UTG, Inc.
Annual Report 2020

Plain-text annual report

2020 Annual Report April 20, 2021 Dear Shareholder, A very interesting year indeed. 2020 is proof that anything can happen. Wild swings in the value of most asset classes. A good time to stick with the fundamentals that have made our company solid. Relationships are important. We took care of our staff, no cuts in compensation or benefits except for the top four individuals. And with a strong recovery in the last part of the year were able to give those back and pay profit sharing. We continued to stay with our partners in several investments that have recovered nicely. The private and public companies we have invested in have little or no debt and strong balance sheets. The stock buyback plan continues to be in place for those who may want to sell. If you have questions or a desire to sell, please feel free to give our office a call. Thank you for the opportunity to serve you. Sincerely, Jesse T. Correll Chairman 1 2 Business Overview UTG, Inc. (the "Registrant", “Company” or “UTG”) is an insurance holding company incorporated in the state of Delaware in 2005 and headquartered in Stanford, KY. The Company’s principal subsidiary is Universal Guaranty Life Insurance Company (“UG”). The Registrant and its primary subsidiary have only one significant segment, insurance. 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. The Company may explore supplemental sources of income in the future. The cash outlays of the Company mainly consist of operational costs and the costs of repurchasing Company common stock. 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, 2020, Mr. Correll owns or controls directly and indirectly approximately 65% of UTG’s outstanding stock. At December 31, 2020, the Company had consolidated assets of $419 million, consolidated liabilities of $282 million and total shareholders’ equity of $137 million. The Company’s consolidated liabilities include policyholder liabilities and accruals of $263 million. The Company’s principal executive office is located at 205 North Depot Street, Stanford, Kentucky 40484. The Company’s telephone number is 217-241-6300. 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, 2020 and 2019. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. 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. 3 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 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, notes receivable and real estate to provide funding of future policy contractual obligations. The Company’s fixed maturities are classified as available- for-sale. Available-for-sale fixed maturity investments are carried at fair value with unrealized gains 4 and losses reported in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets. Equity securities reported at fair value, which include common and preferred stocks, are reported at fair value with unrealized gains and losses reported as a component of net income (loss). Equity securities reported at cost 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. 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. Real estate held-for-investment is stated at cost less accumulated depreciation. Depreciation is computed on a straight-line-basis for financial reporting purposes using estimated useful lives of 3 to 30 years. The Company periodically reviews its real estate held-for-investment for impairment and test for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. Real estate for which the Company commits to a plan to sell within one year and actively markets in its current condition, for a reasonable price, in comparison to its estimated fair value, is classified as held-for-sale. Real estate held-for-sale is stated at lower of depreciated cost or estimated fair value less expected disposition costs and is not depreciated. 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. The Company’s trading securities and equity 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. 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. 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 5 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 During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The pandemic has significantly impacted the economic conditions in the U.S. and globally, accelerating during the first half of March, as federal, state, and local governments reacted to the public health crisis, creating significant uncertainties in the U.S. economy. The Company has not experienced a slow-down in activities, however government restrictions and client imposed delays are evaluated regularly and this could change. While the disruption is expected to be temporary, there continues to be uncertainty around the duration or effects of resurgence of the virus. The Company cannot at this time predict the ultimate impact the pandemic will have on its results of operations, financial position, liquidity, or capital resources, but such impact could be material. On a consolidated basis, the Company had net income attributable to common shareholders of approximately $2.1 million and $16.3 million in 2020 and 2019, respectively. In 2020, income before income taxes was approximately $2.6 million compared to $20.2 million in 2019. Total revenue were approximately $27.3 million in 2020 and $44.2 million in 2019. One-time events, primarily reflected in realized gains, comprise a substantial portion of the net income and revenue reported by the Company during 2020 and 2019. 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 2020 were approximately $24.7 million compared to $24 million in 2019. Revenues Premiums and policy fee revenues, net of reinsurance premiums and policy fees, declined approximately 8% when comparing 2020 to 2019. 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 2020 and 2019 was approximately 98% and 96.6%, respectively. Persistency is a measure of insurance in-force retained in relation to the previous year. The following table summarizes the Company’s investment performance for the years ended December 31: 6 Net investment income Net realized investment gains Change in fair value of equity securities 2020 2019 $ 9,528,948 $ 4,645,699 6,208,148 11,183,128 7,598,048 18,611,248 The following table reflects net investment income of the Company for the years ended December 31: 2020 2019 Fixed maturities Equity securities Trading 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 $ 5,309,028 $ 1,754,958 2,921 709,604 2,212,851 1,233,148 599,897 53,880 167,599 12,043,886 (2,514,938) $ 9,528,948 $ 5,854,031 1,543,904 (132,518) 479,841 2,934,666 1,848,314 607,537 137,372 38,545 13,311,692 (2,128,564) 11,183,128 Net investment income represented approximately 35% and 25% of the Company's total revenues as of December 31, 2020 and 2019, respectively. When comparing current and prior year results, net investment income was comparable in a majority of the investment categories. Investment income earned by the fixed maturities, equity securities, and real estate investment portfolios represented approximately 77% and 78% of the total consolidated investment income for the years ended December 31, 2020 and 2019, respectively. In March 2020, with the onset of the pandemic in America, financial markets became jittery experiencing a significant drop in the major market indices. In response, the Federal Reserve dropped interest rates to near zero. This action resulted in a drop in all other interest rates in the marketplace. While this increased the fair value of the Company’s current fixed income holdings, it made finding investments to acquire with any type of historic yield nearly impossible. The stock markets have experienced a rebound since that time; however, interest rates remain at historic low levels with short term rates at or near zero. Longer term bonds have experienced rate increases later in 2020 and into early 2021, but still remain below recent historic rates. Should rates remain at these levels, it will become increasingly more difficult for the Company to maintain its historic net investment income levels as existing investments mature and are replaced with lower yielding investments. Income from the fixed maturities investment portfolio represented 44% of the total consolidated investment income for the years ended December 31, 2020 and 2019. When comparing earnings from the fixed maturities portfolio for the years ended December 31, 2020 and 2019 income was down approximately 9% or $545,000. Fixed maturities continue to represent the largest investment type and asset class owned by the company. As of December 31, 2020 and 2019, fixed maturities represented 48% and 49%, respectively, of the total investments owned by the Company. 