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EX-32.2 - CERTIFICATION - UTG INCq2exhibit322.htm
EX-32.1 - CERTIFICATION - UTG INCq2exhibit321.htm
EX-31.2 - CERTIFICATION - UTG INCq2exhibit312.htm
EX-31.1 - CERTIFICATION - UTG INCq2exhibit311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2020

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 No. 0-16867

 
UTG, INC.
 
 
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
20-2907892
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
 
205 NORTH DEPOT STREET
 
 
STANFORD, KY 40484
 
 
(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 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   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No

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

Large accelerated filer
Accelerated filer
 
 
Non-accelerated filer
Smaller reporting company
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

The number of shares outstanding of the registrant’s common stock as of July 31, 2020 was 3,268,386.



UTG, Inc.
(The “Company”)

TABLE OF CONTENTS

PART I.   Financial Information
3
Item 1.  Financial Statements
3
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Operations
4
Condensed Consolidated Statements of Comprehensive Income (Loss)
5
Condensed Consolidated Statements of Shareholders' Equity
6
Condensed Consolidated Statements of Cash Flows
8
Notes to Condensed Consolidated Financial Statements
9
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 4.  Controls and Procedures
26
 
PART II.  Other Information
 
27
Item 1.  Legal Proceedings
27
Item 1A. Risk Factors
27
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
27
Item 3.  Defaults Upon Senior Securities
27
Item 4.  Mine Safety Disclosures
27
Item 5.  Other Information
27
Item 6.  Exhibits
27
 
Signatures
 
28




Part 1.   Financial Information.
Item 1.  Financial Statements.

UTG, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

   
June 30, 2020
   
December 31, 2019*
 
ASSETS
 
Investments:
           
Investments available for sale:
           
Fixed maturities, at fair value (amortized cost $157,032,450 and $159,959,855)
 
$
176,585,699
   
$
171,629,373
 
    Equity securities, at fair value (cost $31,796,340 and $32,578,862)
   
66,141,108
     
78,661,793
 
Equity securities, at cost
   
14,417,247
     
10,919,247
 
Mortgage loans on real estate at amortized cost
   
13,097,827
     
8,223,286
 
Investment real estate
   
40,725,963
     
44,344,236
 
Notes receivable
   
19,654,162
     
19,487,458
 
Policy loans
   
8,709,100
     
8,803,876
 
    Short-term investments
   
12,435,481
     
10,442,173
 
Total investments
   
351,766,587
     
352,511,442
 
                 
Cash and cash equivalents
   
29,317,455
     
28,787,629
 
Accrued investment income
   
1,528,217
     
1,679,783
 
Reinsurance receivables:
               
Future policy benefits
   
25,437,203
     
25,655,161
 
Policy claims and other benefits
   
3,713,563
     
4,142,142
 
Cost of insurance acquired
   
4,473,896
     
4,846,321
 
Property and equipment, net of accumulated depreciation
   
387,828
     
427,736
 
Other assets
   
686,497
     
695,517
 
Total assets
 
$
417,311,246
   
$
418,745,731
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Liabilities:
               
Policy liabilities and accruals:
               
Future policyholder benefits
 
$
246,166,152
   
$
249,264,308
 
Policy claims and benefits payable
   
3,438,766
     
3,631,666
 
Other policyholder funds
   
409,612
     
404,177
 
Dividend and endowment accumulations
   
14,705,726
     
14,626,475
 
Income taxes payable
   
785,981
     
313,662
 
Deferred income taxes
   
11,552,261
     
13,222,604
 
Other liabilities
   
6,081,601
     
5,785,933
 
Total liabilities
   
283,140,099
     
287,248,825
 
                 
Shareholders' equity:
               
Common stock - no par value, stated value $0.001 per share.  Authorized 7,000,000 shares - 3,270,515 and 3,277,830 shares outstanding
   
3,272
     
3,279
 
Additional paid-in capital
   
35,780,640
     
36,012,401
 
Retained earnings
   
82,712,737
     
85,979,678
 
Accumulated other comprehensive income
   
15,085,110
     
8,977,914
 
Total UTG shareholders' equity
   
133,581,759
     
130,973,272
 
Noncontrolling interests
   
589,388
     
523,634
 
Total shareholders' equity
   
134,171,147
     
131,496,906
 
Total liabilities and shareholders' equity
 
$
417,311,246
   
$
418,745,731
 

* Balance sheet audited at December 31, 2019.


See accompanying notes.
3



UTG, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Revenue:
                       
Premiums and policy fees
 
$
2,379,976
   
$
2,431,489
   
$
4,735,731
   
$
4,934,694
 
Ceded reinsurance premiums and policy fees
   
(690,036
)
   
(813,256
)
   
(1,370,476
)
   
(1,330,311
)
Net investment income
   
3,021,654
     
2,701,709
     
5,851,840
     
5,813,733
 
Other income
   
93,772
     
95,919
     
152,814
     
159,757
 
      Revenue before net investment gains (losses)
   
4,805,366
     
4,415,861
     
9,369,909
     
9,577,873
 
Net investment gains (losses):
                               
Other realized investment gains, net
   
1,779,333
     
5,301,778
     
8,953,840
     
6,415,476
 
Change in fair value of equity securities
   
12,946,281
     
97,148
     
(11,738,163
)
   
14,884,779
 
      Total net investment gains (losses)
   
14,725,614
     
5,398,926
     
(2,784,323
)
   
21,300,255
 
Total revenue
   
19,530,980
     
9,814,787
     
6,585,586
     
30,878,128
 
                                 
Benefits and other expenses:
                               
Benefits, claims and settlement expenses:
                               
Life
   
3,422,177
     
4,590,885
     
6,962,538
     
8,018,085
 
Ceded reinsurance benefits and claims
   
(353,168
)
   
(607,539
)
   
(988,111
)
   
(1,082,161
)
Annuity
   
259,049
     
307,369
     
491,537
     
505,039
 
Dividends to policyholders
   
92,005
     
96,053
     
186,320
     
199,652
 
Commissions and amortization of deferred policy acquisition costs
   
(28,559
)
   
(38,577
)
   
(63,676
)
   
