Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with
certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this item.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
|
Page No.
|
UTG, Inc. and Consolidated Subsidiaries
|
|
Report of Independent Registered Public Accounting Firm
|
19
|
Consolidated Balance Sheets
|
20
|
Consolidated Statements of Operations
|
21
|
Consolidated Statements of Comprehensive Income
|
22
|
Consolidated Statements of Shareholders’ Equity
|
23
|
Consolidated Statements of Cash Flows
|
24
|
Notes to Consolidated Financial Statements
|
25
|
Report of Independent Registered Public Accounting Firm
Board of Directors and
Shareholders of UTG, Inc. and Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of UTG, Inc. and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the
related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2019, and the related notes to the consolidated financial statements
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the
results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2005.
/s/ Brown Smith Wallace, LLP
St. Louis, Missouri
March 20, 2020
UTG, Inc.
Consolidated Balance Sheets
As of December 31, 2019 and 2018
ASSETS
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
Investments:
|
|
|
|
Investments available for sale:
|
|
|
|
Fixed maturities, at fair value (amortized cost $159,959,855 and $160,895,869)
|
$
|
171,629,373
|
|
$
|
160,960,784
|
Equity securities, at fair value (cost $32,578,862 and $34,885,107)
|
|
78,661,793
|
|
|
67,664,482
|
Equity securities, at cost
|
|
10,919,247
|
|
|
12,118,617
|
Mortgage loans on real estate at amortized cost
|
|
8,223,286
|
|
|
9,069,111
|
Investment real estate, net
|
|
44,344,236
|
|
|
52,518,577
|
Notes receivable
|
|
19,487,458
|
|
|
23,717,312
|
Policy loans
|
|
8,803,876
|
|
|
9,204,222
|
Short-term investments
|
|
10,442,173
|
|
|
–
|
Total
investments
|
|
352,511,442
|
|
|
335,253,105
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
28,787,629
|
|
|
20,150,162
|
Accrued investment income
|
|
1,679,783
|
|
|
2,119,882
|
Reinsurance receivables:
|
|
|
|
|
|
Future policy benefits
|
|
25,655,161
|
|
|
26,117,936
|
Policy claims and other benefits
|
|
4,142,142
|
|
|
4,053,882
|
Cost of insurance acquired
|
|
4,846,321
|
|
|
5,622,227
|
Property and equipment, net of accumulated depreciation
|
|
427,736
|
|
|
688,567
|
Income taxes receivable
|
|
–
|
|
|
279,333
|
Other assets
|
|
695,517
|
|
|
1,263,242
|
Total
assets
|
$
|
418,745,731
|
|
$
|
395,548,336
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Policy liabilities and accruals:
|
Future policy benefits
|
$
|
249,264,308
|
|
$
|
253,852,368
|
Policy claims and benefits payable
|
|
3,631,666
|
|
|
4,267,481
|
Other policyholder funds
|
|
404,177
|
|
|
372,072
|
Dividend and endowment accumulations
|
|
14,626,475
|
|
|
14,608,838
|
Income taxes payable
|
|
313,662
|
|
|
–
|
Deferred income taxes
|
|
13,222,604
|
|
|
9,113,480
|
Other liabilities
|
|
5,785,933
|
|
|
6,257,387
|
Total
liabilities
|
|
287,248,825
|
|
|
288,471,626
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
Common stock - no par value, stated value $0.001 per share. Authorized 7,000,000 shares - 3,277,830 and
3,295,870 shares issued and outstanding
|
|
3,279
|
|
|
3,296
|
Additional paid-in capital
|
|
36,012,401
|
|
|
36,567,865
|
Retained earnings
|
|
85,979,678
|
|
|
69,708,901
|
Accumulated other comprehensive income
|
|
8,977,914
|
|
|
62,495
|
Total UTG shareholders' equity
|
|
130,973,272
|
|
|
106,342,557
|
Noncontrolling interest
|
|
523,634
|
|
|
734,153
|
Total shareholders' equity
|
|
131,496,906
|
|
|
107,076,710
|
Total liabilities and shareholders' equity
|
$
|
418,745,731
|
|
$
|
395,548,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
UTG, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2019 and 2018
|
2019
|
|
2018
|
|
|
|
|
Revenue:
|
|
|
|
Premiums and policy fees
|
$
|
9,601,612
|
|
$
|
10,076,351
|
Ceded reinsurance premiums and policy fees
|
|
(2,535,980)
|
|
|
(2,862,701)
|
Net investment income
|
|
11,315,646
|
|
|
11,202,668
|
Other income
|
|
388,340
|
|
|
400,034
|
Revenues before net investment gains (losses)
|
|
18,769,618
|
|
|
18,816,352
|
Net investment gains (losses):
|
|
|
|
|
|
Other-than-temporary impairments
|
|
(650,956)
|
|
|
(300,000)
|
Other realized investment gains, net
|
|
13,546,463
|
|
|
12,340,077
|
Change in fair value of equity securities
|
|
12,530,315
|
|
|
10,416,758
|
Total net investment gains
|
|
25,425,822
|
|
|
22,456,835
|
Total revenues
|
|
44,195,440
|
|
|
41,273,187
|
|
|
|
|
|
|
Benefits and other expenses:
|
|
|
|
|
|
Benefits, claims and settlement expenses:
|
|
|
|
|
|
Life
|
|
16,191,227
|
|
|
16,751,922
|
Ceded reinsurance benefits and claims
|
|
(2,233,585)
|
|
|
(2,610,586)
|
Annuity
|
|
1,039,604
|
|
|
1,044,397
|
Dividends to policyholders
|
|
359,147
|
|
|
390,368
|
Commissions
|
|
(130,828)
|
|
|
(147,922)
|
Amortization of cost of insurance acquired
|
|
775,906
|
|
|
806,065
|
Operating expenses
|
|
8,006,748
|
|
|
8,531,113
|
Total benefits and other expenses
|
|
24,008,219
|
|
|
24,765,357
|
|
|
|
|
|
|
Income before income taxes
|
|
20,187,221
|
|
|
16,507,830
|
Income tax expense (benefit)
|
|
3,591,301
|
|
|
3,907,536
|
|
|
|
|
|
|
Net income
|
|
16,595,920
|
|
|
12,600,294
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest
|
|
(325,143)
|
|
|
(209,177)
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
$
|
16,270,777
|
|
$
|
12,391,117
|
|
|
|
|
|
|
Amounts attributable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
$
|
4.95
|
|
$
|
3.75
|
|
|
|
|
|
|
Diluted income per share
|
$
|
4.95
|
|
$
|
3.75
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
3,285,813
|
|
|
3,307,448
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
3,285,813
|
|
|
3,307,448
|
See accompanying notes.
UTG, Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2019 and 2018
|
2019
|
|
2018
|
|
|
|
|
Net income
|
$
|
16,595,920
|
|
$
|
12,600,294
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period, pre-tax
|
|
10,822,757
|
|
|
(7,744,899)
|
Tax (expense) benefit on unrealized holding gains (losses) arising during the period
|
|
(2,272,779)
|
|
|
1,626,429
|
Unrealized holding gains (losses) arising during period, net of tax
|
|
8,549,978
|
|
|
(6,118,470)
|
|
|
|
|
|
|
Less reclassification adjustment for (gains) losses included in net income
|
|
462,584
|
|
|
(10,751,955)
|
Tax expense (benefit) for gains included in net income
|
|
(97,143)
|
|
|
2,257,911
|
Reclassification adjustment for gains included in net income, net of tax
|
|
365,441
|
|
|
(8,494,044)
|
Subtotal: Other comprehensive income (loss), net of tax
|
|
8,915,419
|
|
|
(14,612,514)
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
25,511,339
|
|
|
(2,012,220)
|
|
|
|
|
|
|
Less comprehensive income attributable to noncontrolling interests
|
|
(325,143)
|
|
|
(209,177)
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to UTG, Inc.
|
$
|
25,186,196
|
|
$
|
(2,221,397)
|
See accompanying notes.
UTG, Inc.