7 Earnings from the equity securities investment portfolio represented approximately 15% and 12% of the total consolidated investment income report by the Company during 2020 and 2019, respectively. Income from the equity securities portfolio was up approximately 14% or $211,000 when comparing 2020 and 2019 results. The earnings reported by the real estate investment portfolio represented 18% and 22% of the total consolidated investment income reported by the Company during 2020 and 2019, respectively. Earnings from the real estate investment portfolio were down approximately 25% or $722,000 when comparing 2020 and 2019 results. The earnings from the real estate investment portfolio are expected to vary depending on the real estate activities and the potential distributions that may occur. The real estate investment portfolio represents 11% and 13% of the total investment portfolio as of December 31, 2020 and 2019, respectively. The following table reflects net realized investment gains (losses) for the years ended December 31: 2020 2019 Fixed maturities available for sale Equity securities Real estate Fixed maturities available for sale – OTTI Consolidated net realized investment gains Change in fair value of equity securities Net investment gains $ 703,519 $ (405,525) 4,347,705 0 4,645,699 6,208,148 $ 10,853,847 $ 189,070 3,479,783 3,929,195 (650,956) 6,947,092 18,611,248 25,558,340 Realized investment gains are the result of one-time events and are expected to vary from year to year. The sales of fixed maturities available for sale produced net realized gains of approximately $704,000 in 2020 and $189,000 in 2019. The 2019 gains were offset by the recognition of an other- than-temporary impairment of $650,956. The other-than-temporary impairment were taken as a result of Management’s assessment and consideration of the length of time the security had remained in an unrealized loss position and as a result of management’s analysis and determination of value. The investment was written down to better reflect its current estimated fair value. The gains and losses from the sales of fixed maturity investments are expected to vary from year to year depending on market conditions and Management's analysis of the portfolio holdings. The 2020 real estate gains are the result of the sales of real estate in Alabama, Florida and Georgia. The sale of the property in Alabama produced a gain of approximately $2 million and represented approximately 45% of the net investment gains from real estate. The Company sold three real estate parcels located in Georgia that produced gains of approximately $2.2 million and represented 51% of the net investment gains from real estate. The 2019 real estate gains are the result of the sales of real estate in California, Florida, Kentucky, Tennessee, and Texas. The sale of the real estate located in Florida produced a realized gain of approximately $1.7 million and represented approximately 42% of the net investment gains from real estate. The Company sold real estate located in Tennessee that produced a realized gain of approximately $1.1 million and represented approximately 28% of the net investment gains from real estate. Realized gains and losses from equity securities represent the difference between the fair value at the beginning of the reporting period and the fair value at the time of sale. The Company reported 8 net realized losses of approximately $(406,000) in 2020 from the sales of equity securities. During 2020, the Company sold seven equity securities that produced gross realized gains of approximately $2.6 million. The gross gains were offset by the sale of three equity securities that produced gross realized losses of approximately $3 million. The sale of three equity securities represents approximately $2.5 million of the gross realized investment gains from equity securities during 2020. The sale of these securities was first disclosed in the MD&A of the Company's Form 10-K filing for the year ended December 31, 2019. The Company disclosed that we received an offer to purchase investments in certain music royalties held in the form of equity securities. We continued to report on these transactions in MD&A of Company’s 2020 quarterly Form 10-Q filings. The reported gain changed throughout 2020 as additional proceeds were received. The sales agreements contained holdback provisions for a portion of the sales price. Under the terms of the holdback, certain performance results must be achieved during 2020 to release additional sales proceeds to the sellers. At the time of closing, it was determined it was more likely than not that the royalty interests would not perform at the levels necessary to receive the holdback funds. Performance was reviewed throughout the year, and was better than anticipated, resulting in the holdback proceeds being released to the seller. A portion of this transaction flows through change in the fair value of equity securities and will be further discussed below. The sale of one common stock represented almost 100% of the realized losses on equity securities. The Company sold 10,000 shares of this common stock holding that is associated with the oil and gas industry. While this security produced a current period realized loss, overall, the sale of this security produced a significant gain for the Company over the period it was held. The other component of this transaction flows through the change in the fair value of equity securities and will be further discussed below. During 2019, the company sold three equity securities that produced gross realized gains of approximately $3.5 million. One of those equity securities represented 86% or approximately $3 million of the gross realized gains from equity securities. The Company sold 14,000 shares of this common stock holding that is associated with the oil and gas industry. The Company sold one equity security in 2019 that produced an immaterial loss. The Company reported a change in fair value of equity securities of approximately $6.2 million and $18.6 million for the years ended December 31, 2020 and 2019, respectively. This line item is material to the results reported in the consolidated statements of operations. This line item can also be extremely volatile, reflecting changes in the stock market. While both 2019 and 2020 reflected positive results, 2020 results were only 1/3 of that of 2019. With the onset of the pandemic in March 2020, the stock market took a major downward swing. At March 31, 2020, the Company reflected a loss on this line of approximately $(18) million. From that point forward, we have seen a recovery in the market sufficient to move this number to a $6 million positive by year end. While these results can be material and volatile, most of the equity holdings of the Company were acquired with a long-term view, thus making these intermediate changes in value of less concern to Management. Management monitors its equity holdings looking more at the specific entity and market it is in relative to performance and less to changes due to general market swings that occur over the holding period of the investment. While the Company has seen significant positive results on its equity investments in the last two years, a pull back or downward market adjustment could slow these gains or even result in losses in future periods. Management believes its current 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. 