(63,119
)
Amortization of cost of insurance acquired
   
186,212
     
193,976
     
372,425
     
387,953
 
Operating expenses
   
1,703,606
     
1,789,951
     
3,690,298
     
3,934,340
 
Total benefits and other expenses
   
5,281,322
     
6,332,118
     
10,651,331
     
11,899,789
 
                                 
Income (loss) before income taxes
   
14,249,658
     
3,482,669
     
(4,065,745
)
   
18,978,339
 
Income tax (benefit) expense
   
2,504,024
     
662,831
     
(864,558
)
   
4,359,889
 
                                 
Net income (loss)
   
11,745,634
     
2,819,838
     
(3,201,187
)
   
14,618,450
 
                                 
Net income attributable to noncontrolling interests
   
(33,514
)
   
(107,780
)
   
(65,754
)
   
(261,513
)
                                 
Net income (loss) attributable to common shareholders
 
$
11,712,120
   
$
2,712,058
   
$
(3,266,941
)
 
$
14,356,937
 
                                 
Amounts attributable to common shareholders
                               
Basic income (loss) per share
 
$
3.58
   
$
0.82
   
$
(1.00
)
 
$
4.36
 
                                 
Diluted income (loss) per share
 
$
3.58
   
$
0.82
   
$
(1.00
)
 
$
4.36
 
                                 
Basic weighted average shares outstanding
   
3,272,715
     
3,290,617
     
3,273,395
     
3,293,940
 
                                 
Diluted weighted average shares outstanding
   
3,272,715
     
3,290,617
     
3,273,395
     
3,293,940
 


See accompanying notes.
4



UTG, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Net income (loss)
 
$
11,745,634
   
$
2,819,838
   
$
(3,201,187
)
 
$
14,618,450
 
                                 
Other comprehensive income (loss):
                               
                                 
Unrealized holding gains (losses) arising during period, pre-tax
   
6,595,986
     
3,925,070
     
8,068,851
     
8,859,921
 
Tax (expense) benefit on unrealized holding gains (losses) arising during the period
   
(1,385,157
)
   
(824,264
)
   
(1,694,459
)
   
(1,860,583
)
Unrealized holding gains (losses) arising during period, net of tax
   
5,210,829
     
3,100,806
     
6,374,392
     
6,999,338
 
                                 
Less reclassification adjustment for (gains) losses included in net income
   
53,260
     
9,826
     
(338,223
)
   
(5,229
)
Tax expense (benefit) for gains included in net income (loss)
   
(11,185
)
   
(2,064
)
   
71,027
     
1,098
 
Reclassification adjustment for (gains) losses included in net income, net of tax
   
42,075
     
7,762
     
(267,196
)
   
(4,131
)
Subtotal:  Other comprehensive income (loss), net of tax
   
5,252,904
     
3,108,568
     
6,107,196
     
6,995,207
 
                                 
Comprehensive income (loss)
   
16,998,538
     
5,928,406
     
2,906,009
     
21,613,657
 
                                 
Less comprehensive income attributable to noncontrolling interests
   
(33,514
)
   
(107,780
)
   
(65,754
)
   
(261,513
)
                                 
Comprehensive income (loss) attributable to UTG, Inc.
 
$
16,965,024
   
$
5,820,626
   
$
2,840,255
   
$
21,352,144
 


See accompanying notes.
5



UTG, Inc.
Condensed Consolidated Statements of Shareholders' Equity (Unaudited)

Three Months Ended June 30, 2020
 
Common Stock
   
Additional Paid-In Capital
   
Retained Earnings
   
Accumulated Other
Comprehensive Income
   
Noncontrolling Interest
   
Total Shareholders' Equity
 
                                     
Balance at March 31, 2020
 
$
3,276
   
$
35,903,350
   
$
71,000,617
   
$
9,832,206
   
$
555,874
   
$
117,295,323
 
Common stock issued during year
   
1
     
16,739
     
-
     
-
     
-
     
16,740
 
Treasury shares acquired
   
(5
)
   
(139,449
)
   
-
     
-
     
-
     
(139,454
)
Net income (loss) attributable to common shareholders
   
-
     
-
     
11,712,120
     
-
     
-
     
11,712,120
 
Unrealized holding income on securities net of noncontrolling interest and reclassification adjustment and taxes
   
-
     
-
     
-
     
5,252,904
     
-
     
5,252,904
 
Contributions
   
-
     
-
     
-
     
-
     
-
     
-
 
Distributions
   
-
     
-
     
-
     
-
     
-
     
-
 
Gain attributable to noncontrolling interest
   
-
     
-
     
-
     
-
     
33,514
     
33,514
 
Balance at June 30, 2020
 
$
3,272
   
$
35,780,640
   
$
82,712,737
   
$
15,085,110
   
$
589,388
   
$
134,171,147
 

Six Months Ended June 30, 2020
 
Common Stock
   
Additional Paid-In Capital
   
Retained Earnings
   
Accumulated Other
Comprehensive Income
   
Noncontrolling Interest
   
Total Shareholders' Equity
 
                                     
Balance at December 31, 2019
 
$
3,279
   
$
36,012,401
   
$
85,979,678
   
$
8,977,914
   
$
523,634
   
$
131,496,906
 
Common stock issued during year
   
7
     
218,282
     
-
     
-
     
-
     
218,289
 
Treasury shares acquired
   
(14
)
   
(450,043
)
   
-
     
-
     
-
     
(450,057
)
Net income (loss) attributable to common shareholders
   
-
     
-
     
(3,266,941
)
   
-
     
-
     
(3,266,941
)
Unrealized holding income on securities net of noncontrolling interest and reclassification adjustment and taxes
   
-
     
-
     
-
     
6,107,196
     
-
     
6,107,196
 
Contributions
   
-
     
-
     
-
     
-
     
-
     
-
 
Distributions
   
-
     
-
     
-
     
-
     
-
     
-
 
Gain attributable to noncontrolling interest
   
-
     
-
     
-
     
-
     
65,754
     
65,754
 
Balance at June 30, 2020
 
$
3,272
   
$
35,780,640
   
$
82,712,737
   
$
15,085,110
   
$
589,388
   
$
134,171,147
 

See accompanying notes.


