Attached files

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EX-32.2 - CERTIFICATION - UTG INCexhibit322.htm
EX-10.19 - PROMISSORY NOTE WITH INB - UTG INCpromissorynoteinb.htm
EX-10.3 - REINSURANCE AGREEMENT UG AND SWISS RE - UTG INCswissrereinsurance.htm
EX-21.1 - LIST OF SUBSIDIARIES - UTG INClistofsubsidiaries.htm
EX-10.2 - AMENDMENT TO REINSURANCE AGREEMENT WITH OPTIMUM RE - UTG INCoptimumrereinsurance.htm
EX-99.1 - AUDIT COMMITTEE CHARTER - UTG INCauditcommitteecharter.htm
EX-10.4 - ASSUMPTION REINSURANCE AGREEMENT UG AND PARK AVENUE - UTG INCparkavenuereinsurance.htm
EX-99.4 - INVESTMENT COMMITTEE CHARTER - UTG INCinvestmentcommitteecharter.htm
EX-99.3 - COMPENSATION COMMITTEE CHARTER - UTG INCcompensationcommitteecharter.htm
EX-31.2 - CERTIFICATION - UTG INCexhibit312.htm
EX-32.1 - CERTIFICATION - UTG INCexhibit321.htm
EX-31.1 - CERTIFICATION - UTG INCexhibit311.htm
XML - IDEA: XBRL DOCUMENT - UTG INCR9999.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K


[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2015
 
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________

Commission File Number 0-16867

 
UTG, INC.
 
 
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-2907892
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

5250 South Sixth Street, Springfield, IL
 
62703
(Address of principal executive offices)
 
(Zip code)
     

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

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Name of each exchange on which registered
       None
None

Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock, stated value $.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10- K. [  ]

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

Large Accelerated Filer
[ ]
Accelerated Filer
[ ]
Non Accelerated Filer
[ ]
Smaller Reporting Company
[X]

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes [ ] No [X]

As of June 30, 2015, shares of the Registrant's common stock held by non-affiliates (based upon the price of the last sale of $15.50 per share), had an aggregate market value of approximately $20,299,808.

At February 19, 2016 the Registrant had 3,709,087 outstanding shares of common stock, stated value $.001 per share.

Documents incorporated by reference: None

UTG, Inc.
Form 10-K
Year Ended December 31, 2015



TABLE OF CONTENTS

PART I
4
 
   Item 1.   Business
 
4
   Item 1A. Risk Factors
9
   Item 1B. Unresolved Staff Comments
9
   Item 2.   Properties
9
   Item 3.   Legal Proceedings
9
   Item 4.   Mine Safety Disclosures
9
 
PART II
 
10
 
     Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
10
   Item 6.   Selected Financial Data
11
   Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations
11
   Item 7A. Quantitative and Qualitative Disclosures About Market Risk
20
   Item 8.   Financial Statements and Supplementary Data
20
   Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
49
   Item 9A. Controls and Procedures
49
   Item 9B. Other Information
49
 
PART III
 
50
 
   Item 10.  Directors, Executive Officers and Corporate Governance
 
50
   Item 11.  Executive Compensation
54
   Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
55
   Item 13.  Certain Relationships and Related Transactions, and Director Independence
58
   Item 14.  Principal Accounting Fees and Services
58
 
PART IV
 
59
 
   Item 15.  Exhibits and Financial Statement Schedules
 
59
 
Forward-Looking Statements

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

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

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

PART I

Item 1. Business

Business Overview

UTG, Inc. (the "Registrant", "Company" or "UTG") is an insurance holding company incorporated in the state of Delaware in 2005. Its primary direct subsidiary is Universal Guaranty Life Insurance Company ("UG"). The Registrant and its primary subsidiary have only one significant segment, insurance. The Company's dominant business is individual life insurance, which includes the servicing of existing insurance business in-force, the acquisition of other companies in the insurance business, and the administration processing of life insurance business for other entities.

The holding company has no significant business operations of its own and relies on fees, dividends and other distributions from its operating subsidiary as the principal source of cash flows to meet its obligations.  Additional information regarding the cash flow and liquidity needs of the holding company can be found in the Liquidity and Capital Resources section of the Management's Discussion and Analysis of Financial Conditions and Results of Operations.

UG has several wholly-owned and majority-owned subsidiaries. The subsidiaries were formed to hold certain real estate and other investments. The investments were placed into the limited liability companies and partnerships to provide additional protection to the policyholders and to UG.

Increased global IT security threats and more sophisticated and targeted computer crime pose a risk to the security of systems and networks and the confidentiality, availability and integrity of data. Although the Company makes efforts to maintain the security and integrity of the networks and systems, there can be no assurance that the security efforts will be effective or that attempted security breaches or disruptions would not be successful or damaging. In the event a security breach or failure results in the disclosure of sensitive third party data or the transmission of harmful/malicious code to third parties, the Company could be subject to liability claims. The Company does not currently carry insurance coverage against such liabilities. Depending on their nature and scope, such threats also could potentially lead to improper use of our systems and networks, manipulation and destruction of data, loss of trade secrets, system downtimes and operational disruptions, which in turn, could adversely affect our reputation, competitiveness and results of operations.

This document at times will refer to the Registrant's largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll.  Mr. Correll holds a majority ownership of First Southern Funding LLC, a Kentucky corporation, ("FSF") and First Southern Bancorp, Inc. ("FSBI"), a financial services holding company.  FSBI operates through its 100% owned subsidiary bank, First Southern National Bank ("FSNB").  Banking activities are conducted through multiple locations within south-central and western Kentucky.  Mr. Correll is Chief Executive Officer and Chairman of the Board of Directors of UTG and is currently UTG's largest shareholder through his ownership control of FSF, FSBI and affiliates.  At December 31, 2015, Mr. Correll owns or controls directly and indirectly approximately 57.61% of UTG's outstanding stock.

UTG's website is: www.utgins.com. Information regarding the Company, including recent filings with the Securities and Exchange Commission, are accessible via this website.

Insurance

UG's product portfolio consists of a limited number of life insurance product offerings. All of the products are individual life insurance products, with design variations from each other to provide choices to the customer. These variations generally center around the length of the premium paying period, length of the coverage period and whether the product accumulates cash value or not.

While the Company does not actively sell any new policies today, it has the following products available for issue:

Ten Pay Whole Life – This traditional insurance product has a level face amount and level premium is payable for the first ten policy years. This product is available for issue ages 0-65, and has a minimum face amount of $10,000. This policy can be used in conversion situations, where it is available up to age 75 at a minimum face amount of $5,000.

Tradition – The Tradition policy is a fixed premium whole life insurance policy. Premiums are level and payable for life.  Issue ages are 0-75. The minimum face amount is the greater of $10,000 or the amount of coverage provided by a $100 annual premium.

Kid Kare – The Kid Kare product is a single premium level term policy to age 21.  The product is sold in units, with one unit equal to a face amount of $5,000 for a single premium of $250. The policy is issued from ages 0-15 and has conversion privileges at age 21.

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.

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.  See Note 4 – Reinsurance in the Notes to the Consolidated Financial Statements for additional information regarding the Company's reinsurance activities.

Underwriting

The underwriting procedures of the insurance subsidiary are established by Management. Insurance policies are issued by the Company based upon underwriting practices established for each market in which the Company operates. Most policies are individually underwritten. Applications for insurance are reviewed to determine additional information required to make an underwriting decision, which depends on the amount of insurance applied for and the applicant's age and medical history. Additional information may include inspection reports, medical examinations, and statements from doctors who have treated the applicant in the past and, where indicated, special medical tests. After reviewing the information collected, the Company either issues the policy as applied for, issues with an extra premium charge because of unfavorable factors, or rejects the application. Substandard risks may be referred to reinsurers for full or partial reinsurance of the substandard risk.

Reserves

The applicable insurance laws under which the insurance subsidiary operates require that the insurance company report policy reserves as liabilities to meet future obligations on the policies in-force. These reserves are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated in accordance with applicable laws to be sufficient to meet the various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain mortality tables and interest rates.

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% to 6% 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 Linton 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.
 
Investments

Investments are subject to applicable state insurance laws and regulations, which limit the concentration of investments in any one category or class and further limit the investment in any one issuer. Generally, these limitations are imposed as a percentage of statutory assets or percentage of statutory capital and surplus of each company.

The following table summarizes the Company's fixed maturities distribution at December 31, 2015 by ratings category as issued by Standard and Poor's, a leading ratings analyst.

     
Rating
 
2015
Investment Grade
   
AAA
 
8%
AA
 
16%
A
 
31%
BBB
 
38%
Below Investment Grade
 
7%
   
100%

The following table shows the composition, average maturity and current yield on the average carrying value of the Company's investment portfolio at December 31, 2015.

   
Average
         
   
Carrying
 
Average
 
Average
 
Investments
 
Value
 
Maturity
 
Yield
 
               
Fixed maturities held for sale
 
$
191,300,277
 
10.8 years
   
4.47
%
Equity securities
   
43,340,671
 
Not applicable
   
3.94
%
Trading securities
   
1,886,894
 
Not applicable
   
(22.74
)%
Mortgage loans
   
20,465,956
 
22 years
   
27.85
%
Investment real estate
   
49,328,601
 
Not applicable
   
2.99
%
Notes receivable
   
8,105,234
 
Not applicable
   
9.72
%
Policy loans
   
10,894,364
 
Not applicable
   
6.61
%
Short-term investments
   
2,191,091
 
On demand
   
31.95
%
Total Investments
 
$
327,513,088
       
5.85
%

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.

The Company began purchasing discounted commercial mortgage loans in 2009. Management has extensive background and experience in the analysis and valuation of commercial real estate. The discounted loans are available through the FDIC's sale of assets of closed banks and from banks wanting to reduce their loan portfolios. The loans are available on a loan by loan bid process. Once a loan has been acquired, contact is made with the appropriate individuals to begin a dialog with a goal of determining the borrower's willingness to work together. There are generally three paths a discounted loan will take: the borrowers pay as required; a settlement is reached with the loan being paid off at a discounted value; or the loan is foreclosed.


During 2015 and 2014, the Company acquired approximately $10.4 million and $2.3 million in mortgage loans, respectively, including both regular participation mortgage loans as well as discounted mortgage loans.  FSNB services a majority of the mortgage loan portfolio of the Company.  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.