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 9 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 approximately $24.7 million and $24 million for the years ended December 31, 2020 and 2019, respectively. Benefits, claims and settlement expenses represented approximately 66% and 64% of the Company’s total expenses for 2020 and 2019, respectively. The other major expense category of the Company is operating expenses, which represented 32% and 33% of the Company’s total expenses for 2020 and 2019, respectively. Benefits, claims and settlement expenses, net of reinsurance benefits, were up approximately 6% or $859,000 when comparing 2020 and 2019 results. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management. Early in the COVID-19 pandemic, the Company implemented a process to monitor death claims resulting from COVID-19. During 2020, the Company incurred total death benefits of approximately $844,000 with COVID-19 listed as the cause of death. The average death benefit of these policies was $9,500. The Company will continue to monitor COVID-19 death claims. 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. The surrender process has been impacted by temporary state rulings that have been implemented as a result of COVID-19 and in some cases will not allow life insurance companies to lapse policies temporarily. Operating expenses decreased approximately 2% in 2020 compared to that of the same period in 2019. Expenses were comparable in all of the major categories for 2020 and 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 10 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. The following table reflects, by investment category, the investments held by the Company as of December 31: Fixed maturities Equity securities, at fair value Equity securities, at cost Trading securities Mortgage loans Real estate Notes receivable Policy loans Total investments Fixed maturities Equity securities, at fair value Equity securities, at cost Mortgage loans Real estate Notes receivable Policy loans Short-term investments Total investments 2020 $ 165,779,997 78,075,187 14,389,189 (12,219) 20,802,365 38,086,391 17,682,296 8,590,524 $ 343,393,730 2019 $ 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 As a % of Total Investments As a % of Total Assets 48% 23% 4% 0% 6% 11% 5% 3% 100% 40% 19% 3% 0% 5% 9% 4% 2% 82% As a % of Total Investments As a % of Total Assets 49% 22% 3% 2% 13% 6% 2% 3% 100% 41% 19% 3% 2% 11% 5% 2% 2% 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 11 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 82% and 85% of the Company’s total assets as of December 31, 2020 and 2019, respectively. Fixed maturities consistently represented a substantial portion, 48% and 49%, respectively, of the total investments during 2020 and 2019. The overall investment mix, as a percentage of total investments, remained fairly consistent when comparing the respective investments held as of December 31, 2020 and 2019. 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, 2020, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets, shareholders’ equity or results from operations. To provide additional flexibility and liquidity, the Company has identified all fixed maturity securities as "investments available for sale". Investments available for sale are carried at market 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 $9.1 million and $10.8 million as of December 31, 2020 and 2019, 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. In March 2020, with the onset of the pandemic in America, financial markets became jittery experiencing a significant drop in the major market indices. In response, the Federal Reserve dropped interest rates to near zero. This action resulted in a drop in all other interest rates in the marketplace. While this increased the fair value of the Company’s current fixed income holdings, it made finding investments to acquire with any type of historic yield nearly impossible. The stock markets have experienced a rebound since that time; however, interest rates remain at historic low levels with short term rates at or near zero. Longer term bonds have experienced rate increases later in 2020 and into early 2021, but still remain below recent historic rates. Should rates remain at these levels, it will become increasingly more difficult for the Company to maintain its historic net investment income levels as existing investments mature and are replaced with lower yielding investments. 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. 12 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 cash balances, 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, 2020 and 2019, substantially all of the consolidated shareholders’ equity represents net assets of its subsidiaries. In 2020, the Parent company received $4 million in dividends from its insurance subsidiary and $6 million in 2019. 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. 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, 2020 and 2019, the Company and its subsidiaries had available $18 million in line of credit facilities. The Company did not utilize its available credit facilities during 2019 or 2020. 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 13 Consolidated Liquidity Cash used in operating activities was approximately $13.2 million and $6.5 million in 2020 and 2019, 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 2020 and 2019, the Company’s investing activities provided net cash of approximately $27 million and $16.3 million, respectively. The Company recognized proceeds of approximately $80 million and $67.1 million from investments sold and matured in 2020 and 2019, respectively. The Company used approximately $53 million and $50.9 million to acquire investments during 2020 and 2019, 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 $3.4 million and $1.2 million during 2020 and 2019, respectively. As of December 31, 2020 and 2019, the Company had no debt outstanding with third parties. The Company had cash and cash equivalents of approximately $39 million and $28.8 million as of December 31, 2020 and 2019, respectively. The Company has a portfolio of marketable fixed maturity securities that could be sold, if an unexpected event were to occur. These securities had a fair value of approximately $165.8 million and $171.6 million at December 31, 2020 and 2019, 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. 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, 2020 and 2019 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, 2020 and 2019. 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, 2020, UG has a ratio of approximately 6.40, which is 640% of the authorized control level. Accordingly, the Company meets the RBC requirements. 14 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 September of 2020, the Board of Directors of UTG authorized the repurchase of up to an additional $1.5 million of UTG’s common stock, for a total repurchase of $20 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 2020, the Company repurchased 112,907 shares through the stock repurchase program for approximately $3,313,154. Through December 31, 2020, UTG has spent approximately $18,086,249 in the acquisition of 1,282,265 shares under this program. Shareholders’ equity was approximately $136.7 million and $131 million as of December 31, 2020 and 2019, respectively. Total shareholders' equity increased approximately 4% in 2020 compared to 2019. The increase is primarily attributable to the change in accumulated other comprehensive income and retained earnings. As of December 31, 2020 and 2019, the Company reported accumulated other comprehensive income of approximately $15.6 million and $9 million, respectively. For the periods ended December 31, 2020 and 2019, accumulated other comprehensive income was approximately $6.6 million and $8.9 million, respectively, as a result of unrealized gains on fixed maturity securities. 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 marketplace. 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. 