6

UTG, Inc.
Condensed Consolidated Statements of Shareholders' Equity (Unaudited)

Three Months Ended June 30, 2019
 
Common Stock
   
Additional Paid-In Capital
   
Retained Earnings
   
Accumulated Other
Comprehensive Income
   
Noncontrolling Interest
   
Total Shareholders' Equity
 
                                     
Balance at March 31, 2019
 
$
3,297
   
$
36,585,277
   
$
81,353,780
   
$
3,949,134
   
$
642,136
   
$
122,533,624
 
Common stock issued during year
   
1
     
16,735
     
-
     
-
     
-
     
16,736
 
Treasury shares acquired
   
(12
)
   
(348,945
)
   
-
     
-
     
-
     
(348,957
)
Net income attributable to common shareholders
   
-
     
-
     
2,712,058
     
-
     
-
     
2,712,058
 
Unrealized holding income on securities net of noncontrolling interest and reclassification adjustment and taxes
   
-
     
-
     
-
     
3,108,568
     
-
     
3,108,568
 
Contributions
   
-
     
-
     
-
     
-
     
-
     
-
 
Distributions
   
-
     
-
     
-
     
-
     
-
     
-
 
Gain attributable to noncontrolling interest
   
-
     
-
     
-
     
-
     
107,780
     
107,780
 
Balance at June 30, 2019
 
$
3,286
   
$
36,253,067
   
$
84,065,838
   
$
7,057,702
   
$
749,916
   
$
128,129,809
 

Six Months Ended June 30, 2019
 
Common Stock
   
Additional Paid-In Capital
   
Retained Earnings
   
Accumulated Other
Comprehensive Income
   
Noncontrolling Interest
   
Total Shareholders' Equity
 
                                     
Balance at December 31, 2018
 
$
3,296
   
$
36,567,865
   
$
69,708,901
   
$
62,495
   
$
734,153
   
$
107,076,710
 
Common stock issued during year
   
7
     
246,527
     
-
     
-
     
-
     
246,534
 
Treasury shares acquired
   
(17
)
   
(561,325
)
   
-
     
-
     
-
     
(561,342
)
Net income attributable to common shareholders
   
-
     
-
     
14,356,937
     
-
     
-
     
14,356,937
 
Unrealized holding income on securities net of noncontrolling interest and reclassification adjustment and taxes
   
-
     
-
     
-
     
6,995,207
     
-
     
6,995,207
 
Contributions
   
-
     
-
     
-
     
-
     
-
     
-
 
Distributions
   
-
     
-
     
-
     
-
     
(245,750
)
   
(245,750
)
Gain attributable to noncontrolling interest
   
-
     
-
     
-
     
-
     
261,513
     
261,513
 
Balance at June 30, 2019
 
$
3,286
   
$
36,253,067
   
$
84,065,838
   
$
7,057,702
   
$
749,916
   
$
128,129,809
 


See accompanying notes.

7



UTG, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2020
   
2019
 
Cash flows from operating activities:
           
Net income (loss)
 
$
(3,201,187
)
 
$
14,618,450
 
Adjustments to reconcile net income to net cash used in operating activities:
               
Amortization (accretion) of investments
   
(58,394
)
   
(32,084
)
Realized investment gains, net
   
(8,953,840
)
   
(6,415,476
)
Change in fair value of equity securities
   
11,738,163
     
(14,884,779
)
Amortization of cost of insurance acquired
   
372,425
     
387,953
 
Depreciation
   
239,510
     
594,399
 
Stock-based compensation
   
218,289
     
246,534
 
Charges for mortality and administration of universal life and annuity products
   
(3,164,512
)
   
(3,235,159
)
Interest credited to account balances
   
2,012,606
     
2,052,343
 
Change in accrued investment income
   
151,566
     
140,588
 
Change in reinsurance receivables
   
646,537
     
338,491
 
Change in policy liabilities and accruals
   
(2,219,077
)
   
(1,317,789
)
Change in income taxes receivable (payable)
   
472,319
     
(25,242
)
Change in other assets and liabilities, net
   
(3,142,189
)
   
2,842,382
 
Net cash used in operating activities
   
(4,887,784
)
   
(4,689,389
)
                 
Cash flows from investing activities:
               
Proceeds from investments sold and matured:
               
Fixed maturities available for sale
   
12,253,350
     
4,566,651
 
Equity securities
   
16,186,805
     
4,939,893
 
Mortgage loans
   
230,116
     
4,381,319
 
Real estate
   
3,418,671
     
10,687,242
 
Notes receivable
   
3,333,296
     
1,827,987
 
Policy loans
   
713,241
     
930,639
 
Short-term investments
   
6,000,000
     
-
 
Total proceeds from investments sold and matured
   
42,135,479
     
27,333,731
 
Cost of investments acquired:
               
Fixed maturities available for sale
   
(9,038,928
)
   
(2,507,805
)
Equity securities
   
(10,286,666
)
   
(115,013
)
Trading securities
   
-
     
(132,518
)
Mortgage loans
   
(5,098,138
)
   
(4,014,455
)
Real estate
   
-
     
(1,408,021
)
Notes receivable
   
(3,500,000
)
   
(7,528,188
)
Policy loans
   
(618,465
)
   
(705,906
)
Short-term investments
   
(7,890,228
)
   
-
 
Total cost of investments acquired
   
(36,432,425
)
   
(16,411,906
)
Net cash provided by investing activities
   
5,703,054
     
10,921,825
 
                 
Cash flows from financing activities:
               
Policyholder contract deposits
   
2,283,017
     
2,410,517
 
Policyholder contract withdrawals
   
(2,118,404
)
   
(2,756,026
)
Purchase of treasury stock
   
(450,057
)
   
(561,342
)
Non controlling contributions (distributions) of consolidated subsidiary
   
-
     
(245,750
)
Net cash used in financing activities
   
(285,444
)
   
(1,152,601
)
                 
Net increase in cash and cash equivalents
   
529,826
     
5,079,835
 
Cash and cash equivalents at beginning of period
   
28,787,629
     
20,150,162
 
Cash and cash equivalents at end of period
 
$
29,317,455
   
$
25,229,997
 


See accompanying notes.
8



UTG, Inc.

