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EX-32.2 - CERTIFICATION - UTG INCq1exhibit322.htm
EX-32.1 - CERTIFICATION - UTG INCq1exhibit321.htm
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EX-31.1 - CERTIFICATION - UTG INCq1exhibit311.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 March 31, 2021

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 April 30, 2021 was 3,175,848.



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
22
Item 4.  Controls and Procedures
27
 
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)

 
March 31, 2021
   
December 31, 2020*
 
ASSETS
 
Investments:
           
Investments available for sale:
           
Fixed maturities, at fair value (amortized cost $145,577,264 and $146,017,864)
 
$
157,859,328
   
$
165,779,997
 
    Equity securities, at fair value (cost $45,129,944 and $36,833,795)
   
106,191,232
     
78,075,187
 
Equity securities, at cost
   
14,389,189
     
14,389,189
 
Mortgage loans on real estate at amortized cost
   
19,982,199
     
20,802,365
 
Investment real estate
   
37,807,570
     
38,086,391
 
Notes receivable
   
17,359,885
     
17,682,296
 
Policy loans
   
8,542,436
     
8,590,524
 
Total investments
   
362,131,839
     
343,405,949
 
                 
Cash and cash equivalents
   
28,168,570
     
39,025,754
 
Accrued investment income
   
1,219,455
     
1,341,643
 
Reinsurance receivables:
               
Future policy benefits
   
25,062,852
     
25,267,920
 
Policy claims and other benefits
   
3,779,670
     
3,988,088
 
Cost of insurance acquired
   
3,922,728
     
4,101,471
 
Property and equipment, net of accumulated depreciation
   
329,246
     
348,170
 
Income tax receivable
   
948,473
     
0
 
Other assets
   
743,694
     
1,577,098
 
Total assets
 
$
426,306,527
   
$
419,056,093
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Liabilities:
               
Policy liabilities and accruals:
               
Future policyholder benefits
 
$
240,963,919
   
$
243,990,881
 
Policy claims and benefits payable
   
4,636,510
     
4,169,569
 
Other policyholder funds
   
367,433
     
365,761
 
Dividend and endowment accumulations
   
14,736,174
     
14,836,158
 
Income taxes payable
   
0
     
268,497
 
Deferred income taxes
   
15,150,301
     
12,995,714
 
Trading securities, at fair value (proceeds $4,552 and $11,246)
   
2,791
     
12,219
 
Other liabilities
   
4,977,534
     
5,275,803
 
Total liabilities
   
280,834,662
     
281,914,602
 
                 
Shareholders' equity:
               
Common stock - no par value, stated value $0.001 per share.  Authorized 7,000,000 shares - 3,177,177 and 3,175,564 shares outstanding
   
3,178
     
3,176
 
Additional paid-in capital
   
33,065,925
     
33,025,018
 
Retained earnings
   
102,237,250
     
88,068,284
 
Accumulated other comprehensive income
   
9,674,987
     
15,584,241
 
Total UTG shareholders' equity
   
144,981,340
     
136,680,719
 
Noncontrolling interests
   
490,525
     
460,772
 
Total shareholders' equity
   
145,471,865
     
137,141,491
 
Total liabilities and shareholders' equity
 
$
426,306,527
   
$
419,056,093
 

* Balance sheet audited at December 31, 2020.


See accompanying notes.


UTG, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

 
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2021
   
2020
 
Revenue:
           
Premiums and policy fees
 
$
2,299,063
   
$
2,355,755
 
Ceded reinsurance premiums and policy fees
   
(592,474
)
   
(680,440
)
Net investment income
   
1,959,667
     
2,830,186
 
Other income
   
94,735
     
59,042
 
Revenue before net investment gains (losses)
   
3,760,991
     
4,564,543
 
Net investment gains (losses):
               
Other realized investment gains, net
   
145,046
     
(117,000
)
Change in fair value of equity securities
   
20,179,879
     
(17,392,937
)
Total net investment gains (losses)
   
20,324,925
     
(17,509,937
)
Total revenue
   
24,085,916
     
(12,945,394
)
                 
Benefits and other expenses:
               
Benefits, claims and settlement expenses:
               
Life
   
3,994,851
     
3,540,361
 
Ceded reinsurance benefits and claims
   
(409,151
)
   
(634,943
)
Annuity
   
237,555
     
232,488
 
Dividends to policyholders
   
87,808
     
94,315
 
Commissions and amortization of deferred policy acquisition costs
   
(26,154
)
   
(35,117
)
Amortization of cost of insurance acquired
   
178,743
     
186,213
 
Operating expenses
   
2,103,377
     
1,986,692
 
Total benefits and other expenses
   
6,167,029
     
5,370,009
 
                 
Income (loss) before income taxes
   
17,918,887
     
(18,315,403
)
Income tax (benefit) expense
   
3,720,168
     
(3,368,582
)
                 
Net income (loss)
   
14,198,719
     
(14,946,821
)
                 
Net income attributable to noncontrolling interests
   
(29,753
)
   
(32,240
)
                 
Net income (loss) attributable to common shareholders
 
$
14,168,966
   
$
(14,979,061
)
                 
Amounts attributable to common shareholders
               
Basic income (loss) per share
 
$
4.46
   
$
(4.58
)
                 
Diluted income (loss) per share
 
$
4.46
   
$
(4.58
)
                 
Basic weighted average shares outstanding
   
3,177,013
     
3,274,093
 
                 
Diluted weighted average shares outstanding
   
3,177,013
     
3,274,093
 

See accompanying notes.



UTG, Inc.

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

 
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2021
   
2020
 
Net income (loss)
 
$
14,198,719
   
$
(14,946,821
)
                 
Other comprehensive income (loss):
               
                 
Unrealized holding gains (losses) arising during period, pre-tax
   
(7,480,068
)
   
1,472,865
 
Tax (expense) benefit on unrealized holding gains (losses) arising during the period
   
1,570,814
     
(309,302
)
Unrealized holding gains (losses) arising during period, net of tax
   
(5,909,254
)
   
1,163,563
 
                 
Less reclassification adjustment for (gains) losses included in net income
   
0
     
(391,483
)
Tax expense (benefit) for gains included in net income (loss)
   
0
     
82,212
 
Reclassification adjustment for (gains) losses included in net income, net of tax
   
0
     
(309,271
)
    Subtotal:  Other comprehensive income (loss), net of tax
   
(5,909,254
)
   
854,292
 
                 
Comprehensive income (loss)
   
8,289,465
     
(14,092,529
)
                 
Less comprehensive income attributable to noncontrolling interests
   
(29,753
)
   
(32,240
)
                 
Comprehensive income (loss) attributable to UTG, Inc.
 