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, 2020. In making the assessment, Management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Based on Management’s assessment, 15 Management concluded that, as of December 31, 2020, the Company’s internal control over financial reporting was effective. 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, 2020, 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. 16 17 18 19 UTG, Inc. Consolidated Balance Sheets As of December 31, 2020 and 2019 ASSETS 2020 2019 Investments: Investments available for sale: Fixed maturities, at fair value (amortized cost $146,017,864 and $160,382,782) Equity securities, at fair value (cost $36,833,795 and $32,578,862 ) 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 165,779,997 171,629,373 78,075,187 78,661,793 14,389,189 10,919,247 20,802,365 8,223,286 38,086,391 44,344,236 17,682,296 19,487,458 8,803,876 0 10,442,173 343,405,949 352,511,442 8,590,524 39,025,754 28,787,629 1,679,783 1,341,643 25,267,920 25,655,161 4,142,142 4,846,321 427,736 0 695,517 419,056,093 418,745,731 3,988,088 4,101,471 348,170 0 1,577,098 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 Trading securities, at fair value (proceeds $11,246 and $0) Other liabilities Total liabilities Shareholders' equity: Common stock - no par value, stated value $.001 per share. Authorized 7,000,000 shares - 3,175,564 and 3,277,830 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 See accompanying notes. 20 4,169,569 365,761 243,990,881 249,264,308 3,631,666 404,177 14,836,158 14,626,475 313,662 12,995,714 13,222,604 0 5,785,933 281,914,602 287,248,825 12,219 5,275,803 268,497 3,176 3,279 33,025,018 36,012,401 88,068,284 85,979,678 8,977,914 15,584,241 136,680,719 130,973,272 523,634 137,141,491 131,496,906 419,056,093 418,745,731 460,772 UTG, Inc. Consolidated Statements of Operations For the Years Ended December 31, 2020 and 2019 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 Interest expense Total benefits and other expenses Income before income taxes Income tax expense (benefit) Net income 2020 2019 9,256,945 (2,725,303) 9,528,948 343,467 16,404,057 0 4,645,699 6,208,148 10,853,847 27,257,904 17,265,646 (2,399,361) 1,015,308 333,331 (129,835) 744,850 7,870,909 0 24,700,848 9,601,612 (2,535,980) 11,183,128 388,340 18,637,100 (650,956) 7,598,048 18,611,248 25,558,340 44,195,440 16,191,227 (2,233,585) 1,039,604 359,147 (130,828) 775,906 8,006,748 0 24,008,219 2,557,056 340,494 20,187,221 3,591,301 2,216,562 16,595,920 Net income attributable to noncontrolling interest (127,956) (325,143) Net income attributable to common shareholders 2,088,606 16,270,777 Amounts attributable to common shareholders: Basic income per share 0.65 4.95 Diluted income per share 0.65 4.95 Basic weighted average shares outstanding 3,233,773 3,285,813 Diluted weighted average shares outstanding 3,233,773 3,285,813 See accompanying notes. 21 UTG, Inc. Consolidated Statements of Comprehensive Income (Loss) For the Years Ended December 31, 2020 and 2019 2020 2019 Net income 2,216,562 16,595,920 Other comprehensive income (loss): Unrealized holding gains (losses) arising during period, pre-tax Tax (expense) benefit on unrealized holding gains (losses) arising during the period 9,065,958 10,822,757 (1,903,851) (2,272,779) Unrealized holding gains (losses) arising during period, net of tax 7,162,107 8,549,978 Less reclassification adjustment for (gains) losses included in net income (703,519) 462,584 Tax expense (benefit) for (gains) losses included in net income 147,739 (97,143) Reclassification adjustment for (gains) losses included in net income, net of tax (555,780) 365,441 Subtotal: Other comprehensive income (loss), net of tax 6,606,327 8,915,419 Comprehensive income 8,822,889 25,511,339 Less comprehensive income attributable to noncontrolling interests (127,956) (325,143) Comprehensive income attributable to UTG, Inc. 8,694,933 25,186,196 See accompanying notes. 22 See accompanying notes. 23 UTG, Inc. Consolidated Statements of Cash Flows For the Years Ended December 31, 2020 and 2019 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 Unrealized trading (gains) losses included in income Realized trading (gains) losses included in income Amortization of cost of insurance acquired Depreciation and depletion 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 Trading 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 Proceeds from notes payable/line of credit Payments of principal on notes payable/line of credit 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 24 2020 2019 2,216,562 16,595,920 (48,539) 0 (4,645,699) (6,208,148) 973 (3,894) 744,850 1,697,285 325,668 (6,355,601) 4,012,179 338,140 541,295 (2,285,473) (45,165) (3,527,819) (13,243,386) 23,924,989 18,281,727 (579) 707,274 11,983,353 5,305,162 1,256,793 18,500,000 79,958,719 (9,048,928) (15,362,440) 15,719 (13,213,037) (2,995,519) (3,500,000) (1,043,441) (7,890,228) (53,037,874) 26,920,845 4,408,039 (4,343,401) 0 0 (3,313,154) (190,818) (3,439,334) 10,238,125 28,787,629 39,025,754 136,991 650,956 (7,598,048) (18,611,248) 0 132,518 775,906 3,141,801 353,887 (5,211,485) 4,088,309 440,099 374,515 (4,331,160) 592,995 1,988,577 (6,479,467) 14,390,181 14,385,393 0 5,283,749 11,181,547 20,261,459 1,635,686 0 67,138,015 (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) 16,281,761 4,669,825 (4,389,622) 0 0 (909,368) (535,662) (1,164,827) 8,637,467 20,150,162 28,787,629 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”. During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The pandemic has significantly impacted the economic conditions in the U.S. and globally, accelerating during the first half of March, as federal, state, and local governments reacted to the public health crisis, creating significant uncertainties in the U.S. economy. The Company has not experienced a slow-down in activities, however government restrictions and client-imposed delays are evaluated regularly and this could change. While the disruption is currently expected to be temporary, there is uncertainty around the duration. The Company cannot at this time predict the ultimate impact the pandemic will have on its results of operations, financial position, liquidity, or capital resources but such impact could be material. 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, 2020, Mr. Correll owns or controls directly and indirectly approximately 65% 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 25 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). 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. 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 – Real estate held-for-investment is stated at cost less accumulated depreciation. Depreciation is computed on a straight-line-basis for financial reporting purposes using estimated useful lives of 3 to 30 years. Real estate for which the Company commits to a plan to sell within one year and actively markets in its current condition, for a reasonable price, in comparison to its estimated fair value, is classified as held-for-sale. Real estate held-for-sale is stated at lower of depreciated cost or estimated fair value less expected disposition costs and is not depreciated. 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 stated at amortized cost, which approximates fair value. 26 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 and notes receivable 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 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 $5,995,990 and $5,916,424 at December 31, 2020 and 2019, respectively. Depreciation is computed on a straight- 27 for line basis to 30 years. Depreciation expense was $79,565 and $260,831 for the years ended December 31, 2020 and 2019, respectively. financial reporting purposes using estimated useful lives of 3 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 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, 2020 and 2019. 