Consolidated Statements of Shareholders' Equity
Year ended December 31, 2019
|
Common Stock
|
Additional Paid-In Capital
|
Retained Earnings
|
Accumulated Other Comprehensive Income (Loss)
|
Noncontrolling Interest
|
Total Shareholders' Equity
|
Balance at January 1, 2019
|
$
|
3,296
|
36,567,865
|
69,708,901
|
62,495
|
734,153
|
107,076,710
|
Common stock issued during year
|
|
11
|
353,876
|
-
|
-
|
-
|
353,887
|
Treasury shares acquired and retired
|
|
(28)
|
(909,340)
|
-
|
-
|
-
|
(909,368)
|
Net income attributable to common shareholders
|
|
-
|
-
|
16,270,777
|
-
|
-
|
16,270,777
|
Unrealized holding loss on securities net of noncontrolling interest and reclassification adjustment and
taxes
|
|
-
|
-
|
-
|
8,915,419
|
-
|
8,915,419
|
Contributions
|
|
-
|
-
|
-
|
-
|
-
|
0
|
Distributions
|
|
-
|
-
|
-
|
-
|
(535,662)
|
(535,662)
|
Gain attributable to noncontrolling interest
|
|
-
|
-
|
-
|
-
|
325,143
|
325,143
|
Balance at December 31, 2019
|
$
|
3,279
|
36,012,401
|
85,979,678
|
8,977,914
|
523,634
|
131,496,906
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
Common Stock
|
Additional Paid-In Capital
|
Retained Earnings
|
Accumulated Other Comprehensive Income (Loss)
|
Noncontrolling Interest
|
Total Shareholders' Equity
|
Balance at December 31, 2017
|
$
|
3,333
|
37,536,164
|
39,040,456
|
32,952,338
|
899,227
|
110,431,518
|
Adoption of Accounting Standards Update No 2016-01 (Note 1)
|
|
-
|
-
|
18,277,328
|
(18,277,328)
|
-
|
-
|
|
|
3,333
|
37,536,164
|
57,317,784
|
14,675,010
|
899,227
|
110,431,518
|
Common stock issued during year
|
|
13
|
360,799
|
-
|
-
|
-
|
360,812
|
Treasury shares acquired and retired
|
|
(50)
|
(1,329,098)
|
-
|
-
|
-
|
(1,329,148)
|
Net income attributable to common shareholders
|
|
-
|
-
|
12,391,117
|
-
|
-
|
12,391,117
|
Unrealized holding loss on securities net of noncontrolling interest and reclassification adjustment and
taxes
|
|
-
|
-
|
-
|
(14,612,515)
|
-
|
(14,612,515)
|
Contributions
|
|
-
|
-
|
-
|
-
|
-
|
-
|
Distributions
|
|
-
|
-
|
-
|
-
|
(374,252)
|
(374,252)
|
Gain attributable to noncontrolling interest
|
|
-
|
-
|
-
|
-
|
209,178
|
209,178
|
Balance at December 31, 2018
|
$
|
3,296
|
36,567,865
|
69,708,901
|
62,495
|
734,153
|
107,076,710
|
|
|
|
|
|
|
|
|
See accompanying notes.
UTG, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2019 and 2018
|
2019
|
|
2018
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
16,595,920
|
|
$
|
12,600,294
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
Amortization (accretion) of investments
|
|
136,991
|
|
|
(142,519)
|
Other-than-temporary impairments
|
|
650,956
|
|
|
300,000
|
Realized investment gains, net
|
|
(13,678,981)
|
|
|
(12,340,077)
|
Change in fair value of equity securities
|
|
(12,530,315)
|
|
|
(10,416,758)
|
Realized trading (gains) losses included in income
|
|
132,518
|
|
|
-
|
Amortization of cost of insurance acquired
|
|
775,906
|
|
|
806,065
|
Depreciation
|
|
1,039,453
|
|
|
1,067,297
|
Stock-based compensation
|
|
353,887
|
|
|
360,812
|
Charges for mortality and administration of universal life and annuity products
|
|
(5,211,485)
|
|
|
(6,602,846)
|
Interest credited to account balances
|
|
4,088,309
|
|
|
4,221,969
|
Change in accrued investment income
|
|
440,099
|
|
|
870,839
|
Change in reinsurance receivables
|
|
374,515
|
|
|
198,575
|
Change in policy liabilities and accruals
|
|
(4,331,160)
|
|
|
(2,237,947)
|
Change in income taxes receivable (payable)
|
|
592,995
|
|
|
270,518
|
Change in other assets and liabilities, net
|
|
1,988,577
|
|
|
5,985,699
|
Net cash used in operating activities
|
|
(8,581,815)
|
|
|
(5,058,079)
|
Cash flows from investing activities:
|
|
|
|
|
|
Proceeds from investments sold and matured:
|
|
|
|
|
|
Fixed maturities available for sale
|
|
14,390,181
|
|
|
66,408,611
|
Equity securities
|
|
14,385,393
|
|
|
2,169,989
|
Mortgage loans
|
|
5,283,749
|
|
|
8,878,073
|
Real estate
|
|
13,283,895
|
|
|
14,341,204
|
Notes receivable
|
|
20,261,459
|
|
|
6,783,702
|
Policy loans
|
|
1,635,686
|
|
|
1,599,896
|
Short-term investments
|
|
-
|
|
|
7,549,076
|
Total proceeds from investments sold and matured
|
|
69,240,363
|
|
|
107,730,551
|
Cost of investments acquired:
|
|
|
|
|
|
Fixed maturities available for sale
|
|
(14,634,233)
|
|
|
(56,940,883)
|
Equity securities
|
|
(2,092,304)
|
|
|
(12,687,839)
|
Trading securities
|
|
(132,518)
|
|
|
-
|
Mortgage loans
|
|
(4,367,644)
|
|
|
(91,954)
|
Real estate
|
|
(1,958,982)
|
|
|
(15,704,151)
|
Notes receivable
|
|
(16,031,605)
|
|
|
(11,496,998)
|
Policy loans
|
|
(1,235,340)
|
|
|
(1,244,976)
|
Short-term investments
|
|
(10,403,628)
|
|
|
(7,549,076)
|
Total cost of investments acquired
|
|
(50,856,254)
|
|
|
(105,715,877)
|
Net cash provided by investing activities
|
|
18,384,109
|
|
|
2,014,674
|
Cash flows from financing activities:
|
|
|
|
|
|
Policyholder contract deposits
|
|
4,669,825
|
|
|
4,696,980
|
Policyholder contract withdrawals
|
|
(4,389,622)
|
|
|
(5,234,212)
|
Purchase of treasury stock
|
|
(909,368)
|
|
|
(1,329,148)
|
Noncontrolling contributions/(distributions) of consolidated subsidiary
|
|
(535,662)
|
|
|
(374,252)
|
Net cash used in financing activities
|
|
(1,164,827)
|
|
|
(2,240,632)
|
Net increase (decrease) in cash and cash equivalents
|
|
8,637,467
|
|
|
(5,284,037)
|
Cash and cash equivalents at beginning of year
|
|
20,150,162
|
|
|
25,434,199
|
Cash and cash equivalents at end of year
|
$
|
28,787,629
|
|
$
|
20,150,162
|
See accompanying notes.
UTG, Inc.
Notes to Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Business – UTG, Inc. is an insurance holding
company. The Company’s dominant business is individual life insurance, which includes the servicing of existing insurance in-force and the acquisition of other companies in the life insurance business. UTG and its subsidiaries are collectively
referred to as the “Company”.
This document at times will refer to the Registrant’s largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll. Mr.
Correll holds a majority ownership of First Southern Funding, LLC (“FSF”), a Kentucky corporation, and First Southern Bancorp, Inc. (“FSBI”), a financial services holding company. FSBI operates through its 100% owned subsidiary bank, First Southern
National Bank (“FSNB”). Banking activities are conducted through multiple locations within south-central and western Kentucky. Mr. Correll is Chief Executive Officer and Chairman of the Board of Directors of UTG and is currently UTG’s largest
shareholder through his ownership control of FSF, FSBI and affiliates. At December 31, 2019, Mr. Correll owns or controls directly and indirectly approximately 66% of UTG’s outstanding stock.
UTG’s life insurance subsidiary has several wholly-owned and majority-owned subsidiaries. The subsidiaries were formed to hold certain real estate and
other investments. The investments were placed into the limited liability companies and partnerships to provide additional protection to the policyholders and to UG.
Basis of Presentation – The accompanying
consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), under guidance issued by the Financial Accounting Standards Board (“FASB”). The preparation of
financial statements in accordance with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation – The accompanying
consolidated financial statements include the accounts of the Registrant and its wholly and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated during consolidation.
Business Segments – The Company has only one
business segment – life insurance.
Investments – The Company reports its investments as
follows:
Fixed Maturity Investments – The Company classifies
its fixed maturity investments, which include bonds, as available for sale. Investments classified as available for sale are carried at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other
comprehensive income. Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Operations, using the constant yield method over the
period to maturity. Net realized gains and losses on sales of available for sale securities, and unrealized losses considered to be other-than-temporary, are recorded to net realized investment gains (losses) in the Consolidated Statements of
Operations.
Equity Securities at Fair Value – Investments in
equity securities, which include common and preferred stocks, are reported at fair value with unrealized gains and losses reported as a component of net income (loss).
Equity Securities at Cost – These investments are
reported at their cost basis, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company adopted ASU 2016-01 during 2018
and transferred equity securities of $12,118,617, that do not have a readily determinable fair value, from equity securities at fair value to equity securities at cost on the financial statements. There was no impact to the Consolidated Statements
of Operations or net Shareholders' Equity as a result of the change.
Mortgage Loans on Real Estate – Mortgage loans on
real estate are reported at their unpaid principal balances, adjusted for amortization of premium or discount and valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and
interest will not be collected. Included in the mortgage loans balance is discounted mortgage loans on real estate. Discounted mortgage loans on real estate are loans that the Company purchased at a deep discount through an auction process led by the
Federal Government or other intermediary. In general, the discounted loans are non-performing and there is a significant amount of uncertainty surrounding the timing and amount of cash flows to be received by the Company. Accordingly, the Company
records its investment in the discounted loans at its original purchase price adjusted for any principal receipts. Management works with the borrower to reach a settlement on the loan or they foreclose on the underlying collateral which is primarily
commercial real estate. For cash payments received during the work out process, the Company records these payments to interest income on a cash basis. For loan settlements reached, the Company records the amount in excess of the carrying amount of
the loan as a discount accretion to investment income at the closing date. Management reviews the discount loan portfolio regularly for impairment. If an impairment is identified (after consideration of the underlying collateral), the Company
records an impairment to earnings in the period the information becomes known.
