Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is Management's discussion and analysis of the financial condition and results of operations of UTG, Inc. and its subsidiaries (collectively
with the Parent, the "Company"). The following discussion of the financial condition and results of operations of the Company should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements
of the Company and the related Notes thereto appearing in the Company's annual report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial
Statements and related Notes thereto appearing elsewhere in this quarterly report.
Cautionary Statement Regarding Forward-Looking Statements
This report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements
include information about possible or assumed future results of operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect
or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered
forward-looking statements. Also, when we use words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "probably," or similar expressions, we are making forward-looking statements.
Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect
our future financial results and performance.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, the
forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information
is not a representation by us or any other person that our objectives and plans will be achieved. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur. Our forward-looking
statements speak only as of the date made, and we undertake no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments, unless the securities laws require us to do so.
Overview
UTG, Inc., a Delaware corporation, is a life insurance holding company. The Company's dominant business is individual life insurance, which includes the
servicing of existing insurance policies in force, the acquisition of other companies in the life insurance business and the administration and processing of life insurance business for other entities. The Company's focus for the future includes
growing the administrative portion of the business.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ significantly from those estimates. The Company has identified certain estimates that involve a higher degree of judgment and are
subject to a significant degree of variability. The Company's critical accounting policies and the related estimates considered most significant by Management are disclosed in the Company's Annual Report on Form 10-K for the year ended December 31,
2019. Management has identified the accounting policies related to cost of insurance acquired, assumptions and judgments utilized in determining if declines in fair values of investments are other-than-temporary, and valuation methods for
investments that are not actively traded as those, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Condensed Consolidated Financial Statements and this Management's
Discussion and Analysis.
During the three months ended March 31, 2020, there were no additions to or changes in the critical accounting policies disclosed in the 2019 Form 10-K.
Results of Operations
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of
coronavirus (COVID-19). The pandemic has significantly impacted the economic conditions in the U.S. and globally, accelerating during the first half of March, as federal, state, and local governments react to the public health crisis, creating
significant uncertainties in the U.S. economy. The Company has not experienced a slow-down in activities related to the contracted work, however government restrictions and client-imposed delays are evaluated daily and this could change. While the
disruption is currently expected to be temporary, there is uncertainty around the duration. The Company cannot at this time predict the ultimate impact the pandemic will have on its results of operations, financial position, liquidity, or capital
resources but such impact could be material.
On a consolidated basis, the Company reported a net loss to common shareholders' of approximately $(15) million for the three month period ended March 31,
2020 and net income attributable to common shareholders' of approximately $11.6 million for the three month period ended March 31, 2019.
Revenues
For the three month period ended March 31, 2020, the Company reported negative total revenues of approximately $(12.9) million and for the same period in
2019 total revenues of approximately $21.1 million. The negative total revenue the Company is reporting for the first quarter of 2020 is the result of the change in the fair value of equity securities of approximately $(24.7) million that is reported
as a component of total revenue on the Condensed Consolidated Statements of Operations.
The Company reported revenue before net investment gains (losses) of approximately $4.6 million and $5.2 million for the three month periods ended March
31, 2020 and 2019, respectively. Revenue before net investment gains (losses) decreased slightly when comparing the current year and prior year results and is due to minor decreases in premium and policy fees and net investment income.
Premium and policy fee revenues, net of reinsurance, were comparable for the three-months ended March 31, 2020 and 2019. The Company writes minimal new
business. Premium and policy fee revenues, net of reinsurance, represented 37% and 38% of the Company's revenue before net investment gains (losses) as of March 31, 2020 and 2019, respectively.
The following table summarizes the Company's investment performance.