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 28 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. Recently Issued Accounting Standards In November of 2020, the FASB issued Accounting Standards Update No. 2020-11, Financial Services-Insurance (Topic 944): Effective Date and Early Application. The FASB issued ASU 2020- 11 that will help insurance companies adversely affected by the COVID-19 pandemic by giving them an additional year to implement ASU No. 2018-12. See below for further analysis regarding ASU No. 2018-12. 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 implementation of this ASU did not have a material impact on the 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 29 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, 2024 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 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. Reclassifications – Certain reclassifications have been made to the 2019 Consolidated Financial Statements to make them comparable to the current year Consolidated Financial Statements. Note 2 – Investments Available for Sale Securities – Fixed Maturity Securities The Company’s insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments they are permitted to make, and the amount of funds that may be used for any one type of investment. Investments in available for sale securities are summarized as follows for the years ended December 31: December 31, 2020 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 $ $ $ 1,186,999 36,285,535 $ 11,556,980 1,382,164 98,175,349 17,604,617 146,017,864 $ 20,173,780 $ - - $ 37,472,534 12,939,144 (411,647) 115,368,319 (411,647) $ 165,779,997 30 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 $ $ 832,100 14,371,263 110,250,079 10,470,115 160,382,782 $ 11,705,047 $ - (35,529) $ 36,128,743 15,203,363 (422,927) 120,297,267 (458,456) $ 171,629,373 The amortized cost and estimated market value of debt securities at December 31, 2020, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Fixed Maturities Available for Sale December 31, 2020 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 Fixed maturities with no single maturity date Total $ $ 20,502,132 41,801,036 32,822,747 24,149,660 26,742,289 20,830,029 44,366,992 37,705,439 29,454,200 33,423,337 $ 146,017,864 $ 165,779,997 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 $0 and $1,031,570 as of December 31, 2020 and December 31, 2019, respectively. The investments are all classified as “All other corporate bonds”. The fair value of investments with sustained gross unrealized losses are as follows as of December 31: 2020 Less than 12 months 12 months or longer Total All other corporate bonds Total fixed maturities Fair value $ $ 4,937 4,937 Unrealized losses Fair value (63) (63) $ $ Unrealized losses (411,584) (411,584) - - Fair value $ $ 4,937 4,937 Unrealized losses (411,647) (411,647) 31 2019 Less than 12 months 12 months or longer Total Unrealized Unrealized Fair value losses Fair value 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) $ $ - - (422,927) (422,927) $ $ 6,059,380 6,059,380 (458,456) (458,456) 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, 2020 Fixed maturities As of December 31, 2019 Fixed maturities 1 3 1 1 Total 2 4 Substantially all of the unrealized losses on fixed maturities available for sale at December 31, 2020 and 2019 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, 2020 and 2019. Cost Method Investments The Company held equity investments with an aggregate cost of $14,389,189 and $10,919,247 at December 31, 2020 and 2019, 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, 2020. 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 included exchange-traded equities and exchange-traded Operations. Trading Securities 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, will be recognized upon the termination of the short sale. The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2020 was $0 and $(12,219), respectively. The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2019 was $0 and $0, respectively. Earnings from trading securities are classified in cash flows from operating activities. The derivatives held by the Company are for income generation purposes only. 32 The following table reflects trading securities revenue charged to net investment income for the periods ended December 31: 2020 2019 Net unrealized gains (losses) Net realized gains (losses) Net unrealized and realized gains (losses) $ $ (973) 3,894 - (132,518) 2,921 $ (132,518) Mortgage Loans 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. During 2020 and 2019, the Company acquired $13,213,037 and $4,367,644 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 2020 and 2019, the maximum and minimum lending rates for mortgage loans were: 2020 2019 Maximum rate Minimum Maximum Minimum rate rate rate Farm Loans Commercial Loans Residential Loans 4.50 % 5.25 % 4.95 % 4.50 % 4.24 % 4.95 % 5.00 % 7.50 % 5.50 % 5.00 % 4.82 % 5.50 % 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 33 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, 2020 and 2019. The following table summarizes the mortgage loan holdings of the Company for the periods ended December 31: 2020 2019 In good standing Overdue interest over 90 days Total mortgage loans Total foreclosed loans during the year $ 18,704,351 2,098,014 $ 20,802,365 - $ $ $ $ 8,223,286 - 8,223,286 234,044 Investment Real Estate Real estate held-for-investment is stated at cost less accumulated depreciation. Depreciation is computed on a straight-line-basis for financial reporting purposes using estimated useful lives of 3 to 30 years. The Company periodically reviews its real estate held-for-investment for impairment and tests for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. During 2020 and 2019, no impairments were recognized on the investment real estate. Note 3 - Fair Value Measurements of the Consolidated Financial Statements provides further information regarding the fair value of financial instruments that are not measured at fair value. The investment real estate owned by the Company is included in this portion of the Note 3 - Fair Value Measurements disclosure. The following table provides an allocation of the Company's investment real estate by type for the periods ended December 31: 2020 2019 Raw land Commercial Residential Land, minerals and royalty interests Total investment real estate $ 11,727,103 $ 16,089,540 3,530,064 4,908,028 2,797,648 2,251,772 20,031,576 21,094,896 $ 38,086,391 $ 44,344,236 34 The Company's investment real estate portfolio includes ownership in oil and gas royalties. As of December 31, 2020 and 2019, investments in oil and gas royalties represented 48% and 44%, respectively, of the total investment real estate portfolio. See Note 13 - Concentrations of the Consolidated Financial Statements for additional information regarding the allocation of the oil and gas investment real estate holdings by industry type. Gains and losses recognized on the disposition of the properties are recorded as realized gains and losses in the Consolidated Statements of Operations. During 2020 and 2019, the Company acquired $2,995,519 and $1,958,982 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, 2020 and 2019 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 2020 and 2019, the Company acquired $3,500,000 and $16,031,605 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. Short-Term Investments Short-term investments have remaining maturities exceeding three months and under 12 months at the time of purchase and are stated at amortized cost, which approximates fair value. The short- term investments consist of United States Treasury securities. During 2020 and 2019, the Company acquired $7,890,228 and $10,403,628, respectively, in short- term investments. Analysis of Investment Operations The following table reflects the Company’s net investment income for the periods ended December 31: Fixed maturities Equity securities Trading securities Mortgage loans Real estate Notes receivable 2020 2019 $ 5,309,028 1,754,958 2,921 709,604 2,212,851 1,233,148 5,854,031 1,543,904 (132,518) 497,841 2,934,666 1,848,314 $ 35 Policy loans Cash and cash equivalents Short-term Total consolidated investment income Investment expenses Consolidated net investment income $ 599,897 53,880 167,599 12,043,886 (2,514,938) 9,528,948 $ 607,537 137,372 38,545 13,311,692 (2,128,564) 11,183,128 The following table presents net investment gains (losses) and the change in net unrealized gains on investments for the periods ended December 31: Realized gains: Sales of fixed maturities Sales of equity securities Sales of real estate Total realized gains Realized losses: Sales of fixed maturities Sales of equity securities Other-than-temporary impairments 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) Other-Than-Temporary Impairments 2020 2019 $ $ 768,511 - 4,347,705 5,116,216 (64,992) (405,525) - (470,517) 4,645,699 331,322 3,482,092 3,929,195 7,742,609 (142,252) (2,309) (650,956) (795,517) 6,947,092 6,208,148 6,208,148 10,853,847 18,611,248 18,611,248 25,558,340 $ $ $ $ 9,065,958 9,065,958 $ $ 10,822,757 10,822,757 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 Consolidated Statements of Operations. 