Investment Real Estate – Investment real estate
held for sale is reported at the lower of cost or fair value less cost to sell. Expenses to maintain the property are expensed as incurred.
Notes Receivable – Notes receivable are reported at
their unpaid principal balances, adjusted for valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. Interest accruals are analyzed based on the
likelihood of repayment. The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status.
Policy Loans – Policy loans are reported at their
unpaid balances, including accumulated interest, but not in excess of the cash surrender value of the related policy.
Short-Term Investments – Short-term investments
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.
Gains and Losses – Realized gains and losses
include sales of investments and investment impairments. If any, other-than-temporary impairments in fair value are recognized in net income on the specific identification basis.
Fair Value – Fair values for cash, short-term
investments, short-term debt, receivables and payables approximate carrying value. Fair values for fixed maturities, equity securities and certain other assets are determined in accordance with specific accounting guidance. Fair values are based on
quoted market prices, where available. Otherwise, fair values are based on quoted market prices of comparable instruments in active markets, quotes in inactive markets, or other observable criteria. Mortgage loans on real estate are estimated using
discounted cash flow analyses. Discounted mortgage loans on real estate are reported at original purchase price, which Management believes approximates fair value. For more specific information regarding the Company’s measurements and procedures in
valuing financial instruments, see Note 3 – Fair Value Measurements.
Impairment of Investments – The Company evaluates
its investment portfolio for other-than-temporary impairments as described in Note 2 – Investments. If a security is deemed to be other-than-temporarily impaired, the cost basis of the security is written down to fair value and is treated as a
realized loss.
Current accounting guidance states that if an entity intends to sell or if it is more likely than not that it will be required to sell an impaired security
prior to recovery of its cost basis, the security is to be considered other-than-temporarily impaired and the full amount of impairment must be charged to earnings. Otherwise, losses on fixed maturities which are other-than-temporarily impaired are
separated into two categories, the portion of the loss which is considered credit loss and the portion of the loss which is due to other factors. The credit loss portion is charged to earnings while the loss due to other factors is charged to other
comprehensive income.
Cash Equivalents – Cash equivalents consist of money
market accounts and investments with maturities of three months or less when purchased.
Cash – Cash consists of balances on hand and on
deposit in banks and financial institutions.
Reinsurance - In the normal course of business, the
Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts. The Company retains a
maximum of $125,000 of coverage per individual life.
Reinsurance receivables are recognized in a manner consistent with the liabilities relating to the underlying reinsured contracts. The cost of reinsurance
related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.
Cost of Insurance Acquired - When an insurance
company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present
value of the projected future profits from the acquired policies. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected
future profits. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.
Property and Equipment - Company-occupied property,
data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of $5,916,424 and $5,655,593 at December 31, 2019 and 2018, respectively. Depreciation is computed on a straight-line basis for financial
reporting purposes using estimated useful lives of 3 to 30 years. Depreciation expense was $260,831 and $430,260 for the years ended December 31, 2019 and 2018, respectively.
Future Policy Benefits and Expenses - The
liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method. These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on
the life insurance subsidiary’s experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations. The Company makes these assumptions at the time the contract is issued or, in the case of contracts
acquired by purchase, at the purchase date. Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 2.0% to 6.0% for life insurance and 2.5% to 7.5% for annuities. Benefit reserves for
traditional life insurance policies include certain deferred profits on limited-payment policies that are being recognized in income over the policy term. Policy benefit claims are charged to expense in the period that the claims are incurred. The
mortality rate assumptions for policies currently issued by the Company are based on 2001 select and ultimate tables. Withdrawal rate assumptions are based upon Linton B or C, which are industry standard actuarial tables for forecasting assumed
policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life insurance products are computed under a retrospective deposit method and
represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims in excess of related policy account balances. Interest crediting rates for universal life and
interest sensitive products range from 3.0% to 6.0% as of December 31, 2019 and 2018.
Policy Claims and Benefits Payable - Policy and
contract claims include provisions for reported claims in process of settlement, valued in accordance with the terms of the policies and contracts, as well as provisions for claims incurred and unreported. The estimate of incurred and unreported
claims is based on prior experience. The Company makes an estimate after careful evaluation of all information available to the Company. There is no certainty the stated liability for policy claims and benefits payable, including the estimate for
incurred but unreported claims, will be the Company’s ultimate obligation.
Income Taxes – Income taxes are accounted for under
the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax impact attributable to differences between the financial statement book values and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. More information concerning income taxes is provided in Note 6 – Income
Taxes.
Earnings Per Share – The objective of both basic
earnings per share (“EPS”) and diluted EPS is to measure the performance of an entity over the reporting period. The Company presents basic and diluted EPS on the face of the Consolidated Statements of Operations. Basic EPS is computed by dividing
income available to common shareholders by the weighted average common shares outstanding for the period. Diluted EPS is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or contracts, such as
stock options, which could be exercised or converted into common shares.
Recognition of Revenues and Related Expenses -
Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits, consist principally of whole life insurance policies, and certain annuities with life contingencies are recognized as
revenues when due. Limited payment life insurance policies defer gross premiums received in excess of net premiums, which is then recognized in income in a constant relationship with insurance in-force. Accident and health insurance premiums are
recognized as revenue pro rata over the terms of the policies. Benefits and related expenses associated with the premiums earned are charged to expense proportionately over the lives of the policies through a provision for future policy benefit
liabilities and through deferral and amortization of deferred policy acquisition costs. For universal life and investment products, generally there is no requirement for payment of premium other than to maintain account values at a level sufficient
to pay mortality and expense charges. Consequently, premiums for universal life policies and investment products are not reported as revenue, but as deposits. Policy fee revenue for universal life policies and investment products consists of charges
for the cost of insurance and policy administration fees assessed during the period. Expenses include interest credited to policy account balances and benefit claims incurred in excess of policy account balances.
Recently Issued Accounting Standards
In January of 2020, the FASB issued Accounting Standards Update No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815
or ASU 2020-01. ASU 2020-01 clarifies the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption
of this guidance will have on its consolidated financial statements.
In December of 2019, the FASB issued Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes or ASU 2019-12. ASU 2019-12 is expected to reduce the cost and complexity related to the accounting for income taxes. The ASU removes specific
exceptions to the general principles in Topic 740 and improves the financial statement preparer's application of income tax related guidance. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within
those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement or ASU 2018-13. ASU 2018-13 modifies certain disclosure requirements related to fair value
measurements including requiring disclosures on changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements and a requirement to disclose the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently
evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts or ASU 2018-12. ASU 2018-12 significantly changes how insurers account for long-duration insurance contracts.
The new guidance will require insurers to review and update, if necessary, the assumptions used to measure insurance liabilities periodically, rather than retain assumptions used at contract inception. The updated guidance also changes the
recognition and measurement of deferred acquisition costs (DAC) and created a new category of benefit features called market risk benefits (MRB) that will be measured at fair value. The guidance also significantly expands the disclosure requirements
for long-duration contracts. The ASU was originally effective for fiscal years, and interim periods within those years, for years beginning after December 15, 2020 and early adoption is permitted. The guidance on measuring the liabilities for
future policy benefits and DAC will be adopted on a modified retrospective basis as of the earliest period presented in the year of adoption. The guidance on MRB will be adopted on a retrospective basis as of the earliest period presented in the year
of adoption. In November of 2019, the FASB issued ASU 2019-09, which delayed the effective date of ASU 2018-12 to fiscal years beginning after December 15, 2023 for smaller reporting companies. The Company is currently evaluating the impact that the
adoption of this guidance will have on its consolidated financial statements.
Accounting Standards Update (ASU 2016-13), Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments – The
amendments included in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial
institutions and other organizations will now use forward-looking information to better evaluate their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will
change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was originally
effective for public companies for fiscal years beginning after December 15, 2019. In November of 2019, the FASB issued Accounting Standards Update No. 2019-10, which delayed the implementation of ASU 2016-13 to fiscal years beginning after December
15, 2022 for smaller reporting companies. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
Note 2 – Investments
Available for Sale Securities – Fixed Maturity and Equity Securities
The following tables provide a summary of fixed maturities available for sale by original or amortized cost and estimated fair value:
December 31, 2019
|
|
Original or Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
Investments available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and govt. agencies and authorities
|
|
$
|
35,761,440
|
|
$
|
402,832
|
|
$
|
(35,529)
|
|
$
|
36,128,743
|
U.S. special revenue and assessments
|
|
|
14,371,263
|
|
|
832,100
|
|
|
-
|
|
|
15,203,363
|
All other corporate bonds
|
|
|
109,827,152
|
|
|
10,470,115
|
|
|
-
|
|
|
120,297,267
|
Total
|
|
$
|
159,959,855
|
|
$
|
11,705,047
|
|
$
|
(35,529)
|
|
$
|
171,629,373
|
December 31, 2018
|
|
Original or Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
|
|
|
|
|
|
|
|
Investments available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and govt. agencies and authorities
|
|
$
|
25,649,410
|
|
$
|
149,006
|
|
$
|
(138,222)
|
|
$
|
25,660,194
|
U.S. special revenue and assessments
|
|
|
16,350,486
|
|
|
334,300
|
|
|
(4,406)
|
|
|
16,680,380
|
All other corporate bonds
|
|
|
118,895,973
|
|
|
2,569,287
|
|
|
(2,845,050)
|
|
|
118,620,210
|
Total
|
|
$
|
160,895,869
|
|
$
|
3,052,593
|
|
$
|
(2,987,678)
|
|
$
|
160,960,784
|
The following table provides a summary of fixed maturities by contractual maturity as of December 31, 2019. Actual maturities could differ from contractual
maturities due to call or prepayment provisions:
Fixed Maturities Available for Sale
December 31, 2019
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
|
|
|
|
Due in one year or less
|
|
$
|
11,286,769
|
|
$
|
11,461,374
|
Due after one year through five years
|
|
|
50,028,712
|
|
|
51,609,109
|
Due after five years through ten years
|
|
|
50,866,597
|
|
|
56,224,286
|
Due after ten years
|
|
|
47,777,777
|
|
|
52,334,604
|
Total
|
|
$
|
159,959,855
|
|
$
|
171,629,373
|
By insurance statute, the majority of the Company's investment portfolio is invested in investment grade securities to provide ample protection for
policyholders.
