UTG, INC. The following is Management's discussion and analysis of the financial condition
and results of operations of
Cautionary Statement Regarding Forward-Looking Statements
This report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "probably," or similar expressions, we are making forward-looking statements.
Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur. Our forward-looking statements speak only as of the date made, and we undertake no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments, unless the securities laws require us to do so.
Overview
UTG 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.
On
Critical Accounting Policies
We have identified the accounting policies below as critical to the understanding of our results of operations and our financial condition. The application of these critical accounting policies in preparing our consolidated financial statements requires Management to use significant judgments and estimates concerning future results or other developments including the likelihood, timing or amount of one or more future transactions or amounts. Actual results may differ from these estimates under different assumptions or conditions. On an on-going basis, we evaluate our estimates, assumptions and judgments based upon historical experience and various other information that we believe to be reasonable under the circumstances. For a detailed discussion of other significant accounting policies, see Note 1 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
Future Policy Benefits - Because of the long-term nature of insurance contracts, the insurance company is liable for policy benefit payments that will be made in the future. The liability for future policy benefits is determined by standard actuarial procedures common to the life insurance industry. The accounting policies for determining this liability are disclosed in Note 1 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
Cost of Insurance Acquired - The costs of acquiring blocks of insurance from other companies or through the acquisition of other companies are deferred and recorded as deferred acquisition costs. The deferred amounts are recorded as an asset and amortized to expense in a systematic manner as indicated in Note 1 - Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
Valuation of Securities - The Company's investment portfolio consists of fixed maturities, equity securities, trading securities, mortgage loans, notes receivable and real estate to provide funding of future policy contractual obligations. The Company's fixed maturities are classified as available-for-sale. Available-for-sale fixed maturity investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets.
Equity securities reported at fair value, which include common and preferred stocks, are reported at fair value with unrealized gains and losses reported as a component of net income (loss).
Equity securities reported at cost are reported at their cost basis, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Mortgage loans on real estate are carried at their unpaid principal balances, adjusted for amortization of premium or discount and valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected.
Real estate held-for-investment is stated at cost less accumulated depreciation. Depreciation is computed on a straight-line-basis for financial reporting purposes using estimated useful lives of 3 to 30 years. The Company periodically reviews its real estate held-for-investment for impairment and test for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. Real estate for which the Company commits to a plan to sell within one year and actively markets in its current condition, for a reasonable price, in comparison to its estimated fair value, is classified as held-for-sale. Real estate held-for-sale is stated at lower of depreciated cost or estimated fair value less expected disposition costs and is not depreciated.
Notes receivable are reported at their unpaid principal balances, adjusted for valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. Interest accruals are analyzed based on the likelihood of repayment. The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status.
The Company's trading securities and equity securities are carried at fair value with unrealized gains and losses reported in income in the Consolidated Statements of Operations. Fair value is the price that the Company would expect to receive upon sale of the asset in an orderly transaction.
While the available-for-sale fixed maturity securities are generally expected to be held to maturity, they are classified as available-for-sale and are sold periodically to manage risk. Although all of the fixed maturity securities are classified as available-for-sale, the Company has the ability and intent to hold the securities until maturity. See Note 2 - Investments in the Notes to the Consolidated Financial Statements for detailed disclosures regarding the Company's investment portfolio.
Impairment of Investments - The Company continually monitors the investment portfolio for investments that have become impaired; where fair value has declined below carrying value. While the value of the investments in the Company's portfolio continuously fluctuates due to market conditions, an other-than-temporary impairment charge is recorded only when a security has experienced a decline in fair market value which is deemed to be other than temporary. The policies and procedures the Company uses to evaluate and account for impairments of investments are disclosed in Note 1 - Summary of Significant Accounting Policies and Note 2 - Investments in the Notes to the Consolidated Financial Statements. The Company makes every effort to appropriately assess the status and value of the securities with the information available regarding an other-than-temporary impairment. However, it is difficult to predict the future prospects of a distressed or impaired security.
Deferred Income Taxes - The provision for deferred income taxes is based on the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized by applying enacted statutory tax rates to temporary differences between amounts reported in the Consolidated Financial Statements and the tax basis of existing assets and liabilities. A valuation allowance is recognized for the portion of deferred tax assets that, in Management's judgment, is not likely to be realized.
Results of Operations
During
During this time the Company did not experience any significant slow-down in
activities, however, the Company did see an increase in mortality experience.
The Company reported 138 Covid claims totaling
On a consolidated basis, the Company had net income attributable to common
shareholders of approximately
One-time events, primarily reflected in realized gains, comprise a substantial portion of the net income and revenue reported by the Company during 2022 and 2021. The magnitude of realized investment gains and losses in a given year is a function of the timing of trades of investments relative to the markets themselves as well as the recognition of any impairments on investments. Future earnings will be significantly negatively impacted should earnings from these one-time items not be realizable in a future period. While Management believes there remain additional investments with such one-time earnings, when or if realized remains uncertain.
