital, LP Fund III (“Sovereign’s
III”), which invests in companies in emerging markets. Sovereign’s III makes capital calls to
investors as funds are needed.
During 2018, the Company committed to invest in Barton Springs Music, LLC (“Barton”), which
invests in music royalties. Barton makes capital calls to its investors as funds are needed to acquire
the royalty rights.
Note 9 – Shareholders’ Equity
Stock Repurchase Program – The Board of Directors of UTG has authorized the repurchase in
the open market or in privately negotiated transactions of UTG's common stock. At a meeting of
the Board of Directors in June of 2019, the Board of Directors of UTG authorized the repurchase
of up to an additional $2.5 million of UTG's common stock, for a total repurchase of $18.5 million
of UTG's common stock in the open market or in privately negotiated transactions. Company
Management has broad authority to operate the program, including the discretion of whether to
purchase shares and the ability to suspend or terminate the program. Open market purchases are
made based on the last available market price but may be limited. During 2019, the Company
repurchased 29,252 shares through the stock repurchase program for $909,368. Through
December 31, 2019, UTG has spent $14,773,097 in the acquisition of 1,169,358 shares under this
program.
Director Compensation - Effective January 1, 2018, a compensation arrangement was approved
whereby each outside Director annually received $5,000 as a retainer and $2,500 per meeting
attended. All other provisions from the September 2013 arrangement remained the same. The
compensation is being paid in the form of UTG, Inc. common stock. The value is determined
annually on the close of business December 20th or the next business day should December 20th
be a weekend or holiday, based on the activity of the year just ending. Reasonable travel expenses
are reimbursed in cash as incurred. UTG’s Director Compensation policy provides that Directors
who are employees of UTG or its affiliates do not receive any compensation for their services as
Directors except for reimbursement for reasonable travel expenses for attending each meeting.
42
In December of 2019, the Company issued 3,024 shares of its common stock as compensation to
the Directors. The shares were valued at $35.50 per share, the market value at the date of issue.
During 2019, the Company recorded $107,352 in operating expense related to the stock issuance.
In December of 2018, the Company issued 2,994 shares of its common stock as compensation to
the Directors. The shares were valued at $32.50 per share, the market value at the date of issue.
During 2018, the Company recorded $97,305 in operating expense related to the stock issuance.
Other Compensation - During 2019, the Company issued 8,188 shares of stock to management
and employees as compensation at a cost of $246,535. During 2018, The Company issued 10,421
shares of stock to management and employees as compensation at a cost of $263,507. These
awards are determined at the discretion of the Board of Directors.
Earnings Per Share - The following is a reconciliation of basic and diluted weighted average
shares outstanding used in the computation of basic and diluted earnings per share:
Basic weighted average shares outstanding
Weighted average dilutive options outstanding
Diluted weighted average shares outstanding
2019
3,285,813
0
3,285,813
2018
3,307,448
0
3,307,448
The computation of diluted earnings per share is the same as basic earnings per share for the years
ending December 31, 2019 and 2018, as there were no outstanding securities, options or other offers
that give the right to receive or acquire common shares of UTG.
Statutory Restrictions - Restrictions exist on the flow of funds to UTG from its insurance subsidiary.
Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of
capital and surplus. UG is required to maintain minimum statutory surplus of $2,500,000. At
December 31, 2019, substantially all of the consolidated shareholders' equity represents net assets
of UTG’s subsidiaries.
UG is domiciled in the state of Ohio. Ohio requires notification within 5 business days to the insurance
commissioner following the declaration of any ordinary dividend and at least ten days 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. Extraordinary dividends (amounts in
excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are
not restricted to a specific calculation. UG paid ordinary dividends of $6 million and $5 million to UTG
in 2019 and 2018, respectively. No extraordinary dividends were paid during the two years year
period. UTG used the dividends received during 2019 and 2018 to purchase outstanding shares of
UTG stock and for general operations of the Company.