Below investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their
issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities is usually more limited than for investment grade debt securities.
Debt securities classified as below-investment grade are those that receive a Standard & Poor's rating of BB+ or below.
The Company held below investment grade investments with an estimated market value of $1,031,570 and $2,618,594 as of December 31, 2019 and December 31,
2018, respectively. The investments are all classified as “All other corporate bonds”.
The fair value of investments with sustained gross unrealized losses at December 31, 2019 and 2018 are as follows:
December 31, 2019
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
Unrealized losses
|
|
Fair value
|
|
Unrealized losses
|
|
Fair value
|
|
Unrealized losses
|
U.S. Government and govt. agencies and authorities
|
|
$
|
6,059,380
|
|
(35,529)
|
|
$
|
-
|
|
-
|
|
$
|
6,059,380
|
|
(35,529)
|
Total fixed maturities
|
|
$
|
6,059,380
|
|
(35,529)
|
|
$
|
-
|
|
-
|
|
$
|
6,059,380
|
|
(35,529)
|
December 31, 2018
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
Unrealized losses
|
|
Fair value
|
|
Unrealized losses
|
|
Fair value
|
|
Unrealized losses
|
U.S. Government and govt. agencies and authorities
|
|
$
|
6,429,700
|
|
(49,904)
|
|
$
|
1,592,679
|
|
(88,318)
|
|
$
|
8,022,379
|
|
(138,222)
|
U.S. special revenue and assessments
|
|
|
4,023,920
|
|
(4,406)
|
|
|
-
|
|
-
|
|
|
4,023,920
|
|
(4,406)
|
All other corporate bonds
|
|
|
49,270,729
|
|
(2,033,507)
|
|
|
15,337,739
|
|
(811,543)
|
|
|
64,608,468
|
|
(2,845,050)
|
Total fixed maturities
|
|
$
|
59,724,349
|
|
(2,087,817)
|
|
$
|
16,930,418
|
|
(899,861)
|
|
$
|
76,654,767
|
|
(2,987,678)
|
The following table provides additional information regarding the number of securities that were in an unrealized loss position for greater than or less than
twelve months:
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
As of December 31, 2019
|
|
|
|
|
|
Fixed maturities
|
3
|
|
-
|
|
3
|
As of December 31, 2018
|
|
|
|
|
|
Fixed maturities
|
30
|
|
10
|
|
40
|
Substantially all of the unrealized losses on fixed maturities available for sale at December 31, 2019 and 2018 are attributable to changes in market
interest rates and general disruptions in the credit market subsequent to purchase. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position. Based upon the
Company’s expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company’s evaluation of other relevant factors, the Company
deems these securities to be temporarily impaired as of December 31, 2019 and 2018.
Cost Method Investments
The Company held equity investments with an aggregate cost of $10,919,247 and $12,118,617 at December 31, 2019 and 2018, respectively. These equity
investments were not reported at fair value because it is not practicable to estimate their fair values due to insufficient information being available. Management did not identify any events or changes in circumstances that might have a significant
adverse effect on the reported value of those investments. Based on Management's evaluation of the expected cash flow of the investments, and the Company's ability and intent to hold the investments for a reasonable period of time, the Company does
not deem an other-than-temporary impairment necessary at December 31, 2019.
Trading Securities
Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in net
investment income on the Consolidated Statements of Operations. Trading Securities included exchange-traded equities and exchange-traded options. Trading securities carried as liabilities were securities sold short. A gain, limited to the price at
which the security was sold short, or a loss, potentially unlimited in size, was recognized upon the termination of the short sale. Earnings from trading securities were classified in cash flows from operating activities. The Company did not hold
any trading securities at December 31, 2019 or 2018.
The following table reflects trading securities revenue charged to net investment income for the periods ended December 31:
|
2019
|
|
2018
|
|
|
|
|
Net unrealized gains (losses)
|
$
|
-
|
|
$
|
-
|
Net realized gains (losses)
|
|
(132,518)
|
|
|
-
|
Net unrealized and realized gains (losses)
|
$
|
(132,518)
|
|
$
|
-
|
Mortgage Loans on Real Estate
The Company, from time to time, acquires mortgage loans through participation agreements with FSNB. FSNB has been able to provide the Company with
additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market. The Company is able to receive participations from FSNB for three primary reasons:
1) FSNB has already reached its maximum lending limit to a single borrower, but the borrower is still considered a suitable risk; 2) the interest rate on a particular loan may be fixed for a long period that is more suitable for UG given its
asset-liability structure; and 3) FSNB’s loan growth might at times outpace its deposit growth, resulting in FSNB participating such excess loan growth rather than turning customers away. For originated loans, the Company’s Management is responsible
for the final approval of such loans after evaluation. Before a new loan is issued, the applicant is subject to certain criteria set forth by Company Management to ensure quality control. These criteria include, but are not limited to, a credit
report, personal financial information such as outstanding debt, sources of income, and personal equity. Once the loan is approved, the Company directly funds the loan to the borrower. The Company bears all risk of loss associated with the terms of
the mortgage with the borrower.
During 2019 and 2018, the Company acquired $4,367,644 and $91,954 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 2019 and 2018, the maximum and minimum lending rates for mortgage loans were:
|
2019
|
|
2018
|
|
Maximum
rate
|
|
Minimum
rate
|
|
Maximum
rate
|
|
Minimum
rate
|
|
|
|
|
|
|
|
|
Farm loans
|
5.00 %
|
|
5.00 %
|
|
5.00 %
|
|
5.00 %
|
Commercial loans
|
7.50 %
|
|
4.82 %
|
|
7.50 %
|
|
4.00 %
|
Residential loans
|
5.50 %
|
|
5.50 %
|
|
8.00 %
|
|
8.00 %
|
Most mortgage loans are first position loans. Loans issued are generally limited to no more than 80% of the appraised value of the property.
The Company has in place a monitoring system to provide Management with information regarding potential troubled loans. Letters are sent to each mortgagee
when the loan becomes 30 days or more delinquent. Management is provided with a monthly listing of loans that are 60 days or more past due. 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 December 31, 2019 and December 31, 2018.
The following table summarizes the mortgage loan holdings of the Company for the periods ended December 31:
|
2019
|
|
2018
|
|
|
|
|
In good standing
|
$
|
8,223,286
|
|
$
|
7,169,272
|
Overdue interest over 90 days
|
|
-
|
|
|
1,899,839
|
Total mortgage loans
|
$
|
8,223,286
|
|
$
|
9,069,111
|
Total foreclosed loans during the year
|
$
|
234,044
|
|
$
|
-
|
Investment Real Estate
Investment real estate held for sale is reported at the lower of cost or fair value less cost to sell. Investment Real estate acquired through foreclosure,
consisting of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual asset basis at the lower of cost or fair value, less disposal costs. Fair value is determined on the basis
of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. When properties are acquired through foreclosure, any excess of the loan balance at the time of foreclosure over the fair value of
the real estate held as collateral is recognized and charged to the Consolidated Statements of Operations. Based upon Management’s evaluation of the real estate acquired through foreclosure, additional expense is recorded when necessary in an amount
sufficient to reflect any declines in estimated fair value.
The Company's investment real estate portfolio includes ownerships in oil and gas royalties. As of December 31, 2019 and 2018, investments in oil and gas
royalties represented 44% and 43%, respectively, of the total investment real estate portfolio.
Gains and losses recognized on the disposition of the properties are recorded as realized gains and losses in the Consolidated Statements of Operations.
During 2019 and 2018, the Company acquired $1,958,982 and $15,704,151 of investment real estate, respectively.
Notes Receivable
Notes receivable represent collateral loans and promissory notes issued by the
Company and are reported at their unpaid principal balances, adjusted for valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. The valuation
allowance as of December 31, 2019 and 2018 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 2019 and 2018, the Company acquired $16,031,605 and $11,496,998 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.