$
8,259,712
   
$
(14,124,769
)

See accompanying notes.

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

Three Months Ended March 31, 2021
 
Common
Stock
   
Additional Paid-In Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Income
   
Noncontrolling Interest
   
Total
Shareholders'
Equity
 
                                     
Balance at December 31, 2020
 
$
3,176
   
$
33,025,018
   
$
88,068,284
   
$
15,584,241
   
$
460,772
   
$
137,141,491
 
Common stock issued during year
   
6
     
153,759
     
0
     
0
     
0
     
153,765
 
Treasury shares acquired
   
(4
)
   
(112,852
)
   
0
     
0
     
0
     
(112,856
)
Net income (loss) attributable to common shareholders
   
0
     
0
     
14,168,966
     
0
     
0
     
14,168,966
 
Unrealized holding income on securities net of noncontrolling interest and reclassification adjustment and taxes
   
0
     
0
     
0
     
(5,909,254
)
   
0
     
(5,909,254
)
Contributions
   
0
     
0
     
0
     
0
     
0
     
0
 
Distributions
   
0
     
0
     
0
     
0
     
0
     
0
 
Gain attributable to noncontrolling interest
   
0
     
0
     
0
     
0
     
29,753
     
29,753
 
Balance at March 31, 2021
 
$
3,178
   
$
33,065,925
   
$
102,237,250
   
$
9,674,987
   
$
490,525
   
$
145,471,865
 

Three Months Ended March 31, 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
   
6
     
201,543
     
0
     
0
     
0
     
201,549
 
Treasury shares acquired
   
(9
)
   
(310,594
)
   
0
     
0
     
0
     
(310,603
)
Net income attributable to common shareholders
   
0
     
0
     
(14,979,061
)
   
0
     
0
     
(14,979,061
)
Unrealized holding income on securities net of noncontrolling interest and reclassification adjustment and taxes
   
0
     
0
     
0
     
854,292
     
0
     
854,292
 
Contributions
   
0
     
0
     
0
     
0
     
0
     
0
 
Distributions
   
0
     
0
     
0
     
0
     
0
     
0
 
Gain attributable to noncontrolling interest
   
0
     
0
     
0
     
0
     
32,240
     
32,240
 
Balance at March 31, 2020
 
$
3,276
   
$
35,903,350
   
$
71,000,617
   
$
9,832,206
   
$
555,874
   
$
117,295,323
 

See accompanying notes.


UTG, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2021
   
2020
 
Cash flows from operating activities:
           
Net income (loss)
 
$
14,198,719
   
$
(14,946,821
)
Adjustments to reconcile net income to net cash used in operating activities:
               
Amortization (accretion) of investments
   
(49,401
)
   
(98,297
)
Realized investment gains (losses), net
   
(145,046
)
   
117,000
 
Change in fair value of equity securities
   
(20,179,879
)
   
17,392,937
 
Unrealized trading (gains) losses included in income
   
(2,734
)
   
0
 
Realized trading (gains) losses included in income
   
(10,954
)
   
0
 
Amortization of cost of insurance acquired
   
178,743
     
186,213
 
Depreciation and depletion
   
624,797
     
607,243
 
Stock-based compensation
   
153,765
     
201,549
 
Charges for mortality and administration of universal life and annuity products
   
(1,603,750
)
   
(1,583,889
)
Interest credited to account balances
   
987,251
     
1,009,012
 
Change in accrued investment income
   
122,188
     
296,495
 
Change in reinsurance receivables
   
413,486
     
37,201
 
Change in policy liabilities and accruals
   
(1,416,401
)
   
(1,943,479
)
Change in income taxes receivable (payable)
   
(1,216,970
)
   
3,153,812
 
Change in other assets and liabilities, net
   
4,260,542
     
(9,630,253
)
Net cash used in operating activities
   
(3,685,644
)
   
(5,201,277
)
                 
Cash flows from investing activities:
               
Proceeds from investments sold and matured:
               
Fixed maturities available for sale
   
505,000
     
8,626,339
 
Equity securities
   
541,790
     
13,350,043
 
Trading securities
   
8,492
     
-
 
Mortgage loans
   
1,212,205
     
61,847
 
Real estate
   
589,785
     
669,251
 
Notes receivable
   
322,411
     
2,189,408
 
Policy loans
   
244,121
     
387,870
 
Short-term investments
   
0
     
3,000,000
 
Total proceeds from investments sold and matured
   
3,423,804
     
28,284,758
 
Cost of investments acquired:
               
Fixed maturities available for sale
   
(20,000
)
   
(9,038,928
)
Equity securities
   
(8,468,969
)
   
(3,547,593
)
Trading securities
   
(4,232
)
   
0
 
Mortgage loans
   
(387,039
)
   
(931,378
)
Real estate
   
(780,781
)
   
0
 
Notes receivable
   
0
     
(3,500,000
)
Policy loans
   
(196,034
)
   
(316,675
)
Short-term investments
   
0
     
(7,890,228
)
Total cost of investments acquired
   
(9,857,055
)
   
(25,224,802
)
Net cash provided by (used in) investing activities
   
(6,433,251
)
   
3,059,956
 
                 
Cash flows from financing activities:
               
Policyholder contract deposits
   
1,195,495
     
1,187,672
 
Policyholder contract withdrawals
   
(1,820,928
)
   
(1,092,331
)
Purchase of treasury stock
   
(112,856
)
   
(310,603
)
Non controlling contributions (distributions) of consolidated subsidiary
   
0
     
0
 
Net cash used in financing activities
   
(738,289
)
   
(215,262
)
                 
Net increase (decrease) in cash and cash equivalents
   
(10,857,184
)
   
(2,356,583
)
Cash and cash equivalents at beginning of period
   
39,025,754
     
28,787,629
 
Cash and cash equivalents at end of period
 
$
28,168,570
   
$
26,431,046
 


See accompanying notes.



UTG, Inc.

Notes to Condensed Consolidated Financial Statements

Note 1 – Basis of Presentation

The accompanying Condensed Consolidated Balance Sheet as of March 31, 2021, 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, 2020.  The Company’s results of operations for the three month period ended  March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 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 regularly and this could change. While the disruption is currently expected to be temporary, there is uncertainty around the duration. The Company cannot at this time predict the ultimate impact the pandemic will have on its results of operations, financial position, liquidity, or capital resources but such impact could be material.