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 along with a brief description of what steps are being taken to resolve the delinquency. All loans 90 days or more past due are placed on a non-performing status and classified as delinquent loans. Quarterly, coinciding with external financial reporting, the Company reviews each delinquent loan and determines how each delinquent loan should be classified. Management believes the current internal controls surrounding the mortgage loan selection process provide a quality portfolio with minimal risk of negative financial impact.

Management has conservatively decided to place the loans in the discounted mortgage loan portfolio on a non-accrual status, due to the instability of the borrowers.

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

A mortgage loan reserve is established and adjusted based on Management's quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value.  The Company acquired the discounted mortgage loans at below contract value, and believes that it will fully recover its carrying value upon disposal, therefore no reserve for delinquent loans is deemed necessary.  The loan portfolio since purchase is performing very well with a majority of the loans currently paying.  Those not currently paying are being vigorously worked by Management.  The current discounted commercial mortgage loan portfolio has an average price of 39% of face value and Management has determined that this deep discount provides a financial cushion or built in allowance for any of the loans that are not currently performing within the portfolio of loans purchased. The mortgage loan reserve was $0 at December 31, 2015 and 2014.

The following table shows a distribution of the Company's mortgage loans and discounted mortgage loans by type as of December 31, 2015:

Mortgage Loans
 
Amount
   
% of Total
 
             
Commercial – all other
 
$
15,924,512
     
90
%
Residential – all other
   
1,845,418
     
10
%
Total
 
$
17,769,930
     
100
%

The following table shows a geographic distribution of the Company's mortgage loan portfolio including discounted mortgage loans and investment real estate as of December 31, 2015:

 
Mortgage Loans
 
Real Estate
       
Arizona
12%
 
2%
California
0%
 
1%
Colorado
0%
 
3%
Florida
15%
 
26%
Georgia
0%
 
6%
Kentucky
23%
 
31%
Nevada
17%
 
0%
Ohio
1%
 
0%
South Carolina
0%
 
4%
Texas
0%
 
15%
Tennessee
16%
 
0%
West Virginia
16%
 
12%
Total
100%
 
100%

See Note 2 – Investments in the Notes to the Consolidated Financial Statements and Management's Discussion and Analysis for additional information regarding the Company's investments.

Competition

The insurance business is a highly competitive industry and there are a number of other companies, both stock and mutual, doing business in areas where the Company operates. Many of these competing insurers are larger, have more diversified and established lines of insurance coverage, have substantially greater financial resources and brand recognition, as well as a greater number of agents. Other significant competitive factors in the insurance industry include policyholder benefits, service to policyholders, and premium rates.

In recent years, the Company has not placed an emphasis on new business production. Costs associated with supporting new business can be significant. Current sales primarily represent sales to existing customers through additional insurance needs or conservation efforts. The Company currently encourages policy retention as opposed to new sales in an attempt to maintain or improve current persistency levels.

The Company performs administrative work as a third party administrator (TPA) for unaffiliated life insurance companies.  The Company intends to continue to pursue other TPA arrangements. The Company provides TPA services to insurance companies seeking business process outsourcing solutions.  Management believes the Company is positioned to generate additional revenues by utilizing the Company's current excess capacity and administrative services.

Regulation

Holding Company - States have enacted legislation requiring registration and periodic reporting by insurance companies domiciled within their respective jurisdictions that control or are controlled by other corporations so as to constitute a holding company system. Insurance holding company system statutes and regulations impose various limitations on investments in subsidiaries, and may require prior regulatory approval for material transactions between insurers and affiliates and for the payment of certain dividends and other distributions.

Insurance - Insurance companies are subject to regulation and supervision in the states in which they do business. Generally the state supervisory agencies have broad administrative powers relating to granting and revoking licenses to transact business, licensing agents, approving policy forms, regulating trade practices, approving certain premium rates, setting minimum reserve and loss ratio requirements, determining the form and content of required financial statements, and prescribing the type and amount of investments permitted. Insurance companies are also required to file detailed annual reports with supervisory agencies, and records of their business are subject to examination at any time. Under the rules of the National Association of Insurance Commissioners ("NAIC"), insurance companies are examined periodically by one or more of the supervisory agencies.

Risk-Based Capital - The NAIC requires a risk-based capital formula be applied to all life and health insurers. The risk-based capital formula is a threshold formula rather than a target capital formula. It is designed only to identify companies that require regulatory attention and is not to be used to rate or rank companies that are adequately capitalized. UTG's insurance subsidiary, UG, is more than adequately capitalized under the risk-based capital formula.

Guaranty Assessments – State guaranty laws provide for assessments from insurance companies to be placed into a fund which is used, in the event of failure or insolvency of an insurance company, to fulfill the obligations of that company to its policyholders. The amount which a company is assessed is determined according to the extent of these unsatisfied obligations in each state. Assessments are recoverable to a great extent as offsets against state premium taxes.

Personnel

At December 31, 2015, UTG and its subsidiaries had 42 full-time employees. UTG's operations are headquartered in Springfield, Illinois.

Item 1A. Risk Factors

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.

Item 1B. Unresolved Staff Comments

Not applicable.
 
Item 2. Properties

The Company owns an office complex in Springfield, Illinois, which houses the primary insurance operations. The office buildings in this complex contain 57,000 square feet of office and warehouse space.

Item 3. Legal Proceedings

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 these matters will not have a material adverse effect on the Company's results of operations or financial position.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrnat's Common Equity, Related Stockholders Matters and Issuer Purchaes 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.

   
2015
 
2014
                 
Period
 
High
 
Low
 
High
 
Low
                 
First quarter
 
14.25
 
13.05
 
12.50
 
11.25
Second quarter
 
15.99
 
13.50
 
12.50
 
10.55
Third quarter
 
19.00
 
14.80
 
14.13
 
12.25
Fourth quarter
 
17.00
 
14.36
 
14.50
 
13.55

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 February 19, 2016 there were 6,324 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, 2015 and total repurchases:

   
Total Number of Shares Purchased
   
Average Price Paid Per Share
   
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
 
Oct. 1 through Oct. 31, 2015
   
80
   
$
16.63
     
80
     
N/
A
 
$
1,724,840
 
Nov. 1 through Nov. 30, 2015
   
42
   
$
16.50
     
42
     
N/
A
 
$
1,724,147
 
Dec. 1 through Dec. 31, 2015
   
1,949
   
$
14.82
     
1,949
     
N/
A
 
$
1,695,266
 
Total
   
2,071
             
2,071
                 

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 on June 3, 2015, the Board of Directors of UTG authorized the repurchase of up to an additional $1,000,000 of UTG's common stock, for a total repurchase of $8,000,000. Repurchased shares are available for future issuance for general corporate purposes. This program can be suspended or terminated at any time without further notice.  Open market purchases are made based on the last available market price and are generally limited to a maximum per share price of the most recent reported per share GAAP equity book value of the Company.  During 2015, the Company repurchased 25,919 shares through the stock repurchase program for $375,207. Through December 31, 2015, UTG has spent $6.5 million in the acquisition of 688,617 shares under this program.

On July 20, 2015 the Board of Directors of UTG also clarified and amended the terms on which UTG may repurchase shares in the program and gave Company Management broad authority to operate the program, including the discretion of whether to purchase shares and the ability to suspend or terminate the program. The program may be suspended or terminated at any time without further notice.

Stock Performance Graph

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.

Item 6. Selected 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.

Item 7. 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, 2015 and 2014. 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.

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 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 form other companies or through the acquisition of other companies are deferred and recorded as deferred acquisition costs. The deferred amounts are recorded as an asset and amortized to expense in a systematic manner as indicated in Note 1 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.

Valuation of Securities – The Company's investment portfolio consists of fixed maturities, equity securities, trading securities, mortgage loans and real estate to provide funding of future policy contractual obligations.  The Company's fixed maturities and equity securities are classified as available-for-sale.  Available-for-sale investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets.

The Company's trading securities are carried at fair value with unrealized gains and losses reported in income in the Consolidated Statements of Operations. Fair value is the price that the Company would expect to receive upon sale of the asset in an orderly transaction.

Mortgage loans on real estate are carried at their unpaid principal balances, adjusted for amortization of premium or discount and valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. A portion of the mortgage loan balance consists of discounted mortgage loans that were purchased at deep discounts through an auction process led by the Federal Government. In general, the discounted mortgage loans are non-performing and there is a significant amount of uncertainty surrounding the timing and amount of cash flows to be received by the Company. Accordingly, the Company records its investment in the discounted mortgage loans at its original purchase price adjusted for any principal receipts received.

Investment real estate held for sale is reported at the lower of cost or fair value less cost to sell. Expenses to maintain the property are expensed as incurred.

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 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. The effect on deferred income taxes of a change in tax rates or laws is recognized in income tax expense in the period that includes the enactment date.  Refer to Note 1 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements for detailed information regarding the Company's significant accounting policies.

Results of Operations

On a consolidated basis, the Company had net income attributable to common shareholders of $900,000 and $7 million in 2015 and 2014, respectively.  In 2015, income before income taxes was $273,000 compared to $11.1 million in 2014. Total revenue was $28.8 million in 2015 and $43.6 million in 2014.

One-time events, primarily reflected in realized gains, comprise a substantial portion of the net income and revenue reported by the Company during 2015 and 2014.  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 2015 were $28.5 million compared to $32.5 million in 2014.

Revenues

Premiums and policy fee revenues, net of reinsurance premiums and policy fees, decreased approximately 5% when comparing 2015 to 2014.  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 2015 and 2014 was approximately 96.2% and 96.6%, respectively.  Persistency is a measure of insurance in-force retained in relation to the previous year.

The following table reflects net investment income of the Company for the years ended December 31:

   
2015
   
2014
 
             
Fixed maturities
 
$
8,559,938
   
$
8,225,640
 
Equity securities
   
1,708,786
     
3,255,611
 
Trading securities
   
(429,161
)
   
(476,578
)
Mortgage loans
   
5,700,492
     
4,592,853
 
Real estate
   
1,474,726
     
8,355,153
 
Notes receivable
   
787,658
     
340,000
 
Policy loans
   
720,544
     
760,715
 
Cash and cash equivalents
   
681
     
505
 
Short-term
   
699,357
     
70,578
 
Total consolidated investment income
   
19,223,021
     
25,124,477
 
Investment expenses
   
(3,663,086
)
   
(8,774,758
)
Consolidated net investment income
 
$
15,559,935
   
$
16,349,719
 

The Company's gross investment income and net investment income were down approximately 23% and 5%, respectively, when comparing the current and prior year results. Investment expenses were down approximately 58% when comparing the current and prior year results. The variance in investment income, when comparing the current and prior year results, is mainly attributable to fluctuations in the earnings of the equity securities, real estate and short term investment portfolios.