Analysis of Investment Operations
The following table reflects the Company’s net investment income for the periods ended December 31:
|
2019
|
|
2018
|
|
|
|
|
Fixed maturities
|
$
|
5,854,031
|
|
$
|
7,273,157
|
Equity securities
|
|
1,543,904
|
|
|
1,628,649
|
Mortgage loans
|
|
479,841
|
|
|
1,234,115
|
Real estate
|
|
2,934,666
|
|
|
2,771,348
|
Notes receivable
|
|
1,848,314
|
|
|
979,742
|
Policy loans
|
|
607,537
|
|
|
646,993
|
Cash and cash equivalents
|
|
175,917
|
|
|
355,276
|
Short-term
|
|
-
|
|
|
18,159
|
Total consolidated investment income
|
|
13,444,210
|
|
|
14,907,439
|
Investment expenses
|
|
(2,128,564)
|
|
|
(3,704,771)
|
Consolidated net investment income
|
$
|
11,315,646
|
|
$
|
11,202,668
|
The following table presents the Company’s net realized investments gains (losses) and the change in net unrealized gains on available-for-sale investments
for the periods ended December 31:
|
|
2019
|
|
2018
|
|
|
|
|
|
Realized gains on available-for-sale investments:
|
|
|
|
|
|
|
Sales of fixed maturities
|
|
$
|
331,322
|
|
$
|
11,708,320
|
Sales of equity securities
|
|
|
9,560,716
|
|
|
-
|
Sales of real estate
|
|
|
3,929,195
|
|
|
1,588,122
|
Other
|
|
|
-
|
|
|
-
|
Total realized gains
|
|
|
13,821,233
|
|
|
13,296,442
|
Realized losses on available-for-sale investments:
|
|
|
|
|
|
|
Sales of fixed maturities
|
|
|
(142,252)
|
|
|
(956,365)
|
Sales of equity securities
|
|
|
-
|
|
|
-
|
Sales of real estate
|
|
|
-
|
|
|
-
|
Other-than-temporary impairments
|
|
|
(650,956)
|
|
|
(300,000)
|
Other
|
|
|
(132,518)
|
|
|
-
|
Total realized losses
|
|
|
(925,726)
|
|
|
(1,256,365)
|
Net realized investment gains (losses)
|
|
|
12,895,507
|
|
|
12,040,077
|
Change in fair value of equity securities:
|
|
|
|
|
|
|
Change in fair value of equity securities held at the end of the period
|
|
|
12,530,315
|
|
|
10,416,758
|
Change in fair value of equity securities
|
|
|
12,530,315
|
|
|
10,416,758
|
Net investment gains (losses)
|
|
$
|
25,425,822
|
|
$
|
22,456,835
|
Change in net unrealized gains (losses) on available-for-sale investments included in other comprehensive
income:
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
10,822,757
|
|
$
|
(7,744,899)
|
Net increase (decrease)
|
|
$
|
10,822,757
|
|
$
|
(7,744,899)
|
Other-Than-Temporary Impairments
The Company regularly reviews its investment securities for factors that may indicate that a decline in fair value of an investment is other than
temporary. The factors considered by Management in its regular review to identify and recognize other-than-temporary impairment losses on fixed maturities include, but are not limited to: the length of time and extent to which the fair value has
been less than cost; the Company’s intent to sell, or be required to sell, the debt security before the anticipated recovery of its remaining amortized cost basis; the financial condition and near-term prospects of the issuer; adverse changes in
ratings announced by one or more rating agencies; subordinated credit support, whether the issuer of a debt security has remained current on principal and interest payments; current expected cash flows; whether the decline in fair value appears to be
issuer specific or, alternatively, a reflection of general market or industry conditions, including the effect of changes in market interest rates. If the Company intends to sell a debt security, or it is more likely than not that it would be
required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date would be recognized by a charge to other-than-temporary
losses in the Condensed Consolidated Statements of Operations.
Management regularly reviews its real estate portfolio in comparison to appraisal valuations and current market conditions for indications of
other-than-temporary impairments. If a decline in value is judged by Management to be other-than-temporary, a loss is recognized by a charge to other-than-temporary impairment losses in the Consolidated Statements of Operations.
The other-than-temporary impairments recognized during 2018 and 2019 were taken as a result of Management's assessment and determination of value of the
investments. The investments were written down to better reflect their current expected value.
Based on Management’s review of the investment portfolio, the Company recorded the following losses for other-than-temporary impairments in the
Consolidated Statements of Operations for the periods ended December 31:
|
2019
|
|
2018
|
|
|
|
|
Other than temporary impairments:
|
|
|
|
|
|
Fixed maturities
|
$
|
650,956
|
|
$
|
-
|
Real estate
|
|
-
|
|
|
300,000
|
Total other than temporary impairments
|
$
|
650,956
|
|
$
|
300,000
|
Investments on Deposit
The Company had investments with a fair value of $8,371,827 and $8,317,514 on deposit with various state insurance departments as of December 31, 2019 and
2018, respectively.
Note 3 – Fair Value Measurements
The Company measures its assets and liabilities recorded at fair value in the Consolidated Balance Sheets based on the framework set forth in the GAAP fair
value accounting guidance. The framework establishes a fair value hierarchy of three levels based upon the transparency of information used in measuring the fair value of assets or liabilities as of the measurement date. The fair value hierarchy
prioritizes the inputs in the valuation techniques used to measure fair value into three categories.
Level 1 – Valuation is based upon quoted prices for identical assets or liabilities in active markets that the Company is able to access. Level 1 fair
value is not subject to valuation adjustments.
Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar instruments
in markets that are not active. In addition, the Company may use various valuation techniques or pricing models that use observable inputs to measure fair value.
Level 3 – Valuation is based upon unobservable inputs that are supported by little or no market activity and are significant to the fair value of the
assets or liabilities. Unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability.
The Company determines the existence of an active market for an asset or liability based on its judgment as to whether transactions for the asset or
liability occur in such market with sufficient frequency and volume to provide reliable pricing information. If the Company concludes that there has been a significant decrease in the volume and level of activity for an investment in relation to
normal market activity for such investment, adjustments to transactions and quoted prices are made to estimate fair value.
The inputs used in the valuation techniques employed by the Company are provided by nationally recognized pricing services, external investment managers
and internal resources. To assess these inputs, the Company’s review process includes, but is not limited to, quantitative analysis including benchmarking, initial and ongoing evaluations of methodologies used by external parties to calculate fair
value, and ongoing evaluations of fair value estimates based on the Company’s knowledge and monitoring of market conditions.
The Company periodically reviews the pricing service provider’s policies and procedures for valuing securities. The assumptions underlying the
valuations from external service providers, including unobservable inputs, are generally not readily available as this information is often deemed proprietary. Accordingly, the Company is unable to obtain comprehensive information regarding these
assumptions and methodologies.
The Company’s investments in fixed maturity securities available for sale, equity securities and trading securities assets and liabilities are carried at
fair value. The following are the Company’s methodologies and valuation techniques for assets and liabilities measured at fair value.
Fixed maturities available for sale mainly consist of U.S. treasury securities and corporate debt securities. The Company employs a market approach to
the valuation of securities where there are sufficient market transactions involving identical or comparable assets. If sufficient market data is not available for identical or comparable assets, the Company uses an income approach to valuation.
The majority of the financial instruments included in fixed maturity securities available for sale are evaluated utilizing observable inputs; accordingly, they are categorized in either Level 1 or Level 2 of the fair value hierarchy. However, in
instances where significant inputs utilized in valuation of the securities are unobservable, the securities are categorized in Level 3 of the fair value hierarchy.
Corporate securities primarily include fixed rate corporate bonds. Inputs utilized in connection with the Company’s valuation techniques relating to this
class of securities include recently executed transactions, market price quotations, benchmark yields and issuer spreads. Corporate securities are categorized in Level 2 of the fair value hierarchy.
U.S. treasury securities are based on quoted prices in active markets and are generally categorized in Level 1 of the fair value hierarchy.
Equity securities consist of common and preferred stocks mainly in private equity investments, financial institutions and publicly traded corporations.
Equity securities for which there is sufficient market data are categorized as Level 1 or 2 in the fair value hierarchy. For the equity securities in which quoted market prices are not available, the Company uses industry standard pricing
methodologies, including discounted cash flow models that may incorporate various inputs such as payment expectations, risk of the investment, market data, and health of the underlying company. The inputs are based upon Management's assumptions and
available market information. When evidence is believed to support a change to the carrying value from the transaction price, adjustments are made to reflect the expected cash flows, material events and market data. These investments are included
in Level 3 of the fair value hierarchy.
During 2019, the Company received an offer to purchase its investments in certain music royalties held in the form of Level 3 equity investments. As a
result of this event, the Company elected to change its valuation methodology from using discounted cash flow models to estimate fair value to marking the investment do the offer price to estimate the fair value. The change in methodology resulted in
recording an unrealized gain on investment of approximately $2.1 million during the year ended December 31, 2019. The investments were sold during the first quarter of 2020. The Company recognized a gain of approximately $4.2 million on the sale.
The 2020 net income is unaffected by the sale as the realized gain is offset by the unrealized gain reversal at the time of sale.
The following table presents the Company’s assets and liabilities measured at fair value in the consolidated balance sheet on a recurring basis as of
December 31, 2019.