This document at times will refer to the Registrant’s largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll.  Mr. Correll holds a majority ownership of First Southern Funding, LLC (“FSF”), a Kentucky corporation, and First Southern Bancorp, Inc. (“FSBI”), a financial services holding company.  FSBI operates through its 100% owned subsidiary bank, First Southern National Bank (“FSNB”).  Banking activities are conducted through multiple locations within south-central and western Kentucky.  Mr. Correll is Chief Executive Officer and Chairman of the Board of Directors of UTG and is currently UTG’s largest shareholder through his ownership control of FSF, FSBI and affiliates.  At March 31, 2021, Mr. Correll owns or controls directly and indirectly approximately 64.94% 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 three months ended March 31, 2021, there were no additions to or changes in the critical accounting policies disclosed in the 2020 Form 10-K.


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:

March 31, 2021
 
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
 
$
36,279,803
   
$
820,262
   
$
0
   
$
37,100,065
 
U.S. special revenue and assessments
   
11,551,957
     
955,546
     
0
     
12,507,503
 
All other corporate bonds
   
97,745,504
     
10,917,840
     
(411,584
)
   
108,251,760
 
   
$
145,577,264
   
$
12,693,648
   
$
(411,584
)
 
$
157,859,328
 

December 31, 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
 
$
36,285,535
   
$
1,186,999
   
$
0
   
$
37,472,534
 
U.S. special revenue and assessments
   
11,556,980
     
1,382,164
     
0
     
12,939,144
 
All other corporate bonds
   
98,175,349
     
17,604,617
     
(411,647
)
   
115,368,319
 
   
$
146,017,864
   
$
20,173,780
   
$
(411,647
)
 
$
165,779,997
 

The amortized cost and estimated market value of debt securities at March 31, 2021, 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
March 31, 2021
 
Amortized Cost
   
Fair Value
 
Due in one year or less
 
$
26,045,116
   
$
26,323,483
 
Due after one year through five years
   
37,932,995
     
40,056,555
 
Due after five years through ten years
   
31,265,823
     
34,671,168
 
Due after ten years
   
23,469,956
     
26,230,410
 
Fixed maturities with no single maturity date
   
26,863,374
     
30,577,712
 
Total
 
$
145,577,264
   
$
157,859,328
 


The fair value of investments with sustained gross unrealized losses at March 31, 2021 and December 31, 2020 are as follows:

March 31, 2021
 
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
 
$
0
     
0
     
0
     
(411,584
)
   
0
   
$
(411,584
)
Total fixed maturities
 
$
0
     
0
     
0
     
(411,584
)
   
0
   
$
(411,584
)
                                                 

December 31, 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
 
$
4,937
     
(63
)
   
0
     
(411,584
)
   
4,937
   
$
(411,647
)
Total fixed maturities
 
$
4,937
     
(63
)
   
0
     
(411,584
)
   
4,937
   
$
(411,647
)
                                                 

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

 
Less than 12 months
   
12 months or longer
   
Total
 
As of March 31, 2021
                 
Fixed maturities
   
0
     
1
     
1
 
As of December 31, 2020
                       
Fixed maturities
   
1
     
1
     
2
 

Substantially all of the unrealized losses on fixed maturities at March 31, 2021 and December 31, 2020 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  March 31, 2021 and December 31, 2020.
 

Net Investment Gains (Losses)

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

 
Three Months Ended
 
   
March 31,
 
   
2021
   
2020
 
Realized gains:
           
Sales of fixed maturities
 
$
0
   
$
391,483
 
Sales of equity securities
   
12,372
     
342,207
 
Sales of real estate
   
136,059
     
0
 
Total realized gains
   
148,431
     
733,690
 
Realized losses:
               
Sales of fixed maturities
   
0
     
0
 
Sales of equity securities
   
(3,385
)
   
(850,690
)
Sales of real estate
   
0
     
0
 
Other-than-temporary impairments
   
0
     
0
 
Total realized losses
   
(3,385
)
   
(850,690
)
Net realized investment gains (losses)
   
145,046
     
(117,000
)
Change in fair value of equity securities:
               
Change in fair value of equity securities held at the end of the period
   
20,179,879
     
(17,392,937
)
Change in fair value of equity securities
   
20,179,879
     
(17,392,937
)
Net investment gains (losses)
 
$
20,324,925
   
$
(17,509,937
)
Change in net unrealized gains (losses) on available-for-sale investments included in other comprehensive income:
               
Fixed maturities
 
$
(7,480,068
)
 
$
1,472,865
 
Net increase (decrease)
 
$
(7,480,068
)
 
$
1,472,865
 

 
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 Condensed Consolidated Statements of Operations.

The Company did not recognize any other-than-temporary impairments during the three month periods ended March 31, 2021 or 2020.

Cost Method Investments

The Company held equity investments with an aggregate cost of $14,389,189 at March 31, 2021 and December 31, 2020.  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 March 31, 2021.

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 Condensed 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 March 31, 2021 was $0 and $2,791, respectively. The fair value of derivatives included in trading security assets and trading security liabilities as of  December 31, 2020 was $0 and $12,219, respectively.  Earnings from trading securities are classified in cash flows from operating activities. The derivatives held by the Company are for income generation purposes only.

Trading revenue charged to net investment income from trading securities was:

 
Three Months Ended
 
   
March 31,
 
   
2021
   
2020
 
Net unrealized gains (losses)
 
$
2,734
   
$
0
 
Net realized gains (losses)
   
10,954
     
0
 
Net unrealized and realized gains (losses)
 
$
13,688
   
$
0
 

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 three months ended March 31, 2021 and 2020, the Company acquired $387,039 and $931,378 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 2021 and 2020, the maximum and minimum lending rates for mortgage loans were:

 
2021
   
2020
 
   
Maximum rate
   
Minimum rate
   
Maximum rate
   
Minimum rate
 
Farm Loans
   
4.50
%
   
4.50
%
   
4.50
%
   
4.50
%
Commercial Loans
   
5.25
%
   
4.10
%
   
5.25
%
   
4.24
%
Residential Loans
   
4.95
%
   
4.95
%
   
4.95
%
   
4.95
%

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.

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 March 31, 2021and December 31, 2020.