Note 10 - Statutory Accounting
The insurance subsidiary prepares its statutory-based financial statements in accordance with
accounting practices prescribed or permitted by the Ohio Department of Insurance. These
principles differ significantly from accounting principles generally accepted in the United States of
America. "Prescribed" statutory accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). "Permitted" statutory accounting practices encompass all accounting
practices that are not prescribed; such practices may differ from state to state, from company to
company within a state, and may change in the future.
43
The following table reflects UG’s statutory basis net income and capital and surplus (shareholders’
equity) as of December 31:
2019
2018
Net income (loss)
Capital and surplus
$
8,268,187
65,951,037
$
6,166,411
60,024,931
Note 11 – Related Party Transactions
The articles of incorporation of UG contain the following language under item 12 relative to related
party transactions:
A director shall not be disqualified from-dealing with or contracting with the corporation as vendor,
purchaser; employee, agent or otherwise; nor, in the absence of fraud, shall any transaction or
contract or act of this corporation be void or in any way affected or invalidated by the fact that any
director or any firm of which any director is a member or any corporation of which any director is a
shareholder, director or officer is in any way interested in such transaction or contract or act, provided
the fact that such director or such firm or such corporation so interested shall be disclosed or shall be
known to the Board of Directors or such members thereof as shall be present at any meeting of the
Board of Directors at which action upon any such contract or transaction or act shall be taken: nor
shall any such director be accountable .or responsible to the company for or in respect to such
transaction or contract or act of. this corporation or for any gains or profits realized by him by reason
of the fact that he or any firm of which he is a member or any corporation of which he is a shareholder,
director or officer is interested in such action or contract; and any such director may be counted in
determining the existence of a quorum of any meeting of the Board of Directors of the company which
shall authorize or take action in respect to any such contract or transaction or act and may vote thereat
to authorize, ratify, or approve any such contract or transaction or act, with like force and effect as if
he or any firm of which he is a member or any corporation of which he is a shareholder, director or
officer were not interested in such transaction or contract or act.
On February 20, 2003, UG purchased $4 million of a trust preferred security offering issued by First
Southern Bancorp, Inc. (“FSBI”). The security has a mandatory redemption after 30 years with a call
provision after 5 years. The security pays a quarterly dividend at a fixed rate of 6.515%. The
Company received dividends of $198,297 and $283,151 during 2019 and 2018, respectively. On
March 30, 2009, UG purchased $1 million of FSBI common stock. The sale and transfer of this
security is restricted by the provisions of a stock restriction and buy-sell agreement. During 2019, the
Company received a preferred pay down of $558,000 leaving a cost basis of $3,002,000.
UTG has a 30.10% ownership interest in an aircraft that is jointly owned with First Southern National
Bank and Bandyco, LLC. Bandyco, LLC is affiliated with the Estate of Ward F. Correll. Mr. Correll is
the father of Jesse Correll and a former director of the Company. The aircraft is used for business
related travel by various officers and employees of the Company. For years 2019 and 2018, UTG
paid $354,404 and $391,851 for costs associated with the aircraft, respectively.
Effective January 1, 2007, UTG entered into administrative services and cost sharing agreements
with its subsidiary. Under this arrangement, the subsidiary pays its proportionate share of
expenses, based on an allocation formula. During 2019 and 2018, UG paid $7,397,953
and $7,093,227, respectively, in expenses. The Ohio Department of Insurance has approved the
cost sharing agreement and it is Management’s opinion that where applicable, costs have been
allocated fairly and such allocations are based upon accounting principles generally accepted in the
United States of America.
The Company from time to time acquires mortgage loans through participation agreements with
FSNB. FSNB services the Company's mortgage loans including those covered by the participation
44
agreements. The Company pays a .25% servicing fee on these loans and a one-time fee at loan
origination of .50% of the original loan cost to cover costs incurred by FSNB relating to the processing
and establishment of the loan. The Company paid $15,138 and $8,393 in servicing fees and $0 and
$0 in origination fees to FSNB during 2019 and 2018, respectively.