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, available for sale
|
$
|
36,128,743
|
|
$
|
135,500,630
|
|
$
|
-
|
|
$
|
171,629,373
|
Equity Securities
|
|
29,888,281
|
|
|
14,258,750
|
|
|
34,514,762
|
|
|
78,661,793
|
Total
|
$
|
66,017,024
|
|
$
|
149,759,380
|
|
$
|
34,514,762
|
|
$
|
250,291,166
|
The following table presents the Company’s assets and liabilities measured at fair value in the consolidated balance sheet on a recurring basis as of
December 31, 2018.
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, available for sale
|
$
|
25,660,194
|
|
$
|
134,865,746
|
|
$
|
434,844
|
|
$
|
160,960,784
|
Equity Securities
|
|
27,634,283
|
|
|
10,557,031
|
|
|
29,473,168
|
|
|
67,664,482
|
Total
|
$
|
53,294,477
|
|
$
|
145,422,777
|
|
$
|
29,908,012
|
|
$
|
228,625,266
|
The following table provides reconciliations for Level 3 assets measured at fair value on a recurring basis. Transfers into and out of Level 3 are
recognized as of the end of the quarter in which they occur.
|
Fixed Maturities,
Available for Sale
|
|
Equity Securities
|
|
Total
|
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
434,844
|
|
$
|
29,473,168
|
|
$
|
29,908,012
|
Transfers in to Level 3
|
|
-
|
|
|
-
|
|
|
-
|
Transfer out of Level 3
|
|
-
|
|
|
-
|
|
|
-
|
Total unrealized gain (losses):
|
|
|
|
|
|
|
|
|
Included in net income (loss)
|
|
-
|
|
|
6,461,670
|
|
|
6,461,670
|
Included in other comprehensive income
|
|
(422,927)
|
|
|
-
|
|
|
(422,927)
|
Purchases
|
|
-
|
|
|
1,038,220
|
|
|
1,038,220
|
Sales
|
|
(11,917)
|
|
|
(2,458,296)
|
|
|
(2,470,213)
|
Balance at December 31, 2019
|
$
|
-
|
|
$
|
34,514,762
|
|
$
|
34,514,762
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Change in fair value of equity securities included in net income (loss) relating to assets held
|
$
|
6,461,670
|
$
|
4,633,751
|
The Level 3 securities include one fixed maturity and certain equity securities with unobservable inputs. The Company computed fair value of Level 3
equity investments based on a review of current financial information, earnings trends and similar companies in the same industries.
The Company did not transfer any assets in or out of Level 3 during 2019. The Company transferred certain cost method investments out of Level 3 during
2018. Transfers occur when there is a lack of observable market information.
Certain assets are not carried at fair value on a recurring basis, including investments such as mortgage loans and policy loans. Accordingly, such
investments are only included in the fair value hierarchy disclosure when the investment is subject to re-measurement at fair value after initial recognition and the resulting re-measurement is reflected in the Consolidated Financial Statements.
The carrying values and estimated fair values of certain of the Company’s financial instruments not recorded at fair value in the Consolidated Balance
Sheets are shown below. Because the fair value for all Consolidated Balance Sheet items are not required to be disclosed, the aggregate fair value amounts presented below are not reflective of the underlying value of the Company.
|
December 31, 2019
|
|
December 31, 2018
|
Assets
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
Equity securities
|
$
|
10,919,247
|
|
$
|
10,919,247
|
|
$
|
12,118,617
|
|
$
|
12,118,617
|
Mortgage loans on real estate
|
|
8,223,286
|
|
|
8,223,286
|
|
|
9,069,111
|
|
|
9,069,111
|
Investment real estate
|
|
44,344,236
|
|
|
44,344,236
|
|
|
52,518,577
|
|
|
52,518,577
|
Notes receivable
|
|
19,487,458
|
|
|
19,487,458
|
|
|
23,717,312
|
|
|
23,717,312
|
Policy loans
|
|
8,803,876
|
|
|
8,803,876
|
|
|
9,204,222
|
|
|
9,204,222
|
Short-term investments
|
|
10,442,173
|
|
|
10,442,173
|
|
|
-
|
|
|
-
|
Cash and cash equivalents
|
|
28,787,629
|
|
|
28,787,629
|
|
|
20,150,162
|
|
|
20,150,162
|
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, including the Company's investment in oil and gas royalties, is recorded at the lower of the net investment in the real estate or
the fair value of the real estate less costs to sell. The determination of fair value assessments are performed on a periodic, non-recurring basis by external appraisal and assessment of property values by Management. The inputs used to measure
the fair value of our investment real estate are classified as Level 3 within the fair value hierarchy.
Notes receivable are carried at their unpaid principal balances, which approximates fair value. The inputs used to measure the fair value of the loans are
classified as Level 3 within the fair value hierarchy.
Policy loans are carried at the aggregate unpaid principal balances in the Consolidated Balance Sheets which approximate fair value, and earn interest at
rates ranging from 4% to 8%. Individual policy liabilities in all cases equal or exceed outstanding policy loan balances. The inputs used to measure the fair value of our policy loans are classified as Level 3 within the fair value hierarchy.
Short-term investments are stated at amortized costs, which approximates fair value.
The carrying amount of cash and cash equivalents in the Consolidated Balance Sheets approximates fair value given the highly liquid nature of the
instruments. The inputs used to measure the fair value of our cash and cash equivalents are classified as Level 1 within the fair value hierarchy.
Note 4 - Reinsurance
As is customary in the insurance industry, the insurance subsidiary cedes insurance to, and assumes insurance from, other insurance companies under
reinsurance agreements. Reinsurance agreements are intended to limit a life insurer's maximum loss on a large or unusually hazardous risk or to obtain a greater diversification of risk. The ceding insurance company remains primarily liable with
respect to ceded insurance should any reinsurer be unable to meet the obligations assumed by it. However, it is the practice of insurers to reduce their exposure to loss to the extent that they have been reinsured with other insurance companies.
The Company sets a limit on the amount of insurance retained on the life of any one person. The Company will not retain more than $125,000, including accidental death benefits, on any one life. At December 31, 2019, the Company had gross insurance
in-force of $1.1 billion of which approximately $214 million was ceded to reinsurers. At December 31, 2018, the Company had gross insurance in-force of $1.1 billion of which approximately $228 million was ceded to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The Company monitors the solvency of its reinsurers in seeking to minimize the risk of
loss in the event of a failure by one of the parties. The Company is primarily liable to the insureds even if the reinsurers are unable to meet their obligations. The primary reinsurers of the Company are large, well-capitalized entities.
Most recently, UG utilized reinsurance agreements with Optimum Re Insurance Company (“Optimum”), and Swiss Re Life and Health America Incorporated (“SWISS
RE”). Optimum and SWISS RE currently hold an “A” (Excellent) and "A+" (Superior) rating, respectively, from A.M. Best, an industry rating company. The reinsurance agreements were effective December 1, 1993, and covered most new business of UG.
Under the terms of the agreements, UG cedes risk amounts above its retention limit of $100,000 with a minimum cession of $25,000. Ceded amounts are shared equally between the two reinsurers on a yearly renewable term (“YRT”) basis, a common industry
method. The treaty is self-administered; meaning the Company records the reinsurance results and reports them to the reinsurers.
Also, Optimum is the reinsurer of 100% of the accidental death benefits (“ADB”) in force of UG. This coverage is renewable annually at the Company’s
option. Optimum specializes in reinsurance agreements with small to mid-size carriers such as UG.
UG entered into a coinsurance agreement with Park Avenue Life Insurance
Company (“PALIC”) effective September 30, 1996. Under the terms of the agreement, UG ceded to PALIC substantially all of its then in-force paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life
insurance policies. Under the terms of the agreement, UG sold 100% of the future results of this block of business to PALIC through a coinsurance agreement. UG continues to administer the business for PALIC and receives a servicing fee through a
commission allowance based on the remaining in-force policies each month. PALIC has the right to assumption reinsure the business, at its option, and transfer the administration. The Company is not aware of any such plans. PALIC’s ultimate
parent, The Guardian Life Insurance Company of America (“Guardian”), currently holds an "A++" (Superior) rating from A.M. Best. The PALIC agreement accounts for approximately 64% and 63% of UG’s reinsurance reserve credit, as of December 31, 2019 and 2018, respectively.
The Company does not have any short-duration reinsurance contracts. The effect of the Company's long-duration reinsurance contracts on premiums earned
in 2019 and 2018 were as follows:
|
2019
|
|
2018
|
|
Premiums Earned
|
|
Premiums Earned
|
|
|
|
|
Direct
|
$
|
9,601,259
|
|
$
|
10,074,892
|
Assumed
|
|
353
|
|
|
1,459
|
Ceded
|
|
(2,535,980)
|
|
|
(2,862,701)
|
Net Premiums
|
$
|
7,065,632
|
|
$
|
7,213,650
|
Note 5 – Cost of Insurance Acquired
When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts
existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future profits from the acquired policies. Cost of insurance acquired is amortized with interest in
relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates utilized may vary due to differences in the blocks of business. The interest rate
utilized in the amortization calculation of the remaining cost of insurance acquired is 12%. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.
|
2019
|
|
2018
|
|
|
|
|
Cost of insurance acquired, beginning of year
|
$
|
5,622,227
|
|
$
|
6,428,292
|
|
|
|
|
|
|
Interest accretion
|
|
769,612
|
|
|
866,339
|
Amortization
|
|
(1,545,518)
|
|
|
(1,672,404)
|
Net amortization
|
|
(775,906)
|
|
|
(806,065)
|
Cost of insurance acquired, end of year
|
$
|
4,846,321
|
|
$
|
5,622,227
|
Estimated net amortization expense of cost of insurance acquired for the next five years is as follows:
|
Interest
Accretion
|
|
Amortization
|
|
Net
Amortization
|
2020
|
676,503
|
|
1,421,353
|
|
744,850
|
2021
|
587,120
|
|
1,302,090
|
|
714,970
|
2022
|
501,324
|
|
1,189,672
|
|
688,348
|
2023
|
418,722
|
|
1,079,979
|
|
661,257
|
2024
|
339,372
|
|
975,187
|
|
635,815
|
Note 6 – Income Taxes
UTG and UG file separate federal income tax returns.