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

 
March 31, 2021
   
December 31, 2020
 
In good standing
 
$
17,901,426
   
$
18,704,351
 
Overdue interest over 90 days
   
2,080,773
     
2,098,014
 
Total mortgage loans
 
$
19,982,199
   
$
20,802,365
 

Investment Real Estate

Real estate held-for-investment is stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis for financial reporting purposes using estimated useful lives of 3 to 30 years. The Company periodically reviews its real estate held-for-investment for impairment and tests for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. During the three month period ended March 31, 2021, no impairments were recognized on the investment real estate.

Note 4 - Fair Value Measurements of the Condensed Consolidated Financial Statements provides further information regarding the fair value of financial instruments that are not measured at fair value. The investment real estate owned by the Company is included in this portion of the Note 4 - Fair Value Measurements disclosure.

The following table provides an allocation of the Company's investment real estate by type:

 
March 31, 2021
   
December 31, 2020
 
Raw land
 
$
12,081,126
   
$
11,727,103
 
Commercial
   
3,504,783
     
3,530,064
 
Residential
   
3,031,144
     
2,797,648
 
Land, minerals and royalty interests
   
19,190,517
     
20,031,576
 
Total investment real estate
 
$
37,807,570
   
$
38,086,391
 

The Company’s investment real estate portfolio includes ownership in oil and gas royalties. As of March 31, 2021 and December 31, 2020, investments in oil and gas royalties represented 46% and 48%, respectively, of the total investment real estate portfolio.  See Note 9 – Concentrations of Credit Risk of the Condensed Consolidated Financial Statements for additional information regarding the allocation of the oil and gas investment real estate holdings by industry type.

Gains and losses recognized on the disposition of the properties are recorded as realized gains and losses in the Condensed Consolidated Statements of Operations. During the three-months ended March 31, 2021 and 2020, the Company acquired $780,781 and $0 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  March 31, 2021 and December 31, 2020 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 three months ended March 31, 2021 and 2020 the Company acquired  $0 and $3,500,000 of notes receivable, respectively.
 
Before a new note is issued, the applicant is subject to certain criteria set forth by Company Management to ensure quality control.  Once the note is approved, the Company directly funds the note to the borrower. Several of the notes have participation agreements in place, whereas the Company has reduced its investment in the note receivable by participating a portion of the note to a third party.

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

Short-Term Investments

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

During the three months ended March 31, 2021 and 2020, the Company acquired $0 and $7,890,228, respectively, in short-term investments.


Note 4 – Fair Value Measurements

Fair Value Measurements on a Recurring Basis

Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are measured and classified in accordance with a fair value hierarchy consisting of three levels based on the observability of valuation inputs:

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

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

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

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used:


March 31, 2021
 
Level 1
   
Level 2
   
Level 3
   
Net Asset Value
   
Total
 
Financial assets:
                             
Fixed maturities available for sale:
                             
U.S. Government and government agencies and authorities
 
$
37,100,065
   
$
0
   
$
0
   
$
0
   
$
37,100,065
 
U.S. special revenue and assessments
   
0
     
12,507,503
     
0
     
0
     
12,507,503
 
Corporate securities
   
0
     
108,251,760
     
0
     
0
     
108,251,760
 
Total fixed maturities
   
37,100,065
     
120,759,263
     
0
     
0
     
157,859,328
 
Equity securities:
                                       
Common stocks
   
46,324,690
     
15,535,675
     
2,859,971
     
40,690,715
     
105,411,051
 
Preferred stocks
   
0
     
30,181
     
750,000
     
0
     
780,181
 
Total equity securities
   
46,324,690
     
15,565,856
     
3,609,971
     
40,690,715
     
106,191,232
 
Total financial assets
 
$
83,424,755
   
$
136,325,119
   
$
3,609,971
   
$
40,690,715
   
$
264,050,560
 
                                         
Liabilities
                                       
Trading securities
 
$
(2,791
)
 
$
0
   
$
0
   
$
0
   
$
(2,791
)


December 31, 2020
 
Level 1
   
Level 2
   
Level 3
   
Net Asset Value
   
Total
 
Financial assets:
                             
Fixed maturities available for sale:
                             
U.S. Government and government agencies and authorities
 
$
37,472,534
   
$
0
   
$
0
   
$
0
   
$
37,472,534
 
U.S. special revenue and assessments
   
0
     
12,939,144
     
0
     
0
     
12,939,144
 
Corporate securities
   
0
     
115,368,319
     
0
     
0
     
115,368,319
 
Total fixed maturities
   
37,472,534
     
128,307,463
     
0
     
0
     
165,779,997
 
Equity securities:
                                       
Common stocks
   
28,477,005
     
15,922,869
     
3,161,120
     
30,496,625
     
78,057,619
 
Preferred stocks
   
0
     
17,568
     
0
     
0
     
17,568
 
Total equity securities
   
28,477,005
     
15,940,437
     
3,161,120
     
30,496,625
     
78,075,187
 
Total financial assets
 
$
65,949,539
   
$
144,247,900
   
$
3,161,120
   
$
30,496,625
   
$
243,855,184
 
                                         
Liabilities
                                       
Trading securities
 
$
(12,219
)
 
$
0
   
$
0
   
$
0
   
$
(12,219
)


The following is a description of the valuation techniques used the by Company to measure assets reported at fair value on a recurring basis. There have been no significant changes in the valuation techniques utilized by the Company for the three months ended March 31, 2021.

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

Equity Securities at Net Asset Value

Certain equity securities carried at fair value, which do not have readily determinable fair values, use net asset value (“NAV”) and are excluded from the fair value hierarchy. These investments are generally not readily redeemable by the investee. See Note 7 – Commitments and Contingencies for additional information regarding unfunded commitments.

Trading Securities

Trading securities are recorded at fair value. They are classified as Level 1 and utilize fair value measurements based upon quoted market prices.


Change in Level 3 Recurring Fair Value Measurements

The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities.

 
Equity Securities at Fair Value
   
Equity Securities at Net Asset Value
   
Total
 
Balance at December 31, 2020
 
$
3,161,120
   
$
30,496,625
   
$
33,657,745
 
Realized gains (losses)
   
352,869
     
0
     
352,869
 
Unrealized gains (losses)
   
(70,881
)
   
6,927,671
     
6,856,790
 
Purchases
   
519,732
     
3,266,419
     
3,786,151
 
Sales
   
(352,869
)
   
0
     
(352,869
)
Balance at March 31, 2021
 
$
3,609,971
   
$
40,690,715
   
$
44,300,686
 


Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above.  As a result, the unrealized gains (losses) on instruments held at March 31, 2021 and December 31, 2020 may include changes in fair value that were attributable to both observable and unobservable inputs.