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Net investment income
|
$
|
2,830,186
|
|
$
|
3,112,024
|
Net investment gains (losses)
|
$
|
(17,509,937)
|
|
$
|
15,901,329
|
Change in net unrealized investment gains (losses) on available-for-sale securities, pre-tax
|
$
|
1,472,865
|
|
$
|
4,934,851
|
The following table reflects net investment income of the Company:
|
Three Months Ended
|
|
March 31,
|
|
2020
|
|
2019
|
Fixed maturities available for sale
|
$
|
1,409,324
|
|
$
|
1,589,985
|
Equity securities
|
|
755,402
|
|
|
668,108
|
Trading securities
|
|
-
|
|
|
(111,693)
|
Mortgage loans
|
|
85,799
|
|
|
118,612
|
Real estate
|
|
606,657
|
|
|
784,532
|
Notes receivable
|
|
202,221
|
|
|
435,155
|
Policy loans
|
|
137,970
|
|
|
141,552
|
Short-term
|
|
16,227
|
|
|
41,364
|
Cash and cash equivalents
|
|
89,059
|
|
|
-
|
Total consolidated investment income
|
|
3,302,659
|
|
|
3,667,615
|
Investment expenses
|
|
(472,473)
|
|
|
(555,591)
|
Consolidated net investment income
|
$
|
2,830,186
|
|
$
|
3,112,024
|
Net investment income represented 62% and 60% of the Company's revenue before net investment gains (losses) as of March 31, 2020 and 2019, respectively.
Net investment income was comparable in the majority of the investment categories when comparing the first quarter 2020 activity to the same quarter in 2019.
The Company reported net investment gains (losses) of approximately $(17.5) million and $15.9 million for the three-month periods ended March 31, 2020 and
2019, respectively. Included in the net investment gains (losses) are realized investment gains of approximately $7.2 million and $1.1 million for the three-months ended March 31, 2020 and 2019, respectively. The 2020 realized gains are mainly the
result of the Company selling certain equity securities and the 2019 realized gains are the result of the Company selling a parcel of real estate.
During 2019, the Company received an offer to purchase its investments in certain music royalties held in the form of 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 to the offer price to estimate the fair value. The change in methodology resulted in recording
an unrealized gain on investment of approximately $3.3 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.
During March of 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of
coronavirus (COVID-19). The Company holds certain investments that have been negatively impacted by the market reactions to the pandemic. These investments primarily relate to marketable equity securities. The drop in the markets in March, resulted
in an estimated unrealized losses of approximately $(24.7) million. These investments mostly remain in an unrealized gain position even after the market drop. In April of 2020, the Company experienced a partial rebound on these investments of
approximately $6.4 million in unrealized gains.
Prior to March 2020, the Company recognized significant unrealized gains on its equity investments and were mainly from two equity holdings, both in the
area of oil and gas. The Company recognized and disclosed in prior filings that a pull back in the stock market, particularly in the oil and gas arena, could slow these gains or even result in future period unrealized losses. Management believes
these equity investments continue to be solid investments for the Company and have further growth potential; however, changes in market conditions could continue to cause volatility in market prices.
In summary, the Company's basis for future revenue growth is expected to come from the following primary sources: conservation of business currently
in-force, the maximization of investment earnings and the acquisition of other companies or policy blocks in the life insurance business. Management has placed a significant emphasis on the development of these revenue sources to enhance these
opportunities.
Expenses
The Company reported total benefits and other expenses of approximately $5.4 million for the three-month period ended March 31, 2020, a decrease of
approximately 4% from the same period in 2019. Benefits, claims and settlement expenses represented approximately 60% and 58% of the Company's total expenses for the three-month periods ended March 31, 2020 and 2019, respectively. The other major
expense category of the Company is operating expenses, which represented approximately 37% and 39% of the Company's total expenses for the three-month periods ended March 31, 2020 and 2019, respectively.
Life benefits, claims and settlement expenses, net of reinsurance benefits and claims were comparable for the three month period ended March 31, 2020 and
2019. Policy claims vary from period to period and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.
Net amortization of cost of insurance acquired decreased 4% during the three-month period ended March 31, 2020 compared to the same period in 2019. Cost
of insurance acquired is established when an insurance company is acquired or when the Company acquires a block of in-force business. The Company assigns a portion of its cost to the right to receive future profits from insurance contracts existing
at the date of the acquisition. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates
may vary due to risk analysis performed at the time of acquisition on the business acquired. The Company utilizes a 12% discount rate on the remaining unamortized business. The amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are revised. Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force. This expense
is expected to decrease, unless the Company acquires a new block of business.
Operating expenses decreased by approximately 7% in the three-month period ended March 31, 2020 as compared to the same period in 2019. Overall, expenses
were comparable in all of the major expense categories.
Management continues to place significant emphasis on expense monitoring and cost containment. Maintaining administrative efficiencies directly impacts net
income.
Financial Condition
Investment Information
Investments represent approximately 83% and 84% of total assets at March 31, 2020 and December 31, 2019, respectively. Accordingly, investments are the
largest asset group of the Company. The Company's insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments that it is permitted to make and the amount of funds that may be used for any one type of
investment. In light of these statutes and regulations, the majority of the Company's investment portfolio is invested in a diverse set of securities.