During the current year, the Company reported income of $1.7 million from equity securities portfolio, a decrease of 48% in comparison to the prior year. During 2014, the interest rate on one of the Company's preferred stocks increased substantially, according to the terms of the contractual agreement, causing the increase in income reported in the equity securities portfolio. This specific preferred stock was redeemed in subsequent quarters; therefore, no longer providing the high interest rate yield.

The Company's real estate investment portfolio produced income of approximately $1.5 million and $8.4 million during 2015 and 2014, respectively. During 2014, one of the Company's consolidated subsidiaries sold all of the real estate it owned. Historically, this real estate generated annual rental income of approximately $6.7 million. As a result of the sale, the Company no longer recognizes rental income from this real estate.

Income from the short term investment portfolio increased approximately $630,000 in comparison to the prior year. During 2016, the Company financed a short-term note receivable. The note was fully repaid during the fourth quarter of 2015 and the Company recognized income of approximately $443,000 at the time of payoff.

The Company's investment expenses decreased approximately 58% or $5 million when comparing the 2015 and 2014 results. Investment expenses are expected to vary from year to year depending on the resources utilized by the Company to maintain and work the investment portfolio.  As mentioned above, during 2014, one of the Company's consolidated subsidiaries sold the real estate it owned. This real estate generated investment expenses related to its operations of approximately $4.7 million during 2014. As a result of the sale, the Company did not incur similar expenses during 2015.

The following table reflects net realized investment gains (losses) for the years ended December 31:

   
2015
   
2014
 
             
Fixed maturities available for sale
 
$
1,248,240
   
$
1,278,743
 
Equity securities
   
780,396
     
2,645,216
 
Real estate
   
5,968,558
     
13,297,119
 
Equity securities – OTTI
   
(3,515,700
)
   
(126,959
)
Real estate – OTTI
   
(54,901
)
   
(35,946
)
Consolidated net realized investment gains
 
$
4,426,593
   
$
17,058,173
 

The Company's net realized investment gains were approximately $12.6 million lower when comparing the current and prior year results and is primarily attributable to the Company recognizing fewer gains in the equity and real estate investments portfolios during the current year. Furthermore, the Company recognized significantly more other than temporary impairments (OTTI) in the current year as compared to the prior year.

The gain reported in the equity securities portfolio during 2015 and 2014 is mainly the result of the redemption of a certain preferred stock owned by the Company. During 2014, the Company recognized gains totaling approximately $1.9 million from the redemption of a portion of this preferred stock. In 2015, the remaining portion of this preferred stock was redeemed, producing a gain of approximately $972,000.

The 2015 realized gains from real estate are mainly attributable to the sale of three real estate parcels, which produced net gains of approximately $5 million.  The Company reported net gains of approximately $13.3 million during 2014 from the sale of real estate.  During the fourth quarter of 2014, a majority owned subsidiary of UG, HPG Acquisitions, LLC ("HPG"), sold all of the real estate it owned in Midland, Texas and recognized a gain of approximately $10.1 million.  The sale of this real estate is the main reason for the fluctuation in the non-controlling interest balance reported on the Consolidated Statements of Operations. During the third quarter of 2014, the Company recognized a gain of approximately $3.1 million from the sale of real estate held by one of UG's wholly owned subsidiaries.  Gains from the sale of real estate are the result of one-time events and are expected to vary from year to year.

During 2015 and 2014, realized gains were offset by other-than-temporary impairments of approximately $3.6 million and $163,000, respectively. The other-than-temporary impairments were taken as a result of Management's assessment and consideration of the length of time the securities have remained in an unrealized loss position and as a result of management's analysis and determination of value. The investments were written down to better reflect their current expected fair value.

Other Income

Other income, which mainly consists of fees charged for third party administration ("TPA") services, decreased approximately $1 million when comparing the 2015 and 2014 results reported by the Company. The Company receives monthly fees based on policy in-force counts and certain other activity indicators, such as number of premium collections performed, or services performed.  The Company provides TPA services to insurance companies seeking business process outsourcing solutions.

During the fourth quarter of 2014, Management did not renew its largest third party administration contract as a result of thin profit margins associated with this contract coupled with its labor intensity. The non-renewal of this contract did not have a material financial impact as the Company has recognized operating expense reductions similar to the lost revenues.

In summary, the Company's basis for future revenue growth is expected to come from the following primary sources: conservation of business currently in-force, the maximization of investment earnings and the acquisition of other companies or policy blocks in the life insurance business. Management has placed a significant emphasis on the development of these revenue sources to enhance these opportunities.

Expenses

The Company reported total benefits and other expenses of $28.5 million and $32.5 million for the twelve-month period ended December 31, 2015 and 2014, respectively. Benefits, claims and settlement expenses represented approximately 66% and 60% of the Company's total expenses for 2015 and 2014, respectively.  The other major expense category of the Company is operating expenses, which represented 31% and 33% of the Company's total expenses for 2015 and 2014, respectively.

Benefits, claims and settlement expenses, net of reinsurance benefits, decreased approximately 4% in 2015 compared to 2014.  The decrease primarily relates to changes in the Company's death claim experience. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.

In early 2013, the Company began a proactive analysis of its in-force business to try to reconnect with lost customers and verify its customers are not deceased. In some instances, the Company found that the customer was indeed deceased, but no notification or claim was presented to the Company. During 2014, the Company paid approximately $1.2 million in death claim benefits as a result of this action. This project was completed during the second quarter of 2014 and contributed to higher benefit expenses in 2014, compared to 2015.

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 acknowledgement of increased risk as the insured continues to age.

The short-term impact of policy surrenders is negligible since a reserve for future policy benefits payable is held which is, at a minimum, equal to and generally greater than the cash surrender value of a policy. The benefit of fewer policy surrenders is primarily received over a longer time period through the retention of the Company's asset base.

Operating expenses decreased approximately 17% in 2015 compared to 2014.  When analyzing 2014 and 2015 operating expenses, expenses were down slightly in the majority of the categories, and significantly in two categories, information technology and charitable contributions. As previously mentioned in the Results of Operations – Other Income section of the MD&A, the Company did not renew its largest third party administration contract. The non-renewal of this contract allowed the Company to recognize cost saving measures therefore reducing operating expenses incurred by the Company during 2015.

Information technology expenses decreased approximately 29% compared to the prior year. Information technology expenses were higher in the prior year as a result of additional expenses incurred in relation to the conversion to a new administrative system. Following an extensive analysis of administrative systems available in the market place, early in 2014 the Company determined it would change its administrative system. The Company will be fully converted to the new system during the first quarter of 2016. Management believes this system change will better position the Company for the future by providing a more modern and flexible operating system while reducing ongoing operating costs.

Charitable contributions decreased approximately 63% when comparing current and prior year expenditures. 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 8% when comparing current and prior year activity. Cost of insurance acquired is established when an insurance company is acquired or when the Company acquires a block of in-force business. The Company assigns a portion of its cost to the right to receive future profits from insurance contracts existing at the date of the acquisition. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates may vary due to risk analysis performed at the time of acquisition on the business acquired. The Company utilizes a 12% discount rate on the remaining unamortized business. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force. This expense is expected to decrease, unless the Company acquires a new block of business.

Management has been working on a plan and has made the determination it is in the Company's best long term interest to relocate its main operations from Springfield, Illinois to Stanford, Kentucky. The Company's majority shareholder, Jess Correll, headquarters his other operating entities in Stanford, Kentucky. Management believes this move will provide the Company with significant synergies, improve efficiencies and reduce overall operating expenses. The relocation is anticipated to occur during the third quarter of 2016. Significant time and planning has been put into this relocation to help ensure as smooth a transition as possible.

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

Financial Condition

Investment Information

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:

   
2015
   
As a % of Total Investments
   
As a % of Total Assets
 
                   
Fixed maturities
 
$
185,119,097
     
58
%
   
49
%
Equity securities
   
45,685,340
     
15
%
   
12
%
Mortgage loans
   
17,769,930
     
6
%
   
5
%
Real estate
   
47,650,102
     
15
%
   
13
%
Notes receivable
   
10,597,907
     
3
%
   
3
%
Policy loans
   
10,684,244
     
3
%
   
3
%
Total investments
 
$
317,506,620
     
100
%
   
85
%

   
2014
   
As a % of Total Investments
   
As a % of Total Assets
 
                   
Fixed maturities
 
$
197,481,456
     
59
%
   
49
%
Equity securities
   
40,996,002
     
12
%
   
10
%
Trading securities
   
3,826,250
     
1
%
   
1
%
Mortgage loans
   
23,161,982
     
7
%
   
6
%
Real estate
   
51,007,101
     
15
%
   
13
%
Notes receivable
   
5,612,560
     
2
%
   
1
%
Policy loans
   
11,104,485
     
3
%
   
3
%
Short-term
   
4,382,181
     
1
%
   
1
%
Total investments
 
$
337,572,017
     
100
%
   
84
%

The Company's investments are generally managed to match related insurance and policyholder liabilities. The comparison of investment return with insurance or investment product crediting rates establishes an interest spread. Interest crediting rates on adjustable rate policies have been reduced to their guaranteed minimum rates, and as such, cannot be lowered any further. Policy interest crediting rate changes and expense load changes become effective on an individual policy basis on the next policy anniversary. Therefore, it takes a full year from the time the change was determined for the full impact of such change to be realized. If interest rates decline in the future, the Company will not be able to lower rates and both net investment income and net income will be impacted negatively.

The Company's total investments represented 85% and 84% of the Company's total assets as of December 31, 2015 and 2014, respectively. Fixed maturities consistently represented a substantial portion, 49%, of the total investments during 2014 and 2015.  The overall investment mix, as percentage of total investments, remained fairly consistent when comparing the investments held as of December 31, 2015 and 2014.