Quantitative Information About Level 3 Fair Value Measurements

The following table presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and include only those instrument for which information about the inputs is reasonably available to the Company, such as data from independent third-party valuation service providers and from internal valuation models.

Financial Assets
 
Fair Value at
March 31, 2021
   
Fair Value at
December 31, 2020
 
 
Valuation Technique
Equities
 
$
40,690,715
   
$
30,496,625
 
Net Asset Value
Equities
   
3,609,971
     
3,161,120
 
Pricing Model
Total
 
$
44,300,686
   
$
33,657,745
   

Uncertainty of Fair Value Measurements

The significant unobservable inputs used in the determination of the fair value of assets classified as Level 3 have an inherent measurement uncertainty that if changed could result in higher or lower fair value measurements of these assets as of the reporting date.

Equity Securities at Fair Value

Fair market value for equity securities is derived based on unobservable inputs, such as projected normalized revenues and industry standard multiples of revenue for the equity securities valued using pricing model.  Significant increases (decreases) in either of those inputs in isolation would result in a significantly higher (lower) fair value measurement. 

Investments in Certain Entities Carried at Fair Value Using Net Asset Value per Share

Investment Company
 
Fair Value at March 31, 2021
   
Unfunded Commitments
   
Redemption Frequency
   
Redemption Notice Period
 
Common Stocks
                       
Growth Equity
                       
     Redeemable
 
$
28,847,190
   
$
0
   
Quarterly
   
45 days
 
     Non-Redeemable
   
11,843,525
     
6,889,304
     
n/a
     
n/a
 
  Total
 
$
40,690,715
   
$
6,889,304
                 


Investment Company
 
Fair Value at December 31, 2020
   
Unfunded Commitments
   
Redemption Frequency
   
Redemption Notice Period
 
Common Stocks
                       
  Growth Equity
                       
    Redeemable
 
$
21,713,727
   
$
0
   
Quarterly
   
45 days
 
Non-Redeemable
   
8,782,898
     
6,856,072
     
n/a
     
n/a
 
  Total
 
$
30,496,625
   
$
6,856,072
                 

Fair Value Measurements on a Nonrecurring Basis

Certain assets are not carried at fair value on a recurring basis. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to re-measurement at fair value after initial recognition and the resulting re-measurement is reflected in the Condensed Consolidated Financial Statements. The Company did not recognize any re-measurements or impairments of financial instruments at March 31, 2021 or December 31, 2020.

Fair Value Information About Financial Instruments Not Measured at Fair Value

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

The following table presents the carrying amount and estimated fair values of the Company’s financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:

 
Carrying
   
Estimated
                   
March 31, 2021
 
Amount
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Common stock, at cost
 
$
5,860,000
     
5,860,000
     
0
     
0
     
5,860,000
 
Preferred stock, at cost
   
8,529,189
     
8,529,189
     
0
     
0
     
8,529,189
 
Mortgage loans on real estate
   
19,982,199
     
19,982,199
     
0
     
0
     
19,982,199
 
Investment real estate
   
37,807,570
     
81,985,379
     
0
     
0
     
81,985,379
 
Notes receivable
   
17,359,885
     
17,375,712
     
0
     
0
     
17,375,712
 
Policy loans
   
8,542,436
     
8,542,436
     
0
     
0
     
8,542,436
 

 
Carrying
   
Estimated
                   
December 31, 2020
 
Amount
   
Fair Value
   
Level 1
   
Level 2
   
Level 3
 
Common stock, at cost
 
$
5,860,000
     
5,860,000
     
0
     
0
     
5,860,000
 
Preferred stock, at cost
   
8,529,189
     
8,529,189
     
0
     
0
     
8,529,189
 
Mortgage loans on real estate
   
20,802,365
     
20,802,365
     
0
     
0
     
20,802,365
 
Investment real estate
   
38,086,391
     
82,689,332
     
0
     
0
     
82,689,332
 
Notes receivable
   
17,682,296
     
17,709,894
     
0
     
0
     
17,709,894
 
Policy loans
   
8,590,524
     
8,590,524
     
0
     
0
     
8,590,524
 

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

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

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

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

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

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

Note 5 – Credit Arrangements

Instrument
 
Issue Date
 
Maturity Date
 
Revolving
Credit Limit
 
December 31, 2020
 
Borrowings
 
Repayments
 
March 31, 2021
Lines of Credit:
                                 
UTG
 
11/20/2013
 
11/20/2021
 
$
8,000,000
   
0
 
0
 
0
 
$
0
UG
 
6/2/2015
 
5/7/2022
   
10,000,000
   
0
 
0
 
0
   
0

The UTG line of credit carries interest at a fixed rate of 3.750% and is payable monthly. As collateral, UTG has pledged 100% of the  common voting stock of its wholly owned subsidiary, Universal Guaranty Life Insurance Company.

During May of 2021, 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 $12,087,465.

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 September of 2020, the Board of Directors of UTG authorized the repurchase of up to an additional $1.5 million of UTG's common stock, for a total  repurchase of up to $20 million of UTG's common stock in the open market or in privately negotiated transactions. Company Management has broad authority to operate the program, including the discretion of whether to purchase shares and the ability to suspend or terminate the program. Open market purchases are made based on the last available market price but may be limited.  During the three months ended March 31, 2021, the Company repurchased 4,082 shares through the stock repurchase program for $112,856. Through March 31, 2021, UTG has spent $18,199,105 in the acquisition of 1,286,347 shares under this program.

During 2021, the Company issued 5,695 shares of stock to management and employees as compensation at a cost of $153,765. 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 three months ended March 31, 2021 and 2020, diluted earnings per share were the same as basic earnings per share since the Company had no dilutive instruments outstanding.


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 March 31, 2021 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
     
13,000
 
Sovereign's Capital, LP Fund II
   
1,000,000
     
109,033
 
Sovereign's Capital, LP Fund III
   
3,000,000
     
1,847,846
 
Macritchie Storage II, LP
   
7,000,750
     
1,656,075
 
Garden City Companies, LLC
   
2,000,000
     
1,872,425
 
Carrizo Springs Music, LLC
   
2,500,000
     
1,535,336
 
Modern Distributors, Inc.
   
7,200,000
     
3,700,000
 
Legacy Venture X, LLC
   
3,000,000
     
2,910,000
 
QCC Investment Co., LLC
   
1,500,000
     
150,000
 

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

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

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

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

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

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

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

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

During 2020, the Company committed to invest in Legacy Venture X, LLC ("Legacy Venture X"), which is a fund of funds. Legacy Venture X makes capital calls to its investors as funds are needed.