Effective January 1, 2017, UTG entered into a shared services contract with FSNB. Pursuant to the
terms of the agreement, UTG and FSNB will utilize the services of the other’s staff in certain instances
for the betterment of both entities. Personnel within departments, such as accounting, human
resources, and information technology, are shared between the entities. Costs of these resources
are then reimbursed between the companies. The shared services arrangement provides benefits to
both parties such as access to a greater pool of knowledgeable staff, efficiencies from elimination of
redundancies and more streamlined operations.
The Company reimbursed expenses incurred by employees of FSNB relating to salaries, travel and
other costs incurred on behalf of or relating to the Company and received reimbursements from
FSNB. The Company paid $519,857 and $571,648 in 2019 and 2018, respectively to FSNB in net
reimbursement of such costs. In addition, the Company reimburses FSNB a portion of salaries and
pension costs for Mr. Correll and Mr. Ditto. The reimbursement was approved by the UTG Board of
Directors and totaled $322,188 and $307,645 in 2019 and 2018, respectively, which included salaries
and other benefits.
Effective July 1, 2018, the Company assumed the employees of several smaller entities associated
with UTG. The purpose of this was to support the continued efforts to further streamline operations
amongst associated entities. The salaries, benefits, and payroll related processing fees are 100%
reimbursed by the associated entities on a monthly basis. During 2019 and 2018, the Company
received reimbursements of $922,357 and $372,849, respectively.
The Company rents approximately 8,000 square feet of office space, located in Stanford, Kentucky,
from FSNB and pays $2,000 per month in rent. The Company paid rent of $24,000 to FSNB during
2019 and 2018.
As previously disclosed in the Notes Receivable section of Note 2 - Investments, several of the
Company’s notes have participation agreements in place with third parties. Certain participation
agreements are with FSF, a related party. The participation agreements are sold without recourse
and assigned to the participant based on their pro-rata share of the principal, interest and collateral
as specified in the participation agreements. The undivided participations in the notes receivable
range from 20% - 50%. The total amount of loans participated to FSF was $250,000 as of December
31, 2019 and 2018.
During 2016, UG and FSF established a partnership agreement and formed a limited liability company
to purchase real estate. FSF contributed $140,000 to the partnership, which gave them a 10%
ownership in the LLC. The property held by this LLC was sold in January of 2019 and the funds from
the sale were subsequently distributed to the members.
Note 12 – Other Cash Flow Disclosures
On a cash basis, the Company paid the following expenses for the periods ended December 31:
Interest
Federal income tax
$
-
1,106,000
$
-
1,652,000
2019
2018
45
Note 13 – Concentrations
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 T. 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.
Because UTG serves primarily individuals located in four states, the ability of our customers to pay
their insurance premiums is impacted by the economic conditions in these areas. As of December
31, 2019 and 2018, approximately 56% of the Company’s total direct premium was collected from
Illinois, Ohio, Texas and West Virginia. Thus, results of operations are heavily dependent upon the
strength of these economies.
The Company reinsures that portion of insurance risk which is in excess of its retention limits.
Retention limits range up to $125,000 per life. Life insurance ceded represented 20% of total life
insurance in force at December 31, 2019 and 2018, respectively. Insurance ceded represented
33% and 35% of premium income for 2019 and 2018, respectively. The Company would be liable
for the reinsured risks ceded to other companies to the extent that such reinsuring companies are
unable to meet their obligations.
The Company owns a variety of investments associated with the oil and gas industry. These
investments represented approximately 25% of the Company’s total invested assets at December
31, 2019 and 2018.
Note 14 – Selected Quarterly Financial Data
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of
Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting
obligations, and therefore does not have to provide the information required by this item.
46
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
Jesse T. Correll
Chairman of the Board and
Chief Executive Officer
James P. Rousey
President
Theodore C. Miller
Senior Vice President,
Chief Financial Officer and
Corporate Secretary
Douglas P. Ditto
Vice President
Jesse T. Correll
Chairman, President and Director
of First Southern Bancorp, Inc.
Preston H. Correll
Founder, Marksbury Farm Market and
Owner, St. Asaph Farm
John M. Cortines
Director of Generosity, Maclellan Foundation
Thomas F. Darden, II
Founder and Chief Executive Officer
of Cherokee
Howard L. Dayton, Jr.