36 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. 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: 2020 2019 Other than temporary impairments: Fixed Maturities Total other than temporary impairments $ $ - - $ $ 650,956 650,956 The other-than-temporary impairment recognized during 2019 was taken as a result of Management's assessment and determination of value of the investment. The investment was written down to better reflect its current expected value. Investments on Deposit The Company had investments with a fair value of $8,680,638 and $8,371,827 on deposit with various state insurance departments as of December 31, 2020 and 2019, respectively. Note 3 – Fair Value Measurements Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are measured and classified in accordance with a fair value hierarchy consisting of three levels based on the observability of valuation inputs: Level 1 – Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 – Valuation methodologies include quoted prices for similar assets and liabilities in active markets or quoted prices for identical, quoted prices for identical or similar assets or liabilities in markets that are not active, or 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. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used as of December 31: 37 2020 Financial assets: Fixed maturities available for sale: U.S. Government and government agencies and authorities U.S. special revenue and assessments Corporate securities Total fixed maturities Equity securities: Common stocks Preferred stocks Total equity securities Total financial assets Liabilities Trading Securities 2019 Financial assets: Fixed maturities available Level 1 Level 2 Level 3 Net Asset Value Total $ 37,472,534 $ - $ - 12,939,144 - 115,368,319 37,472,534 128,307,463 - $ - - - - $ 37,472,534 - 12,939,144 - 115,368,319 - 165,779,997 28,477,005 15,922,869 3,161,120 30,496,625 78,057,619 17,568 28,477,005 15,940,437 3,161,120 30,496,625 78,075,187 $ 65,949,539 $ 144,247,900 $ 3,161,120 $ 30,496,625 $ 243,855,184 17,568 - - - $ (12,219 ) $ - $ - $ - $ (12,219 ) Level 1 Level 2 Level 3 Net Asset Value Total for sale: $ 36,128,743 $ - $ U.S. Government and government agencies and authorities U.S. special revenue and - 15,203,363 - 120,297,267 36,128,743 135,500,630 - $ - - - - $ 36,128,743 - 15,203,363 - 120,297,267 - 171,629,373 assessments Corporate securities Total fixed maturities Common stocks Total equity securities Total financial assets Liabilities Trading Securities 29,888,281 14,258,750 10,274,810 24,239,952 78,661,793 29,888,281 14,258,750 10,274,810 24,239,952 78,661,793 $ 66,017,024 $ 149,759,380 $ 10,274,810 $ 24,239,952 $ 250,291,166 $ - $ - $ - $ - $ - The following is a description of the valuation techniques used the by Company to measure assets reported at fair value on a recurring basis. There have been no significant changes in the valuation techniques utilized by the Company during 2020 or 2019. Available for Sale Securities Securities classified as available for sale are recorded at fair value on a recurring basis. Securities classified as Level 1 utilized fair value measurements based upon quoted market prices, when available. If quoted market prices are not available, the Company obtains fair value measurements from recently executed transactions, market price quotations, benchmark yields and issuer spreads to value Level 2 securities. In certain instances where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standards generally accepted in the United States. 38 Equity Securities at Fair Value 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. Equity Securities at Net Asset Value Certain equity securities carried at fair value, which do not have readily determinable fair values, use net asset value (“NAV”) and are excluded from the fair value hierarchy. These investments are generally not readily redeemable by the investee. See Note 8 – Commitments and Contingencies for additional information regarding unfunded commitments. During 2020, the Company elected to begin reporting the fair value for a certain equity security that was previously reported with a fair value of zero. Historically, the Company did not assign a fair value to this equity security due to the lack of availability of adequate financial and other data necessary to reasonably determine a fair value. During 2020, the Company started receiving consistent and timely financial data and determined we had sufficient data to support and report a fair value for this security. The fair value of this security was approximately $3.9 million at December 31, 2020. The mark to fair value produced an unrealized gain of approximately $3.9 million, which is reported as a component of the change in the fair value of equity securities in the Consolidated Statements of Operations. Trading Securities Trading securities are recorded at fair value. They are classified as Level 1 and utilize fair value measurements based upon quoted market prices. Change in Level 3 Recurring Fair Value Measurements The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities. Balance at December 31, 2019 Realized gains (losses) Unrealized gains (losses) Purchases Sales Balance at December 31, 2020 Equity Securities, Fair Value Equity Securities, Net Asset Value $ 10,274,810 $ 24,239,952 $ 34,514,762 2,499,653 - 2,499,653 1,053,688 4,506,736 5,560,424 2,107,432 1,782,842 3,890,274 (12,774,463 ) (32,905 ) (12,807,368 ) $ 3,161,120 $ 30,496,625 $ 33,657,745 Total 39 Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at December 31, 2020 and 2019 may include changes in fair value that were attributable to both observable and unobservable inputs. Quantitative Information About Level 3 Fair Value Measurements The following table presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and include only those instrument for which information about the inputs is reasonably available to the Company, such as data from independent third-party valuation service providers and from internal valuation models. Financial Assets Common stocks Common stocks Total $ $ Fair Value at December 31, 2020 30,496,625 $ 3,161,120 33,657,745 $ Fair Value at December 31, 2019 24,239,952 Net Asset Value 10,274,810 Pricing Model 34,514,762 Valuation Technique Uncertainty of Fair Value Measurements The significant unobservable inputs used in the determination of the fair value of assets classified as Level 3 have an inherent measurement uncertainty that if changed could result in higher or lower fair value measurements of these assets as of the reporting date. Equity Securities at Fair Value Fair market value for equity securities is derived based on unobservable inputs, such as projected normalized revenues and industry standard multiples of revenue for the equity securities valued using pricing model. Significant increases (decreases) in either of those inputs in isolation would result in a significantly higher (lower) fair value measurement. Investments in Certain Entities Carried at Fair Value Using Net Asset Value per Share Investment Category Common stocks Growth equity Redeemable $ Non-redeemable $ Total Investment Category Common stocks Growth equity Redeemable $ Non-redeemable $ Total Fair Value at December 31, 2020 Unfunded Commitments Redemption Frequency Redemption Notice Period 21,713,727 $ 8,782,898 30,496,625 $ - 6,856,072 6,856,072 Quarterly n/a 45 days n/a Fair Value at December 31, 2019 Unfunded Commitments Redemption Frequency Redemption Notice Period 21,270,734 $ 2,969,218 24,239,952 $ - 163,750 163,750 Quarterly n/a 45 days n/a Fair Value Measurements on a Nonrecurring Basis Certain assets are not carried at fair value on a recurring basis. 