The Company reported a change in fair value of equity securities of
approximately
While the Company has seen significant positive results on its equity investments in the last two years, a pull back or downward market adjustment could slow these gains or even result in losses in future periods. Management believes its current equity investments continue to be solid investments for the Company and have further growth potential; however, changes in market conditions could cause volatility in market prices.
Total benefits and other expenses paid in 2022 were approximately
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.
Revenues
Premiums and policy fee revenues, net of reinsurance premiums and policy fees, declined approximately 11% when comparing 2022 to 2021. The Company writes very little new business. Unless the Company acquires a new company or a block of in-force business, Management expects premium revenue to continue to decline on the existing block of business at a rate consistent with prior experience. The Company's average persistency rate for all policies in-force for 2022 and 2021 was approximately 96.8% and 95.7%, respectively. Persistency is a measure of insurance in-force retained in relation to the previous year. A positive impact on premium income is the consistency of the lapse percentage. Persistency of the business has been consistent over the last several years. The lapse percentages were 3.2% and 4.3% for 2022 and 2021, respectively.
The following table summarizes the Company's investment performance for the
years ended
2022 2021
Net investment income $ 20,811,471 $ 9,050,325
Net realized investment gains 14,168,911 6,021,653
Change in fair value of equity securities 33,690,712 14,121,883
The following table reflects net investment income of the Company for the years endedDecember 31 : 2022 2021 Fixed maturities$ 4,153,453 $ 4,566,293 Equity securities 2,539,579 1,274,147 Trading securities (13,283) 22,568 Mortgage loans 1,580,647 706,883 Real estate 15,424,260 3,241,689 Notes receivable 933,886 1,558,406 Policy loans 489,823 606,347 Cash and cash equivalents 203,250 2,567 Short-term investments 5,056 0
Total consolidated investment income 25,316,671 11,978,900 Investment expenses
(4,505,200) (2,928,575)
Consolidated net investment income
Net investment income represented approximately 30% and 25% of the Company's
total revenues as of
In
Since the start of 2022, we have seen more volatility in the
Income from the fixed maturities investment portfolio represented 16% and 38% of
the total consolidated investment income for the years ended
Income from the equity securities portfolio was approximately double that of the
prior year and represents approximately 10% of the total consolidated investment
income for 2022. Distributions from four securities represented 62% of the 2022
income from the equity securities income. These four securities are associated
with the oil and gas industry. During 2022, the Company disposed of a
significant portion of two of these securities. Future results are expected to
vary based upon these disposals and other investing decisions made by
Management. The equity securities investment portfolio represents 45% and 37% of
the total investment portfolio as of
Income from the real estate portfolio represented 61% of the consolidated
investment income for 2022 and is approximately
The earnings from the real estate investment portfolio are expected to vary
depending on the real estate activities and market conditions. The real estate
investment portfolio represents 10% and 11% of the total investment portfolio as
of
The following table reflects net realized investment gains (losses) for the
years ended
2022 2021
Fixed maturities available for sale $ (528) $ 55,867
Equity securities 8,877,148 3,087,978
Real estate 5,292,291 2,877,808
Fixed maturities available for sale - OTTI 0 (393,455)
Equity securities - OTTI (5,000,000) 0
Consolidated net realized investment gains 9,168,911 5,628,198
Change in fair value of equity securities - held 19,212,045 12,584,561 Change in fair value of equity securities - sold 14,478,667 1,537,322 Total change in fair value of equity securities 33,690,712 14,121,883
Net investment gains$ 42,859,623 $ 19,750,081
Realized gains and losses from equity securities represent the difference
between the fair value at the beginning of the reporting period and the fair
value at the time of sale. The total gains from equity securities sold in 2022
were approximately
The total gains from equity securities sold in 2021 were approximately
The Company reported a change in fair value of equity securities of
approximately
While the Company has seen significant positive results from its equity investments in the last two years, a pull back or downward market adjustment could slow these gains or even result in losses in future periods. Management believes its current equity investments continue to be solid investments for the Company and have further growth potential; however, changes in market conditions could cause volatility in market prices.
Included in the 2022 and 2021 net investment gains are other-than-temporary
impairments of
During 2022, the Company sold real estate located in
Realized investment gains are the result of one-time events and are expected to vary from year to year.
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
Benefits, claims and settlement expenses, net of reinsurance benefits, were down approximately 9% when comparing 2022 and 2021 activity. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.
Early in the COVID-19 pandemic, the Company implemented a process to monitor
death claims resulting from COVID-19. Prior to the pandemic, death benefits were
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.