As of December 31, 2015, 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, with changes in market value charged directly to shareholders' equity.  Changes in the market value of available for sale securities resulted in net unrealized losses of approximately $(7.2) million during 2015 and net unrealized gains of approximately $4.2 million during 2014. The variance in the net unrealized gains and losses is the result of normal market fluctuations mainly related to higher interest rates.

During 2015, the trading securities asset balance decreased while the equity securities balance increased. As disclosed in Note 2 - Investment of the Consolidated Financial Statements, as of June 30, 2015, the Company reclassified its remaining exchange-traded equity trading security to the available for sale category. The fair value of the security at the time of the reclassification was $3,224,000.  Trading securities are purchased and held primarily for purposes of selling them in the near term and reflect active and frequent buying and selling. Management analyzed the recent buying and selling activity related to the exchange-traded equity and deems the available for sale category to better reflect Management's intent for this security going forward. Through June 30, 2015, unrealized gains and losses from this exchange-traded equity were recorded as a component of earnings. Future unrealized gains/losses will be reported as a component of comprehensive income.

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 additional deterioration or market condition changes. Future events may result in Management's determination that certain current investment holdings may need to be sold which could result in gains or losses in future periods. Such future events could also result in other than temporary declines in value that could result in future period impairment losses.

There are a number of significant risks and uncertainties inherent in the process of monitoring impairments and determining if impairment is other-than-temporary. These risks and uncertainties related to Management's assessment of other-than-temporary declines in value include but are not limited to: the risk that Company's assessment of an issuer's ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer; the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated; the risk that fraudulent information could be provided to the Company's investment professionals who determine the fair value estimates.

Liquidity

Liquidity provides the Company with the ability to meet on demand the cash commitments required by its business operations and financial obligations.  The Company's liquidity is primarily derived from a portfolio of marketable securities and line of credit facilities.  The Company has two principal needs for cash – the insurance company's contractual obligations to policyholders and the payment of operating expenses.

Parent Company Liquidity

UTG is a holding company that has no day-to-day operations of its own.  Cash flows from UTG's insurance subsidiary, UG, are used to pay costs associated with maintaining the Company in good standing with states in which it does business and purchasing outstanding shares of UTG stock.  UTG's cash flow is dependent on management fees received from its insurance subsidiary, stockholder dividends from its subsidiary and earnings received on cash balances.  As of December 31, 2015 and 2014, substantially all of the consolidated shareholders' equity represents net assets of its subsidiaries.  In 2015, the Parent company received $4 million in dividends from its insurance subsidiary and $4.8 million in 2014. 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, commissions, 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, 2015, the Company and its subsidiaries had available $18 million in line of credit facilities. As of December 31, 2014, the Company and its subsidiaries had available $8 million in line of credit facilities.  For additional information regarding the line of credit facilities, see Note 7 – Credit Arrangements in the Notes to the Consolidated Financial Statements.

The Company expects to have readily available funds for the foreseeable future to conduct its operations and to maintain target capital ratios in the insurance subsidiary through internally generated cash flow and the credit facilities. In the unlikely event that more liquidity is needed, the Company could generate additional funds through such sources as a short-term credit facility and intercompany borrowing.

Consolidated Liquidity

Cash used in operating activities was approximately $11.1 million and $13.6 million in 2015 and 2014, 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 2015, the Company's investing activities provided net cash of approximately $13.6 million.  During 2014, the Company's investing activities provided net cash of approximately $34.3 million.  Proceeds from investments sold decreased approximately 39% or $50 million when comparing 2015 to 2014. Investment purchases decreased approximately 30% or $27.3 million. 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 $(4.6) million and $(26.5) million during 2015 and 2014, respectively. During 2015, the Company made principal payments on its outstanding debt of approximately $4.4 million and as of December 31, 2015 the Company had no debt outstanding with third parties. During 2014, the Company made principal payments on its outstanding debt of approximately $16.3 million. As a result of the 2014 principal payments made, UTG, as well as one of its subsidiaries, HPG Acquisitions, LLC, fully repaid their outstanding debt.

The Company had cash and cash equivalents of approximately $11.8 million and $14 million as of December 31, 2015 and 2014, respectively. The Company has a portfolio of marketable fixed and equity securities that are available for sale, if an unexpected event were to occur. These securities had a fair value of approximately $231 million and $238 million at December 31, 2015 and 2014, 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 short-term debt, long-term debt and shareholders' equity. A complete analysis and description of the short-term and long-term debt issues outstanding as of December 31, 2015 and 2014 are presented in Note 7 – Credit Arrangements in the Notes to the Consolidated Financial Statements.

The Company had no outstanding debt as of December 31, 2015 and $4.4 million of outstanding debt as of December 31, 2014.  The 2014 outstanding debt belonged to   UTG Avalon, LLC, a wholly owned subsidiary of UG. See Note 7 – Credit Arrangements in the Notes to the Consolidated Financial Statements for detailed disclosures regarding the Company's notes payable.

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, 2015, UG has a ratio of approximately 4.74, which is 474% of the authorized control level. Accordingly, the Company meets the RBC requirements.

The Board of Directors of UTG has authorized the repurchase in the open market or in privately negotiated transactions of UTG's common stock. At a meeting of the Board of Directors on June 3, 2015, the Board of Directors of UTG authorized the repurchase of up to an additional $1,000,000 of UTG's common stock, for a total repurchase of $8,000,000. Repurchased shares are available for future issuance for general corporate purposes. This program can be suspended or terminated at any time without further notice.  Open market purchases are made based on the last available market price and are generally limited to a maximum per share price of the most recent reported per share GAAP equity book value of the Company.  During 2015, the Company repurchased 25,919 shares through the stock repurchase program for $375,207. Through December 31, 2015, UTG has spent $6.5 million in the acquisition of 688,617 shares under this program.

On July 20, 2015 the Board of Directors of UTG also clarified and amended the terms on which UTG may repurchase shares in the program and gave Company Management broad authority to operate the program, including the discretion of whether to purchase shares and the ability to suspend or terminate the program. The program may be suspended or terminated at any time without further notice.

Shareholders' equity was approximately $77 million and $83.6 million as of December 31, 2015 and 2014, respectively. Total shareholders' equity decreased approximately 8% in 2015 compared to 2014.  The decrease is primarily attributable to the change in accumulated other comprehensive income (loss). As of December 31, 2015, the Company reported an accumulated other comprehensive loss of approximately $(1.2) million and accumulated other comprehensive income of approximately $6.9 million as of December 31, 2014. The change in accumulated other comprehensive income (loss) is mainly attributable to the net unrealized holding losses of approximately $(7.2) million during 2015 compared to net unrealized holding gains of $4.2 million reported during 2014. As previously discussed in the above in the Financial Condition – Investment Information section of the MD&A, the variance in the net unrealized gains and losses is the result of normal market fluctuations mainly related to higher interest rates.

The Company's investments are predominantly in fixed maturity investments such as bonds, which provide sufficient return to cover future obligations. The Company carries all of its fixed maturity holdings as available for sale, which are reported in the 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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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.


Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

 
Page No.
UTG, Inc. and Consolidated Subsidiaries
 
Report of Independent Registered Public Accounting Firm
21
Consolidated Balance Sheets
22
Consolidated Statements of Operations
23
Consolidated Statements of Comprehensive Income
24
Consolidated Statements of Shareholders' Equity
25
Consolidated Statements of Cash Flows
26
Notes to Consolidated Financial Statements
27
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and
Shareholders of UTG, Inc. and Subsidiaries
Springfield, Illinois

We have audited the accompanying consolidated balance sheets of UTG, Inc. and subsidiaries (a Delaware corporation, the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2015. The Company's management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of UTG, Inc. and subsidiaries as of December 31, 2015 and 2014, and the consolidated results of their operations and their consolidated cash flows for each of the years in the two-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

/s/ Brown Smith Wallace, LLC

St. Louis, Missouri
March 25, 2016


UTG, Inc.
Consolidated Balance Sheets
As of December 31, 2015 and 2014

ASSETS
 
             
   
2015
   
2014
 
             
Investments:
           
Investments available for sale:
           
Fixed maturities, at fair value (amortized cost $188,647,671 and $188,634,364)
 
$
185,119,097
   
$
197,481,456
 
Equity securities, at fair value (cost $43,954,737 and $39,275,638)
   
45,685,340
     
40,996,002
 
Trading securities, at fair value (cost $0 and $5,179,850)
   
0
     
3,826,250
 
Mortgage loans on real estate at amortized cost
   
17,769,930
     
23,161,982
 
Investment real estate
   
47,650,102
     
51,007,101
 
Notes receivable
   
10,597,907
     
5,612,560
 
Policy loans
   
10,684,244
     
11,104,485
 
Short-term investments
   
0
     
4,382,181
 
Total investments
   
317,506,620
     
337,572,017
 
                 
Cash and cash equivalents
   
11,822,615
     
13,977,443
 
Accrued investment income
   
2,821,338
     
2,662,865
 
Reinsurance receivables:
               
Future policy benefits
   
27,462,830
     
27,906,905
 
Policy claims and other benefits
   
3,553,978
     
3,788,294
 
Cost of insurance acquired
   
8,140,379
     
9,047,984
 
Property and equipment, net of accumulated depreciation
   
2,016,611
     
2,475,829
 
Income taxes recoverable
   
619,043
     
0
 
Other assets
   
3,283,681
     
2,468,901
 
Total assets
 
$
377,227,095
   
$
399,900,238
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Policy liabilities and accruals:
               
Future policy benefits
 
$
269,119,859
   
$
275,044,909
 
Policy claims and benefits payable
   
3,759,565
     
3,208,324
 
Other policyholder funds
   
457,774
     
341,248
 
Dividend and endowment accumulations
   
14,233,644
     
14,239,054
 
Income taxes payable
   
0
     
1,933,243
 
Deferred income taxes
   
3,405,467
     
9,413,794
 
Notes payable
   
0
     
4,400,000
 
Trading securities, at fair value (proceeds $108,881 and $464,215)
   
28,609
     
23,853
 
Other liabilities
   
9,234,675
     
7,723,213
 
Total liabilities
   
300,239,593
     
316,327,638
 
                 
Shareholders' equity:
               
Common stock - no par value, stated value $0.001 per share. Authorized 7,000,000 shares - 3,699,447 and 3,706,780 shares issued and outstanding
   
3,699
     
3,706
 
Additional paid-in capital
   
43,002,670
     
43,122,944
 
Retained earnings
   
33,062,282
     
32,145,662
 
Accumulated other comprehensive income
   
(1,183,552
)
   
6,853,974
 
Total UTG shareholders' equity
   
74,885,099
     
82,126,286
 
Noncontrolling interest
   
2,102,403
     
1,446,314
 
Total shareholders' equity
   
76,987,502
     
83,572,600
 
Total liabilities and shareholders' equity
 
$
377,227,095
   
$
399,900,238
 
See accompaning notes.
 