Notes to Condensed Consolidated Financial Statements

Note 1 – Basis of Presentation

The accompanying Condensed Consolidated Balance Sheet as of December 31, 2019, which has been derived from audited consolidated financial statements, and the unaudited interim Condensed Consolidated Financial Statements include the accounts of UTG, Inc. (the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”).  All significant intercompany accounts and transactions have been eliminated in consolidation.  The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for audited annual financial statements.  The information furnished includes all adjustments and accruals of a normal recurring nature, which in the opinion of Management, are necessary for a fair presentation of the results for the interim periods.  The unaudited Condensed Consolidated Financial Statements included herein and these related notes should be read in conjunction with the Company’s consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.  The Company’s results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or for any other future period.

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The pandemic has significantly impacted the economic conditions in the U.S. and globally, accelerating during the first half of March, as federal, state, and local governments react to the public health crisis, creating significant uncertainties in the U.S. economy. The Company has not experienced a slow-down in activities, however government restrictions and client-imposed delays are evaluated daily and this could change. While the disruption is currently expected to be temporary, there is uncertainty around the duration. The Company cannot at this time predict the ultimate impact the pandemic will have on its results of operations, financial position, liquidity, or capital resources but such impact could be material.

This document at times will refer to the Registrant’s largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll.  Mr. Correll holds a majority ownership of First Southern Funding, LLC (“FSF”), a Kentucky corporation, and First Southern Bancorp, Inc. (“FSBI”), a financial services holding company.  FSBI operates through its 100% owned subsidiary bank, First Southern National Bank (“FSNB”).  Banking activities are conducted through multiple locations within south-central and western Kentucky.  Mr. Correll is Chief Executive Officer and Chairman of the Board of Directors of UTG and is currently UTG’s largest shareholder through his ownership control of FSF, FSBI and affiliates.  At June 30, 2020, Mr. Correll owns or controls directly and indirectly approximately 65.78% of UTG’s outstanding stock.

UTG’s life insurance subsidiary, Universal Guaranty Life Insurance Company (“UG”), has several wholly-owned and majority-owned subsidiaries.  The subsidiaries were formed to hold certain real estate investments.  The real estate investments were placed into the limited liability companies and partnerships to provide additional protection to the policyholders and to UG.

Certain amounts in prior periods have been reclassified to conform with the current period presentation.

Note 2 – Recently Issued Accounting Standards

During the six months ended June 30, 2020, there were no additions to or changes in the critical accounting policies disclosed in the 2019 Form 10-K.
9



Note 3 – Investments

Available for Sale Securities – Fixed Maturity Securities

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

Investments in available for sale securities are summarized as follows:

June 30, 2020
 
Original or Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Investments available for sale:
                       
Fixed maturities
                       
U.S. Government and govt. agencies and authorities
 
$
44,793,626
   
$
1,614,309
   
$
-
   
$
46,407,935
 
U.S. special revenue and assessments
   
14,361,765
     
1,524,448
     
-
     
15,886,213
 
All other corporate bonds
   
97,877,059
     
16,414,492
     
-
     
114,291,551
 
   
$
157,032,450
   
$
19,553,249
   
$
-
   
$
176,585,699
 

December 31, 2019
 
Original or Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
Investments available for sale:
                       
Fixed maturities
                       
U.S. Government and govt. agencies and authorities
 
$
35,761,440
   
$
402,832
   
$
(35,529
)
 
$
36,128,743
 
U.S. special revenue and assessments
   
14,371,263
     
832,100
     
-
     
15,203,363
 
All other corporate bonds
   
109,827,152
     
10,470,115
     
-
     
120,297,267
 
   
$
159,959,855
   
$
11,705,047
   
$
(35,529
)
 
$
171,629,373
 

The amortized cost and estimated market value of debt securities at June 30, 2020, by contractual maturity, is shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Fixed Maturities Available for Sale
June 30, 2020
 
Amortized Cost
   
Fair Value
 
Due in one year or less
 
$
23,776,809
   
$
24,205,154
 
Due after one year through five years
   
46,399,814
     
49,609,973
 
Due after five years through ten years
   
34,654,588
     
39,465,754
 
Due after ten years
   
25,468,466
     
30,241,655
 
Fixed maturities with no single maturity date
   
26,732,773
     
33,063,163
 
Total
 
$
157,032,450
   
$
176,585,699
 
10



The fair value of investments with sustained gross unrealized losses at June 30, 2020 and December 31, 2019 are as follows:

June 30, 2020
 
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair value
   
Unrealized losses
   
Fair value
   
Unrealized losses
   
Fair value
   
Unrealized losses
 
All other corporate bonds
 
$
-
     
-
     
-
     
-
     
-
   
$
-
 
Total fixed maturities
 
$
-
     
-
     
-
     
-
     
-
   
$
-
 
                                                 

December 31, 2019
 
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair value
   
Unrealized losses
   
Fair value
   
Unrealized losses
   
Fair value
   
Unrealized losses
 
U.S. Government and govt. agencies and authorities
 
$
6,059,380
     
(35,529
)
   
-
     
-
     
6,059,380
   
$
(35,529
)
Total fixed maturities
 
$
6,059,380
     
(35,529
)
   
-
     
-
     
6,059,380
   
$
(35,529
)
                                                 

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

Less than 12 months
 
12 months or longer
 
Total
As of June 30, 2020
         
Fixed maturities
-
 
-
 
-
As of December 31, 2019
         
Fixed maturities
3
 
-
 
3

Substantially all of the unrealized losses on fixed maturities at December 31, 2019 are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase.  The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position.  Based upon the Company’s expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company’s evaluation of other relevant factors, the Company deems these securities to be temporarily impaired as of  June 30, 2020 and December 31, 2019.
 
11


Net Investment Gains (Losses)

The following table presents net investment gains (losses) and the change in net unrealized gains (losses) on investments. 