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 Company did not recognize any re-measurements or 40 impairments of financial instruments during the years ended December 31, 2020 and 2019. Fair Value Information About Financial Instruments Not Measured at Fair Value Certain assets are not carried at fair value on a recurring basis. 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 following table presents the carrying amount and estimated fair values of the Company’s financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used as of December 31: Carrying Amount Estimated Fair Value Level 1 Level 2 2020 Common stock, at cost $ 5,860,000 $ 5,860,000 $ 8,529,189 8,529,189 Preferred stock, at cost Mortgage loans on real estate 20,802,365 20,802,365 38,086,391 82,689,332 Investment real estate 17,682,296 17,709,894 Notes receivable 8,590,524 8,590,524 Policy loans Carrying Amount Estimated Fair Value Level 1 Level 2 2019 $ 7,875,145 $ 7,875,145 $ Common stock, at cost Preferred stock, at cost 3,044,102 3,044,102 Mortgage loans on real estate 8,223,286 7,531,094 44,344,236 88,483,424 Investment real estate 19,487,458 19,332,472 Notes receivable 8,803,876 8,803,876 Policy loans Level 3 - $ 5,860,000 - 8,529,189 - 20,802,365 - 82,689,332 - 17,709,894 - 8,590,524 Level 3 - $ 7,875,145 - 3,044,102 - 7,531,094 - 88,483,424 - 19,332,472 - 8,803,876 - $ - - - - - - $ - - - - - The above estimated fair value amounts have been determined based upon the following valuation methodologies. Considerable judgment was required to interpret market data in order to develop these estimates. Accordingly, the estimates are not necessarily indicative of the amounts which could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the fair value amounts. The fair values of mortgage loans on real estate are estimated using discounted cash flow analyses and interest rates being offered for similar loans to borrowers with similar credit ratings. The inputs used to measure the fair value of our mortgage loans on real estate are classified as Level 3 within the fair value hierarchy. 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 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 41 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. The fair values of notes receivable 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 the notes receivable are classified as Level 3 within the fair value hierarchy. Policy loans are carried at the aggregate unpaid principal balances in the Condensed 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. 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, 2020, the Company had gross insurance in-force of $1 billion of which approximately $206 million was ceded to reinsurers. At December 31, 2019, the Company had gross insurance in-force of $1.1 billion of which approximately $214 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. 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 42 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% of UG’s reinsurance reserve credit, as of December 31, 2020 and 2019. The Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned in 2020 and 2019 were as follows: 2020 Premiums Earned 2019 Premiums Earned Direct Assumed Ceded Net Premiums $ $ 9,256,992 (47) (2,725,303) 6,531,642 $ $ 9,601,259 353 (2,535,980) 7,065,632 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. Cost of insurance acquired, beginning of year $ Interest accretion Amortization Net amortization Cost of insurance acquired, end of year $ 2020 2019 4,846,321 676,503 (1,421,353) (744,850) 4,101,471 $ $ 5,622,227 769,612 (1,545,518) (775,906) 4,846,321 Estimated net amortization expense of cost of insurance acquired for the next five years is as follows: Interest Accretion Amortization 1,302,090 1,189,672 1,079,979 975,187 877,240 587,120 501,324 418,722 339,372 263,074 Net Amortization 714,970 688,348 661,257 635,815 614,166 2021 2022 2023 2024 2025 43 Note 6 – Income Taxes UTG and UG file separate federal income tax returns. Income tax expense (benefit) consists of the following components: 2020 2019 Current tax Deferred tax Income tax expense $ $ 2,476,599 (2,136,105) 340,494 $ $ 1,698,995 1,892,306 3,591,301 The expense for income taxes differed from the amounts computed by applying the applicable United States statutory rate of 21% as of December 31, 2020 and 2019, 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 2020 $ 536,982 $ 4,239,316 2019 (26,871 ) (68,280 ) (155,597 ) (175,866 ) (14,020 ) (403,869 ) $ 340,494 $ 3,591,301 The following table summarizes the major components that comprise the net deferred tax liability as reflected in the balance sheets: 2020 2019 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 $ $ 10,918,449 861,309 (8,832) (511,297) 1,387,490 364,797 240,266 (256,468) 12,995,714 $ $ 10,983,955 1,017,727 (9,147) (460,923) 1,387,490 197,876 288,320 (182,694) 13,222,604 At December 31, 2020 and 2019, the Company had gross deferred tax assets of $1,413,608 and $1,359,230, respectively, and gross deferred tax liabilities of $14,409,322 and $14,581,834, 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’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 44 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, 2017, 2018, 2019 and 2020. 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. Note 7 – Credit Arrangements At December 31, 2020 and 2019, the Company had the following lines of credit available: Instrument Issue Date Maturity Date Revolving Credit Limit December 31, 2019 Borrowings Repayments December 31, 2020 Lines of Credit: UTG UG 11/20/2013 11/20/2021 $ 8,000,000 $ 6/2/2015 5/8/2021 10,000,000 - - - - - $ - - - The UTG line of credit carries interest at a fixed rate of 3.750% 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 2020, 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. The Company has pledged bonds with a collateral lendable value of $12,482,563. 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. 45 Within the Company’s trading accounts, certain trading securities carried as liabilities represent securities sold short. A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale. The following table represents the total funding commitments and the unfunded commitment as of December 31, 2020 related to certain investments: RLF III, LLC Sovereign’s Capital, LP Fund I Sovereign's Capital, LP Fund II Sovereign's Capital, LP Fund III Macritchie Storage II, LP Garden City Companies, LLC Carrizo Springs Music, LLC Modern Distributors, Inc. Legacy Venture X, LLC Total Unfunded Funding Commitment Commitment 398,120 $ 4,000,000 $ 13,000 500,000 141,538 1,000,000 3,000,000 1,847,486 7,000,750 1,840,485 2,000,000 1,956,688 3,750,000 2,055,068 7,200,000 3,700,000 3,000,000 2,910,000 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 fund a mortgage loan for Macritchie Storage II, LP ("Macritchie"). Macritchie makes draw requests on the loan as funds are needed to fund the construction project. During 2020, the Company committed to invest in Garden City Companies, LLC (“Garden City”), which invests primarily in companies in the healthcare, inspection/testing services and maintenance service arena. Garden City makes capital calls to investors as funds are needed. During 2020, the Company committed to invest in Carrizo Springs Music, LLC (“Carrizo”), which invests in music royalties. Carrizo makes capital calls to its investors as funds are needed to acquire the royalty rights. During 2020, the Company committed to fund a collateral loan for Modern Distributors, Inc. (“Modern Distributors”). Modern Distributors makes draw requests on the loan as funds are needed to fund a construction project. During 2020, the Company committed to invest in Legacy Venture X, LLC ("Legacy Venture X"), which is a fund of funds. Legacy Venture X makes capital calls to its investors as funds are needed. 