 
UTG, Inc.
Consolidated Statements of Operations
As of December 31, 2015 and 2014

   
2015
   
2014
 
             
Revenues:
           
             
Premiums and policy fees
 
$
11,164,857
   
$
11,667,248
 
Reinsurance premiums and policy fees
   
(3,090,503
)
   
(3,126,914
)
Net investment income
   
15,559,935
     
16,349,719
 
Other income
   
707,069
     
1,676,602
 
Revenues before realized gains (losses)
   
24,341,358
     
26,566,655
 
Realized investment gains (losses), net:
               
Other-than-temporary impairments
   
(3,570,601
)
   
(162,905
)
Other realized investment gains, net
   
7,997,194
     
17,221,078
 
Total realized investment gains, net
   
4,426,593
     
17,058,173
 
Total revenues
   
28,767,951
     
43,624,828
 
                 
Benefits and other expenses:
               
                 
Benefits, claims and settlement expenses:
               
Life
   
20,245,920
     
21,404,297
 
Ceded Reinsurance benefits and claims
   
(2,919,064
)
   
(2,855,202
)
Annuity
   
996,485
     
597,792
 
Dividends to policyholders
   
446,567
     
479,158
 
Commissions and amortization of deferred policy acquisition costs
   
(168,533
)
   
432,695
 
Amortization of cost of insurance acquired
   
907,605
     
985,650
 
Operating expenses
   
8,916,771
     
10,776,690
 
Interest expense
   
68,876
     
677,079
 
Total benefits and other expenses
   
28,494,627
     
32,498,159
 
                 
Income before income taxes
   
273,324
     
11,126,669
 
Income tax benefit (expense)
   
932,715
     
(1,082,927
)
                 
Net income
   
1,206,039
     
10,043,742
 
                 
Net income attributable to noncontrolling interest
   
(289,419
)
   
(3,067,726
)
                 
Net income attributable to common shareholders':
 
$
916,620
   
$
6,976,016
 
                 
Amounts attributable to common shareholders':
               
                 
Basic income per share
 
$
0.25
   
$
1.86
 
                 
Diluted income per share
 
$
0.25
   
$
1.86
 
                 
Basic weighted average shares outstanding
   
3,704,322
     
3,750,239
 
                 
Diluted weighted average shares outstanding
   
3,704,322
     
3,750,239
 
See accompanying notes.
 
 
UTG, Inc.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2015 and 2014

   
2015
   
2014
 
             
Net Income
 
$
1,206,039
   
$
10,043,742
 
                 
Other comprehensive income (loss):
               
                 
Unrealized holding gains (losses) arising during period, pre-tax
   
(11,117,183
)
   
6,501,163
 
Tax (expense) benefit on unrealized holding gains (losses) arising during the period
   
3,891,014
     
(2,275,407
)
Unrealized holding gains (losses) arising during period, net of tax
   
(7,226,169
)
   
4,225,756
 
                 
Less reclassification adjustment for gains included in net income
   
(1,248,241
)
   
(1,278,743
)
Tax expense for gains included in net income
   
436,884
     
447,560
 
Reclassification adjustment for gains included in net income, net of tax
   
(811,357
)
   
(831,183
)
Subtotal: Other comprehensive income (loss), net of tax
   
(8,037,526
)
   
3,394,573
 
                 
Comprehensive income (loss)
   
(6,831,487
)
   
13,438,315
 
                 
Less comprehensive income attributable to no controlling interest
   
(289,419
)
   
(3,067,726
)
                 
Comprehensive income (loss) attributable to UTG, Inc.
 
$
(7,120,906
)
 
$
10,370,589
 
See accompanying notes.

UTG, Inc.
Consolidated Statements of Shareholders' Equity

Year ended December 31, 2015
 
Common Stock
   
Additional Paid-In Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Income (Loss)
   
Noncontrolling Interest
   
Total Shareholders' Equity
 
                                     
Balance at January 1, 2015
 
$
3,706
   
$
43,122,944
   
$
32,145,662
   
$
6,853,974
   
$
1,446,314
   
$
83,572,600
 
Common stock issued during year
   
19
     
254,908
     
0
     
0
     
0
     
254,927
 
Treasury shares acquired
   
(26
)
   
(375,182
)
   
0
     
0
     
0
     
(375,208
)
Net income attributable to common shareholders
   
0
     
0
     
916,620
     
0
     
0
     
916,620
 
Unrealized holding loss on securities net of noncontrolling interest and reclassification adjustment and taxes
   
0
     
0
     
0
     
(8,037,526
)
   
0
     
(8,037,526
)
Contributions
   
0
     
0
     
0
     
0
     
1,124,217
     
1,124,217
 
Distributions
   
0
     
0
     
0
     
0
     
(757,547
)
   
(757,547
)
Gain attributable to noncontrolling interest
   
0
     
0
     
0
     
0
     
289,419
     
289,419
 
Balance at December 31, 2015
 
$
3,699
   
$
43,002,670
   
$
33,062,282
   
$
(1,183,552
)
 
$
2,102,403
   
$
76,987,502
 
                                                 
Year ended December 31, 2014
   
 
Common
Stock 
     
Additional
Paid-In
Capital 
     
Retained
Earnings 
     
Accumulated Other
Comprehensive Income (Loss) 
      Noncontrolling Interest       
Total
Shareholders'
Equity 
 
Balance at January 1, 2014
 
$
3,776
   
$
44,050,778
   
$
25,169,646
   
$
3,459,401
   
$
5,183,840
   
$
77,867,441
 
Common stock issued during year
   
4
     
68,943
     
0
     
0
     
0
     
68,947
 
Treasury shares acquired
   
(74
)
   
(996,777
)
   
0
     
0
     
0
     
(996,851
)
Net income attributable to common shareholders
   
0
     
0
     
6,976,016
     
0
     
0
     
6,976,016
 
Unrealized holding loss on securities net of noncontrolling interest and reclassification adjustment and taxes
   
0
     
0
     
0
     
3,394,573
     
0
     
3,394,573
 
Contributions
   
0
     
0
     
0
     
0
     
185,689
     
185,689
 
Distributions
   
0
     
0
     
0
     
0
     
(6,990,941
)
   
(6,990,941
)
Gain attributable to noncontrolling interest
   
0
     
0
     
0
     
0
     
3,067,726
     
3,067,726
 
Balance at December 31, 2014
 
$
3,706
   
$
43,122,944
   
$
32,145,662
   
$
6,853,974
   
$
1,446,314
   
$
83,572,600
 
See accompanying notes.
 
 
 
UTG, INC.
Consolidated Statements of Cash Flows
As of December 31, 2015 and 2014

   
2015
   
2014
 
             
Cash flows from operating activities:
           
Net income attributable to common shares
 
$
916,620
   
$
6,976,016
 
Adjustments to reconcile net income to net cash used in operating activities
               
resulting from the sales and purchases of subsidiaries:
               
Amortization (accretion) of investments
   
(2,753,269
)
   
(2,161,508
)
Realized investment gains, net
   
(4,426,593
)
   
(17,058,173
)
Unrealized trading (gains) losses included in income
   
945,128
     
722,573
 
Realized trading (gains) losses included in income
   
0
     
143,957
 
Amortization of deferred policy acquisition costs
   
0
     
369,786
 
Amortization of cost of insurance acquired
   
907,605
     
985,650
 
Depreciation
   
814,336
     
1,303,829
 
Net income attributable to noncontrolling interest
   
289,419
     
3,067,726
 
Charges for mortality and administration of universal life and annuity products
   
(6,640,391
)
   
(6,651,876
)
Interest credited to account balances
   
4,835,215
     
4,985,077
 
Change in accrued investment income
   
(158,473
)
   
(229,926
)
Change in reinsurance receivables
   
678,391
     
998,863
 
Change in policy liabilities and accruals
   
(3,132,596
)
   
(5,123,893
)
Change in income taxes receivable (payable)
   
(2,552,286
)
   
3,229,286
 
Change in other assets and liabilities, net
   
(871,642
)
   
(5,197,626
)
Net cash used in operating activities
   
(11,148,536
)
   
(13,640,239
)
                 
Cash flows from investing activities:
               
Proceeds from investments sold and matured:
               
Fixed maturities available for sale
   
22,484,522
     
44,228,405
 
Equity securities available for sale
   
8,087,827
     
14,686,816
 
Trading securities
   
125,774
     
1,992,704
 
Mortgage loans
   
20,140,224
     
9,040,925
 
Real estate
   
19,829,665
     
53,674,168
 
Policy loans
   
3,102,284
     
3,322,613
 
Short-term investments
   
4,482,329
     
960,148
 
Total proceeds from investments sold and matured
   
78,252,625
     
127,905,779
 
Cost of investments acquired:
               
Fixed maturities available for sale
   
(21,733,834
)
   
(60,986,549
)
Equity securities available for sale
   
(12,278,232
)
   
(12,963,380
)
Trading securities
   
(463,895
)
   
(371,388
)
Mortgage loans
   
(13,774,698
)
   
(2,348,890
)
Real estate
   
(8,650,084
)
   
(7,424,311
)
Notes receivable
   
(4,985,347
)
   
0
 
Policy loans
   
(2,682,043
)
   
(2,566,138
)
Short-term investments
   
(100,149
)
   
(5,342,329
)
Total cost of investments acquired
   
(64,668,282
)
   
(92,002,985
)
Purchase of property and equipment
   
0
     
(1,600,000
)
Net cash provided by investing activities
   
13,584,343
     
34,302,794
 
                 
Cash flows from financing activities:
               
Policyholder contract deposits
   
5,189,311
     
5,304,502
 
Policyholder contract withdrawals
   
(5,514,232
)
   
(6,323,472
)
Proceeds from notes payable/line of credit
   
0
     
1,600,000
 
Payments of principal on notes payable/line of credit
   
(4,400,000
)
   
(16,297,534
)
Purchase of treasury stock
   
(120,281
)
   
(927,904
)
Non controlling contributions/(distributions) of consolidated subsidiary
   
254,567
     
(6,833,748
)
Sale of block of business
   
0
     
(3,045,574
)
Net cash used in financing activities
   
(4,590,635
)
   
(26,523,730
)
                 
Net decrease in cash and cash equivalents
   
(2,154,828
)
   
(5,861,175
)
Cash and cash equivalents at beginning of year
   
13,977,443
     
19,838,618
 
Cash and cash equivalents at end of year
 
$
11,822,615
   
$
13,977,443
 
See accompanying notes.
 