 
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Realized gains:
                       
Sales of fixed maturities
 
$
11,732
   
$
101,633
   
$
403,215
   
$
116,688
 
Sales of equity securities
   
1,832,593
     
2,765,915
     
8,615,617
     
2,765,915
 
Sales of real estate
   
-
     
2,678,207
     
-
     
3,776,850
 
Other
   
-
     
-
     
-
     
-
 
Total realized gains
   
1,844,325
     
5,545,755
     
9,018,832
     
6,659,453
 
Realized losses:
                               
Sales of fixed maturities
   
(64,992
)
   
(111,459
)
   
(64,992
)
   
(111,459
)
Sales of equity securities
   
-
     
-
     
-
     
-
 
 Sales of real estate
   
-
     
-
     
-
     
-
 
 Other-than-temporary impairments
   
-
     
-
     
-
     
-
 
 Other
   
-
     
(132,518
)
   
-
     
(132,518
)
Total realized losses
   
(64,992
)
   
(243,977
)
   
(64,992
)
   
(243,977
)
Net realized investment gains (losses)
   
1,779,333
     
5,301,778
     
8,953,840
     
6,415,476
 
Change in fair value of equity securities:
                               
Change in fair value of equity securities held at the end of the period
   
12,946,281
     
97,148
     
(11,738,163
)
   
14,884,779
 
Change in fair value of equity securities
   
12,946,281
     
97,148
     
(11,738,163
)
   
14,884,779
 
Net investment gains (losses)
 
$
14,725,614
   
$
5,398,926
   
$
(2,784,323
)
 
$
21,300,255
 
Change in net unrealized gains (losses) on available-for-sale investments included in other comprehensive income:
                               
Fixed maturities
 
$
6,595,986
   
$
3,925,070
   
$
8,068,851
   
$
8,859,921
 
Net increase (decrease)
 
$
6,595,986
   
$
3,925,070
   
$
8,068,851
   
$
8,859,921
 

Other-Than-Temporary Impairments

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

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

The Company did not recognize any other-than-temporary impairments during the six month periods ended June 30, 2020 or 2019.
12


Cost Method Investments

The Company held equity investments with an aggregate cost of $14,417,247 and $10,919,247 at June 30, 2020 and December 31, 2019, respectively.  These equity investments were not reported at fair value because it is not practicable to estimate their fair values due to insufficient information being available. Management did not identify any events or changes in circumstances that might have a significant adverse effect on the reported value of those investments.  Based on Management's evaluation of the expected cash flow of the investments, and the Company's ability and intent to hold the investments for a reasonable period of time, the Company does not deem an other-than-temporary impairment necessary at June 30, 2020.

Mortgage Loans

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

During the six months ended June 30, 2020 and 2019, the Company acquired $5,098,138 and $4,014,455 in mortgage loans, respectively.  FSNB services the majority of the Company’s mortgage loan portfolio.  The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan cost to cover costs incurred by FSNB relating to the processing and establishment of the loan.

During 2020 and 2019, the maximum and minimum lending rates for mortgage loans were:

2020
 
2019
 
Maximum rate
 
Minimum rate
 
Maximum rate
 
Minimum rate
Farm Loans
5.00%
 
5.00%
 
5.00%
 
5.00%
Commercial Loans
7.50%
 
4.24%
 
7.50%
 
4.82%
Residential Loans
5.50%
 
5.50%
 
8.00%
 
8.00%

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

The Company has in place a monitoring system to provide Management with information regarding potential troubled loans.  Letters are sent to each mortgagee when the loan becomes 30 days or more delinquent.  Management is provided with a monthly listing of loans that are 60 days or more past due 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.  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.
13


A mortgage loan reserve is established and adjusted based on Management's quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value.  The mortgage loan reserve was $0 at June 30, 2020 and December 31, 2019.

The following table summarizes the mortgage loan holdings of the Company for the periods ended:

 
June 30, 2020
   
December 31, 2019
 
In good standing
 
$
13,097,827
   
$
8,223,286
 
Total mortgage loans
 
$
13,097,827
   
$
8,223,286
 

Investment Real Estate

Investment real estate held for sale is reported at the lower of cost or fair value less cost to sell. Investment Real estate acquired through foreclosure, consisting of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual asset basis at the lower of cost or fair value, less disposal costs. Fair value is determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. When properties are acquired through foreclosure, any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is recognized and charged 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.

The Company's investment real estate portfolio includes ownerships in oil and gas royalties. As of June 30, 2020 and December 31, 2019, investments in oil and gas royalties represented 45% and 44%, respectively, of the total investment real estate portfolio.

Gains and losses recognized on the disposition of the properties are recorded as realized gains and losses in the Condensed Consolidated Statements of Operations. During the six months ended June 30, 2020 and 2019, the Company acquired $0 and $1,408,021 of investment real estate, respectively.

Notes Receivable

Notes receivable represent collateral loans and promissory notes issued by the Company and are reported at their unpaid principal balances, adjusted for valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. The valuation allowance as of  June 30, 2020 and December 31, 2019 was $0. Interest accruals are analyzed based on the likelihood of repayment.  The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status. During the six months ended June 30, 2020 and 2019 the Company acquired  $3,500,000 and $7,528,188 of notes receivable, respectively.
 
Before a new note is issued, the applicant is subject to certain criteria set forth by Company Management to ensure quality control.  Once the note is approved, the Company directly funds the note to the borrower. Several of the notes have participation agreements in place, whereas the Company has reduced its investment in the note receivable by participating a portion of the note to a third party.

Similar to the mortgage loans, FSNB services several of the notes receivable. The Company, and the participants in the notes, share in the risk of loss associated with the terms of the note with the borrower, based upon their ownership percentage in the note.  The Company has in place a monitoring system to provide Management with information regarding potential troubled loans. 

Short-Term Investments

Short-term investments have remaining maturities exceeding three months and under 12 months at the time of purchase and are stated at amortized cost, which approximates fair value. The short-term investments consist of United States Treasury securities.

Dung the six months ended June 30, 2020 and 2019, the Company acquired $6,000,000 and $0, respectively, in short-term investments.
14



Note 4 – Fair Value Measurements

The Company measures its assets and liabilities recorded at fair value on a recurring basis utilizing valuation techniques based upon observable and unobservable inputs. 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.  Observable inputs reflect market data obtained from independent sources and unobservable inputs reflect the Company’s expectations. The levels of the hierarchy are defined as follows:

Level 1 – Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.

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

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

Recurring Measurements

The following table presents the fair value measurements of the Company’s assets and liabilities measured at fair value in the Condensed Consolidated Balance Sheet on a recurring basis as of June 30, 2020 and December 31, 2019.