46 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 September of 2020, the Board of Directors of UTG authorized the repurchase of up to an additional $1.5 million of UTG's common stock, for a total repurchase of $20 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 2020, the Company repurchased 112,907 shares through the stock repurchase program for $3,313,154. Through December 31, 2020, UTG has spent $18,086,249 in the acquisition of 1,282,265 shares under this program. During the third quarter of 2020, the Company purchased 88,341 shares from Cumberland Lake Shell, Inc. at a price of $29 per share for a total cost of $2,561,889. 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 be 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. In December of 2020, the Company issued 3,977 shares of its common stock as compensation to the Directors. The shares were valued at $27.00 per share, the market value at the date of issue. During 2020, the Company recorded $107,379 in operating expense related to the stock issuance. 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. Other Compensation - During 2020, the Company issued 6,664 shares of stock to management and employees as compensation at a cost of $218,289. During 2019, The Company issued 8,188 shares of stock to management and employees as compensation at a cost of $246,535. 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 2020 3,233,773 0 3,233,773 2019 3,285,813 0 3,285,813 The computation of diluted earnings per share is the same as basic earnings per share for the years ending December 31, 2020 and 2019, as there were no outstanding securities, options or other offers that give the right to receive or acquire common shares of UTG. 47 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, 2020, 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 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 $4 million and $6 million to UTG in 2020 and 2019, respectively. No extraordinary dividends were paid during the two year period. UTG used the dividends received during 2020 and 2019 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. The following table reflects UG’s statutory basis net income and capital and surplus (shareholders’ equity) as of December 31: 2020 2019 Net income Capital and surplus $ 6,258,945 70,605,156 $ 8,268,187 65,951,037 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, 48 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 $165,590 and $198,297 during 2020 and 2019, 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 2020, the Company received a preferred pay down of $502,000 leaving a cost basis of $2,500,000. 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 2020 and 2019, UTG paid $298,058 and $354,404 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 2020 and 2019, UG paid $7,262,645 and $7,397,953, 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 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 $23,721 and $15,138 in servicing fees and $35,240 and $0 in origination fees to FSNB during 2020 and 2019, 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 $766,616 and $842,045 in 2020 and 2019, respectively to FSNB in net reimbursement of such costs. 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 2020 and 2019, the Company received reimbursements of $838,431 and $922,357, 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 2020 and 2019. 49 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 $216,160 and $250,000 as of December 31, 2020 and 2019, respectively. During 2020, UG purchased four real estate parcels from FSNB at a cost of $1,560,000. Also, during 2020, UG purchased UG-Cam, LLC from FSF at a cost of $539,508. At the time of purchase, UG-Cam, LLC owned four properties. 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 $ - 2,531,500 $ - 1,106,000 2020 2019 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, 2020 and 2019, 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, 2020 and 2019, respectively. Insurance ceded represented 37% and 33% of premium income for 2020 and 2019, 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 20% and 25% of the Company’s total invested assets at December 31, 2020 and 2019, respectively. The following table provides an allocation of the oil and gas investments by type as of December 31: 2020 Fixed maturities, at fair value Equity securities, at fair value Investment real estate Notes receivable Land, Minerals & Royalty Interests Transportation Exploration Total 0 $ $ 41,551,468 20,031,576 6,000,000 50 0 $ 1,268,670 $ 1,268,670 0 41,551,468 0 0 20,031,576 0 0 6,000,000 0 Total $ 67,583,044 $ 0 $ 1,268,670 $ 68,851,714 2019 Fixed maturities, at fair value Equity securities, at fair value Investment real estate Notes receivable Total Land, Minerals & Royalty Interests Transportation Exploration Total 0 $ 3,812,565 $ 2,824,810 $ 6,637,375 $ 0 48,585,959 48,585,959 0 21,094,898 21,094,898 7,000,000 0 7,000,000 $ 76,680,857 $ 3,812,565 $ 2,824,810 $ 83,318,232 0 0 0 As of December 31, 2020 and 2019, the Company owned two equity securities that represented approximately 47% and 49%, respectively, of the total investments associated with the oil and gas industry. The Company’s results of operations and financial condition have in the past been, and may in the future be, adversely affected by the degree of certain industry specific concentrations in the Company’s investment portfolio. The Company has significant exposure to investments associated with the oil and gas industry. Events or developments that have a negative effect on the oil and gas industry may adversely affect the valuation of our investments in this specific industry. The Company’s ability to sell its investments associated with the oil and gas industry may be limited. 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. 51 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 April R. Chapman Impact Investor & Consultant 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 52 SHAREHOLDER INFORMATION Annual Meeting The 2021 Annual Meeting of Shareholders will be held on Wednesday, June 23, 2021 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. 2020 2019 Period High Low High Low First quarter Second quarter Third quarter Fourth quarter 35.50 33.00 36.00 28.00 29.00 27.00 27.00 25.00 30.50 34.00 33.01 39.80 30.10 29.36 30.01 33.25 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, 2021 there were 4,728 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, 2020 and total repurchases: Total Number of Shares Purchased Oct. 1 through Oct. 31, 2020 Nov. 1 through Nov. 30, 2020 Dec. 1 through Dec. 31, 2020 Total 1,540 $ 2,255 $ 1,290 $ 5,085 Average Price Paid Per Share 28.14 27.00 26.91 53 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 1,540 2,255 1,290 5,085 N/A N/A N/A $ $ $ 1,994,943 1,934,058 1,899,351 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 September of 2020, the Board of Directors of UTG authorized the repurchase of up to an additional $1.5 million of UTG’s common stock, for a total repurchase of $20 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 2020, the Company repurchased 112,907 shares through the stock repurchase program for $3,313,154. Through December 31, 2020, UTG has spent $18,086,249 in the acquisition of 1,282,265 shares under this program. During the third quarter of 2020, the Company purchased 88,341 shares from Cumberland Lake Shell, Inc. at a price of $29 per share for a total cost of $2,561,889. 54 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 the Securities and Exchange Commission’s Web site address at www.sec.gov. 55 

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