Founder and Chief Executive Officer of
Compass – finances God’s way
Thomas E. Harmon
Owner and President of Harmon Foods, Inc.
Gabriel J. Molnar
Chief Financial Officer, Capstone Realty, Inc.
Peter L. Ochs
Founder of Capital III and
Founding Member of Trinity Academy
James P. Rousey
President
47
SHAREHOLDER INFORMATION
Annual Meeting
The 2020 Annual Meeting of Shareholders will be held on Wednesday, June 24, 2020 at 9:30 a.m.
eastern time at 205 North Depot Street, Stanford, Kentucky 40484. All shareholders are welcome to
attend and to take part in the discussion of Company affairs.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
The Registrant is a public company whose common stock is traded in the over-the-counter market.
Over-the-counter quotations can be obtained using the UTGN stock symbol.
The following table shows the high and low closing prices for each quarterly period during the past
two years, without retail mark-up, mark-down or commission and may not necessarily represent
actual transactions. The quotations below were acquired from the Yahoo Finance web site, which
also provides quotes for over-the-counter traded securities such as UTG.
2019
2018
Period
High
Low
High
Low
First quarter
Second quarter
Third quarter
Fourth quarter
30.50
34.00
33.01
39.80
30.10
29.36
30.01
33.25
25.20
28.25
34.00
33.00
22.95
24.00
26.00
31.00
UTG has not declared or paid any dividends on its common stock in the past two fiscal years, and
has no current plans to pay dividends on its common stock as it intends to retain all earnings for
investment in and growth of the Company’s business. See Note 9 – Shareholders’ Equity in the
Notes to the Consolidated Financial Statements for information regarding dividend restrictions,
including applicable restrictions on the ability of the Company’s life insurance subsidiary to pay
dividends.
As of January 31, 2020 there were 4,899 record holders of UTG common stock.
Purchases of Equity Securities
The following table provides information with respect to purchases we made of our common stock
during the three months ended December 31, 2019 and total repurchases:
Total
Number of
Shares
Purchased
Oct. 1 through Oct. 31, 2019
Nov. 1 through Nov. 30, 2019
Dec. 1 through Dec. 31, 2019
Total
980 $
480 $
294 $
1,754
Average
Price
Paid Per
Share
33.73
34.60
35.50
48
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Program
Maximum
Number of
Shares
That May
Yet Be
Purchased
Under the
Program
Approximate
Dollar Value
That May Yet
Be Purchased
Under the
Program
980
480
294
1,754
N/A
N/A
N/A
$
$
$
3,739,548
3,722,940
3,712,503
The Board of Directors of UTG has authorized the repurchase in the open market or in privately
negotiated transactions of UTG's common stock. At a meeting of the Board of Directors in June of
2019, the Board of Directors of UTG authorized the repurchase of up to an additional $2.5 million of
UTG’s common stock, for a total repurchase of $18.5 million of UTG's common stock in the open
market or in privately negotiated transactions. Company Management has broad authority to operate
the program, including the discretion of whether to purchase shares and the ability to suspend or
terminate the program. Open market purchases are made based on the last available market price
but may be limited. During 2019, the Company repurchased 29,252 shares through the stock
repurchase program for $909,368. Through December 31, 2019, UTG has spent $14,773,097 in the
acquisition of 1,169,358 shares under this program.
49
Corporate Office
205 North Depot Street
Stanford, KY 40484
(217) 241-6300
Corporate Website
www.utgins.com
Shareholder Services
The Company acts as its own transfer agent. Communications regarding stock transfer, lost
certificates or changes of address should be directed to the Stock Transfer Department at the
corporate office address above or telephone (217) 241-6410.
Certified Public Accountants
Brown Smith Wallace LLP
St. Louis, Missouri
Request for Information
Shareholders may receive a copy, without charge, of the annual report, Form 10-K, or Form 10-Q
upon written request. Copies of Form 10-K or Form 10-Q are also available electronically at our Web
site address at www.utgins.com or the Securities and Exchange Commission’s Web site address at
www.sec.gov.
50