During 2021, the Company committed to invest in QCC Investment Co., LLC ("QCC"). The funds are being utilized to purchase a manufacturing entity. QCC makes capital calls to its investors as funds are needed.


Note 8 – Other Cash Flow Disclosures


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

 
Three Months Ended
 
   
March 31,
 
   
2021
   
2020
 
Interest
 
$
0
   
$
0
 
Federal income tax
   
1,202,000
     
0
 

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 March 31, 2021 and 2020, approximately 57% and 55%, respectively, of the Company’s total direct premium was collected from Illinois, Ohio, Texas and West Virginia. Thus, results of operations are heavily dependent upon the strength of these economies.

The Company reinsures that portion of insurance risk which is in excess of its retention limits. Retention limits range up to $125,000 per life.  Life insurance ceded represented 20% of total life insurance in force at March 31, 2021 and  December 31, 2020.  Insurance ceded represented 33% and 34% of premium income for the three months ended March 31, 2021and 2020, 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 24% and 20% of the Company's total invested assets as of March 31, 2021 and December 31, 2020, respectively. The following table provides an allocation of the oil and gas investments by type.

March 31, 2021
 
Land, Minerals &
Royalty Interests
   
Transportation
   
Exploration
   
Total
 
Fixed maturities, at fair value
 
$
0
   
$
0
   
$
1,245,020
   
$
1,245,020
 
Equity securities, at fair value
   
62,257,209
     
0
     
0
     
62,257,209
 
Investment real estate
   
19,190,517
     
0
     
0
     
19,190,517
 
Notes receivable
   
6,000,000
     
0
     
0
     
6,000,000
 
Total
 
$
87,447,726
   
$
0
   
$
1,245,020
   
$
88,692,746
 

December 31, 2020
 
Land, Minerals &
Royalty Interests
   
Transportation
   
Exploration
   
Total
 
Fixed maturities, at fair value
 
$
0
   
$
0
   
$
1,268,670
   
$
1,268,670
 
Equity securities, at fair value
   
41,551,468
     
0
     
0
     
41,551,468
 
Investment real estate
   
20,031,576
     
0
     
0
     
20,031,576
 
Notes receivable
   
6,000,000
     
0
     
0
     
6,000,000
 
Total
 
$
67,583,044
   
$
0
   
$
1,268,670
   
$
68,851,714
 

At March 31, 2021 and December 31, 2020, the Company owned two equity securities that represented approximately 59% and 47%, respectively, of the total investments associated with the oil and gas industry.

The Company’s results of operations and financial condition have in the past been, and may in the future be, adversely affected by the degree of certain industry specific concentrations in the Company’s investment portfolio. The Company has significant exposure to investments associated with the oil and gas industry. Events or developments that have a negative effect on the oil and gas industry may adversely affect the valuation of our investments in this specific industry. The Company’s ability to sell its investments associated with the oil and gas industry may be limited.




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, 2020, 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 and the administration and processing of life insurance business for other entities.  The Company's focus for the future includes growing the administrative portion of the business.

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

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, 2020.  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 three-months ended March 31, 2021, there were no additions to or changes in the critical accounting policies disclosed in the 2020 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 regularly and this could change. While the disruption is expected to be temporary, there continues to be uncertainty around the duration or effects of resurgence of the virus. The Company cannot at this time predict the ultimate impact the pandemic will have on its results of operations, financial position, liquidity, or capital resources, but such impact
could be material.

On a consolidated basis, the Company reported net income attributable to common shareholders' of approximately $14.2 million for the three-month period ended March 31, 2021 and a net loss attributable to common shareholders' of approximately $(15) million for the three-month period ended March 31, 2020.

Revenues

For the three-month period ended March 31, 2021, the Company reported total revenues of approximately $24.1 million and for the same period in 2020 negative total revenues of approximately $(12.9) million. The negative total revenue the Company reported for the first quarter of 2020 is the result of the change in the fair value of equity securities of approximately $(12) million that is reported as a component of total revenue on the Condensed Consolidated Statements of Operations.

The Company reported revenue before net investment gains (losses) of approximately $3.8 million and $4.6 million for the three-month periods ended March 31, 2021 and 2020, respectively. Revenue before net investment gains (losses) decreased slightly when comparing the current year and prior year results and is due to minor decreases in premium and policy fees and net investment income.

Premium and policy fee revenues, net of reinsurance, were comparable for the three-months ended March 31, 2021 and 2020.  The Company writes minimal new business.  Premium and policy fee revenues, net of reinsurance, represented 45% and 37% of the Company's revenue before net investment gains (losses) as of March 31, 2021 and 2020, respectively.

The following table summarizes the Company's investment performance.

 
 
Three Months Ended March 31,
 
   
2021
   
2020
 
Net investment income
 
$
1,959,667
   
$
2,830,186
 
Net investment gains (losses)
 
$
20,324,925
   
$
(17,509,937
)
Change in net unrealized investment gains (losses) on available-for-sale securities, pre-tax
 
$
20,179,879
   
$
(12,021,502
)

The following table reflects net investment income of the Company:

 
Three Months Ended
 
   
March 31,
 
   
2021
   
2020
 
Fixed maturities available for sale
 
$
1,203,482
   
$
1,409,324
 
Equity securities
   
297,599
     
755,402
 
Trading securities
   
13,688
     
0
 
Mortgage loans
   
269,804
     
85,799
 
Real estate
   
554,724
     
606,657
 
Notes receivable
   
193,871
     
202,221
 
Policy loans
   
132,794
     
137,970
 
Short-term
   
0
     
16,227
 
Cash and cash equivalents
   
562
     
89,059
 
Total consolidated investment income
   
2,666,524
     
3,302,659
 
Investment expenses
   
(706,857
)
   
(472,473
)
Consolidated net investment income
 
$
1,959,667
   
$
2,830,186
 

Net investment income represented approximately 52% and 62% of the Company's revenue before net investment gains (losses) as of March 31, 2021 and 2020, respectively.  When comparing current and prior year results, net investment income was comparable in a majority of the investment categories. Investment income earned by the fixed maturities, equity securities, and real estate investment portfolios represented approximately 77% and 84% of the total consolidated investment income for the three-months ended March 31, 2021 and 2020, respectively.