 
UTG, Inc.
Notes to Consolidated Financial Statements


Note 1 – Summary of Significant Accounting Policies


Business – UTG, Inc. is an insurance holding company. The Company's dominant business is individual life insurance, which includes the servicing of existing insurance in-force and the acquisition of other companies in the life insurance business. UTG and its subsidiaries are collectively referred to as the "Company".

This document at times will refer to the Registrant's largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll.  Mr. Correll holds a majority ownership of First Southern Funding, LLC ("FSF"), a Kentucky corporation, and First Southern Bancorp, Inc. ("FSBI"), a financial services holding company.  FSBI operates through its 100.00 %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, 2015, Mr. Correll owns or controls directly and indirectly approximately 57.61 % of UTG's outstanding stock.

UTG's life insurance subsidiary has several wholly-owned and majority-owned subsidiaries. The subsidiaries were formed to hold certain real estate and other investments. The investments were placed into the limited liability companies and partnerships to provide additional protection to the policyholders and to UG.

Basis of Presentation – The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"), under guidance issued by the Financial Accounting Standards Board ("FASB").  The preparation of financial statements in accordance with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Registrant and its wholly and majority-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated during consolidation.

Business Segments – The Company has only one business segment – life insurance.

Investments – The Company reports its investments as follows:

Fixed Maturity Investments – The Company classifies its fixed maturity investments, which include bonds, as available for sale. Investments classified as available for sale are carried at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income.  Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Operations, using the constant yield method over the period to maturity.  Net realized gains and losses on sales of available for sale securities, and unrealized losses considered to be other-than-temporary, are recorded to net realized investment gains (losses) in the Consolidated Statements of Operations.

Equity Securities – Investments in equity securities, which include common and preferred stocks, are reported at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income (loss).

Trading Securities – Trading security investments are reported at fair value with gains and losses resulting from changes in fair value recognized in earnings. Trading securities include exchange traded equities and exchange traded options.

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 received.  Management works with the borrower to reach a settlement on the loan or they foreclose on the underlying collateral which is primarily commercial real estate.  For cash payments received during the work out process, the Company records these payments to interest income on a cash basis.  For loan settlements reached, the Company records the amount in excess of the carrying amount of the loan as a discount accretion to investment income at the closing date.  Management reviews the discount loan portfolio regularly for impairment.  If an impairment is identified (after consideration of the underlying collateral), the Company records an impairment to earnings in the period the information becomes known.

Investment Real Estate – Investment real estate held for sale is reported at the lower of cost or fair value less cost to sell. Expenses to maintain the property are expensed as incurred.

Notes Receivable – Notes receivable are reported at their unpaid principal balances, adjusted for valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. Interest accruals are analyzed based on the likelihood of repayment. The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status.

Policy Loans – Policy loans are reported at their unpaid balances, including accumulated interest, but not in excess of the cash surrender value of the related policy.

Short-Term Investments – Short-term investments are reported at amortized cost, which approximates fair value.

Gains and Losses – Realized gains and losses include sales of investments and investment impairments.  If any, other-than-temporary impairments in fair value are recognized in net income on the specific identification basis.
 
Fair Value – Fair values for cash, short-term investments, short-term debt, receivables and payables approximate carrying value. Fair values for fixed maturities, equity securities and certain other assets are determined in accordance with specific accounting guidance.  Fair values are based on quoted market prices, where available.  Otherwise, fair values are based on quoted market prices of comparable instruments in active markets, quotes in inactive markets, or other observable criteria. Mortgage loans on real estate are estimated using discounted cash flow analyses. Discounted mortgage loans on real estate are reported at original purchase price, which Management believes approximates fair value.  For more specific information regarding the 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 – The Company considers certificates of deposit and other short-term instruments with an original purchased maturity of three months or less to be cash equivalents.

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  $3,323,718 and $3,868,331 at December 31, 2015 and 2014, respectively. Depreciation is computed on a straight-line basis for financial reporting purposes using estimated useful lives of  three to thirty years.  Depreciation expense was $139,218 and $309,279 for the years ended December 31, 2015 and 2014, respectively.
 
Future Policy Benefits and Expenses - The liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method. These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on the life insurance subsidiary's experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations. The Company makes these assumptions at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date.  Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 2% to 6% for life insurance and 2.5% to 7.50% 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 4.0% to 5.5% as of December 31, 2015 and 2014.

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 consequences 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.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  More information concerning income taxes is provided in Note 6 – Income Taxes.
Earnings Per Share – The objective of both basic earnings per share ("EPS") and diluted EPS is to measure the performance of an entity over the reporting period.  The Company presents basic and diluted EPS on the face of the Consolidated Statements of Operations. Basic EPS is computed by dividing income available to common shareholders by the weighted average common shares outstanding for the period.  Diluted EPS is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or contracts, such as stock options, which could be exercised or converted into common shares.

Recognition of Revenues and Related Expenses - Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits, consist principally of whole life insurance policies, and certain annuities with life contingencies are recognized as revenues when due. Limited payment life insurance policies defer gross premiums received in excess of net premiums, which is then recognized in income in a constant relationship with insurance in-force. Accident and health insurance premiums are recognized as revenue pro rata over the terms of the policies. Benefits and related expenses associated with the premiums earned are charged to expense proportionately over the lives of the policies through a provision for future policy benefit liabilities and through deferral and amortization of deferred policy acquisition costs. For universal life and investment products, generally there is no requirement for payment of premium other than to maintain account values at a level sufficient to pay mortality and expense charges. Consequently, premiums for universal life policies and investment products are not reported as revenue, but as deposits. Policy fee revenue for universal life policies and investment products consists of charges for the cost of insurance and policy administration fees assessed during the period. Expenses include interest credited to policy account balances and benefit claims incurred in excess of policy account balances.
 
Recently Issued Accounting Standards

Accounting Standards Update (ASU) 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities – ASU 2016-01 makes targeted improvements to existing U.S. GAAP for financial instruments, including requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requiring entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and requiring entities to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as "own credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017. Early adoption of the own credit provision is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

Accounting Standards Update (ASU) 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes – ASU 2015-17 simplifies the presentation of deferred income taxes to require that deferred tax assets and liabilities be classified as non-current in a classified balance sheet. Current U.S. GAAP requires an entity to separate deferred income tax assets and liabilities into current and non-current amounts in a classified balance sheet. The current requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments of this Update.  For public companies, the guidance is ASC 2015-17 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

Accounting Standards Update (ASU) 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis – ASU 2015-02 makes changes to both the variable interest model and voting interest model and eliminates the indefinite deferral of FASB Statement No. 167, included in ASU 2010-10, for certain investment funds. All reporting entities that hold a variable interest in other legal entities will need to re-evaluate their consolidation conclusions as well as disclosure requirements. This ASU is effective for annual periods beginning after December 15, 2015, and early adoption is permitted, including any interim period. This is not expected to have a material impact on the financial statements of the Company.

Accounting Standards Update (ASU) 2015-01, Income Statement – Extraordinary and Unusual Items – ASU 2015-01 removes the concept of extraordinary items from U.S. GAAP.  Under the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual and occurs infrequently.  This separate, net-of-tax presentation will no longer be allowed.  The existing requirement to separately disclose events or transactions that are unusual or occur infrequently on a pre-tax basis within continuing operations in the income statement has been retained.  The new guidance requires similar separate presentation of items that are both unusual and infrequent.  The new standard is effective for periods beginning after December 15, 2015.  Early adoption is permitted, but only as of the beginning of the fiscal year of adoption.  Upon adoption, the Company will present transactions that are both unusual and infrequent, if any, on a pre-tax basis within continuing operations in the Consolidated Statements of Operations.

Reclassifications – Certain reclassifications have been made to the 2014 consolidated financial statements to make them comparable to the current year consolidated financial statements.

Note 2 – Investments

Available for Sale Securities – Fixed Maturity and Equity Securities


The following tables provide a summary of fixed maturities available for sale and equity securities by original or amortized cost and estimated fair value:

December 31, 2015
 
Original or Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
                         
Investments available for sale:
                       
Fixed maturities
                       
U.S. Government and govt. agencies and authorities
 
$
20,336,681
   
$
1,441,890
   
$
(32,083
)
 
$
21,746,488
 
U.S. special revenue and assessments
   
1,137,546
     
7,843
     
(2,550
)
   
1,142,839
 
All other corporate bonds
   
167,173,444
     
3,762,156
     
(8,705,830
)
   
162,229,770
 
     
188,647,671
     
5,211,889
     
(8,740,463
)
   
185,119,097
 
Equity securities
   
43,954,737
     
2,119,205
     
(388,602
)
   
45,685,340
 
Total
 
$
232,602,408
   
$
7,331,094
   
$
(9,129,065
)
 
$
230,804,437
 

December 31, 2014
 
Original or Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
                         
Investments available for sale:
                       
Fixed maturities
                       
U.S. Government and govt. agencies and authorities
 
$
23,036,161
   
$
1,970,791
   
$
(50,184
)
 
$
24,956,768
 
States, municipalities and political subdivisions
   
95,000
     
2,385
     
0
     
97,385
 
U.S. special revenue and assessments
   
1,137,702
     
13,739
     
(202,930
)
   
948,511
 
Collateralized mortgage obligations
   
1,005,081
     
92,091
     
(6
)
   
1,097,166
 
Public utilities
   
399,927
     
55,913
     
0
     
455,840
 
All other corporate bonds
   
162,960,493
     
8,624,486
     
(1,659,193
)
   
169,925,786
 
     
188,634,364
     
10,759,405
     
(1,912,313
)
   
197,481,456
 
Equity securities
   
39,275,638
     
2,260,855
     
(540,491
)
   
40,996,002
 
Total
 
$
227,910,002
   
$
13,020,260
   
$
(2,452,804
)
 
$
238,477,458
 


The following table provides a summary of fixed maturities by contractual maturity as of  December 31, 2015. Actual maturities could differ from contractual maturities due to call or prepayment provisions:

Fixed Maturities Available for Sale
December 31, 2015
 
Amortized
Cost
   
Estimated
Fair Value
 
             
Due in one year or less
 
$
3,961,534
   
$
4,000,512
 
Due after one year through five years
   
23,444,519
     
24,343,844
 
Due after five years through ten years
   
64,352,687
     
62,094,221
 
Due after ten years
   
96,888,931
     
94,680,520
 
Total
 
$
188,647,671
   
$
185,119,097
 

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 $13,352,934 and $9,142,063 as of December 31, 2015 and 2014, respectively. The investments are all classified as "All other corporate bonds".