June 30, 2020
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                       
Fixed maturities available for sale:
                       
U.S. Government and government agencies and authorities
 
$
46,407,935
   
$
-
   
$
-
   
$
46,407,935
 
U.S. special revenue and assessments
   
-
     
15,886,213
     
-
     
15,886,213
 
Corporate securities
   
-
     
114,291,551
     
-
     
114,291,551
 
Total fixed maturities
   
46,407,935
     
130,177,764
     
-
     
176,585,699
 
Equity securities:
                               
Common stocks
   
23,092,530
     
16,041,865
     
27,006,713
     
66,141,108
 
Total equity securities
   
23,092,530
     
16,041,865
     
27,006,713
     
66,141,108
 
Total financial assets
 
$
69,500,465
   
$
146,219,629
   
$
27,006,713
   
$
242,726,807
 


December 31, 2019
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial assets:
                       
Fixed maturities available for sale:
                       
U.S. Government and government agencies and authorities
 
$
36,128,743
   
$
-
   
$
-
   
$
36,128,743
 
U.S. special revenue and assessments
   
-
     
15,203,363
     
-
     
15,203,363
 
Corporate securities
   
-
     
120,297,267
     
-
     
120,297,267
 
Total fixed maturities
   
36,128,743
     
135,500,630
     
-
     
171,629,373
 
Equity securities:
                               
Common stocks
   
29,888,281
     
14,258,750
     
34,514,762
     
78,661,793
 
Total equity securities
   
29,888,281
     
14,258,750
     
34,514,762
     
78,661,793
 
Total financial assets
 
$
66,017,024
   
$
149,759,380
   
$
34,514,762
   
$
250,291,166
 
15



The following is a description of the valuation techniques used the by Company to measure assets reported at fair value on a recurring basis. The Company had no liabilities measured and reported at fair value as of June 30, 2020 and December 31, 2019.  There have been no significant changes in the valuation techniques utilized by the Company for the six months ended June 30, 2020.

Available for Sale Securities

Securities classified as available for sale are recorded at fair value on a recurring basis. Securities classified as Level 1 utilized fair value measurements based upon quoted market prices, when available. If quoted market prices are not available, the Company obtains fair value measurements from recently executed transactions, market price quotations, benchmark yields and issuer spreads to value Level 2 securities. In certain instances where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Fair value determinations for Level 3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value complies with accounting standard generally accepted in the United States.

Equity Securities at Fair Value

Equity securities consist of common and preferred stocks mainly in private equity investments, financial institutions and publicly traded corporations. Equity securities for which there is sufficient market data are categorized as Level 1 or 2 in the fair value hierarchy.  For the equity securities in which quoted market prices are not available, the Company uses industry standard pricing methodologies, including discounted cash flow models that may incorporate various inputs such as payment expectations, risk of the investment, market data, and health of the underlying company. The inputs are based upon Management's assumptions and available market information. When evidence is believed to support a change to the carrying value from the transaction price, adjustments are made to reflect the expected cash flows, material events and market data. These investments are included in Level 3 of the fair value hierarchy.

The Level 3 securities include 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.

Level 3 Reconciliation

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
   
Total
 
Balance at December 31, 2019
 
$
-
   
$
34,514,762
   
$
34,514,762
 
Total unrealized gain or (losses):
                       
Included in net income (loss)
   
-
     
(139,588
)
   
(139,588
)
Included in other comprehensive income
   
-
     
-
     
-
 
Purchases
   
-
     
3,082,007
     
3,082,007
 
Sales
   
-
     
(10,450,468
)
   
(10,450,468
)
Balance at June 30, 2020
 
$
-
   
$
27,006,713
   
$
27,006,713
 

 
June 30, 2020
   
December 31, 2019
 
Change in fair value of equity securities included in net income (loss) relating to assets held
 
$
(139,588
)
 
$
6,461,670
 
16



Nonrecurring Measurements

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

The 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.

   
Carrying
   
Estimated
                   
June 30, 2020
 
Amount
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Equity securities, at cost
 
$
14,417,247
     
14,417,247
     
-
     
-
     
14,417,247
 
Mortgage loans on real estate
   
13,097,827
     
12,934,172
     
-
     
-
     
12,934,172
 
Investment real estate
   
40,725,963
     
85,158,424
     
-
     
-
     
85,158,424
 
Notes receivable
   
19,654,162
     
23,313,608
     
-
     
-
     
23,313,608
 
Policy loans
   
8,709,100
     
8,709,100
     
-
     
-
     
8,709,100
 
Short term investments
   
12,435,481
     
12,435,481
     
12,435,481
     
-
     
-
 
Cash and cash equivalents
   
29,317,455
     
29,317,455
     
29,317,455
     
-
     
-
 

   
Carrying
   
Estimated
                   
December 31, 2019
 
Amount
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Equity securities, at cost
 
$
10,919,247
     
10,919,247
     
-
     
-
     
10,919,247
 
Mortgage loans on real estate
   
8,223,286
     
7,531,094
     
-
     
-
     
7,531,094
 
Investment real estate
   
44,344,236
     
85,158,424
     
-
     
-
     
85,158,424
 
Notes receivable
   
19,487,458
     
19,332,472
     
-
     
-
     
19,332,472
 
Policy loans
   
8,803,876
     
8,803,876
     
-
     
-
     
8,803,876
 
Short term investments
   
10,442,173
     
10,442,173
     
10,442,173
     
-
     
-
 
Cash and cash equivalents
   
28,787,629
     
28,787,629
     
28,787,629
     
-
     
-
 

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

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

A portion of the mortgage loans balance consists of discounted mortgage loans. The Company has historically purchased non-performing discounted mortgage loans at a deep discount through an auction process led by the Federal Government.  In general, the discounted loans are non-performing and there is a significant amount of uncertainty surrounding the timing and amount of cash flows to be received by the Company.  Accordingly, the Company records its investment in the discounted loans at its original purchase price, which Management believes approximates fair value.  The inputs used to measure the fair value of our discounted mortgage loans are classified as Level 3 within the fair value hierarchy.
17


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.

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

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

The carrying amount of cash and cash equivalents in the Condensed 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 Condensed 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.