In March 2020, with the onset of the pandemic in America, financial markets became jittery experiencing a significant drop in the major market indices. In response, the Federal Reserve dropped interest rates to near zero. This action resulted in a drop in all other interest rates in the marketplace. While this increased the fair value of the Company’s current fixed income holdings, it made finding investments to acquire with any type of historic yield nearly impossible. The stock markets have experienced a rebound since that time; however, interest rates remain at historic low levels with short term rates at or near zero. Longer term bonds have experienced rate increases later in 2020 and into early 2021, but still remain below recent historic rates. Should rates remain at these levels, it will become increasingly more difficult for the Company to maintain its historic net investment income levels as existing investments mature and are replaced with lower yielding investments.

Income from the fixed maturities investment portfolio represented approximately 45% and 43% of the total consolidated investment income for the three months ended March 31, 2021 and 2020, respectively. When comparing earnings from the fixed maturities portfolio for the three months ended March 31, 2021 and 2020 income was down approximately 15% or $206,000. Fixed maturities continue to represent the largest investment type and asset class owned by the company.

Earnings from the equity securities investment portfolio represented approximately 11% and 23% of the total consolidated investment income report by the Company during the three months ended March 31, 2021 and 2020, respectively.  Income from the equity securities portfolio was down approximately 61% or $458,000 when comparing 2021 and 2020 results.  This decrease is primarily due to the company partially selling their holdings in a specific dividend paying security during 2020.

The earnings reported by the real estate investment portfolio represented approximately 21% and 18% of the total consolidated investment income reported by the Company during the three months ended March 31, 2021 and 2020, respectively. Earnings from the real estate investment portfolio were down approximately 9% or $52,000 when comparing 2021 and 2020 results. The earnings from the real estate investment portfolio are expected to vary depending on the real estate activities and the potential distributions that may occur.

The earnings reported by the mortgage loan investment portfolio represented approximately 10% and 3% of the total consolidated investment income reported by the Company during the three months ended March 31, 2021 and 2020, respectively. Earnings from the mortgage loan investment portfolio were up approximately $184,000 when comparing 2021 and 2020 results. The earnings from the mortgage loan portfolio have increased due to the increase in size of the portfolio itself. The mortgage loan investment portfolio increased by approximately $10.9 million when comparing the three-months ended March 31, 2021 and 2020, respectively.  With the low investment rates currently available in the bond market, the Company has placed more emphasis on loans to improve investment yields.

The following table reflects net realized investment gains (losses) for the three months ended March 31:

   
2021
   
2020
 
Fixed maturities available for sale
 
$
0
   
$
391,483
 
Equity securities
   
8,987
     
(508,483
)
Real estate
   
136,059
     
0
 
Consolidated net realized investment gains (losses)
   
145,046
     
(117,000
)
Change in fair value of equity securities
   
20,179,879
     
(17,392,937
)
Net investment gains (losses)
 
$
20,324,925
   
$
(17,509,937
)
 
Realized investment gains are the result of one-time events and are expected to vary during a given reporting period.

In the December 31, 2020 Form 10-K filing, the Company disclosed that we received an offer to purchase investments in certain music royalties held in the form of equity securities. We continued to report on these transactions in MD&A of Company's 2020 quarterly Form 10-Q filings. The reported gain (loss) changed throughout 2020 as additional proceeds were received. The sales agreements contained holdback provisions for a portion of the sales price. Under the terms of the holdback, certain performance results must be achieved during 2020 to release additional sales proceeds to the sellers. At the time of closing, it was determined it was more likely than not that the royalty interests would not perform at the levels necessary to receive the holdback funds. Performance was reviewed throughout the year, and was better than anticipated, resulting in the holdback proceeds being released to the seller. A portion of this transaction flows through change in the fair value of equity securities and will be further discussed below.

The sale of one equity security represented approximately $851,000 of the realized losses on equity securities for the three-months ended March 31, 2020. The Company sold 5,000 shares of this common stock holding that is associated with the oil and gas industry. While this security produced a current period realized loss, overall, the sale of this security produced a significant gain for the Company over the period it was held. The other component of this transaction flows through the change in the fair value of equity securities and will be further discussed below.

The Company reported a change in fair value of equity securities of approximately $20.2 million and $(17.4) million for the three-months ended March 31, 2021 and 2020, respectively.  This line item is material to the results reported in the Condensed Consolidated Statements of Operations.  While the three-months ended March 31, 2021, reflected very positive results, the onset of the pandemic in March 2020 resulted in the stock market taking a major downward swing.  At March 31, 2020, the Company reflected a loss on this line of approximately $(12.0) million.  While these results can be material and volatile, most of the equity holdings of the Company were acquired with a long-term view, thus making these intermediate changes in value of less concern to Management.  Management monitors its equity holdings looking more at the specific entity and market it is in relative to performance and less to changes due to general market swings that occur over the holding period of the investment.

While the Company has seen significant positive results on its equity investments so far this year, a pull back or downward market adjustment could slow these gains or even result in losses in future periods.  Management believes its current equity investments continue to be solid investments for the Company and have further growth potential; however, changes in market conditions could cause volatility in market prices.

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

Expenses

The Company reported total benefits and other expenses of approximately $6.2 million for the three-months ended March 31, 2021, an increase of approximately 15% from the same period in 2020.  Benefits, claims and settlement expenses represented approximately 63% and 60% of the Company's total expenses for the three-month periods ended March 31, 2021 and 2020, respectively. The other major expense category of the Company is operating expenses, which represented approximately 34% and 37% of the Company's total expenses for the three-month periods ended March 31, 2021 and 2020, respectively.

Life benefits, claims and settlement expenses, net of reinsurance benefits and claims were up approximately 21% or $679,000 when comparing the three-months ended March 31, 2021 and 2020.  Policy claims vary from period to period and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.

Early in the COVID-19 pandemic, the Company implemented a process to monitor death claims resulting from COVID-19. During the three-months ended March 31, 2021, the Company incurred total death benefits of approximately $388,000 with COVID-19 listed as the cause of death. The average death benefit of these policies was $7,500. The Company will continue to monitor COVID-19 death claims.

Changes in policyholder reserves, or future policy benefits, also impact this line item.  Reserves are calculated on an individual policy basis and generally increase over the life of the policy as a result of additional premium payments and acknowledgment of increased risk as the insured continues to age.