Income tax expense (benefit) consists of the following components:
|
2019
|
|
2018
|
|
|
|
|
Current tax
|
$
|
1,698,995
|
|
$
|
1,922,542
|
Deferred tax
|
|
1,892,306
|
|
|
1,984,994
|
Income tax expense
|
$
|
3,591,301
|
|
$
|
3,907,536
|
The expense for income taxes differed from the amounts computed by applying the applicable United States statutory rate of 21% and 21% as of December 31,
2019 and 2018, respectively, before income taxes as a result of the following differences:
|
2019
|
|
2018
|
|
|
|
|
Tax computed at statutory rate
|
$
|
4,239,316
|
|
$
|
3,466,644
|
Changes in taxes due to:
|
|
|
|
|
|
Non-controlling interest
|
|
(68,280)
|
|
|
(43,927)
|
Dividend received deduction
|
|
(175,866)
|
|
|
(170,690)
|
Other
|
|
(403,869)
|
|
|
655,509
|
Income tax expense
|
$
|
3,591,301
|
|
$
|
3,907,536
|
The following table summarizes the major components that comprise the net deferred tax liability as reflected in the balance sheets:
|
2019
|
|
2018
|
|
|
|
|
Investments
|
$
|
10,983,955
|
|
$
|
6,939,758
|
Cost of insurance acquired
|
|
1,017,727
|
|
|
1,180,668
|
Management/consulting fees
|
|
(9,147)
|
|
|
(15,724)
|
Future policy benefits
|
|
(460,923)
|
|
|
(1,670,814)
|
Deferred gain on sale of subsidiary
|
|
1,387,490
|
|
|
1,387,490
|
Other assets (liabilities)
|
|
197,876
|
|
|
65,573
|
Reserves adjustment
|
|
288,320
|
|
|
1,426,205
|
Federal tax DAC
|
|
(182,694)
|
|
|
(199,676)
|
Deferred tax liability
|
$
|
13,222,604
|
|
$
|
9,113,480
|
At December 31, 2019 and 2018, the Company had gross deferred tax assets of $1,359,230 and $2,723,053, respectively, and gross deferred tax liabilities of
$14,581,834 and $11,836,533, respectively, resulting from temporary differences primarily related to the life insurance subsidiary. A valuation allowance is to be provided when it is more likely than not that deferred tax assets will not be realized
by the Company. No valuation allowance has been recorded (except as noted below) relating to the Company’s deferred tax assets since, in Management’s judgment, the Company will more likely than not have sufficient taxable income in future periods to
fully realize its existing deferred tax assets.
The Company also has a deferred tax asset of $0 and $43,717 relating to an AMT tax carryforward as of December 31, 2019 and 2018, respectively. As a
result of the changes to the Alternative Minimum Tax and corresponding credits resulting from the Tax Cuts and Jobs Act ("TCJA"), Management has determined that an allowance against this asset is no longer required.
The Company’s Federal income tax returns are periodically audited by the Internal Revenue Service (“IRS”). There are currently no examinations in process,
nor is Management aware of any pending examination by the IRS. The Company follows the accounting guidance for uncertainty in income taxes using the provisions of Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more-likely-than-not the position will be sustained
upon examination by the tax authorities. Such tax positions initially and subsequently need to be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority
assuming full knowledge of the position and relevant facts. The Company has evaluated its tax positions, expiring statutes of limitations, changes in tax law and new authoritative rulings and believes that no disclosure relative to a provision of
income taxes is necessary, at this time, to cover any uncertain tax positions. Tax years that remain subject to examination are the years ended December 31, 2016, 2017, 2018 and 2019.
The Company classifies interest and penalties on underpayment of income taxes as income tax expense. No interest or penalties were included in the
reported income taxes for the years presented. The Company is not aware of any potential or proposed changes to any of its tax filings.
Note 7 – Credit Arrangements
At December 31, 2019 and 2018, the Company had the following lines of credit available:
Instrument
|
|
Issue Date
|
|
Maturity Date
|
|
Revolving Credit Limit
|
|
December 31, 2018
|
|
Borrowings
|
|
Repayments
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of Credit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UTG
|
|
11/20/2013
|
|
11/20/2020
|
|
$
|
8,000,000
|
|
$
|
-
|
|
-
|
|
-
|
|
$
|
-
|
UG
|
|
6/2/2015
|
|
5/8/2020
|
|
|
10,000,000
|
|
|
-
|
|
-
|
|
-
|
|
|
-
|
The UTG line of credit carries interest at a fixed rate of 4.040% and is payable monthly. As collateral, UTG has pledged 100% of the common voting stock of
its wholly owned subsidiary, Universal Guaranty Life Insurance Company ("UG").
During May of 2019, 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.
Note 8 – Commitments and Contingencies
The insurance industry has experienced a number of civil jury verdicts which have been returned against life and health insurers in the jurisdictions in
which the Company does business involving the insurers' sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurer,
including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances. In the normal course of business, the Company is involved from time to time in various legal
actions and other state and federal proceedings. Management is of the opinion that the ultimate disposition of the matters will not have a materially adverse effect on the Company’s results of operations or financial position.
Under the insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits
for policyholder losses incurred by insolvent or failed insurance companies. Although the Company cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred
if it would threaten an insurer's financial strength. Mandatory assessments may be partially recovered through a reduction in future premium tax in some states. The Company does not believe such assessments will be materially different from amounts
already provided for in the condensed consolidated financial statements, though the Company has no control over such assessments.
Within the Company’s trading accounts, certain trading securities carried as liabilities represent securities sold short. A gain, limited to the price at
which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale.
The following table represents the total funding commitments and the unfunded commitment as of December 31, 2019 related to certain investments:
|
Total Funding
Commitment
|
|
Unfunded
Commitment
|
RLF III, LLC
|
$
|
4,000,000
|
|
$
|
398,120
|
Sovereign’s Capital, LP Fund I
|
|
500,000
|
|
|
20,000
|
Sovereign's Capital, LP Fund II
|
|
1,000,000
|
|
|
158,596
|
Sovereign's Capital, LP Fund III
|
|
1,000,000
|
|
|
800,000
|
Barton Springs Music, LLC
|
|
1,750,000
|
|
|
302,250
|
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 invest in Barton Springs Music, LLC (“Barton”), which invests in music royalties. Barton makes capital calls to its
investors as funds are needed to acquire the royalty rights.
Note 9 – Shareholders’ Equity
Stock Repurchase Program – The Board of Directors of
UTG has authorized the repurchase in the open market or in privately negotiated transactions of UTG's common stock. At a meeting of the Board of Directors in June of 2019, the Board of Directors of UTG authorized the repurchase of up to an additional
$2.5 million of UTG's common stock, for a total repurchase of $18.5 million of UTG's common stock in the open market or in privately negotiated transactions. Company Management has broad authority to operate the program, including the discretion of
whether to purchase shares and the ability to suspend or terminate the program. Open market purchases are made based on the last available market price but may be limited. During 2019, the Company repurchased 29,252 shares through the stock
repurchase program for $909,368. Through December 31, 2019, UTG has spent $14,773,097 in the acquisition of 1,169,358 shares under this program.
Director Compensation - Effective January 1, 2018, a
compensation arrangement was approved whereby each outside Director annually received $5,000 as a retainer and $2,500 per meeting attended. All other provisions from the September 2013 arrangement remained the same. The compensation is be paid in
the form of UTG, Inc. common stock. The value is determined annually on the close of business December 20th or the next business day should December 20th be a weekend or holiday, based on the activity of the year just ending. Reasonable
travel expenses are reimbursed in cash as incurred. UTG’s Director Compensation policy provides that Directors who are employees of UTG or its affiliates do not receive any compensation for their services as Directors except for reimbursement for
reasonable travel expenses for attending each meeting.
In December of 2019, the Company issued 3,024 shares of its common stock as
compensation to the Directors. The shares were valued at $35.50 per share, the
market value at the date of issue. During 2019, the Company recorded $107,352 in
operating expense related to the stock issuance. In December of 2018, the Company issued 2,994 shares of its common stock as compensation to the Directors. The shares were valued at $32.50 per share, the market value at the date of issue. During 2018, the Company recorded $97,305 in operating expense related to the stock issuance.
Other Compensation - During 2019, the Company issued
8,188 shares of stock to management and employees as compensation at a cost of $246,535. During 2018, The Company issued 10,421 shares of stock to management and employees as compensation at a cost of $263,507. These awards are determined at the
discretion of the Board of Directors.