Note 5 – Credit Arrangements

Instrument
 
Issue Date
 
Maturity Date
 
Revolving
Credit Limit
   
December 31, 2019
   
Borrowings
   
Repayments
   
June 30, 2020
 
Lines of Credit:
                                 
UTG
 
11/20/2013
 
11/20/2020
 
$
8,000,000
     
-
     
-
     
-
     
-
 
UG
 
6/2/2015
 
5/7/2021
   
10,000,000
     
-
     
-
     
-
     
-
 

The UTG line of credit carries interest at a fixed rate of  4.040% and is payable monthly. As collateral, UTG has pledged 100% of the  common voting stock of its wholly owned subsidiary, Universal Guaranty Life Insurance Company.

During May of 2020, the Federal Home Loan Bank approved UG’s Cash Management Advance Application (“CMA”). The CMA gives the Company the option of selecting a variable rate of interest for up to 90 days or a fixed rate for a maximum of 30 days. The variable rate CMA is prepayable at any time without a fee, while the fixed CMA is not prepayable prior to maturity. The Company has pledged bonds with a collateral lendable value of $12,549,410.

Note 6 – Shareholders’ Equity

Stock Repurchase Program – The Board of Directors of UTG has authorized the repurchase in the open market or in privately negotiated transactions of UTG's common stock.  At a meeting of the Board of Directors in June of 2019, the Board of Directors of UTG authorized the repurchase of up to an additional $2.5 million of UTG's common stock, for a total  repurchase of up to $18.5 million of UTG's common stock in the open market or in privately negotiated transactions. Company Management has broad authority to operate the program, including the discretion of whether to purchase shares and the ability to suspend or terminate the program. Open market purchases are made based on the last available market price but may be limited.  During the six months ended June 30, 2020, the Company repurchased 13,979 shares through the stock repurchase program for $450,057. Through June 30, 2020, UTG has spent $15,223,153 in the acquisition of 1,183,337 shares under this program.

During 2020, the Company issued 6,664 shares of stock to management and employees as compensation at a cost of $218,289. These awards are determined at the discretion of the Board of Directors.

Earnings Per Share Calculations

Earnings per share are based on the weighted average number of common shares outstanding during each period.  For the six months ended June 30, 2020 and 2019, diluted earnings per share were the same as basic earnings per share since the Company had no dilutive instruments outstanding.
18



Note 7 – Commitments and Contingencies

The insurance industry has experienced a number of civil jury verdicts which have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters.  Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages.  In some states, juries have substantial discretion in awarding punitive damages in these circumstances.  In the normal course of business, the Company is involved from time to time in various legal actions and other state and federal proceedings.  Management is of the opinion that the ultimate disposition of the matters will not have a materially adverse effect on the Company’s results of operations or financial position.

Under the insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent or failed insurance companies.  Although the Company cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred if it would threaten an insurer's financial strength.  Mandatory assessments may be partially recovered through a reduction in future premium tax in some states. The Company does not believe such assessments will be materially different from amounts already provided for in the condensed consolidated financial statements, though the Company has no control over such assessments.

The following table represents the total funding commitments and the unfunded commitment as of June 30, 2020 related to certain investments:

 
Total Funding
Commitment
   
Unfunded
Commitment
 
RLF III, LLC
 
$
4,000,000
   
$
398,120
 
Sovereign’s Capital, LP Fund I
   
500,000
     
20,000
 
Sovereign's Capital, LP Fund II
   
1,000,000
     
158,596
 
Sovereign's Capital, LP Fund III
   
3,000,000
     
2,137,079
 
Macritchie Storage II, LP
   
7,000,750
     
2,100,407
 
Garden City Companies, LLC
   
2,000,000
     
1,956,688
 
Carrizo Springs Music, LLC
   
2,500,000
     
2,296,875
 
Modern Distributors, Inc.
   
7,200,000
     
3,700,000
 

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

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

During 2015, the Company committed to invest in Sovereign’s Capital, LP Fund II (“Sovereign’s II”), which invests in companies in emerging markets. Sovereign’s II makes capital calls to investors as funds are needed.

During 2018, the Company committed to invest in Sovereign’s Capital, LP Fund III (“Sovereign’s III”), which invests in companies in emerging markets. Sovereign’s III makes capital calls to investors as funds are needed.

During 2018, the Company committed to fund a mortgage loan for Macritchie Storage II, LP ("Macritchie"). Macritchie makes draw requests on the loan as funds are needed to fund the construction project.

During 2020, the Company committed to invest in Garden City Companies, LLC (“Garden City”), which invests primarily in companies in the healthcare, inspection/testing services and maintenance service arena. Garden City makes capital calls to investors as funds are needed.

During 2020, the Company committed to invest in Carrizo Springs Music, LLC (“Carrizo”), which invests in music royalties.  Carrizo makes capital calls to its investors as funds are needed to acquire the royalty rights.

During 2020, the Company committed to fund a collateral loan for Modern Distributors, Inc. (“Modern Distributors”). Modern Distributors makes draw requests on the loan as funds are needed to fund a construction project.
19



Note 8 – Other Cash Flow Disclosures

On a cash basis, the Company paid the following expenses:

Three Months Ended
 
 
June 30,
 
 
2020
 
2019
 
Interest
 
$
-
   
$
-
 
Federal income tax
   
2,110,000
     
1,106,000
 

Six Months Ended
 
 
June 30,
 
 
2020
 
2019
 
Interest
 
$
-
   
$
-
 
Federal income tax
   
2,110,000
     
1,106,000
 

Note 9 – Concentrations of Credit Risk

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

Because UTG serves primarily individuals located in four states, the ability of our customers to pay their insurance premiums is impacted by the economic conditions in these areas.  As of June 30, 2020 and 2019 , approximately 55% of the Company’s total direct premium was collected from Illinois, Ohio, Texas and West Virginia. Thus, results of operations are heavily dependent upon the strength of these economies.

The Company reinsures that portion of insurance risk which is in excess of its retention limits. Retention limits range up to $125,000 per life.  Life insurance ceded represented 20% and 21% of total life insurance in force at June 30, 2020 and  December 31, 2019, respectively.  Insurance ceded represented 36% and 34% of premium income for the six months ended June 30, 2020 and 2019, respectively. The Company would be liable for the reinsured risks ceded to other companies to the extent that such reinsuring companies are unable to meet their obligations.