The short-term impact of policy surrenders is negligible since a reserve for future policy benefits payable is held which is, at a minimum, equal to and generally greater than the cash surrender value of a policy.  The benefit of fewer policy surrenders is primarily received over a longer time period through the retention of the Company’s asset base. The surrender process has been impacted by temporary state rulings that were implemented as a result of COVID-19 and in some cases did not allow life insurance companies to lapse policies temporarily during 2020.

Operating expenses increased approximately 6% in the three-month period ended March 31, 2021 as compared to the same period in 2020. Overall, expenses were comparable in all of the major expense categories.

As mentioned above in the Overview section of the Management Discussion and Analysis, UTG has a strong philanthropic program.  The Company generally allocates a portion of its earnings to be used for its philanthropic efforts primarily targeted to Christ-centered organizations or organizations that help the weak or poor.  Charitable contributions made by the Company are expected to vary from year to year depending on the earnings of the Company.

Net amortization of cost of insurance acquired decreased approximately 4% when comparing current and prior year activity.  Cost of insurance acquired is established when an insurance company is acquired or when the Company acquires a block of in-force business.  The Company assigns a portion of its cost to the right to receive future profits from insurance contracts existing at the date of the acquisition.  Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates may vary due to risk analysis performed at the time of acquisition on the business acquired. The Company utilizes a 12% discount rate on the remaining unamortized business.  The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.  Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force.  This expense is expected to decrease, unless the Company acquires a new block of business.

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

Financial Condition

Investment Information

Investments represent approximately 85% and 82% of total assets at March 31, 2021 and December 31, 2020, respectively.  Accordingly, 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 that it is permitted to make and the amount of funds that may be used for any one type of investment.  In light of these statutes and regulations, the majority of the Company's investment portfolio is invested in a diverse set of securities.

As of March 31, 2021, 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 a net unrealized losses of approximately $(6) million and net unrealized gains of approximately $1.2 million for the three-month periods ended March 31, 2021 and 2020, respectively.  The variance in the net unrealized gains and losses is the result of normal market fluctuations and lower interest rates.

Capital Resources

Total shareholders' equity increased by approximately 6% as of March 31, 2021 compared to December 31, 2020. The increase is mainly attributable to a increase in retained earnings, which is the result of the current year net income reported by the Company.

The Company's investments are predominately 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 Condensed Consolidated Financial Statements at their market value.

Liquidity

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

Parent Company Liquidity - UTG is a holding company that has no day-to-day operations of its own.  Cash flows from UTG’s insurance subsidiary, UG, are used to pay costs associated with maintaining the Company in good standing with states in which it does business and purchasing outstanding shares of UTG stock.  UTG's cash flow is dependent on management fees received from its insurance subsidiary, stockholder dividends from its subsidiary and earnings received on cash balances.  As of March 31, 2021, substantially all of the consolidated shareholders’ equity represents net assets of its subsidiaries.  During the second quarter of 2021, UG paid UTG a dividend of $3 million. Certain restrictions exist on the payment of dividends from the insurance subsidiary to the Parent company. Although these restrictions exist, dividend availability from the insurance subsidiary has historically been sufficient to meet the cash flow needs of the Parent company.

Insurance Subsidiary Liquidity - Sources of cash flows for the insurance subsidiary primarily consist of premium and investment income.  Cash outflows from operations include policy benefit payments, administrative expenses, taxes and dividends to the Parent company.

UG is an Ohio domiciled insurance company, which requires notification within five business days to the insurance commissioner following the declaration of any ordinary dividend and at least ten calendar days prior to payment of such dividend.  Ordinary dividends are defined as the greater of:  a) prior year statutory net income or b) 10% of statutory capital and surplus.  For the year ended December 31, 2020, UG had statutory net income of approximately $6.3 million.  At December 31, 2020 UG's statutory capital and surplus amounted to approximately $70.6 million.  Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation.  During 2020, UG paid UTG ordinary dividends of $4 million. During the second quarter of 2021, UG paid UTG a dividend of $3 million.  UTG used the dividends received during 2020 and 2021 to purchase outstanding shares of UTG stock and for general operations of the 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 March 31, 2021, the Company and its subsidiaries had available $18 million in line of credit facilities.  The Company did not utilize its available credit facilities during 2020 or so far in 2021.  For additional information regarding the line of credit facilities, see Note 5 – Credit Arrangements in the Notes to the Condensed 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.

Cash used in operating activities was approximately $3.7 million and $5.2 million in the three-month periods ended March 31, 2021 and 2020, 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 the three-month period ended March 31, 2021, the Company's investing activities used net cash of approximately $6.4 million. During the three-month period ended March 31, 2020, the Company's investing activities provided net cash of approximately $3.1 million. The Company recognized proceeds of approximately $3.4 million and $28.3 million from investments sold and matured during the three-month periods ended March 31, 2021 and 2020, respectively.  The Company used approximately $9.9 million and $25.2 million to acquire investments during the three-month periods ended March 31, 2021 and 2020, respectively.  The net cash provided by investing activities is expected to vary from year to year depending on market conditions and management’s ability to find and negotiate favorable investment contracts.

Net cash used in financing activities was approximately $738,000 and $215,000 during the three-month periods ended March 31, 2021 and 2020, respectively. As of March 31, 2021 and December 31, 2020, the Company had no debt outstanding with third parties.

The Company had cash and cash equivalents of approximately $28.2 million and $39.0 million as of March 31, 2021 and December 31, 2020, respectively.  The Company has a portfolio of marketable fixed maturity securities that could be sold, if an unexpected event were to occur.  These securities had a fair value of approximately $157.9 million and $165.8 million at March 31, 2021 and December 31, 2020, 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 3 – Investments in the Notes to the Condensed 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.
 
ITEM 4.  CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In addition, the disclosure controls and procedures ensure that information required to be disclosed is accumulated and communicated to Management, including the principal executive officer and principal financial officer, allowing timely decisions regarding required disclosure. Under the supervision and with the participation of our Management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.


PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

NONE


ITEM 1A.  RISK FACTORS

NONE

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NONE

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

NONE


ITEM 4.  MINE SAFETY DISCLOSURES

NONE

ITEM 5.  OTHER INFORMATION

NONE

ITEM 6.  EXHIBITS

*31.1
Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2
Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1
Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*32.2
Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**101
Interactive Data File

*Filed herewith



EXHIBIT INDEX



Exhibit Number
Description
Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
**101
Interactive Data File


* Filed herewith


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


UTG, INC.
(Registrant)

Date:
May 14, 2021
 
By
/s/ James P. Rousey
       
James P. Rousey
       
President and Director



Date:
May 14, 2021
 
By
/s/ Theodore C. Miller