The fair value of investments with sustained gross unrealized losses at December 31, 2015 and 2014 are as follows:

December 31, 2015
 
Less than 12 months
 
12 months or longer
 
Total
                         
   
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
U.S. Government and govt. agencies and authorities
 
$
4,966,210
 
(32,083)
 
$
0
 
0
 
$
4,966,210
 
(32,083)
U.S. special revenue and assessments
   
984,770
 
(2,550)
   
0
 
0
   
984,770
 
(2,550)
All other corporate bonds
   
85,734,097
 
(5,255,276)
   
19,400,640
 
(3,450,554)
   
105,134,737
 
(8,705,830)
Total fixed maturities
 
$
91,685,077
 
(5,289,909)
 
$
19,400,640
 
(3,450,554)
 
$
111,085,717
 
(8,740,463)
                               
Equity securities
 
$
4,741,132
 
(388,602)
 
$
0
 
0
 
$
4,741,132
 
(388,602)

 
December 31, 2014
 
Less than 12 months
 
12 months or longer
 
Total
                         
   
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
U.S. Government and govt. agencies and authorities
   
0
 
0
   
4,947,265
 
(50,184)
   
4,947,265
 
(50,184)
U.S. special revenue and assessments
   
0
 
0
   
784,390
 
(202,930)
   
784,390
 
(202,930)
Collateralized mortgage obligations
   
0
 
0
   
1,012
 
(6)
   
1,012
 
(6)
All other corporate bonds
 
$
28,954,477
 
(416,560)
 
$
3,535,206
 
(1,242,633)
 
$
32,489,683
 
(1,659,193)
Total fixed maturities
 
$
28,954,477
 
(416,560)
 
$
9,267,873
 
(1,495,753)
 
$
38,222,350
 
(1,912,313)
                               
Equity securities
 
$
6,067,132
 
(540,491)
 
$
0
 
0
 
$
6,067,132
 
(540,491)

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
 
Total
As of December 31, 2015
         
Fixed maturities
40
 
9
 
49
Equity securities
9
 
0
 
9
As of December 31, 2014
         
Fixed maturities
18
 
7
 
25
Equity securities
25
 
0
 
25
 
 
Substantially all of the unrealized losses on fixed maturities available for sale at December 31, 2015 and 2014 are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase.  The unrealized losses on equity investments were primarily attributable to normal market fluctuations.  The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position.  Based upon the Company's expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company's evaluation of other relevant factors, the Company deems these securities to be temporarily impaired as of December 31, 2015 and 2014

Trading Securities

Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in net investment income on the Consolidated Statements of Operations. Trading securities include exchange-traded equities and exchange-traded options. Trading securities carried as liabilities are securities sold short. A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale.  The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2015 was $0 and $(28,609), respectively. The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2014 was $6,250 and $(23,853), 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.

As of June 30, 2015, the Company reclassified its remaining exchange-traded equity trading security to the available for sale category. The fair value of the security at the time of the reclassification was $3,224,000.  Trading securities are purchased and held primarily for purposes of selling them in the near term and reflect active and frequent buying and selling. Management analyzed the recent buying and selling activity related to the exchange-traded equity and deems the available for sale category to better reflect Management's intent for this security going forward. Through June 30, 2015, unrealized gains and losses from this exchange-traded equity were recorded as a component of earnings. Subsequent unrealized gains/losses are reported as a component of comprehensive income.

The following table reflects trading securities revenue charged to net investment income for the periods ended December 31:

 
2015
 
2014
 
         
Net unrealized gains (losses)
 
$
945,128
   
$
(722,573
)
Net realized gains (losses)
   
(515,967
)
   
245,995
 
Net unrealized and realized gains (losses)
 
$
429,161
   
$
(476,578
)


Mortgage Loans on Real Estate

The Company, from time to time, acquires mortgage loans through participation agreements with FSNB. FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market. The Company is able to receive participations from FSNB for three primary reasons: 1) FSNB has already reached its maximum lending limit to a single borrower, but the borrower is still considered a suitable risk; 2) the interest rate on a particular loan may be fixed for a long period that is more suitable for UG given its asset-liability structure; and 3) FSNB's loan growth might at times outpace its deposit growth, resulting in FSNB participating such excess loan growth rather than turning customers away. For originated loans, the Company's Management is responsible for the final approval of such loans after evaluation. Before a new loan is issued, the applicant is subject to certain criteria set forth by Company Management to ensure quality control. These criteria include, but are not limited to, a credit report, personal financial information such as outstanding debt, sources of income, and personal equity. Once the loan is approved, the Company directly funds the loan to the borrower. The Company bears all risk of loss associated with the terms of the mortgage with the borrower.

Approximately 30% and 39% of the mortgage loan portfolio consists of discounted commercial mortgage loans as of December 31, 2015 and 2014, respectively. The Company began purchasing discounted commercial mortgage loans in 2009. Management has extensive background and experience in the analysis and valuation of commercial real estate. The discounted loans are available through the FDIC's sale of assets of closed banks and from banks wanting to reduce their loan portfolios. The loans are available on a loan by loan bid process. Once a loan has been acquired, contact is made with the appropriate individuals to begin a dialog with a goal of determining the borrower's willingness to work together. There are generally three paths a discounted loan will take: the borrowers pay as required; a settlement is reached with the loan being paid off at a discounted value; or the loan is foreclosed.

During 2015 and 2014, the Company acquired $13,774,698 and $2,348,890 in mortgage loans, respectively, including both regular participation mortgage loans as well as discounted mortgage loans.  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 2015 and 2014, the maximum and minimum lending rates for mortgage loans were:

 
2015
 
2014
 
Maximum
rate
 
Minimum
rate
 
Maximum
rate
 
Minimum
rate
               
Commercial Loans
8.00 %
 
4.00 %
 
10.00 %
 
3.91 %
Residential Loans
8.00 %
 
3.00 %
 
8.00 %
 
7.00 %


Most mortgage loans are first position loans.  Loans issued are generally limited to no more than 80% of the appraised value of the property.

The Company has in place a monitoring system to provide Management with information regarding potential troubled loans. Letters are sent to each mortgagee when the loan becomes 30 days or more delinquent. Management is provided with a monthly listing of loans that are 60 days or more past due along with a brief description of what steps are being taken to resolve the delinquency. All loans 90 days or more past due are placed on a non-performing status and classified as delinquent loans. Quarterly, coinciding with external financial reporting, the Company reviews each delinquent loan and determines how each delinquent loan should be classified. Management believes the current internal controls surrounding the mortgage loan selection process provide a quality portfolio with minimal risk of foreclosure and/or negative financial impact.

Changes in the current economy could have a negative impact on the loans, including the financial stability of the borrowers, the borrowers' ability to pay or to refinance, the value of the property held as collateral and the ability to find purchasers at favorable prices. Given the uncertainty of the current market, Management has taken a conservative approach with the discounted mortgage loans and has classified all discounted mortgage loans held as non-accrual. In such status, the Company is not recording any accrued interest income nor is it recording any accrual of discount on the loans held. The Company records repayments on loans as discount accrual when the loan basis has been paid in full.

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

A mortgage loan reserve is established and adjusted based on Management's quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value.  The Company acquired the discounted mortgage loans at below contract value, and believes that it will fully recover its carrying value upon disposal, therefore no reserve for delinquent loans is deemed necessary.  Those not currently paying are being vigorously worked by Management.  The current discounted commercial mortgage loan portfolio has an average price of 39.0 % of face value and Management has determined that this deep discount provides a financial cushion or built in allowance for any of the loans that are not currently performing within the portfolio of loans purchased.  The mortgage loan reserve was $0 at December 31, 2015 and 2014.


The following table summarizes the number of loans held in the discounted mortgage loan portfolio and the carrying value of the loans as of December 31, 2015:

 
Payment Frequency
 
Number of Loans
   
Carrying
Value
 
             
No payments received
   
8
   
$
0
 
One-time payment received
   
1
     
0
 
Irregular payments received
   
2
     
20,834
 
Periodic payments received
   
7
     
5,347,215
 
Total
   
18
   
$
5,368,049
 
 
 
The following table summarizes the mortgage loan holdings of the Company for the periods ended December 31:

   
2015
   
2014
 
             
In good standing
 
$
14,701,228
   
$
14,443,455
 
Overdue interest over 90 days
   
20,834
     
3,130,290
 
Restructured
   
126,118
     
1,104,972
 
In process of foreclosure
   
2,921,750
     
4,483,265
 
Total mortgage loans
 
$
17,769,930
   
$
23,161,982
 
Total foreclosed  loans during the year
 
$
0
   
$
56,576
 


Investment Real Estate

Real estate acquired through foreclosure, consisting of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual asset basis at the lower of cost or fair value, less disposal costs. Fair value is determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. When properties are acquired through foreclosure, any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is recognized and charged to the Consolidated Statements of Operations. Based upon Management's evaluation of the real estate acquired through foreclosure, additional expense is recorded when necessary in an amount sufficient to reflect any declines in estimated fair value. Gains and losses recognized on the disposition of the properties are recorded as realized gains and losses in the Consolidated Statements of Operations.

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, 2015 and 2014 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.

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. 