Earnings Per Share - The following is a
reconciliation of basic and diluted weighted average shares outstanding used in the computation of basic and diluted earnings per share:
|
|
2019
|
|
|
2018
|
|
Basic weighted average shares outstanding
|
|
|
3,285,813
|
|
|
|
3,307,448
|
|
Weighted average dilutive options outstanding
|
|
|
0
|
|
|
|
0
|
|
Diluted weighted average shares outstanding
|
|
|
3,285,813
|
|
|
|
3,307,448
|
|
The computation of diluted earnings per share is the same as basic earnings per share for the years ending December 31, 2019 and 2018, as there were no
outstanding securities, options or other offers that give the right to receive or acquire common shares of UTG.
Statutory Restrictions – Restrictions exist on the
flow of funds to UTG from its insurance subsidiary. Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital and surplus. UG is required to maintain minimum statutory surplus of $2,500,000. At December
31, 2019, substantially all of the consolidated shareholders' equity represents net assets of UTG’s subsidiaries.
UG is domiciled in the state of Ohio. Ohio requires notification within 5 business days to the insurance commissioner following the declaration of any
ordinary dividend and at least ten days calendar days prior to payment of such dividend. Ordinary dividends are defined as the greater of: a) prior year statutory net income or b) 10% of statutory capital and surplus. Extraordinary dividends
(amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. UG paid ordinary dividends of $6 million and $5 million to UTG in 2019 and 2018,
respectively. No extraordinary dividends were paid during the two years year period. UTG used the dividends received during 2019 and 2018 to purchase outstanding shares of UTG stock and for general operations of the Company.
Note 10 - Statutory Accounting
The insurance subsidiary prepares its statutory-based financial statements in accordance with accounting practices prescribed or permitted by the Ohio
Department of Insurance. These principles differ significantly from accounting principles generally accepted in the United States of America. "Prescribed" statutory accounting practices include state laws, regulations, and general administrative
rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to
state, from company to company within a state, and may change in the future.
The following table reflects UG’s statutory basis net income and capital and surplus (shareholders’ equity) as of December 31:
|
2019
|
|
2018
|
|
|
|
|
Net income (loss)
|
$
|
8,268,187
|
|
$
|
6,166,411
|
Capital and surplus
|
|
65,951,037
|
|
|
60,024,931
|
Note 11 – Related Party Transactions
The articles of incorporation of UG contain the following language under item 12 relative to related party transactions:
A director shall not be disqualified from-dealing with or contracting with the corporation as vendor, purchaser; employee, agent or otherwise; nor, in the
absence of fraud, shall any transaction or contract or act of this corporation be void or in any way affected or invalidated by the fact that any director or any firm of which any director is a member or any corporation of which any director is a
shareholder, director or officer is in any way interested in such transaction or contract or act, provided the fact that such director or such firm or such corporation so interested shall be disclosed or shall be known to the Board of Directors or
such members thereof as shall be present at any meeting of the Board of Directors at which action upon any such contract or transaction or act shall be taken: nor shall any such director be accountable .or responsible to the company for or in respect
to such transaction or contract or act of. this corporation or for any gains or profits realized by him by reason of the fact that he or any firm of which he is a member or any corporation of which he is a shareholder, director or officer is
interested in such action or contract; and any such director may be counted in determining the existence of a quorum of any meeting of the Board of Directors of the company which shall authorize or take action in respect to any such contract or transaction or act and may vote thereat to authorize, ratify, or approve any such contract or transaction or act, with like force and
effect as if he or any firm of which he is a member or any corporation of which he is a shareholder, director or officer were not interested in such transaction or contract or act.
On February 20, 2003, UG purchased $4 million of a trust preferred security offering issued by First Southern Bancorp, Inc. (“FSBI”). The security has a
mandatory redemption after 30 years with a call provision after 5 years. The security pays a quarterly dividend at a fixed rate of 6.515%. The Company received dividends of $198,297 and $283,151 during 2019 and 2018, respectively. On March 30, 2009,
UG purchased $1 million of FSBI common stock. The sale and transfer of this security is restricted by the provisions of a stock restriction and buy-sell agreement. During 2019, the Company received a preferred pay down of $558,000 leaving a cost
basis of $3,002,000.
UTG has a 30.10% ownership interest in an aircraft that is jointly owned with First Southern National Bank and Bandyco, LLC. Bandyco, LLC is affiliated
with the Estate of Ward F. Correll. Mr. Correll is the father of Jesse Correll and a former director of the Company. The aircraft is used for business related travel by various officers and employees of the Company. For years 2019 and 2018, UTG paid
$354,404 and $391,851 for costs associated with the aircraft, respectively.
Effective January 1, 2007, UTG entered into administrative services and cost sharing agreements with its subsidiary. Under this arrangement, the subsidiary
pays its proportionate share of expenses, based on an allocation formula. During 2019 and 2018, UG paid $7,397,953 and $7,093,227, respectively, in expenses. The Ohio Department of Insurance has approved the cost sharing agreement and it is
Management’s opinion that where applicable, costs have been allocated fairly and such allocations are based upon accounting principles generally accepted in the United States of America.
The Company from time to time acquires mortgage loans through participation agreements with FSNB. FSNB services the Company's mortgage loans including
those covered by the participation agreements. The Company pays a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan cost to cover costs incurred by FSNB relating to the processing and establishment
of the loan. The Company paid $15,138 and $8,393 in servicing fees and $0 and $0 in origination fees to FSNB during 2019 and 2018, respectively.
Effective January 1, 2017, UTG entered into a shared services contract with FSNB. Pursuant to the terms of the agreement, UTG and FSNB will utilize the
services of the other’s staff in certain instances for the betterment of both entities. Personnel within departments, such as accounting, human resources, and information technology, are shared between the entities. Costs of these resources are then
reimbursed between the companies. The shared services arrangement provides benefits to both parties such as access to a greater pool of knowledgeable staff, efficiencies from elimination of redundancies and more streamlined operations.
The Company reimbursed expenses incurred by employees of FSNB relating to salaries, travel and other costs incurred on behalf of or relating to the Company
and received reimbursements from FSNB. The Company paid $519,857 and $571,648 in 2019 and 2018, respectively to FSNB in net reimbursement of such costs. In addition, the Company reimburses FSNB a portion of salaries and pension costs for Mr. Correll
and Mr. Ditto. The reimbursement was approved by the UTG Board of Directors and totaled $322,188 and $307,645 in 2019 and 2018, respectively, which included salaries and other benefits.
Effective July 1, 2018, the Company assumed the employees of several smaller entities associated with UTG. The purpose of this was to support the continued
efforts to further streamline operations amongst associated entities. The salaries, benefits, and payroll related processing fees are 100% reimbursed by the associated entities on a monthly basis. During 2019 and 2018, the Company received
reimbursements of $922,357 and $372,849, respectively.
The Company rents approximately 8,000 square feet of office space, located in Stanford, Kentucky, from FSNB and pays $2,000 per month in rent. The Company
paid rent of $24,000 to FSNB during 2019 and 2018.
As previously disclosed in the Notes Receivable section of Note 2 -
Investments, several of the Company’s notes have participation agreements in place with third parties. Certain participation agreements are with FSF, a related party. The participation agreements are sold without recourse and assigned to the
participant based on their pro-rata share of the principal, interest and collateral as specified in the participation agreements. The undivided participations in the notes receivable range from 20% - 50%. The total amount of loans participated to FSF was $250,000 as of December 31, 2019 and 2018.
During 2016, UG and FSF established a partnership agreement and formed a limited liability company to purchase real estate. FSF contributed $140,000 to the
partnership, which gave them a 10% ownership in the LLC. The property held by this LLC was sold in January of 2019 and the funds from the sale were subsequently distributed to the members.
Note 12 – Other Cash Flow Disclosures
On a cash basis, the Company paid the following expenses for the periods ended December 31:
|
2019
|
|
2018
|
|
|
|
|
Interest
|
$
|
-
|
|
$
|
-
|
Federal income tax
|
|
1,106,000
|
|
|
1,652,000
|
Note 13 - Concentrations
The Company maintains cash balances in financial institutions that at times may exceed federally insured limits. The Company maintains its primary
operating cash accounts with First Southern National Bank, an affiliate of the largest shareholder of UTG, Mr. Jesse T. Correll, the Company’s CEO and Chairman. The Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash equivalents.
Because UTG serves primarily individuals located in four states, the ability of our customers to pay their insurance premiums is impacted by the economic
conditions in these areas. As of December 31, 2019 and 2018, approximately 56% of the Company’s total direct premium was collected from Illinois, Ohio, Texas and West Virginia. Thus, results of operations are heavily dependent upon the strength of
these economies.
The Company reinsures that portion of insurance risk which is in excess of its retention limits. Retention limits range up to $125,000 per life. Life
insurance ceded represented 20% of total life insurance in force at December 31, 2019 and 2018, respectively. Insurance ceded represented 33% and 35% of premium income for 2019 and 2018, respectively. The Company would be liable for the reinsured
risks ceded to other companies to the extent that such reinsuring companies are unable to meet their obligations.
The Company owns a variety of investments associated with the oil and gas industry. These investments represented approximately 25% of the Company’s total
invested assets at December 31, 2019 and 2018.
Note 14 – Selected Quarterly Financial Data
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with
certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this item.