As of March 31, 2020, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated
assets, shareholders' equity or results from operations. To provide additional flexibility and liquidity, the Company has identified all fixed maturity securities as "investments available for sale". Investments available-for-sale are carried at
market, with changes in market value charged directly to shareholders' equity. Changes in the market value of available for sale securities resulted in a net unrealized gain of approximately $1.2 million and $3.9 million for the three-month periods
ended March 31, 2020 and 2019, respectively. The variance in the net unrealized gains and losses is the result of normal market fluctuations and lower interest rates.
Capital Resources
Total shareholders' equity decreased by approximately 11% as of March 31, 2020 compared to December 31, 2019. The decrease is mainly attributable to a
decrease in retained earnings, which is the result of the current year net loss reported by the Company.
The Company's investments are predominately in fixed maturity investments such as bonds, which provide sufficient return to cover future obligations. The
Company carries all of its fixed maturity holdings as available for sale, which are reported in the Condensed Consolidated Financial Statements at their market value.
Liquidity
The Company has two principal needs for cash - the insurance company's contractual obligations to policyholders and the payment of operating expenses.
Cash and cash equivalents represented 7% total assets as of March 31, 2020 and December 31, 2019. Fixed maturities as a percentage of total assets were approximately 44% and 41% as of March 31, 2020 and December 31, 2019, respectively.
The Company currently has access to funds for operating liquidity. UTG has an $8 million revolving credit note with Illinois National Bank. At March 31,
2020, the Company had no outstanding borrowings against the UTG line of credit. UG has a $10 million line of credit with the Federal Home Loan Bank. At March 31, 2020, the Company had no outstanding borrowings against the UG line of credit
Future policy benefits are primarily long-term in nature and therefore, the Company's investments are predominantly in long-term fixed maturity investments
such as bonds and mortgage loans which provide sufficient return to cover these obligations. Many of the Company's products contain surrender charges and other features which reward persistency and penalize the early withdrawal of funds.
For the three months ended March 31, 2020 and 2019, operating activities used cash of approximately $5.7 millions and $135,000, respectively. Sources of
operating cash flows of the Company, as with most insurance entities, is comprised primarily of premiums received on life insurance products and income earned on investments. Uses of operating cash flows consist primarily of payments of benefits to
policyholders and beneficiaries and operating expenses. The Company has not marketed any significant new products for several years.
Investing activities of the Company produced cash of approximately $3.5 million and used cash of approximately $540,000 for the three month periods ended March 31, 2020 and 2019, respectively. The net cash provided by or used in investing activities is expected to vary from quarter to quarter
depending on market conditions and Management’s ability to find and negotiate favorable investment contracts.
UTG is a holding Company that has no day-to-day operations of its own. Funds required to meet its expenses, generally costs associated with maintaining
the Company in good standing with states in which it does business are primarily provided by its subsidiaries. On a parent only basis, UTG's cash flow is dependent on Management fees received from its insurance subsidiary, stockholder dividends from
its subsidiary and earnings received on cash balances. At March 31, 2020, substantially all of the consolidated shareholders' equity represented net assets of its subsidiary. The Company's insurance subsidiary has maintained adequate statutory
capital and surplus. The payment of cash dividends to shareholders by UTG is not legally restricted. However, the state insurance department regulates insurance Company dividend payments where the Company is domiciled. No dividends were paid to
shareholders in 2019 or the three-month period ended March 31, 2020.
UG is an Ohio domiciled insurance company, which requires notification within five business days to the insurance commissioner following the declaration of
any ordinary dividend and at least ten calendar days prior to payment of such dividend. Ordinary dividends are defined as the greater of: a) prior year statutory net income or b) 10% of statutory capital and surplus. For the year ended December
31, 2019, UG had statutory net income of approximately $8.3 million. At December 31, 2019 UG's statutory capital and surplus amounted to approximately $66 million. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require
prior approval of the insurance commissioner and are not restricted to a specific calculation. During 2019, UG paid UTG ordinary dividends of $6 million. During the second quarter of 2020, UG paid UTG a dividend of $1 million. UTG used the
dividends received during 2019 and 2020 to purchase outstanding shares of UTG stock and for general operations of the Company.