Analysis of Investment Operations

The following table reflects the Company's net investment income for the periods ended December 31:

   
2015
   
2014
 
             
Fixed maturities
 
$
8,559,938
   
$
8,225,640
 
Equity securities
   
1,708,786
     
3,255,611
 
Trading securities
   
(429,161
)
   
(476,578
)
Mortgage loans
   
5,700,492
     
4,592,853
 
Real estate
   
1,474,726
     
8,355,153
 
Notes receivable
   
787,658
     
340,000
 
Policy loans
   
720,544
     
760,715
 
Cash and cash equivalents
   
681
     
505
 
Short-term
   
699,357
     
70,578
 
Total consolidated investment income
   
19,223,021
     
25,124,477
 
Investment expenses
   
(3,663,086
)
   
(8,774,758
)
Consolidated net investment income
 
$
15,559,935
   
$
16,349,719
 


The following table reflects the Company's net realized investments gains and losses for the periods ended December 31:

2015
 
Gross
Realized
Gains
 
Gross
Realized
(Losses)
 
Net
Realized
Gains (Losses)
             
Fixed maturities
 
$
1,289,455
 
$
(41,215)
 
$
1,248,240
Real estate
   
5,968,558
   
0
   
5,968,558
Common stock
   
48,165
   
(238,794)
   
(190,629)
Preferred stock
   
  971,662
   
(637)
   
971,025
Real estate – OTTI
   
0
   
(54,901)
   
(54,901)
Common stock – OTTI
   
0
   
(3,515,700)
   
(3,515,700)
Total realized gains (losses)
 
$
8,277,840
 
$
(3,851,247)
 
$
4,426,593

2014
 
Gross
Realized
Gains
 
Gross
Realized
(Losses)
 
Net
Realized
Gains (Losses)
             
Fixed maturities
 
$
2,414,160
 
$
(1,135,417)
 
$
1,278,743
Real estate
   
14,757,451
   
(1,460,332)
   
13,297,119
Common stock
   
673,821
   
(14,908)
   
658,913
Preferred stock
   
1,986,303
   
0
   
1,986,303
Real estate – OTTI
   
0
   
(35,946)
   
(35,946)
Common stock – OTTI
   
0
   
(126,959)
   
(126,959)
Total realized gains (losses)
 
$
19,831,735
 
$
(2,773,562)
 
$
17,058,173


Other-Than-Temporary Impairments

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

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

Management regularly reviews its real estate portfolio in comparison to appraisal valuations and current market conditions for indications of other-than-temporary impairments. If a decline in value is judged by Management to be other-than-temporary, a loss is recognized by a charge to other-than-temporary impairment losses in the Consolidated Statements of Operations.
 
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:

   
2015
   
2014
 
             
Other than temporary impairments:
           
Common stock
 
$
3,515,700
   
$
126,959
 
Real estate
   
54,901
     
35,946
 
Total other than temporary impairments
 
$
3,570,601
   
$
162,905
 


The other-than-temporary impairments recognized during 2015 and 2014 were taken as a result of Management's assessment and consideration of the length of time the securities have remained in an unrealized loss position and as a result of management's analysis and determination of value. The investments were written down to better reflect their current expected market value.

Investments on Deposit

The Company had investments with a fair value of $8,932,241 and $10,635,716 on deposit with various state insurance departments as of December 31, 2015 and 2014, respectively.

Note 3 – Fair Value Measurements

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

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

Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active. In addition, the Company may use various valuation techniques or pricing models that use observable inputs to measure fair value.
 
Level 3 – Valuation is based upon unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company's own assumptions about the inputs that market participants would use in pricing the asset or liability.

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

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

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

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

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

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

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

Securities designated as trading securities consist of exchange-traded equities and exchange-traded options.  These securities are primarily valued at quoted active market prices, and are therefore categorized as Level 1 in the fair value hierarchy.

The following table presents the Company's assets and liabilities measured at fair value in the consolidated balance sheet on a recurring basis as of December 31, 2015.

   
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Assets
                       
Fixed Maturities, available for sale
 
$
10,459,758
   
$
173,632,645
   
$
1,026,694
   
$
185,119,097
 
Equity Securities, available for sale
   
13,312,331
     
5,567,061
     
26,805,948
     
45,685,340
 
Total
   
23,772,089
     
179,199,706
     
27,832,642
     
230,804,437
 
                                 
Liabilities
                               
Trading Securities
 
$
28,609
   
$
0
   
$
0
   
$
28,609
 

The following table presents the Company's assets and liabilities measured at fair value in the consolidated balance sheet on a recurring basis as of December 31, 2014.

   
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Assets
                       
Fixed Maturities, available for sale
 
$
13,374,878
   
$
183,236,853
   
$
869,725
   
$
197,481,456
 
Equity Securities, available for sale
   
4,756,292
     
7,361,076
     
28,878,634
     
40,996,002
 
Trading Securities
   
3,826,250
     
0
     
0
     
3,826,250
 
Total
 
$
21,957,420
   
$
190,597,929
   
$
29,748,359
   
$
242,303,708
 
                                 
Liabilities
                               
Trading Securities
 
$
23,853
   
$
0
   
$
0
   
$
23,853
 


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

   
Fixed Maturities,
Available for Sale
   
Equity Securities,
Available for Sale
   
Total
 
                   
Balance at December 31, 2014
 
$
869,725
   
$
28,878,634
   
$
29,748,359
 
Transfers in to Level 3
   
0
     
0
     
0
 
Total unrealized gains or (losses):
                       
Included in realized gains (losses)
   
67,905
     
-
     
67,905
 
Included in other comprehensive income
   
210,819
     
270,670
     
481,489
 
Purchases
   
0
     
1,920,607
     
1,920,607
 
Sales
   
(121,755
)
   
(4,263,963
)
   
(4,385,718
)
Balance at December 31, 2015
 
$
1,026,694
   
$
26,805,948
   
$
27,832,642
 


The Level 3 securities include collateralized debt obligations of trust preferred securities issued by banks and insurance companies and certain equity securities with unobservable inputs. The Company computed fair value of Level 3 equity investments based on a review of current financial information, earnings trends and similar companies in the same industries.
There were no transfers in or out of Level 3 as of December 31, 2015.  Transfers occur when there is a lack of observable market information.

Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans and policy loans. Accordingly such investments are only included in the fair value hierarchy disclosure when the investment is subject to re-measurement at fair value after initial recognition and the resulting re-measurement is reflected in the Consolidated Financial Statements.
The carrying values and estimated fair values of certain of the Company's financial instruments not recorded at fair value in the Consolidated Balance Sheets are shown below. Because the fair value for all Consolidated Balance Sheet items are not required to be disclosed, the aggregate fair value amounts presented below are not reflective of the underlying value of the Company.

   
December 31, 2015
   
December 31, 2014
 
 
 
Assets
 
Carrying
Amount
   
Estimated
Fair
Value
   
Carrying
Amount
   
Estimated
Fair
Value
 
                         
Mortgage loans on real estate
 
$
17,769,930
   
$
17,775,178
   
$
23,161,982
   
$
23,337,728
 
Investment real estate
   
47,650,102
     
47,650,102
     
51,007,101
     
51,007,101
 
Notes receivable
   
10,597,907
     
10,597,907
     
5,612,560
     
5,612,560
 
Policy loans
   
10,684,244
     
10,684,244
     
11,104,485
     
11,104,485
 
Cash and cash equivalents
   
11,822,615
     
11,822,615
     
13,977,443
     
13,977,443
 
Short term investments
   
0
     
0
     
4,382,181
     
4,382,181
 
Liabilities
                               
Notes payable
   
0
     
0
     
4,400,000
     
4,400,000
 


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

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

Notes receivable are carried at their unpaid principal balances, which approximates fair value. The inputs used to measure the fair value of the loans are classified as Level 3 within the fair value hierarchy.

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

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

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

The carrying value is a reasonable estimate of fair value for notes payable subject to floating rates of interest.  The fair value of notes payable with fixed rate borrowings is determined based on the borrowing rates currently available to the Company for loans with similar terms and average maturities.  The inputs used to measure the fair value of our notes payable are classified as Level 2 within the fair value hierarchy.
Note 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, 2015, the Company had gross insurance in-force of $1.3 billion of which approximately $272 million was ceded to reinsurers.  At December 31, 2014, the Company had gross insurance in-force of $1.4 billion of which approximately $287 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 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 63 % of UG's reinsurance reserve credit, as of December 31, 2015 and 2014.

At December 31, 1992, UG (formerly American Capitol) entered into a reinsurance agreement with Canada Life Assurance Company ("the Canada Life agreement") that fully reinsured virtually all of its traditional life insurance policies. The reinsurer's obligations under the Canada Life agreement were secured by assets withheld by UG representing policy loans and deferred and uncollected premiums related to the reinsured policies. UG continues to administer the reinsured policies. At December 31, 2013, the Canada Life agreement had insurance in-force of approximately $6,815,000, with no reserve credit being taken on that amount.  The Canada Life agreement was fully repaid in August 2012. With the reinsurance recaptured by the Company, a 15 % profit share will continue to be paid to the reinsurer going forward relative to the block of business.  Effective July 1, 2014, the Company acquired the 15% profit share on this block of business from Canada Life for $300,000. This payment effectively settled any future obligations of the Company to the reinsurer under this agreement.

During 2014, the Company disposed of a block of business through an assumption reinsurance agreement, whereby the Company transferred cash of $3,000,000 and extinguished reserves of $3,600,000 and reduced cost of insurance acquired by $600,000.

On September 30, 1998, UG entered into a coinsurance agreement with The Independent Order of Vikings, (IOV) an Illinois fraternal benefit society.  Under the terms of the agreement, UG agreed to assume, on a coinsurance basis, 25% of the reserves and liabilities arising from all in-force insurance contracts issued by the IOV to its members.  At December 31, 2015, the IOV insurance in-force assumed by UG was approximately $1,451,000, with reserves being held on that amount of approximately $350,000. At December 31, 2014, the IOV insurance in-force assumed by UG was approximately $1,503,000, with reserves being held on that amount of approximately $346,000.

The Company does not have any short-duration reinsurance contracts.  The effect of the Company's long-duration reinsurance contracts on premiums earned in 2015 and 2014 were as follows:

   
2015
Premiums
Earned
   
2014
Premiums
Earned
 
             
Direct
 
$
11,140,000
   
$
11,642,000
 
Assumed
   
25,000
     
26,000
 
Ceded
   
(3,091,000
)
   
(3,127,000
)
Net Premiums
 
$
8,074,000
   
$
8,541,000
 


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.


   
2015
   
2014