Overall, the Company's persistency for business in-force remained relatively steady at 96.8% in 2022 compared to 95.7% in 2021. The Company's actual experience for earned interest, persistency, and mortality varies from the assumptions applied to pricing and for determining premiums. Accordingly, differences between the Company's actual experience and those assumptions applied may affect the profitability of the Company. The Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted interest spreads.
Operating expenses increased approximately 48% or
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. In 2022, the
Company paid approximately
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 are the largest asset group of the Company. The Company's insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments they are permitted to make, and the amount of funds that may be used for any one type of investment.
The following table reflects, by investment category, the investments held by
the Company as of
As a % of
Total As a % of
2022 Investments Total Assets
Fixed maturities $ 108,313,059 30% 24%
Equity securities, at fair value 150,053,686 41% 33%
Equity securities, at cost 15,683,343 4% 4%
Mortgage loans 30,698,694 8% 7%
Real estate 34,934,352 10% 8%
Notes receivable 14,424,127 4% 3%
Policy loans 6,567,434 2% 1%
Short-term investments 3,596,941 1% 1%
Total investments $ 364,271,636 100% 81%
As a % of
Total As a % of
2021 Investments Total Assets
Fixed maturities $ 140,963,881 38% 32%
Equity securities, at fair value 122,229,121 33% 28%
Equity securities, at cost 14,543,343 4% 3%
Trading securities (1,116) 0% 0%
Mortgage loans 29,183,562 8% 7%
Real estate 39,748,261 10% 9%
Notes receivable 17,722,976 5% 4%
Policy loans 7,390,497 2% 2%
Total investments $ 371,780,525 100% 85%
The Company's investments are generally managed to match related insurance and policyholder liabilities. The comparison of investment return with insurance or investment product crediting rates establishes an interest spread. Interest crediting rates on adjustable rate policies have been reduced to their guaranteed minimum rates, and as such, cannot be lowered any further. Policy interest crediting rate changes and expense load changes become effective on an individual policy basis on the next policy anniversary. Therefore, it takes a full year from the time the change was determined for the full impact of such change to be realized. If interest rates decline in the future, the Company will not be able to lower rates and both net investment income and net income will be impacted negatively.
The Company's total investments represented 81% and 85% of the Company's total
assets as of
As of
Management continues to view the Company's investment portfolio with utmost priority. Significant time has been spent internally researching the Company's risk and communicating with outside investment advisors about the current investment environment and ways to ensure preservation of capital and mitigate losses. Management has put extensive efforts into evaluating the investment holdings. Additionally, members of the Company's Board of Directors and investment committee have been solicited for advice and provided with information. Management reviews the Company's entire portfolio on a security level basis to be sure all understand our holdings, potential risks and underlying credit supporting the investments. Management intends to continue its close monitoring of its bond holdings and other investments for possible deterioration or market condition changes. Future events may result in Management's determination that certain current investment holdings may need to be sold which could result in gains or losses in future periods. Such future events could also result in other than temporary declines in value that could result in future period impairment losses.
There are a number of significant risks and uncertainties inherent in the
process of monitoring impairments and determining if impairment is
other-than-temporary. These risks and uncertainties related to Management's
assessment of other-than-temporary declines in value include but are not limited
to: the risk that Company's assessment of an issuer's ability to meet all of its
contractual obligations will change based on changes in the credit
characteristics of that issuer; the risk that the economic outlook will be worse
than expected or have more of an impact on the issuer than anticipated; the risk
that fraudulent information could be provided to the Company's investment
professionals
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
Insurance Subsidiary Liquidity
Sources of cash flows for the insurance subsidiary primarily consist of premium and investment income. Cash outflows from operations include policy benefit payments, administrative expenses, taxes and dividends to the Parent company.
Short-Term Borrowings
During October of 2022, the
Consolidated Liquidity
Cash used in operating activities was approximately
During 2022 and 2021, the Company's investing activities provided (used) net
cash of approximately
Net cash provided by (used in) financing activities was approximately
The Company had cash and cash equivalents of approximately
Management believes the overall sources of liquidity available will be sufficient to satisfy its financial obligations.
Capital Resources
The Company's capital structure consists of available short-term debt, long-term
debt and shareholders' equity. A complete analysis and description of the
short-term and long-term debt issues available as of
The Company had
The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The risk-based capital (RBC) formula measures the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized.
At
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 March of 2022, the Board of Directors of UTG
authorized the repurchase of up to an additional
Shareholders' equity was approximately
For the periods ended
The Company's investments provide sufficient return to cover future obligations. The Company carries all of its fixed maturity holdings as available for sale, which are reported in the Consolidated Financial Statements at their fair value.
New Accounting Pronouncements
See Note 1 - Summary of Significant Account Policies in the Notes to the Consolidated Financial Statements for information regarding new accounting pronouncements.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, financing activities or other relationships with unconsolidated entities or other persons.
Contractual Obligations
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this item.
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