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
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Business Overview
UTG, Inc. (the "Registrant", “Company” or “UTG”) is an insurance holding company incorporated in
the state of Delaware in 2005 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.
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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
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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
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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:
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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.
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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
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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
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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
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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
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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