The Company owns a variety of investments associated with the oil and gas industry. These investments represent approximately 18% and 25% of the Company's total invested assets as of June 30, 2020 and December 31, 2019, respectively. The following table provides an allocation of the oil and gas investments by type.

 
June 30, 2020
   
December 31, 2019
 
Land, mineral, and royalty interests
 
$
63,724,044
   
$
80,182,100
 
Transportation
   
-
     
3,812,565
 
Exploration
   
1,222,760
     
2,824,810
 
Total
 
$
64,946,804
   
$
86,819,475
 

20



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is Management’s discussion and analysis of the financial condition and results of operations of UTG, Inc. and its subsidiaries (collectively with the Parent, the “Company”).  The following discussion of the financial condition and results of operations of the Company should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in the Company’s annual report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

Overview

UTG, Inc., a Delaware corporation, is a life insurance holding company.  The Company’s dominant business is individual life insurance, which includes the servicing of existing insurance policies in force, the acquisition of other companies in the life insurance business, 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.

21


Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ significantly from those estimates.  The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability.  The Company’s critical accounting policies and the related estimates considered most significant by Management are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.  Management has identified the accounting policies related to cost of insurance acquired, assumptions and judgments utilized in determining if declines in fair values of investments are other-than-temporary, and valuation methods for investments that are not actively traded as those, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company’s Condensed Consolidated Financial Statements and this Management’s Discussion and Analysis.

During the six months ended June 30, 2020, there were no additions to or changes in the critical accounting policies disclosed in the 2019 Form 10-K.

Results of Operations

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The pandemic has significantly impacted the economic conditions in the U.S. and globally, accelerating during the first half of March, as federal, state, and local governments reacted to the public health crisis, creating significant uncertainties in the U.S. economy. The Company has not experienced a slow-down in activities, however government restrictions and client-imposed delays are evaluated daily and this could change. While the disruption is expected to be temporary, there continues to be uncertainty around the duration or effects of resurgence of the virus. The Company cannot at this time predict the ultimate impact the pandemic will have on its results of operations, financial position, liquidity, or capital resources, but such impact could be material.

On a consolidated basis, the Company reported a net loss attributable to common shareholders’ of approximately $(3.3) million for the six-month period ended June 30, 2020 and net income attributable to common shareholders’ of approximately $11.7 million for the three-month period ended June 30, 2020.  The variance in the first and second quarter 2020 earnings are driven by the change in the unrealized gains (losses) reported by the Company. During the first quarter of 2020, the Company reported approximately $24.7 million of unrealized losses due to the change in the fair value of equity securities. During the second quarter of 2020, the Company experienced a partial rebound in the performance of its equity securities and recognized a change in the fair value of its equity securities of approximately $13 million.

For the six-month period ended June 30, 2019, the Company reported net income attributable to common shareholders’ of approximately $14.4 million and net income attributable to common shareholders’ of approximately $2.7 million for the three-month period ended June 30, 2019.

Revenues

The Company reported total revenues of approximately $6.6 million for the six months ended June 30, 2020, a decrease of approximately $24.3 million as compared to the same period in 2019. The variance in total revenues from the prior year to the current year is mainly attributable to the change in the fair value of equity securities between periods.  The Company reported total revenues of approximately $19.5 million for the three months ended June 30, 2020, an increase of approximately $9.7 million as compared to the three-month period ended June 30, 2019.  For the quarter, the fluctuations are also largely related to the change in the fair value of equity securities between the periods that is reported as a component of total revenue on the Condensed Consolidated Statements of Operations.

The Company reported revenue before net investment gains of approximately $9.4 million and $9.6 million for the six months ended June 30, 2020 and 2019, respectively. Revenue before net investment gains decreased only slightly when comparing the current year and prior year results and is due to minor decreases in premium and policy fee revenue. For the three months ended June 30, 2020, the Company reported revenue before net investment gains and losses of $4.8 million, up from $4.4 million from the same period in 2019. The increase between periods is largely attributable to real estate investment income.

22


Premium and policy fee revenues, net of reinsurance, were comparable for the six-month periods ended June 30, 2020 and 2019. Premium and policy fee revenues, net of reinsurance, represented 36% and 38% of the Company’s revenues before net investment gains (losses) as of June 30, 2020 and 2019, respectively. The decline in premiums is not unusual as the Company is not actively marketing new business.

The Company reported total net investment gains (losses) of approximately $14.7 million and $(2.7) million for the three and six-month periods ended June 30, 2020, respectively.  For the three and six month periods ended June 30, 2020, the Company reported approximately $1.8 million and $9 million, respectively, in net realized investment gains comprised mainly from the sale of equity securities. Also, in the total net investment gains are unrealized gains (losses) related to the change in the fair value of equity securities. The Company reported unrealized equity gains (losses) of $12.9 million and $(11.7) million for the three and six-months ended June 30, 2020 and $97,000 and $14.9 million for the three and six-months ended June 30, 2019.

Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2020
 
2019
 
2020
 
2019
 
Net investment income
 
$
3,021,654
   
$
2,701,709
   
$
5,851,840
   
$
5,813,733
 
Net investment gains (losses)
 
$
14,725,614
   
$
5,398,926
   
$
(2,784,323
)
 
$
21,300,255
 
Change in net unrealized investment gains (losses) on available-for-sale securities, pre-tax
 
$
6,595,986
   
$
3,925,070
   
$
8,068,851
   
$
8,859,921
 

The Company holds certain investments that have been negatively impacted by ongoing market reactions to the pandemic.  These investments primarily relate to marketable equity securities, particularly in the area of oil and gas.  The drop in the markets in March, resulted in estimated unrealized losses of approximately $(24.7) million for the three months ending March 31, 2020.  For the three months ended June 30, 2020, the Company experienced a partial rebound on these investments of approximately $13 million in unrealized gains.

The Company recognized and disclosed in prior filings that a pullback in the stock market, particularly in the oil and gas arena, could slow these gains or even result in future-period unrealized losses. Management believes these equity investments continue to be solid investments for the Company and have further growth potential. However, current market conditions remain volatile and Management anticipates the Company will experience significant fluctuations in this line item in future periods.

The following table reflects net investment income of the Company: