UTG, Inc.
See accompanying notes.
UTG, Inc.
See accompanying notes.
UTG, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of Presentation
The accompanying Condensed Consolidated Balance Sheet as of December 31, 2016,September 30, 2023, which has been derived from audited consolidated financial statements, and the unaudited interim Condensed Consolidated Financial Statements include the accounts of UTG, Inc. (the “Parent”) and its subsidiaries (collectively with the Parent, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for audited annual financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which in the opinion of Management, are necessary for a fair presentation of the results for the interim periods. The unaudited Condensed Consolidated Financial Statements included herein and these related notes should be read in conjunction with the Company’s consolidated financial statements, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 2022. The Company’s results of operations for the three and nine month periodsmonths endedSeptember 30, 2017 2023are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 2023 or for any other future period.
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, Chief Executive Officer, President, and a Director of UTG and is currently UTG’s largest shareholder through his ownership control of FSF, FSBI and affiliates. At September 30, 2017,2023, Mr. Correll owns or controls directly and indirectly approximately 64.13%65.79% of UTG’s outstanding stock.
UTG’s life insurance subsidiary, Universal Guaranty Life Insurance Company (“UG”), has several wholly-owned and majority-owned subsidiaries. The subsidiaries were formed to hold certain real estate investments. The real estate investments were placed into the limited liability companies and partnerships to provide additional protection to the policyholders and to UG.
Certain amounts in prior periods have been reclassified to conform with the current period presentation.
Note 2 – Recently Issued Accounting Standards
DuringIn the nine months ended September 30, 2017, there were no additionsfirst quarter of 2023, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to or changesas the current expected credit loss ("CECL") methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposure such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.
The Company adopted ASC 326 and all related subsequent amendments thereto using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposure. The transition adjustment of the adoption of CECL included an increase in the critical accounting policies disclosedallowance for credit losses on loans of $540,000, which is presented as a reduction to net loans outstanding, and an increase in the 2016 Form 10-K.allowance for credit losses on unfunded commitments of $35,000, which is recorded within other liabilities. The Company recorded a net decrease to retained earnings of $454,250 as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards ("Incurred Loss").
The updated guidance also amended the current other-than-temporary model for available-for-sale securities and requires the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized costs basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.
The following are changes to the Company’s Significant Accounting Policies as result of the adoption of ASU No. 2016-13:
Fixed maturity securities comprised of bonds are classified as available-for-sale and are carried at fair value with unrealized gains and losses, net of applicable income taxes, reported in accumulated other comprehensive income. The amortized cost of fixed maturity securities available-for-sale is adjusted for amortization of premium and accretion of discount to maturity. The amortized cost of fixed maturity securities available-for-sale are written down to fair value when a decline is considered to be other-than-temporary.
The Company evaluates the difference between the cost or amortized cost and estimated fair value of its fixed maturity securities to determine whether any decline in value is the result of a credit loss or other factors. An allowance for credit losses is recorded against available-for-sale securities to reflect the amount of an unrealized loss attributed to credit. This impairment is limited by the amount the fair value is less than the amortized cost basis. Any remaining unrealized loss is recognized in other comprehensive income (loss) with no change to the cost basis of the security. This determination involves a degree of uncertainty. Changes in the allowance for credit losses are recognized in earnings.
The assessment and determination of whether or not a credit loss exists is based on consideration of the cash flows expected to be collected from the fixed maturity security. The Company develops those expectations after considering various factors such as agency ratings, the financial condition of the issuer or underlying obligors, payment history, payment structure of the security, industry and market conditions, underlying collateral, and other factors that may be relevant based on the facts and circumstances pertaining to individual securities.
If the Company intends to sell the fixed maturity or will be more likely than not required to sell the fixed maturity security before recovery of the amortized cost basis, then any allowance for credit losses, if previously recorded, is written off and the fixed maturity security’s amortized cost is written down to the security’s fair value as of the reporting dates with any incremental impairment recorded as a charge to noninterest income.
Prior to 2023, the Company evaluated the difference between the cost or amortized cost and estimated fair value of its fixed maturity securities to determine whether any decline is value was other-than-temporary in nature. That determination involved a degree of uncertainty. If a decline in the fair value of a security was determined to be temporary, the decline was recorded as an unrealized loss in shareholders’ equity. If a decline in a security’s fair value is considered to be other-than-temporary, the Company then determined the proper treatment for the other-than-temporary impairment. The amount of any other-than-temporary impairment related to a credit loss was recognized in earnings and reflected as a reduction in the cost basis of the security; and the amount of any other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss) with no change to the cost basis of the security. If an other-than-temporary impairment related to a credit loss occurs with respect to a bond, the Company amortized the reduced book value back to the security’s expected recovery value over the remaining term of the bond. The Company continued to review the security for further impairment that would prompt another write-down in the value.
Mortgage loans are carried at unpaid balances, net of unamortized premium or discount. This measurement of mortgage loans on an amortized cost basis reduced by an allowance for credit losses representing a valuation allowance that is deducted from the amortized cost basis of mortgage loans to present the net carrying value at the amount expected to be collected on the mortgage loans.
Notes receivable are carried at unpaid balances, net of unamortized premium or discount. This measurement of notes receivable on an amortized cost basis reduced by an allowance for credit losses representing a valuation allowance that is deducted from the amortized cost basis of notes receivable to present the net carrying value at the amount expected to be collected on the notes receivable.
The Statement of Operations reflects the measurement of credit losses for newly recognized mortgage loans and notes receivable as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported mortgage loan balances. The Company uses judgment in determining the relevant information and estimation methods that are appropriate in establishing the valuation allowance for credit losses.The allowance for credit losses for mortgage loans and notes receivable with a more-than-insignificant amount of credit determination since origination is determined and the initial allowance for credit losses should be added to the purchase price of the mortgage loans rather than being reported as a credit loss expense.
While the Company utilizes its best judgment and information available, the ultimate adequacy of this allowance is dependent upon a variety of factors beyond our control, including the performance of the mortgage loan and notes receivable portfolios, the economy, and interest rates. The allowance for possible loan losses consists of specific valuation allowances established for probable losses on specific loans and a portfolio reserve for probably incurred but not specifically identified loans.
Note 3 – Investments
Available for Sale Securities – Fixed Maturity and Equity Securities
The Company’s insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments they are permitted to make, and the amount of funds that may be used for any one type of investment.
Investments in available for sale securities are summarized as follows:
| September 30, 2017 | | Original or Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | | |
| September 30, 2023 | | | Original or Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
| Investments available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and govt. agencies and authorities | | $ | 7,678,557 | | | $ | 47,605 | | | $ | (67,183 | ) | | $ | 7,658,979 | | | $ | 16,317,458 | | | $ | 0 | | | $ | (1,044,198 | ) | | $ | 15,273,260 | |
| U.S. special revenue and assessments | | | 9,010,920 | | | | 755,683 | | | | - | | | | 9,766,603 | | | | 7,530,519 | | | | 0 | | | | (487,454 | ) | | | 7,043,065 | |
| All other corporate bonds | | | 149,195,785 | | | | 19,913,522 | | | | (411,677 | ) | | | 168,697,630 | | | | 89,360,347 | | | | 37,216 | | | | (10,039,776 | ) | | | 79,357,787 | |
| | | | 165,885,262 | | | | 20,716,810 | | | | (478,860 | ) | | | 186,123,212 | | | $ | 113,208,324 | | | $ | 37,216 | | | $ | (11,571,428 | ) | | $ | 101,674,112 | |
| Equity securities | | | 37,097,494 | | | | 22,866,154 | | | | (385,620 | ) | | | 59,578,028 | | |
| Total | | $ | 202,982,756 | | | $ | 43,582,964 | | | $ | (864,480 | ) | | $ | 245,701,240 | | |
| December 31, 2016 | | Original or Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | | |
| December 31, 2022 | | | Original or Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
| Investments available for sale: | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Government and govt. agencies and authorities | | $ | 9,058,210 | | | $ | 74,581 | | | $ | (96,981 | ) | | $ | 9,035,810 | | | $ | 18,315,321 | | | $ | 0 | | | $ | (1,104,146 | ) | | $ | 17,211,175 | |
| U.S. special revenue and assessments | | | 10,145,531 | | | | 1,002,789 | | | | (14,043 | ) | | | 11,134,277 | | | | 7,535,018 | | | | 0 | | | | (335,918 | ) | | | 7,199,100 | |
| All other corporate bonds | | | 151,392,119 | | | | 17,234,691 | | | | (1,557,179 | ) | | | 167,069,631 | | | | 91,429,481 | | | | 65,529 | | | | (7,592,226 | ) | | | 83,902,784 | |
| | | | 170,595,860 | | | | 18,312,061 | | | | (1,668,203 | ) | | | 187,239,718 | | | $ | 117,279,820 | | | $ | 65,529 | | | $ | (9,032,290 | ) | | $ | 108,313,059 | |
| Equity securities | | | 37,014,712 | | | | 15,214,862 | | | | (522,471 | ) | | | 51,707,103 | | |
| Total | | $ | 207,610,572 | | | $ | 33,526,923 | | | $ | (2,190,674 | ) | | $ | 238,946,821 | | |
The amortized cost and estimated market value of debt securities at September 30, 2017,2023, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Fixed Maturities Available for Sale September 30, 2017 | | Amortized Cost | | | Estimated Fair Value | | |
Fixed Maturities Available for Sale September 30, 2023 | | | Amortized Cost | | | Fair Value | |
| Due in one year or less | | $ | 5,383,493 | | | $ | 5,473,716 | | | $ | 8,499,821 | | | $ | 8,429,455 | |
| Due after one year through five years | | | 29,857,885 | | | | 41,316,685 | | | | 51,497,869 | | | | 48,657,990 | |
| Due after five years through ten years | | | 44,110,567 | | | | 48,479,332 | | | | 4,182,082 | | | | 3,988,524 | |
| Due after ten years | | | 86,533,317 | | | | 90,853,479 | | | | 21,892,608 | | | | 18,524,135 | |
| Fixed maturities with no single maturity date | | | | 27,135,944 | | | | 22,074,008 | |
| Total | | $ | 165,885,262 | | | $ | 186,123,212 | | | $ | 113,208,324 | | | $ | 101,674,112 | |
The fair value of investments with sustained gross unrealized losses at September 30, 2017 and December 31, 2016 are as follows:
| September 30, 2017 | | Less than 12 months | | | 12 months or longer | | | Total | | |
| September 30, 2023 | | | Less than 12 months | | | | | | Total | |
| | | Fair value | | | Unrealized losses | | | Fair value | | | Unrealized losses | | | Fair value | | | Unrealized losses | | | Fair value | | | Unrealized losses | | | Fair value | | | Unrealized losses | | | Fair value | | | Unrealized losses | |
| U.S. Government and govt. agencies and authorities | | $ | 6,610,509 | | | $ | (67,183 | ) | | $ | - | | | $ | - | | | $ | 6,610,509 | | | $ | (67,183 | ) | | $ | 1,476,590 | | | | (24,645 | ) | | | 13,796,670 | | | $ | (1,019,553 | ) | | | 15,273,260 | | | $ | (1,044,198 | ) |
| U.S. special revenue and assessments | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | |
| U.S. Special Revenue and Assessments | | | | 0 | | | | 0 | | | | 7,043,065 | | | | (487,454 | ) | | | 7,043,065 | | | | (487,454 | ) |
| All other corporate bonds | | | 16,381,344 | | | | (234,288 | ) | | | 5,357,880 | | | | (177,389 | ) | | | 21,739,224 | | | | (411,677 | ) | | | 7,585,524 | | | | (210,980 | ) | | | 70,741,578 | | | | (9,828,796 | ) | | | 78,327,102 | | | | (10,039,776 | ) |
| Total fixed maturities | | $ | 22,991,853 | | | $ | (301,471 | ) | | $ | 5,357,880 | | | | (177,389 | ) | | $ | 28,349,733 | | | | (478,860 | ) | | $ | 9,062,114 | | | | (235,625 | ) | | | 91,581,313 | | | | (11,335,803 | ) | | | 100,643,427 | | | $ | (11,571,428 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity securities | | $ | 5,260,992 | | | $ | (385,620 | ) | | $ | - | | | $ | - | | | $ | 5,260,992 | | | $ | (385,620 | ) | |
| December 31, 2016 | | Less than 12 months | | | 12 months or longer | | | Total | | |
| December 31, 2022 | | | Less than 12 months | | | 12 months or longer | | | Total | |
| | | Fair value | | | Unrealized losses | | | Fair value | | | Unrealized losses | | | Fair value | | | Unrealized losses | | | Fair value | | | Unrealized losses | | | Fair value | | | Unrealized losses | | | Fair value | | | Unrealized losses | |
| U.S. Government and govt. agencies and authorities | | $ | 6,578,248 | | | $ | (96,981 | ) | | $ | - | | | $ | - | | | $ | 6,578,248 | | | $ | (96,981 | ) | | $ | 17,211,175 | | | | (1,104,146 | ) | | | 0 | | | $ | 0 | | | | 17,211,175 | | | $ | (1,104,146 | ) |
| U.S. special revenue and assessments | | | 974,250 | | | | (14,043 | ) | | | - | | | | - | | | | 974,250 | | | | (14,043 | ) | | | 7,199,100 | | | | (335,918 | ) | | | 0 | | | | 0 | | | | 7,199,100 | | | | (335,918 | ) |
| All other corporate bonds | | | 50,161,487 | | | | (1,408,828 | ) | | | 4,023,510 | | | | (148,351 | ) | | | 54,184,997 | | | | (1,557,179 | ) | | | 80,144,564 | | | | (7,592,226 | ) | | | 0 | | | | 0 | | | | 80,144,564 | | | | (7,592,226 | ) |
| Total fixed maturities | | $ | 57,713,985 | | | $ | (1,519,852 | ) | | $ | 4,023,510 | | | | (148,351 | ) | | $ | 61,737,495 | | | | (1,668,203 | ) | | $ | 104,554,839 | | | | (9,032,290 | ) | | | 0 | | | $ | 0 | | | | 104,554,839 | | | $ | (9,032,290 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity securities | | $ | 4,703,033 | | | $ | (522,471 | ) | | $ | - | | | $ | - | | | $ | 4,703,033 | | | $ | (522,471 | ) | |
Additional information regarding investments in an unrealized loss position is as follows:
| | | Less than 12 months | | | 12 months or longer | | | Total | |
| As of September 30, 2017 | | | | | | | | | |
| Fixed maturities | | | 11 | | | | 3 | | | | 14 | |
| Equity securities | | | 4 | | | | - | | | | 4 | |
| As of December 31, 2016 | | | | | | | | | | | | |
| Fixed maturities | | | 25 | | | | 3 | | | | 28 | |
| Equity securities | | | 3 | | | | - | | | | 3 | |
| | Less than 12 months | | | 12 months or longer | | | Total | |
As of September 30, 2023 | | | | | | | | | |
| Fixed maturities | | | 7 | | | | 47 | | | | 54 | |
| As of December 31, 2022 | | | | | | | | | | | | |
| Fixed maturities | | | 57 | | | | 0 | | | | 57 | |
Substantially all of the unrealized losses on fixed maturities available for sale and equity securities at September 30, 20172023 and December 31, 20162022 are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase. TheBased upon Management’s review of the fixed maturity available-for-sale portfolio, an allowance for credit losses is not deemed necessary as of September 30, 2023.
There were no impairment losses recognized by the Company during the nine moths ended September 30, 2023. Management believes that the Company will fully recover its cost basis in the securities held as of September 30, 2023, and Management does not currently intendhave the intent to sell nor doesis it expect tomore likely than not the Company will be required to sell anysuch securities until they recover or mature.
Net unrealized losses included in other comprehensive income (loss) for investments classifies as available-for-sale, net of the securities in an unrealized loss position. Based uponeffect of deferred income taxes, assuming that 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 impaireddepreciation had been realized as of September 30, 20172023 and December 31, 2016.2022:
| | September 30, 2023 | | | December 31, 2022 | |
| Unrealized appreciation (depreciation) on available-for-sale securities | | $ | (11,534,212 | ) | | $ | (8,996,761 | ) |
| Deferred income taxes | | | 2,422,185 | | | | 1,889,320 | |
| Net unrealized appreciation (depreciation) on available-for-sale securities | | $ | (9,112,027 | ) | | $ | (7,107,441 | ) |
Other-Than-Temporary Impairments
Net Investment Gains (Losses)
The following table presents net investment gains (losses) and the change in net unrealized gains (losses) on investments.
| | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
| Realized gains: | | | | | | | | | | | | |
| Sales of fixed maturities | | $ | 12,500 | | | $ | 0 | | | $ | 58,333 | | | $ | 4,683 | |
| Sales of equity securities | | | 110,742 | | | | 1,485,872 | | | | 359,216 | | | | 1,883,453 | |
| Sales of real estate | | | 7,815,364 | | | | 449,133 | | | | 8,541,124 | | | | 5,020,973 | |
| Sales of short-term investments | | | 0 | | | | 0 | | | | 23,509 | | | | 0 | |
| Total realized gains | | | 7,938,606 | | | | 1,935,005 | | | | 8,982,182 | | | | 6,909,109 | |
| Realized losses: | | | | | | | | | | | | | | | | |
| Sales of fixed maturities | | | 0 | | | | 0 | | | | 0 | | | | (5,210 | ) |
| Sales of equity securities | | | 0 | | | | 0 | | | | (7,966 | ) | | | (109,636 | ) |
| Sales of real estate | | | 0 | | | | (34,547 | ) | | | 0 | | | | (34,547 | ) |
| Sales of short-term investments | | | (374 | ) | | | 0 | | | | (374 | ) | | | 0 | |
| Total realized losses | | | (374 | ) | | | (34,547 | ) | | | (8,340 | ) | | | (149,393 | ) |
| Net realized investment gains (losses) | | | 7,938,232 | | | | 1,900,458 | | | | 8,973,842 | | | | 6,759,716 | |
| Change in fair value of equity securities: | | | | | | | | | | | | | | | | |
| Change in fair value of equity securities held at the end of the period | | | (23,403 | ) | | | 7,097,738 | | | | (7,209,399 | ) | | | 14,462,029 | |
| Change in fair value of equity securities | | | (23,403 | ) | | | 7,097,738 | | | | (7,209,399 | ) | | | 14,462,029 | |
| Net investment gains (losses) | | $ | 7,914,829 | | | $ | 8,998,196 | | | $ | 1,764,443 | | | $ | 21,221,745 | |
| Change in net unrealized gains (losses) on available-for-sale investments included in other comprehensive income: | | | | | | | | | | | | | | | | |
| Fixed maturities | | $ | (3,606,251 | ) | | $ | (7,122,856 | ) | | $ | (2,521,367 | ) | | $ | (23,436,431 | ) |
| Net increase (decrease) | | $ | (3,606,251 | ) | | $ | (7,122,856 | ) | | $ | (2,521,367 | ) | | $ | (23,436,431 | ) |
Cost Method Investments
The Company regularly reviews its investment securities for factors that may indicate that a decline inheld equity investments with an aggregate cost of $15,683,343 at September 30, 2023 and December 31, 2022. 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 an investment is other than temporary. The factors considered by Management in its regular review to identify and recognize other-than-temporary impairment lossesthose investments. Based 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 prospectsManagement’s evaluation 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; whetherflow of 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.
Equity securities may experience other-than-temporary impairments in the future based on the prospects for full recovery in value in a reasonable period of timeinvestments, and the Company’s ability and intent to hold the security to recovery. Ifinvestments for a decline in fair value is judged by Management to be other-than-temporary or Managementreasonable period of time, the Company does not have the intent or ability to hold a security, a loss is recognized by a charge todeem an other-than-temporary impairment 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.
Based on Management's review of the investment portfolio, the Company did not record any losses for other-than-temporary impairments in the Condensed Consolidated Statements of Operations for the three-month period endednecessary at September 30, 2017. The other-than-temporary impairment recognized during the first quarter of 2017 was recognized during the second quarter of 2017. The Company did not recognize any losses for other-than-temporary impairments during the nine-month period ended September 30, 2017.2023.
Trading Securities
Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in net investment income on the Condensed Consolidated Statements of Operations. Trading securities includeSecurities included exchange-traded equities and exchange-traded options. Trading securities carried as liabilities arewere securities sold short. A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale. The fair value of derivatives included in trading security assets and trading security liabilities as of September 30, 20172023 was $0 and $0, respectively.$0. The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 20162022 was $2,500 and $(1,439), respectively.$0. Earnings from trading securities are classified in cash flows from operating activities. The derivatives held by the Company are for income generation purposes only.
Trading revenue charged to net investment income from trading securities was:
| | | Three Months Ended | | | Three Months Ended | |
| | | September 30, | | | September 30, | |
| | | 2017 | | | 2016 | | | 2023 | | | 2022 | |
| Net unrealized gains (losses) | | $ | - | | | $ | - | | | $ | 0 | | | $ | 0 | |
| Net realized gains (losses) | | | - | | | | - | | | | 0 | | | | 0 | |
| Net unrealized and realized gains (losses) | | $ | - | | | $ | - | | | $ | 0 | | | $ | 0 | |
| | | Nine Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
| | | 2017 | | | 2016 | | | 2023 | | | 2022 | |
| Net unrealized gains (losses) | | $ | (111,531 | ) | | $ | - | | | $ | 0 | | | $ | 0 | |
| Net realized gains (losses) | | | 110,470 | | | | - | | | | 0 | | | | (13,283 | ) |
| Net unrealized and realized gains (losses) | | $ | (1,061 | ) | | $ | - | | | $ | 0 | | | $ | (13,283 | ) |
Mortgage Loans
The Company, from time to time, acquires mortgage loans through participation agreements with FSNB. FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market. The Company is able to receive participations from FSNB for three primary reasons: 1) FSNB has already reached its maximum lending limit to a single borrower, but the borrower is still considered a suitable risk; 2) the interest rate on a particular loan may be fixed for a long period that is more suitable for UG given its asset-liability structure; and 3) FSNB’s loan growth might at times outpace its deposit growth, resulting in FSNB participating such excess loan growth rather than turning customers away. For originated loans, the Company’s Management is responsible for the final approval of such loans after evaluation. Before a new loan is issued, the applicant is subject to certain criteria set forth by Company Management to ensure quality control. These criteria include, but are not limited to, a credit report, personal financial information such as outstanding debt, sources of income, and personal equity. Once the loan is approved, the Company directly funds the loan to the borrower. The Company bears all risk of loss associated with the terms of the mortgage with the borrower.
Approximately 12% ofDuring the mortgage loan portfolio consists of discounted commercial mortgage loans as ofnine months ended September 30, 20172023 and December 31, 2016. The Company began purchasing discounted commercial mortgage loans in 2009. Management has extensive background and experience in the analysis and valuation of commercial real estate. The discounted loans are available through the FDIC’s sale of assets of closed banks and from banks wanting to reduce their loan portfolios. The loans are available on a loan by loan bid process. Once a loan has been acquired, contact is made with the appropriate individuals to begin a dialog with a goal of determining the borrower’s willingness to work together. There are generally three paths a discounted loan will take: the borrowers pay as required; a settlement is reached with the loan being paid off at a discounted value; or the loan is foreclosed.
During 2017 and 2016,2022, the Company acquired $360,531$2,050,124 and $6,922,723$1,755,496 in mortgage loans, respectively, including both regular participation mortgage loans as well as discounted mortgage loans.respectively. FSNB services the majority of the Company’s mortgage loan portfolio. The Company pays FSNB a .25%0.25% servicing fee on these loans and a one-time fee at loan origination of .50%0.50% of the original loan cost to cover costs incurred by FSNB relating to the processing and establishment of the loan.
During 20172023 and 2016,2022, the maximum and minimum lending rates for the mortgage loansloan portfolio were:
| | | 2017 | | | 2016 | | | 2023 | | | 2022 | |
| | | Maximum rate | | | Minimum rate | | | Maximum rate | | | Minimum rate | | | Maximum rate | | | Minimum rate | | | Maximum rate | | | Minimum rate | |
| Farm Loans | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % | | | 4.50 | % |
| Commercial Loans | | | 8.50 | % | | | 3.94 | % | | | 8.00 | % | | | 4.00 | % | | | 8.75 | % | | | 4.00 | % | | | 7.00 | % | | | 4.00 | % |
| Residential Loans | | | 8.00 | % | | | 4.00 | % | | | 8.00 | % | | | 3.94 | % | | | 5.00 | % | | | 4.15 | % | | | 5.00 | % | | | 4.15 | % |
Most mortgage loans are first position loans. Loans issued are generally limited to no more than 80% of the appraised value of the property.
The Company has in place a monitoring system to provide Management with information regarding potential troubled loans. Letters are sent to each mortgagee when the loan becomes 30 days or more delinquent. Management is provided with a monthly listing of loans that are 60 days or more past due along with a brief description of what steps are being taken to resolve the delinquency. All loans 90 days or more past due are placed on a non-performing status and classified as delinquent loans. Quarterly, coinciding with external financial reporting, the Company reviews each delinquent loan and determines how each delinquent loan should be classified. Management believes the current internal controls surrounding the mortgage loan selection process provide a quality portfolio with minimal risk of foreclosure and/or negative financial impact.
Changes in the current economy could have a negative impact on the loans, including the financial stability of the borrowers, the borrowers’ ability to pay or to refinance, the value of the property held as collateral and the ability to find purchasers at favorable prices. Given the uncertainty of the current market, Management has taken a conservative approach with the discounted mortgage loans and has classified all discounted mortgage loans held as non-accrual. In such status, the Company is not recording any accrued interest income nor is it recording any accrual of discount on the loans held. The Company records repayments on loans as discount accrual when the loan basis has been paid in full.
On the remainder of the mortgage loan portfolio, interestInterest 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 reserveThe following is established and adjusted based on Management's quarterly analysisa summary 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 Company acquired the discounted mortgage loans at below contract value,outstanding and believes that it will fully recover its carrying value upon disposal, thereforethe related allowance for credit losses:
| | September 30, 2023 | | | December 31, 2022 | |
| Farm | | $ | 338,207 | | | $ | 383,278 | |
| Commercial | | | 14,610,583 | | | | 30,102,775 | |
| Residential | | | 206,897 | | | | 212,641 | |
| Total mortgage loans | | | 15,155,687 | | | | 30,698,694 | |
| Less allowance for credit losses | | | (370,000 | ) | | | 0 | |
| Total mortgage loans, net | | $ | 14,785,687 | | | $ | 30,698,694 | |
There were no reserve for delinquentpast due loans is deemed necessary. Those not currently paying are being vigorously worked by Management. The current discounted commercial mortgage loan portfolio has an average price of 32% of face value as of September 30, 20172023 and December 31, 2016. Management has determined that this deep discount provides a financial cushion or built in allowance for any of the loans that are not currently performing within the portfolio of loans purchased. The mortgage loan reserve was $0 at September 30, 2017 and December 31, 2016.2022.
The following table summarizes the number of loans held in the discounted mortgage loan portfolio and the carrying value of the loans:
September 30, 2017 Payment Frequency | | Number of Loans | | | Carrying Value | |
| No payments received | | | 8 | | | $ | - | |
| One-time payment received | | | 1 | | | | - | |
| Irregular payments received | | | 2 | | | | 20,834 | |
| Periodic payments received | | | 5 | | | | 2,090,929 | |
| Total | | | 16 | | | $ | 2,111,763 | |
December 31, 2016 Payment Frequency | | Number of Loans | | | Carrying Value | |
| No payments received | | | 8 | | | $ | - | |
| One-time payment received | | | 1 | | | | - | |
| Irregular payments received | | | 2 | | | | 20,834 | |
| Periodic payments received | | | 5 | | | | 2,168,062 | |
| Total | | | 16 | | | $ | 2,188,896 | |
The following table summarizes the mortgage loan holdings of the Company for the periods ended:
| | | September 30, 2017 | | | December 31, 2016 | |
| In good standing | | $ | 16,059,494 | | | $ | 16,388,477 | |
| Overdue interest over 90 days | | | 20,834 | | | | 20,834 | |
| Restructured | | | 52,827 | | | | 60,827 | |
| In process of foreclosure | | | 2,038,102 | | | | 2,107,234 | |
| Total mortgage loans | | $ | 18,171,257 | | | $ | 18,577,372 | |
| Total foreclosed loans during the year | | $ | - | | | $ | 735,000 | |
Investment Real Estate
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. Gains and losses recognized on the disposition of the properties are recorded as realized gains and losses in the Consolidated Statements of Operations.
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 September 30, 2017 and December 31, 2016 was $0. Interest accruals are analyzed based on the likelihood of repayment. The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status. During the nine months ended September 30, 2023 and 2022 the Company acquired $3,579,241 and $5,870,657 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.
The following is a summary of the notes receivable outstanding and the related allowance for credit losses:
| | September 30, 2023 | | | December 31, 2022 | |
| Notes receivable | | $ | 13,352,860 | | | $ | 14,424,127 | |
| Less allowance for credit losses | | | (170,000 | ) | | | 0 | |
| Total notes receivable, net | | $ | 13,182,860 | | | $ | 14,424,127 | |
Allowance for Credit Losses - Loans
The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when Management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
The allowance for credit losses represents Management's estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by Management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments - mortgage loans on real estate and notes receivable.
The allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for risk tolerance, loan review and audit results, asset quality and portfolio trends, industry concentrations, external factors and economic conditions.
Loans that do not share risk characteristics are evaluated on an individual bases, When Management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date unadjusted for selling costs as appropriate.
Allowance for Credit Losses - Unfunded Commitments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Company's income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well a any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company's consolidated balance sheets.
Investment Real Estate
Real estate held-for-investment is stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis for financial reporting purposes using estimated useful lives of 3 to 30 years. The Company periodically reviews its real estate held-for-investment for impairment and tests for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. During the nine months ended September 30, 2023, no impairments were recognized on the investment real estate.
Note 4 - Fair Value Measurements of the Condensed Consolidated Financial Statements provides further information regarding the fair value of financial instruments that are not measured at fair value. The investment real estate owned by the Company is included in this portion of the Note 4 - Fair Value Measurements disclosure.
The following table provides an allocation of the Company’s investment real estate by type:
| | September 30, 2023 | | | December 31, 2022 | |
| Raw land | | $ | 7,471,926 | | | $ | 11,634,472 | |
| Commercial | | | 5,847,661 | | | | 5,124,847 | |
| Residential | | | 4,738,882 | | | | 3,402,502 | |
| Land, minerals and royalty interests | | | 13,550,749 | | | | 14,772,531 | |
| Total investment real estate | | $ | 31,609,218 | | | $ | 34,934,352 | |
The Company’s investment real estate portfolio includes ownership in oil and gas royalties. As of September 30, 2023 and December 31, 2022, investments in oil and gas royalties represented 43% and 42%, respectively, of the total investment real estate portfolio. See Note 9 – Concentrations of Credit Risk of the Condensed Consolidated Financial Statements for additional information regarding the allocation of the oil and gas investment real estate holdings by industry type.
Gains and losses recognized on the disposition of the properties are recorded as realized gains and losses in the Condensed Consolidated Statements of Operations. During the nine months ended September 30, 2023 and 2022, the Company acquired $4,115,151 and $4,236,603 of investment real estate, respectively.
Short-Term Investments
Short-term investments have remaining maturities exceeding three months and under 12 months at the time of purchase and are stated at amortized cost, which approximates fair value. The short-term investments consist of United States Treasury securities.
During 2023 and 2022, the Company acquired $29,300,034 and $0, respectively, in short-term investments.
Note 4 – Fair Value Measurements
The Company measures its assetsFair Value Measurements on a Recurring Basis
Assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets based on the framework set forthare measured and classified in the GAAP fair value accounting guidance. The framework establishesaccordance with a fair value hierarchy consisting of three levels based uponon the transparencyobservability 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.inputs:
Level 1 – Valuation is based upon quoted prices (unadjusted) 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.markets.
Level 2 – Valuation is based uponmethodologies include quoted prices for similar assets and liabilities in active markets or quoted prices for identical, quoted prices for identical or similar instrumentsassets or liabilities in markets that are not active. In addition,active, or the Company may use various valuation techniques or pricing models that use observable inputs to measure fair value.
Level 3 – Valuation is based upon unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability.
The Company determinesIn certain cases, the existenceinputs used to measure fair value may fall into different levels of an active market for an asset or liability based on its judgment as to whether transactions for the asset or liability occur infair value hierarchy. In such market with sufficient frequency and volume to provide reliable pricing information. Ifcases, the Company concludes that there has been a significant decreaselevel 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 ofhierarchy within which the fair value estimatesmeasurement in its entirety falls is determined based on the Company’s knowledge and monitoring of market conditions.lowest level input that is significant to the fair value measurement in its entirety.
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 available for sale and trading securities assets and liabilities are carried at fair value. The following are the Company’s methodologies and valuation techniques fortable presents information about assets and liabilities measured at fair value.value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used:
September 30, 2023 | | Level 1 | | | Level 2 | | | Level 3 | | | Net Asset Value | | | Total | |
| Financial assets: | | | | | | | | | | | | | | | |
| Fixed maturities available for sale: | | | | | | | | | | | | | | | |
| U.S. Government and government agencies and authorities | | $ | 15,273,260 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 15,273,260 | |
| U.S. special revenue and assessments | | | 0 | | | | 7,043,065 | | | | 0 | | | | 0 | | | | 7,043,065 | |
| Corporate securities | | | 0 | | | | 79,357,787 | | | | 0 | | | | 0 | | | | 79,357,787 | |
| Total fixed maturities | | | 15,273,260 | | | | 86,400,852 | | | | 0 | | | | 0 | | | | 101,674,112 | |
| Equity securities: | | | | | | | | | | | | | | | | | | | | |
| Common stocks | | | 38,069,750 | | | | 5,435,800 | | | | 6,840,062 | | | | 92,615,146 | | | | 142,960,758 | |
| Preferred stocks | | | 0 | | | | 0 | | | | 1,247,000 | | | | 0 | | | | 1,247,000 | |
| Total equity securities | | | 38,069,750 | | | | 5,435,800 | | | | 8,087,062 | | | | 92,615,146 | | | | 144,207,758 | |
| Total financial assets | | $ | 53,343,010 | | | $ | 91,836,652 | | | $ | 8,087,062 | | | $ | 92,615,146 | | | $ | 245,881,870 | |
| | | | | | | | | | | | | | | | | | | | | |
Fixed maturities available for sale mainly consist
December 31, 2022 | | Level 1 | | | Level 2 | | | Level 3 | | | Net Asset Value | | | Total | |
| Financial assets: | | | | | | | | | | | | | | | |
| Fixed maturities available for sale: | | | | | | | | | | | | | | | |
| U.S. Government and government agencies and authorities | | $ | 17,211,175 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 17,211,175 | |
| U.S. special revenue and assessments | | | 0 | | | | 7,199,100 | | | | 0 | | | | 0 | | | | 7,199,100 | |
| Corporate securities | | | 0 | | | | 83,902,784 | | | | 0 | | | | 0 | | | | 83,902,784 | |
| Total fixed maturities | | | 17,211,175 | | | | 91,101,884 | | | | 0 | | | | 0 | | | | 108,313,059 | |
| Equity securities: | | | | | | | | | | | | | | | | | | | | |
| Common stocks | | | 45,999,477 | | | | 6,651,800 | | | | 6,720,643 | | | | 89,434,766 | | | | 148,806,686 | |
| Preferred stocks | | | 0 | | | | 0 | | | | 1,247,000 | | | | 0 | | | | 1,247,000 | |
| Total equity securities | | | 45,999,477 | | | | 6,651,800 | | | | 7,967,643 | | | | 89,434,766 | | | | 150,053,686 | |
| Total financial assets | | $ | 63,210,652 | | | $ | 97,753,684 | | | $ | 7,967,643 | | | $ | 89,434,766 | | | $ | 258,366,745 | |
The following is a description 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 comparabletechniques used the by Company to measure assets reported at fair value on a recurring basis. There have been no significant changes in the valuation techniques utilized by the Company uses an income approach to valuation. The majority offor the financial instruments included in fixed maturity securitiesnine months ended September 30, 2023.
Available for Sale Securities
Securities classified as available for sale are evaluated utilizing observable inputs; accordingly, they are categorized in either Level 1 or Level 2 of therecorded at fair value hierarchy. However, in instances where significant inputson a recurring basis. Securities classified as Level 1 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 withmeasurements based upon quoted market prices, when available. If quoted market prices are not available, the Company’s valuation techniques relating to this class of securities includeCompany obtains fair value measurements from recently executed transactions, market price quotations, benchmark yields and issuer spreads. Corporatespreads to value Level 2 securities. In certain instances where Level 1 or Level 2 inputs are not available, securities are categorized inclassified within Level 23 of the hierarchy. Fair value determinations for Level 3 measurements are estimated on a quarterly basis where assumptions used are reviewed to ensure the estimated fair value hierarchy.complies with accounting standard generally accepted in the United States.
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 at Fair Value
Equity securities available for sale consist of common and preferred stocks mainly in private equity investments, financial institutions and insurance companies.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 transaction price is usedCompany uses industry standard pricing methodologies, including discounted cash flow models that may incorporate various inputs such as payment expectations, risk of the best estimateinvestment, market data, and health of fair value at inception.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 exit values. The Company performs ongoing reviews of the underlying investments. The reviews consist of the evaluations of expected cash flows, material events and market data. These investments are included in Level 3 of the fair value hierarchy.
Equity Securities designated as tradingat Net Asset Value
Certain equity securities consist of exchange traded equities and exchange traded options. These securities are primarily valuedcarried at quoted active market prices,fair value, which do not have readily determinable fair values, use net asset value (“NAV”) and are therefore categorized as Level 1 inexcluded from the fair value hierarchy. These investments are generally not readily redeemable by the investee. See Note 7 – Commitments and Contingencies for additional information regarding unfunded commitments.
Trading Securities
Trading securities are recorded at fair value. They are classified as Level 1 and utilize fair value measurements based upon quoted market prices.
Change in Recurring Fair Value Measurements
The following table presents the Company’s assets and liabilities measured at fair valuechanges in the Condensed Consolidated Balance Sheet on a recurring basis as of September 30, 2017.
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Assets | | | | | | | | | | | | |
| Fixed Maturities, available for sale | | $ | 9,683,209 | | | $ | 173,683,226 | | | $ | 2,756,777 | | | $ | 186,123,212 | |
| Equity Securities, available for sale | | | 22,709,227 | | | | 7,428,608 | | | | 29,440,193 | | | | 59,578,028 | |
| Total | | $ | 32,392,436 | | | $ | 181,111,834 | | | $ | 32,196,970 | | | $ | 245,701,240 | |
The following table presents the Company’s assets and liabilities measured at fair value in the Condensed Consolidated Balance Sheet on a recurring basis as of December 31, 2016.
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Assets | | | | | | | | | | | | |
| Fixed Maturities, available for sale | | $ | 9,035,810 | | | $ | 175,120,657 | | | $ | 3,083,251 | | | $ | 187,239,718 | |
| Equity Securities, available for sale | | | 19,360,394 | | | | 6,553,410 | | | | 25,793,299 | | | | 51,707,103 | |
| Trading Securities | | | 2,500 | | | | - | | | | - | | | | 2,500 | |
| Total | | $ | 28,398,704 | | | $ | 181,674,067 | | | $ | 28,876,550 | | | $ | 238,949,321 | |
| | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | |
| Trading Securities | | $ | 1,439 | | | $ | - | | | $ | - | | | $ | 1,439 | |
The following table provides reconciliations for Level 3 assetsequity securities measured at fair value on a recurring basis. Transfers intobasis and outequity securities measured at net asset value, and the realized and unrealized gains (losses) related to the equity securities.
| | Equity Securities at Fair Value | | | Equity Securities at Net Asset Value | | | Total | |
| Balance at December 31, 2022 | | $ | 7,967,643 | | | $ | 89,434,766 | | | $ | 97,402,409 | |
| Realized gains (losses) | | | 0 | | | | 95,606 | | | | 95,606 | |
| Unrealized gains (losses) | | | (68,706 | ) | | | (1,485,604 | ) | | | (1,554,310 | ) |
| Purchases | | | 354,375 | | | | 5,173,181 | | | | 5,527,556 | |
| Sales | | | (166,250 | ) | | | (602,803 | ) | | | (769,053 | ) |
| Balance at September 30, 2023 | | $ | 8,087,062 | | | $ | 92,615,146 | | | $ | 100,702,208 | |
Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 are recognizedin the tables above. As a result, the unrealized gains (losses) on instruments held at September 30, 2023 and December 31, 2022 may include changes in fair value that were attributable to both observable and unobservable inputs.
Quantitative Information About Level 3 Fair Value Measurements
The following table presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and include only those instruments for which information about the inputs is reasonably available to the Company, such as data from independent third-party valuation service providers and from internal valuation models.
| | Fair Value at September 30, 2023 | | | Fair Value at December 31, 2022 | | |
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Uncertainty of Fair Value Measurements
The significant unobservable inputs used in the determination of the fair value of assets classified as Level 3 have an inherent measurement uncertainty that if changed could result in higher or lower fair value measurements of these assets as of the end of the quarter in which they occur.reporting date.
| | | Fixed Maturities, Available for Sale | | | Equity Securities, Available for Sale | | | Total | |
| Balance at December 31, 2016 | | $ | 3,083,251 | | | $ | 25,793,299 | | | $ | 28,876,550 | |
| Total unrealized gains (losses): | | | | | | | | | | | | |
| Included in realized gains (losses) | | | - | | | | - | | | | - | |
| Included in other comprehensive income | | | 702,375 | | | | 2,640,392 | | | | 3,342,767 | |
| Purchases | | | - | | | | 2,114,307 | | | | 2,114,307 | |
| Sales | | | (1,028,849 | ) | | | (1,107,805 | ) | | | (2,136,654 | ) |
| Balance at September 30, 2017 | | $ | 2,756,777 | | | $ | 29,440,193 | | | $ | 32,196,970 | |
The Level 3 securities include collateralized debt obligations of trust preferred securities issued by banks and insurance companies and certain
Equity Securities at Fair Value
Fair market value for equity securities withis derived based on unobservable inputs. The Company computedinputs, such as projected normalized revenues and industry standard multiples of revenue for the equity securities valued using pricing model. Significant increases (decreases) in either of those inputs in isolation would result in a significantly higher (lower) fair value of Level 3 equity investments basedmeasurement.
Investments in Certain Entities Carried at Fair Value Using Net Asset Value per Share
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Fair Value Measurements on a review of current financial information, earnings trends and similar companies in the same industries.Nonrecurring Basis
There were no transfers in or out of Level 3 as of September 30, 2017. 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.basis. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to re-measurement at fair value after initial recognition and the resulting re-measurement is reflected in the Condensed Consolidated Financial Statements. The Company did not recognize any re-measurements or impairments of financial instruments at September 30, 2023 or December 31, 2022.
Certain assets are not carried at fair value on a recurring basis. Accordingly, such investments are only included in the fair value hierarchy disclosure when the investment is subject to re-measurement at fair value after initial recognition and the resulting re-measurement is reflected in the Condensed Consolidated Financial Statements.
The following table presents the carrying valuesamount and estimated fair values of certain of the Company’s financial instruments not recordedmeasured at fair value inand indicates the Consolidated Balance Sheets are shown below. Becauselevel in the fair value for all Consolidated Balance Sheet items are not required to be disclosed,hierarchy of the aggregateestimated fair value amounts presented below are not reflectivemeasurement based on the observability of the underlying value of the Company.inputs used:
| | | September 30, 2017 | | | December 31, 2016 | | | Carrying | | | Estimated | | | | | | | | | | |
| September 30, 2023 | | | Amount | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| Assets | | Carrying Amount | | | Estimated Fair Value | | | Carrying Amount | | | Estimated Fair Value | | | | | | | | | | | | | | | | |
| Preferred stock, at cost | | | $ | 15,683,343 | | | | 15,683,343 | | | | 0 | | | | 0 | | | | 15,683,343 | |
| Mortgage loans on real estate | | $ | 18,171,257 | | | $ | 18,171,257 | | | $ | 18,577,372 | | | $ | 18,577,372 | | | | 14,785,687 | | | | 14,007,952 | | | | 0 | | | | 0 | | | | 14,007,952 | |
| Investment real estate | | | 52,637,677 | | | | 52,637,677 | | | | 57,138,980 | | | | 57,138,980 | | | | 31,609,218 | | | | 78,305,554 | | | | 0 | | | | 0 | | | | 78,305,554 | |
| Notes receivable | | | 17,638,632 | | | | 17,638,632 | | | | 16,876,485 | | | | 16,876,485 | | | | 13,182,860 | | | | 13,320,399 | | | | 0 | | | | 0 | | | | 13,320,399 | |
| Policy loans | | | 9,669,594 | | | | 9,669,594 | | | | 10,070,134 | | | | 10,070,134 | | | | 6,160,290 | | | | 6,160,290 | | | | 0 | | | | 0 | | | | 6,160,290 | |
| Cash and cash equivalents | | | 15,989,747 | | | | 15,989,747 | | | | 15,156,548 | | | | 15,156,548 | | |
| | Carrying | | | Estimated | | | | | | | | | | |
| December 31, 2022 | | Amount | | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| Assets | | | | | | | | | | | | | | | |
| Preferred stock, at cost | | $ | 15,683,343 | | | | 15,683,343 | | | | 0 | | | | 0 | | | | 15,683,343 | |
| Mortgage loans on real estate | | | 30,698,694 | | | | 29,735,873 | | | | 0 | | | | 0 | | | | 46,906,538 | |
| Investment real estate | | | 34,934,352 | | | | 92,425,241 | | | | 0 | | | | 0 | | | | 92,425,241 | |
| Notes receivable | | | 14,424,127 | | | | 14,812,523 | | | | 0 | | | | 0 | | | | 14,812,523 | |
| Policy loans | | | 6,567,434 | | | | 6,567,434 | | | | 0 | | | | 0 | | | | 6,567,434 | |
| Liabilities | | | | | | | | | | | | | | | | | | | | |
| Notes payable | | | 19,000,000 | | | | 19,000,000 | | | | 0 | | | | 19,000,000 | | | | 0 | |
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 been purchasing non-performing discounted mortgage loans at a deep discount through an auction process led by the Federal Government. In general, the discounted loans are non-performing and there is a significant amount of uncertainty surrounding the timing and amount of cash flows to be received by the Company. Accordingly, the Company records its investment in the discounted loans at its original purchase price, which Management believes approximates fair value. The inputs used to measure the fair value of our discounted mortgage loans are classified as Level 3 within the fair value hierarchy.
Investment real estate is recorded at the lower of the net investment in the real estate or the fair value of the real estate less costs to sell. The determination of fair value assessments are performed on a periodic, non-recurring basis by external appraisal and assessment of property values by Management. The inputs used to measure the fair value of our investment real estate are classified as Level 3 within the fair value hierarchy.
NotesThe fair values of notes receivable are carried at their unpaid principal balances, which approximates fair value.estimated using discounted cash flow analyses and interest rates being offered for similar loans to borrowers with similar credit ratings. The inputs used to measure the fair value of the loansnotes receivable are classified as Level 3 within the fair value hierarchy.hierarchy.
Policy loans are carried at the aggregate unpaid principal balances in the Condensed Consolidated Balance Sheets which approximate fair value, and earn interest at rates ranging from 4% to 8%. Individual policy liabilities in all cases equal or exceed outstanding policy loan balances. The inputs used to measure the fair value of our policy loans are classified as Level 3 within the fair value hierarchy.
The carrying amount of cash and cash equivalents in the Consolidated Balance Sheets approximates fair value given the highly liquid nature of the instruments. The inputs used to measure the fair value of our cash and cash equivalents are classified as Level 1 within the fair value hierarchy.
The carrying amount of short term investments in the Consolidated Balance Sheets approximates fair value. The inputs used to measure the fair value of our short term investments are classified as Level 3 within the fair value hierarchy.
The carrying value for notes payable is a reasonable estimate of fair value for notes payable subject to floating rates of interest. The fair value of notes payable with fixed rate borrowings is determined based on the borrowing rates currently available to the Company for loans with similar terms and average maturities. The inputs used to measure the fair value of our notes payable are classified as Level 2 within the fair value hierarchy.
Note 5 – Credit Arrangements
| Instrument | | Issue Date | | Maturity Date | | Revolving Credit Limit | | December 31, 2022 | | Borrowings | | Repayments | | September 30, 2023 |
| Lines of Credit: | | | | | | | | | | | | | | | | | |
| UTG | | 11/20/2013 | | 11/20/2023 | | $ | 8,000,000 | | | 0 | | 0 | | 0 | | $ | 0 |
| UG - CMA | | 10/21/2021 | | 10/6/2023 | | | 25,000,000 | | | 19,000,000 | | 2,500,000 | | 21,500,000 | | | 0 |
At September 30, 2017 and December 31, 2016, the Company had the following outstanding debt:
| | | | | Outstanding Principal Balance | |
| Instrument | Issue Date | Maturity Date | | September 30, 2017 | | | December 31, 2016 | |
| Promissory Note: | | | | | | | | |
| SoftVest, LP | 7/22/2016 | 7/22/2018 | | $ | 725,000 | | | $ | 1,450,000 | |
| SoftSearch Investment, L.P. | 7/22/2016 | 7/22/2018 | | | 725,000 | | | | 1,450,000 | |
| Instrument | Issue Date | Maturity Date | | Revolving Credit Limit | | | December 31, 2016 | | | Borrowings | | | Repayments | | | September 30, 2017 | |
| Lines of Credit: | | | | | | | | | | | | | | | | | |
| UTG | 11/20/2013 | 11/20/2018 | | $ | 8,000,000 | | | $ | - | | | | - | | | | - | | | $ | - | |
| UG | 6/2/2015 | 5/10/2018 | | | 10,000,000 | | | | - | | | | - | | | | - | | | | - | |
The UTG line of credit carries interest at a fixed rate of 4.00%6.500% 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”). The CompanyCompany. UTG is currently in the process of renewing this line of credit.
During MayOctober of 2017,2023, the Federal Home Loan Bank approved UG’s Cash Management Advance Application (“CMA”). The CMA gives the Company the option of selecting a variable rate of interest for up to 90 days or a fixed rate for a maximum of 30 days. The variable rate CMA is prepayable at any time without a fee, while the fixed CMA is not prepayable prior to maturity. The Company is currently in the processhas pledged bonds with a collateral lendable value of renewing the CMA.$18,946,634.
On July 22, 2016, the Company entered in to an agreement to acquire 300,000 shares of its outstanding common stock from a shareholder that owned approximately 8% of the Company’s outstanding common stock. The acquisition was made under the Company’s stock buy-back program. As part of this transaction, two promissory notes totaling $2.9 million were issued. The notes require principal payments of one half of the note value to be paid one year from the date of purchase and the other one half to be paid two years from the date of purchase. The notes bear interest at 0%. During April of 2017, the Company paid $725,000 on the outstanding principal balance of each promissory note.
Note 6 – Shareholders’ Equity
Stock Repurchase Program – The Board of Directors of UTG has authorized the repurchase in the open market or in privately negotiated transactions of UTG'sUTG’s common stock. At a meeting of the Board of Directors on June 15, 2016,in March of 2022, the Board of Directors of UTG authorized the repurchase of up to an additional $2$2 million of UTG’s common stock, and on July 14, 2016, the Board of Directors again increased the amount available by an additional $4.5 million, for a total repurchase of $14.5 million. Repurchased shares are available for future issuance for general corporate purposes.up to $22 million of UTG’s common stock in the open market or in privately negotiated transactions. Company Management has broad authority to operate the program, including the discretion of whether to purchase shares and the ability to suspend or terminate the program. Open market purchases are made based on the last available market price but may be limited. During the nine month periodmonths endedSeptember 30, 2017,2023, the Company repurchased approximately 21,40026,863 shares through the stock repurchase program for approximately $397,000.$765,048. Through September 30, 2017,2023, UTG has spent approximately $12.3 million$20,074,486 in the acquisition of approximately 1,080,0001,353,076 shares under this program.
During 2017,2023, the Company issued approximately 11,00026,911 shares of stock to Managementmanagement and employees as compensation.compensation at a cost of $674,390. These awards are determined at the discretion of the Board of Directors.
Earnings Per Share Calculations
Earnings per share are based on the weighted average number of common shares outstanding during each period. For the three and nine months ended September 30, 20172023 and 2016,2022, diluted earnings per share were the same as basic earnings per share since the Company had no dilutive instruments outstanding.
Note 7 – Commitments and Contingencies
The insurance industry has experienced a number of civil jury verdicts which have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers'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'sinsurer’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. All trading securities were settled during the first quarter of 2017.
The following table represents the total funding commitments and the unfunded commitment as of September 30, 20172023 related to certain investments:
| | | Total Funding Commitment | | | Unfunded Commitment | | | Total Funding Commitment | | | Unfunded Commitment | |
| RLF III, LLC | | $ | 4,000,000 | | | $ | 398,120 | | | $ | 4,000,000 | | | $ | 398,120 | |
| Sovereign’s Capital, LP Fund I | | | 500,000 | | | | 33,642 | | | | 500,000 | | | | 13,000 | |
| UGLIC, LLC | | | 1,600,000 | | | | 120,000 | | |
| Sovereign's Capital, LP Fund II | | | 1,000,000 | | | | 410,301 | | | | 1,000,000 | | | | 76,732 | |
| Barton Springs Music, LLC | | | 2,500,000 | | | | 1,339,063 | | |
| Master Mineral Holdings II, LP | | | 4,122,167 | | | | 556,286 | | |
| Sovereign's Capital, LP Fund III | | | | 3,000,000 | | | | 505,453 | |
| Garden City Companies, LLC | | | | 2,000,000 | | | | 510,546 | |
| Carrizo Springs Music, LLC | | | | 5,000,000 | | | | 189,711 | |
| Legacy Venture X, LLC | | | | 3,000,000 | | | | 1,350,000 | |
| QCC Investment Co., LLC | | | | 1,500,000 | | | | 150,000 | |
| Sovereign's Capital Evergreen Fund I, LLC | | | | 3,000,000 | | | | 4,062 | |
| Sovereign's Capital Lower Middle Market Fund II, LP | | | | 3,000,000 | | | | 1,768,904 | |
| Elisha's Properties, LLC | | | | 1,096,750 | | | | 491,823 | |
| Granite Shoals Music, LLC | | | | 6,500,000 | | | | 5,633,332 | |
| Legacy Venture XI, LLC | | | | 2,000,000 | | | | 1,920,000 | |
| Great American Media Group, LLC | | | | 4,000,000 | | | | 4,000,000 | |
During 2006, the Company committed to invest in RLF III, LLC (“RLF”), which makes land-based investments in undervalued assets. RLF makes capital calls as funds are needed for continued land purchases.
During 2012, the Company committed to invest in Sovereign’s Capital, LP Fund I (“Sovereign’s”), which invests in companies in emerging markets. Sovereign’s makes capital calls to investors as funds are needed.
During 2014, the Company committed to invest in UGLIC, LLC, which purchases real estate tax receivables. UGLIC, LLC makes capital calls as funds are needed for additional purchases.
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 2016,2018, the Company made a commitmentcommitted to invest in BartonSovereign’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 2020, the Company committed to invest in Garden City Companies, LLC (“Garden City”), which invests primarily in companies in the health care, inspection/testing services and maintenance service arena. Garden City makes capital calls to investors as funds are needed.
During 2020, the Company committed to invest in Carrizo Springs Music, LLC (“Barton”Carrizo”), which invests in music royalties. BartonCarrizo makes capital calls to its investors as funds are needed to acquire the royalty rights.
During 2016,2020, the Company made a commitmentcommitted to invest in Master Mineral HoldingsLegacy Venture X, LLC (“Legacy Venture X”), which is a fund of funds. Legacy Venture X makes capital calls to its investors as funds are needed.
During 2021, the Company committed to invest in QCC Investment Co., LLC (“QCC”). The funds are being utilized to purchase a manufacturing entity. QCC makes capital calls to its investors as funds are needed.
During 2021, the Company committed to invest in Sovereign's Capital Evergreen Fund I, LLC ("Evergreen"), which invests in companies in emerging markets. Evergreen makes capital calls to investors as funds are needed.
During 2022, the Company committed to invest in Sovereign's Capital Lower Middle Market Fund II, LP (“MMH”("Sovereign's LMM"), which purchases land for leasing opportunitiesinvests in companies in emerging markets. Sovereign's LMM makes capital calls to those lookinginvestors as funds are needed.
During 2022, the Company committed to harvest natural resources. MMHinvest in Elisha's Properties, LLC ("Elisha's"), which investment in real estate properties. Elisha's makes capital calls as funds are needed.
During 2022, the Company committed to invest in Granite Shoals Music, LLC (“Granite”), which invests in music royalties. Granite makes capital calls to its investors as funds are needed to acquire the royalty rights.
During 2022, the Company committed to invest in Legacy Venture XI, LLC (“Legacy Venture XI”), which is a fund of funds. Legacy Venture XI makes capital calls to its investors as funds are needed.
During 2023, the Company committed to fund a collateral loan for continued land purchases.Great American Media Group, LLC ("GAMG"). GAMG makes draw requests on the loan as funds are needed to fund the operating needs of the Company.
Note 8 – Other Cash Flow Disclosures
On a cash basis, the Company paid the following expenses:
| | | Three Months Ended | | Three Months Ended | |
| | | September 30, | | September 30, | |
| | | 2017 | | | 2016 | | 2023 | | 2022 | |
| Interest | | $ | - | | | $ | - | | | $ | 0 | | | $ | 31,244 | |
| Federal income tax | | | 20,000 | | | | 33,000 | | | | 740,000 | | | | 0 | |
| | | Nine Months Ended | | Nine Months Ended | |
| | | September 30, | | September 30, | |
| | | 2017 | | | 2016 | | 2023 | | 2022 | |
| Interest | | $ | - | | | $ | - | | | $ | 44,814 | | | $ | 61,440 | |
| Federal income tax | | | 175,000 | | | | 768,000 | | | | 5,800,000 | | | | 1,000,000 | |
Note 9 – Concentrations of Credit Risk
The Company maintains cash balances in financial institutions that at times may exceed federally insured limits. The Company maintains its primary operating cash accounts with First Southern National Bank, an affiliate of the largest shareholder of UTG, Mr. Jesse Correll, the Company’s CEO and Chairman. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Because UTG serves primarily individuals located in three states, the ability of the Company's customers to pay their insurance premiums is impacted by the economic conditions in these areas. As of September 30, 2023 and 2022, approximately 51% and 49%, respectively, of the Company’s total direct premium was collected from Illinois, Ohio, and Texas. 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 22% and 20% of total life insurance in force at September 30, 2023 and December 31, 2022, respectively. Insurance ceded represented 39% of premium income for the nine months ended September 30, 2023 and 2022. The Company would be liable for the reinsured risks ceded to other companies to the extent that such reinsuring companies are unable to meet their obligations.
The Company owns a variety of investments associated with the oil and gas industry. These investments represent approximately 28% and 31% of the Company’s total invested assets as of September 30, 2023 and December 31, 2022, respectively. The following table provides an allocation of the oil and gas investments by type.
| September 30, 2023 | | Land, Minerals & Royalty Interests | | | Exploration | | | Total | |
| Fixed maturities, at fair value | | $ | 0 | | | $ | 1,034,870 | | | $ | 1,034,870 | |
| Equity securities, at fair value | | | 81,985,219 | | | | 0 | | | | 81,985,219 | |
| Investment real estate | | | 13,550,754 | | | | 0 | | | | 13,550,754 | |
| Notes receivable | | | 2,000,000 | | | | 0 | | | | 2,000,000 | |
| Total | | $ | 97,535,973 | | | $ | 1,034,870 | | | $ | 98,570,843 | |
| December 31, 2022 | | Land, Minerals & Royalty Interests | | | Exploration | | | Total | |
| Fixed maturities, at fair value | | $ | 0 | | | $ | 1,060,710 | | | $ | 1,060,710 | |
| Equity securities, at fair value | | | 93,811,806 | | | | 0 | | | | 93,811,806 | |
| Investment real estate | | | 14,772,536 | | | | 0 | | | | 14,772,536 | |
| Notes receivable | | | 1,950,657 | | | | 0 | | | | 1,950,657 | |
| Total | | $ | 110,534,999 | | | $ | 1,060,710 | | | $ | 111,595,709 | |
At September 30, 2023 and December 31, 2022, the Company owned two equity securities that represented approximately 48% and 50%, respectively, of the total investments associated with the oil and gas industry.
The Company’s results of operations and financial condition have in the past been, and may in the future be, adversely affected by the degree of certain industry specific concentrations in the Company’s investment portfolio. The Company has significant exposure to investments associated with the oil and gas industry. Events or developments that have a negative effect on the oil and gas industry may adversely affect the valuation of our investments in this specific industry. The Company’s ability to sell its investments associated with the oil and gas industry may be limited.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is Management’sManagement's discussion and analysis of the financial condition and results of operations of UTG, Inc. and its subsidiaries (collectively with the Parent, the “Company”"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’sCompany's annual report on Form 10-K for the year ended December 31, 2016, 2022, 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,in-force, the acquisition of other companies in the life insurance business, the acquisition of blocks of business and the administration and processing of life insurance business for other entities.
UTG has a strong philanthropic program. The Company generally allocates a portion of its earnings to be used for its philanthropic efforts primarily targeted to Christ-centered organizations or organizations that help the weak or poor. The Company also encourages its staff to be involved on a personal level through monetary giving, volunteerism and use of their talents to assist those less fortunate than themselves. Through these efforts, the Company hopes to make a positive difference in the local community, state, nation and world.
On February 21, 2023 Mr. James Rousey submitted a letter of resignation stating his desire to retire. In this regard, he retired as President of UTG, Inc. and its subsidiary, Universal Guaranty Life Insurance Company as well as his position as a Director of both entities. This was effective as of the date of the letter. The Board of Directors of UTG, Inc. and Universal Guaranty Life Insurance Company formally accepted the resignation letter on February 22, 2023. Mr. Jesse Correll, CEO and Chairman of the Board of the companies, assumed the title of President initially. At the June 2023 Board of Directors meeting, the Board appointed Mr. Daniel Roberts as President of Universal Guaranty Life Insurance Company. Mr. Correll continues to hold the President title for UTG, Inc. Mr. Roberts was previously a Vice President with both companies.
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’sCompany's critical accounting policies and the related estimates considered most significant by Management are disclosed in the Company’sCompany's Annual Report on Form 10-K for the year endedDecember 31, 2016. 2022. Management has identified the accounting policies related to cost of insurance acquired, assumptions and judgments utilized in determining if declineswhether any decline in fair valuesvalue is the result of investments are other-than-temporary,a credit loss or other factors, 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’sCompany's Condensed Consolidated Financial Statements and this Management’sManagement's Discussion and Analysis.
During the nine monthsnine-months ended September 30, 2017,2023, there were no additions to or changes in the critical accounting policies disclosed in the 20162022 Form 10-K, as discussed inexcept for the January 1, 2023 adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). See Note 2 – Recently Adopted Accounting Principles for further information regarding the adoption of the Notes to the Condensed Consolidated Financial Statements.ASU No. 2016-13.
Results of Operations
On a consolidated basis, the Company reported a net loss attributable to common shareholders’shareholders of approximately $(2.4)$(1.7) million for the nine monthnine-month period ended September 30, 20172023, and net income attributable to common shareholders’shareholders of approximately $134,000$5.2 million for the three monththree-month period ended September 30, 2017. 2023.
For the nine monthnine-month period ended September 30, 2016,2022, the Company reported net income attributable to common shareholders’shareholders of approximately $889,000$16.5 million and a net income attributable to common shareholders’shareholders of approximately $319,000$8.1 million for the three monththree-month period ended September 30, 2016.2022.
Revenues
The Company’s total revenues decreased approximately 28% when comparingFor the nine month periodsnine-month period ended September 30, 20172023, the Company reported total revenues of approximately $16.0 million and 2016.for the same period in 2022 total revenues of approximately $40.9 million. The Company’sCompany reported total revenues decreased byof approximately 14% when comparing$12.7 million and $16.7 million for the three month periodsthree-month period ended September 30, 20172023, and 2016. 2022, respectively.
The variance in total revenuesrevenue between third quarter 2022 and 2023 results, and the year-to-date results, is primarily the result of the change in the fair value of equity securities. The Company reported yeara year-to-date 2023 loss in the change in the fair value of equity securities of approximately $(7.2) million and a third quarter 2023 loss of approximately $(23,000). Most of the unrealized stock losses in 2023 occurred during the first quarter. It appears the markets have somewhat stabilized since then although continued volatility should always be expected.
This line item is material to datethe results reported in the Condensed Consolidated Statements of Operations, and this line item can also be extremely volatile, as it reflects changes in the stock market. While these results can be material and volatile, most of the equity holdings of the Company were acquired with a long-term view, thus making these intermediate changes in value of less concern to Management. Management monitors its equity holdings looking more at the specific entity and market it is in relative to performance and less to changes due to general market swings that occur over the holding period of the investment.
The Company reported revenue before net investment gains (losses) of approximately $14.2 million and $19.7 million for the nine-month-period ended September 30, 2023 and 2022, respectively. The Company reported $4.8 million and $7.7 million, respectively, of revenue before net investment gains (losses) for the third quarter is mainly attributableof 2023 and 2022, respectively. The decline in the 2023 results, when compared to fluctuations2022, are the result of a decline in net investment income and net realized investment gains reported by the Company during 2017 and 2016. Further analysis of the fluctuations in net investment income and net realized investment gains is provided below.
Premium and policy fee revenues, net of reinsurance, decreased approximately 14% when comparing the nine month period ended September 30, 2017 to the same period in 2016. Premium and policy fee revenues, net of reinsurance, decreased by approximately 18% when comparing the third quarter of 2017 to the same quarter in 2016. and year-to-date.
The Company writes minimal new business. Premium and policy fee revenues, net of reinsurance, represented 35% and 29% of the Company’s revenues as of September 30, 2017 and 2016, respectively.following table summarizes our investment performance.
| Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Net investment income | $ | 3,432,684 | | $ | 6,266,722 | | $ | 9,994,645 | | $ | 15,166,276 |
| Net investment gains (losses) | $ | 7,938,232 | | $ | 1,900,458 | | $ | 8,973,842 | | $ | 6,759,716 |
| Change in net unrealized investment gains (losses) on equity securities, pre-tax | $ | (23,403) | | $ | 7,097,738 | | $ | (7,209,399) | | $ | 14,462,029 |
The following table reflects net investment income of the Company:
| | | Three Months Ended | | | Nine Months Ended September 30, | | |
| | | September 30, | | | September 30, | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | | | | | | | | | | | | | | |
| Fixed maturities available for sale | | $ | 2,312,874 | | | $ | 2,308,923 | | | $ | 6,531,313 | | | $ | 6,946,490 | | $ | 1,012,577 | $ | 1,025,578 | $ | 3,032,835 | $ | 3,125,400 |
| Equity securities | | | 230,476 | | | | 297,682 | | | | 826,119 | | | | 998,544 | | | 250,435 | | 719,953 | | 949,096 | | 2,057,986 |
| Trading securities | | | - | | | | (119,749 | ) | | | (1,061 | ) | | | (80,272 | ) | | 0 | | 0 | | 0 | | (13,283) |
| Mortgage loans | | | 310,804 | | | | 314,128 | | | | 908,488 | | | | 1,566,902 | | | 242,073 | | 307,492 | | 916,524 | | 907,284 |
| Real estate | | | 533,291 | | | | 363,052 | | | | 1,544,739 | | | | 1,489,981 | | | 2,926,082 | | 4,924,772 | | 7,021,560 | | 11,103,517 |
| Notes receivable | | | 295,181 | | | | 284,142 | | | | 664,697 | | | | 1,225,723 | | | 354,125 | | 273,376 | | 1,087,103 | | 659,024 |
| Policy loans | | | 151,054 | | | | 177,317 | | | | 499,813 | | | | 442,435 | | | 103,137 | | 121,097 | | 327,353 | | 369,297 |
| Short term | | | - | | | | 7,877 | | | | - | | | | 7,877 | | |
| Short-term investments | | | 114,244 | | 0 | | 213,447 | | 0 |
| Cash and cash equivalents | | | 8,349 | | | | 10,905 | | | | 12,315 | | | | 20,465 | | | 333,643 | | 43,812 | | 700,182 | | 53,746 |
| Total consolidated investment income | | | 3,842,029 | | | | 3,644,277 | | | | 10,986,423 | | | | 12,618,145 | | | 5,336,316 | | 7,416,080 | | 14,248,100 | | 18,262,971 |
| Investment expenses | | | (720,741 | ) | | | (793,976 | ) | | | (2,012,234 | ) | | | (2,538,872 | ) | | (1,903,632) | | (1,149,358) | | (4,253,455) | | (3,096,695) |
| Consolidated net investment income | | $ | 3,121,288 | | | $ | 2,850,301 | | | $ | 8,974,189 | | | $ | 10,079,273 | | $ | 3,432,684 | $ | 6,266,722 | $ | 9,994,645 | $ | 15,166,276 |
Net investment income represented 54%70% and 445%77% of the Company’s total revenuesCompany's revenue before net investment gains (losses) as of September 30, 20172023 and 2016,2022, respectively. The Company reportedFor the third quarter ended September 30, net investment income represented 72% and 81% of approximately $9 millionrevenue before net investment gains (losses) for the nine month period ended September 30, 2017, a decrease of approximately 11% compared to the same period in 2016. For the three month period ended September 30, 2017,2023 and 2022, respectively. When comparing current and prior year results, net investment income increased approximately 10%, compared to the same quarterwas comparable in 2016. When comparing the three and nine month periods ended September 30, 2017 and 2016, income from investing activities was down in mosta majority of the investment categories withoutside of the largest variances being foundequity securities, real estate and cash and cash equivalents investment portfolios.
Since the start of 2022, we have seen more volatility in the fixed maturities, mortgage loans,U.S. markets in general and notes receivablehave seen an increase in bonds yields. This is due to the Federal Open Market Committee (“FOMC”) aggressively raising interest rates to fight the inflation that is currently being experienced. As of September 30, 2023, the interest rate environment experienced eleven rate increases totaling 5.25% over the last 1.5 years. While these actions had a negative impact on some of our investments that we currently own, this will also allow for better yields on future investments acquired as current investments mature.
Earnings from the equity securities investment categories.
portfolio represented approximately 7% and 11% of the total consolidated investment income reported by the Company during the nine months ended September 30, 2023 and 2022, respectively. Income from the fixed maturitiesequity securities portfolio was down approximately 54% or $1,109,000 when comparing year to date 2023 and 2022 results. Third quarter 2023 and 2022 earnings from equity securities represented approximately 5% and 10%, respectively, of the total investment income reported by the Company. Income from the equity securities portfolio was down approximately 65% when comparing third quarter 2023 and 2022 results.
The 2022 investment income from equity securities was exceptionally high, and the result of dividends from oil and gas equity securities. When comparing historical earnings, the 2023 earnings from the equity securities portfolio are more comparable to the third quarter and year to date results for 2021.
The earnings reported by the real estate investment portfolio represented 49% and 61% of the total consolidated investment income reported by the Company during the nine months ended September 30, 2023 and 2022, respectively. Earnings from the real estate investment portfolio were down approximately $4.1 million when comparing year to date 2023 and 2022 results. Earnings reported by the real estate investment portfolio represented 55% and 66% of the total consolidated investment income for the third quarter 2023 and 2022, respectively, and is down approximately 6% when comparing the nine month period ended September 30, 2017 to the same period in 2016. The decrease is attributable to the Company holding fewer bonds combined with upgrading credit quality. During 2017, the Company sold some lower rated, higher yielding securities and replaced them with higher rated, lower yielding securities.
Income from the mortgage loan investment portfolio is down$2.0 million in the current year, when comparingyear.
Earnings from the three and nine month periods ended September 30, 2017real estate investment portfolio are primarily related to the same periods in 2016. This isoil and gas and timber industries. In 2022, we experienced the resultreopening of the continued pay offworld economies post-COVID, and the demand for oil and gas and other commodities substantially increased, which resulted in increases in prices in the marketplace. Add to this the Russian invasion of loans within the portfolio, particularly the discounted mortgage loans, which have,Ukraine, and more upward pricing pressure was felt. In 2022, oil averaged $105 per barrel compared to an average price of $78 in recent periods, provided significant earnings. During the first quarter of 2016, two of the discounted mortgage loans paid off, which produced income of approximately $842,000.
Income2023. Earnings from the notes receivablereal estate investment portfolio is down inare expected to vary depending on the current year, when comparingreal estate activities and the three and nine month periods ended September 30, 2017 to the same periods in 2016. During the first quarter of 2016, one of the notes receivable was fully repaid and produced income of approximately $500,000.potential distributions that may occur.
The Company reportedfollowing table reflects net realized investment gains of approximately $1.7 million and $6 million for the nine month periods ended September 30, 2017 and 2016, respectively. During the third quarter of 2017 and 2016, the Company reported net realized investment gains of approximately $1.1 million and $1.9 million, respectively. (losses):
| | Three Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, |
| | | 2023 | | 2022 | | 2023 | | 2022 |
| Fixed maturities available for sale | | 12,500 | | 0 | | 58,333 | | (527) |
| Equity securities | | 110,742 | | 1,485,872 | | 351,250 | | 1,773,817 |
| Real estate | | 7,815,364 | | 414,586 | | 8,541,124 | | 4,986,426 |
| Short-term investments | | (374) | | 0 | | 23,135 | | 0 |
| Consolidated net realized investment gains | | 7,938,232 | | 1,900,458 | | 8,973,842 | | 6,759,716 |
| Change in fair value of equity securities | | (23,403) | | 7,097,738 | | (7,209,399) | | 14,462,029 |
| | $ | 7,914,829 | $ | 8,998,196 | $ | 1,764,443 | $ | 21,221,745 |
Realized investment gains are the result of one-time events and are expected to vary from quarteryear to quarter.year.
The 2017 netsale of four small equity security holdings represents the realized investment gains are attributable to the sales of certain fixed maturities andfrom equity securities. During the second quarter of 2017,securities during 2023. In 2022, the Company sold certain equitytwo securities that producedrepresented a majority of the gain reported.
During 2023, the Company sold several smaller real estate land parcels located in Kentucky producing realized gains of approximately $850,000. During the$760,000. Additionally, during third quarter of 2017,2023, the Company sold certain fixed maturities that produced gainsa large land parcel in West Virginia realizing a gain of approximately $800,000. As mentioned above,$7.6 million. During 2022, the Company made the decision to sell some lower rated, higher yielding securities and replace them with higher rated, lower yielding securities.
The 2016 net realized investment gains were mainly attributable to the sale ofsold a parcel of real estate during the second quarter of 2016parcel in Kentucky that produced a gain of $3.5 million and a parcel in Georgia that produced a gain of $812,000.
The Company reported a year-to-date 2023 loss in the change in the fair value of equity securities of approximately $3.2$(7.2) million and a third quarter 2023 loss of approximately $(23,000). For the nine month period ended September 30, 2022, the Company reported a gain of approximately $14.5 million and a third quarter gain of approximately $7.1 million.
This line item is material to the results reported in the Condensed Consolidated Statements of Operations, and this line item can also be extremely volatile, as it reflects changes in the stock market. While these results can be material and volatile, most of the equity holdings of the Company were acquired with a long-term view, thus making these intermediate changes in value of less concern to Management. Management monitors its equity holdings looking more at the specific entity and market it is in relative to performance and less to changes due to general market swings that occur over the holding period of the investment.
Year to date, the Company has seen negative results in its equity investments. However, most all the negative results occurred in the first quarter of 2023. Since that time, we reported a slight rebound, and it appears to be the result of market stabilization. Equity investments primarily in the oil and gas area represent almost all of the unrealized losses reported in 2023. The Company experienced significant unrealized gains on these same investments in 2022. Oil prices declined in early 2023 as concerns of recession intensified leading to a reduction in world demand for oil temporarily causing the price to decline. Periodic pull backs and downward market adjustments are expected by management. Management believes its current equity investments continue to be solid investments for the Company and have further growth potential; however, changes in market conditions could cause volatility in market prices.
In summary, the Company’s basis for future revenue growth is expected to come from the following primary sources: conservationConservation 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 $19.4$11.0 million for the nine month period ended September 30, 2017,2023, a decrease of approximately 10%4% from the same period in 2016. For the three month period ended September 30, 2017, total benefits and other expenses decreased approximately 17%, compared to the same quarter in 2016.2022. Benefits, claims and settlement expenses represented approximately 70%58% and 71%59% of the Company’sCompany's total expenses for the three and nine month periods ended September 30, 2017,2023 and 2022, respectively. The other major expense category of the Company is operating expenses, which represented approximately 28%40% and 27%39% of the Company's total expenses for the nine month periods ended September 30, 2023 and 2022, respectively.
When comparing third quarter 2023 and 2022 results, total benefits and other expenses were up approximately 15%. Benefits, claims and settlement expenses represented 53% and 52% of the Company’s total expenses for the threethird quarter of 2023 and nine month periods ended September 30, 2017,2022, respectively.
Life benefits, claims and settlement expenses, net of reinsurance benefits and claims decreasedwere down approximately 14% in4% when comparing the nine month periodmonths ended September 30, 2017, compared to the same period in 2016. For the three month period ended September 30, 2017,2023, and 2022. When comparing third quarter 2023 and 2022 results, life benefits, claims and settlement expenses net of reinsurance benefits and claims, decreasedwere up approximately 21%, compared to the same quarter in 2016.16%. Policy claims vary from period to period and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.
Early in the COVID-19 pandemic, the Company implemented a process to monitor death claims resulting from COVID-19. Prior to the pandemic, death benefits were $12.6 million, $12.8 million and $12.4 million in 2017, 2018 and 2019, respectively. During the three plus years of the pandemic, total death benefits were $14.3 million, $16.0 million, and $13.3 million in 2020, 2021, and 2022, respectively. When comparing the nine-month periods ended 2023 and 2022, there was a decline of approximately $420,000 in death benefits, net of reinsurance. Death benefits of the Company have been higher than recent past experience, even when adjusting for the identified COVID-19 claims. This anomaly showed throughout the entire U.S. insurance industry. Industry experts believe this increase in death benefits while not always directly related to COVID-19, were caused indirectly by the pandemic due to delays in medical care as a result of the lockdown in 2020 and then later, people’s fears of seeking out treatment and trouble making up appointments. This is further compounded by depression from isolation. In the latter half of 2022, claims appeared to be moving back to pre-pandemic levels. This has continued throughout 2023. While we believe our mortality experience has returned to pre-pandemic norms, we cannot be absolutely certain at this time. For the nine months of 2023, the Company has had $63,000 of claims associated with COVID.
Changes in policyholder reserves, or future policy benefits, also impact this line item. Reserves are calculated on an individual policy basis and generally increase over the life of the policy as a result of additional premium payments and acknowledgment of increased risk as the insured continues to age.
The short-term impact of policy surrenders is negligible since a reserve for future policy benefits payable is held which is, at a minimum, equal to and generally greater than the cash surrender value of a policy. The benefit of fewer policy surrenders is primarily received over a longer time period through the retention of the Company’s asset base.
Operating expenses decreased approximately 1% in the nine month period ended September 30, 2023 as compared to the same period in 2022. For third quarter operating expenses increased approximately 15% comparing 2023 to 2022.
While comparable year to date, there are three expense items that are different from the prior year, salary, charitable contributions and aircraft maintenance. The third quarter increase in expenses were from a bonus accrual related to the sale of the West Virginia real estate during the quarter and an increase in charitable contributions as the realized gain significantly increased our current year taxable income. Charitable expense fluctuates based on reported taxable income of the Company. Additionally, in 2022 the Company incurred maintenance expenses relating to the Company’s partially owned aircraft. The year to date 2023 aircraft maintenance expense is $316,000 less than year to date 2022. Expenses in the remaining categories are comparable between years.
As mentioned above in the Overview section of the Management Discussion and Analysis, UTG has a strong philanthropic program. The Company generally allocates a portion of its earnings to be used for its philanthropic efforts primarily targeted to Christ-centered organizations or organizations that help the weak or poor. Charitable contributions made by the Company are expected to vary from year to year depending on the earnings of the Company.
Net amortization of cost of insurance acquired decreased approximately 4% during the nine monthwhen comparing current and three month periods ended September 30, 2017 compared to the same period in 2016.prior year activity. Cost of insurance acquired is established when an insurance company is acquired or when the Company acquires a block of in-force business. The Company assigns a portion of its cost to the right to receive future profits from insurance contracts existing at the date of the acquisition. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates may vary due to risk analysis performed at the time of acquisition on the business acquired. The Company utilizes a 12% discount rate on the remaining unamortized business. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force. This expense is expected to decrease unless the Company acquires a new block of business.
UTG has a strong philanthropic program. The Company generally allocates a portion of its taxable income to be used for its philanthropic efforts primarily targeted to Christ-centered organizations or organizations that help the weak or poor. Charitable contributions made by the Company are expected to vary from year to year depending on the earnings of the Company.
Effective January 1, 2017, the Company and FSNB began sharing certain services. The shared services focuses on departments commonly utilized by both organizations such as Financial Accounting, Human Resources and Information Technology.
Management continues to place significant emphasis on expense monitoring and cost containment. Maintaining administrative efficiencies directly impacts net income.
Financial Condition
Investment Information
Investments represent approximately 85% of total assets at September 30, 2017 and December 31, 2016. 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 isthey are permitted to make, and the amount of funds that may be used for any one type of investment. In light
The following table reflects, by investment category, the investments held by the Company as of these statutesSeptember 30, 2023, and regulations,December 31, 2022:
| | | September 30, 2023 | | As a % of Total Investments | | As a % of Total Assets | |
| Fixed maturities | $ | 101,674,112 | | 29% | | 24% | |
| Equity securities, at fair value | | 144,207,758 | | 41% | | 35% | |
| Equity securities, at cost | | 15,683,343 | | 4% | | 4% | |
| Mortgage loans | | 14,785,687 | | 4% | | 4% | |
| Real Estate | | 31,609,218 | | 9% | | 8% | |
| Notes receivable | | 13,182,860 | | 4% | | 3% | |
| Policy loans | | 6,160,290 | | 2% | | 1% | |
| Short-term | | 23,393,115 | | 7% | | 6% | |
| Total investments | $ | 350,696,383 | | 100% | | 85% | |
| | | December 31, 2022 | | As a % of Total Investments | | As a % of Total Assets | |
| Fixed maturities | $ | 108,313,059 | | 30% | | 24% | |
| Equity securities, at fair value | | 150,053,686 | | 41% | | 33% | |
| Equity securities, at cost | | 15,683,343 | | 4% | | 4% | |
| Mortgage loans | | 30,698,694 | | 8% | | 7% | |
| Real Estate | | 34,934,352 | | 10% | | 8% | |
| Notes receivable | | 14,424,127 | | 4% | | 3% | |
| Policy loans | | 6,567,434 | | 2% | | 1% | |
| Short-term | | 3,596,941 | | 1% | | 1% | |
| Total investments | $ | 364,271,636 | | 100% | | 81% | |
The Company's investments are generally managed to match related insurance and policyholder liabilities. The comparison of investment return with insurance or investment product crediting rates establishes an interest spread. Interest crediting rates on adjustable-rate policies have been reduced to their guaranteed minimum rates, and as such, cannot be lowered any further. Policy interest crediting rate changes and expense load changes become effective on an individual policy basis on the majoritynext policy anniversary. Therefore, it takes a full year from the time the change was determined for the full impact of such change to be realized. If interest rates decline in the future, the Company will not be able to lower rates and both net investment income and net income will be impacted negatively.
The Company’s total investments represented 85% and 81% of the Company’s total assets as of September 30, 2023, and December 31, 2022, respectively. Fixed maturities and equity securities consistently represented a substantial portion, 70% and 71%, of the total investments during 2023 and 2022, respectively. The overall investment portfolio is invested inmix, as a diverse setpercentage of securities.total investments, remained fairly consistent when comparing the respective investments held as of September 30, 2023 and December 31, 2022.
As of September 30, 2017,2023, 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 value, with changes in market value charged directly to the other comprehensive component of shareholders' equity. Changes in the market value of available for sale securities resulted in net unrealized gains (losses) of approximately $8.1$(2.0) million for the nine month period endedand $(18.5) million as of September 30, 20172023 and $5 million for the third quarter of 2017. Changes in the market value of available for sale securities resulted in net unrealized gains of approximately $24.7 million for the nine month period ended September 30, 2016 and $4.7 million for the third quarter of 2016.2022, respectively. The variance in the net unrealized gains and losses is the result of normal market fluctuations andmainly related to changes in interest rates.rates in the marketplace.
Capital ResourcesIn the first quarter of 2023, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASCD 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposure such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.
Total shareholders’ equity increased by approximately 4% asThe Company adopted ASC 326 and all related subsequent amendments thereto using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposure. The transition adjustment of September 30, 2017 compared to December 31, 2016. The increase in total shareholders’ equity is the resultadoption of CECL included an increase in accumulatedthe allowance for credit losses on loans of $540,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded commitments of $35,000, which is recorded within other comprehensive income.liabilities. The Company recorded a net decrease to retained earnings of $454,250 as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards ("Incurred Loss").
The Company’s investments are predominatelyupdated guidance also amended the current other-than-temporary model for available-for-sale securities and requires the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized costs basis and its fair value. In addition, the length of time a security has been in fixed maturity investments such as bonds, which provide sufficient return to cover future obligations. The Company carries allan unrealized loss position will no longer impact the determination of its fixed maturity holdings as available for sale, which are reported inwhether a credit loss exists. See Note 2 – Recently Issued Accounting Standards – of the Condensed Consolidated Financial Statements at theirfor further information on this topic.
Management continues to view the Company’s investment portfolio with utmost priority. Significant time has been spent internally researching the Company’s risk and communicating with outside investment advisors about the current investment environment and ways to ensure preservation of capital and mitigate losses. Management has put extensive efforts into evaluating the investment holdings. Additionally, members of the Company’s Board of Directors and investment committee have been solicited for advice and provided with information. Management reviews the Company’s entire portfolio on a security level basis to be sure all understand our holdings, potential risks and underlying credit supporting the investments. Management intends to continue its close monitoring of its bond holdings and other investments for possible deterioration or market value.condition changes. Future events may result in Management’s determination that certain current investment holdings may need to be sold which could result in gains or losses in future periods.
Capital Resources
Total shareholders' equity decreased by approximately 3% as of September 30, 2023, compared to December 31, 2022. 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 and the decline in market value of the available for sale fixed maturities portfolio.
Liquidity
Liquidity provides the Company with the ability to meet on demand the cash commitments required by its business operations and financial obligations. The Company’s liquidity is primarily derived from cash balances, a portfolio of marketable securities and line of credit facilities. The Company has threetwo principal needs for cash -– the insurance company’s contractual obligations to policyholders and the payment of operating expenses.
Parent Company Liquidity
UTG is a holding company that has no day-to-day operations of its own. Cash flows from UTG’s insurance subsidiary, UG, are used to pay costs associated with maintaining the Company in good standing with states in which it does business and purchasing outstanding shares of UTG stock. UTG's cash flow is dependent on management fees received from its insurance subsidiary, stockholder dividends from its subsidiary and earnings received on cash balances. As of September 30, 2023, and December 31, 2022, substantially all of the consolidated shareholders’ equity represents net assets of its subsidiaries. As of September 30, 2023, the Parent company has received $2 million in dividends from its insurance subsidiary. Certain restrictions exist on the payment of dividends from the insurance subsidiary to the Parent company. For further information regarding the restrictions on the payment of dividends by the insurance subsidiary, see Note 9 – Shareholders’ Equity in the Notes to the Consolidated Financial Statements. Although these restrictions exist, dividend availability from the insurance subsidiary has historically been sufficient to meet the cash flow needs of the Parent company.
Insurance Subsidiary Liquidity
Sources of cash flows for the insurance subsidiary primarily consist of premium and investment income. Cash outflows from operations include policy benefit payments, administrative expenses, taxes and debt service.dividends to the Parent company.
Short-Term Borrowings
During October of 2022, the Federal Home Loan Bank approved UG’s Cash andManagement Advance Application (“CMA”). The CMA is a source of overnight liquidity utilized to address the day-to-day cash equivalents represented 4%needs of total assetsa Company. The CMA gives the company the option of selecting a variable rate of interest for up to 90 days or a fixed rate for a maximum of 30 days. The variable rate CMA is prepayable at any time without a fee, while the fixed CMA is not prepayable prior to maturity. The Company has pledged bonds with a collateral lendable value of $18.9 million as of September 30, 20172023. During the fourth quarter of 2022, the Company borrowed $19 million and December 31, 2016. Fixed maturities, as a percentage of total assets, were approximately 46% and 47% as of September 30, 2017 and December 31, 2016, respectively.
The Company currently has accessplanned to utilize the funds for operating liquidity. UTG has an $8,000,000 revolving credit note with Illinois National Bank. At September 30, 2017,investing activities. During the first quarter of 2023, the Company had norepaid the entire outstanding borrowings against the UTG line of credit.principal balance. The CMA agreement was renewed for another year in October 2023.
Future policy benefits are primarily long-termConsolidated Liquidity
Cash used in natureoperating activities was approximately $9.7 million in 2023 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.
Net cash used in operating activities was approximately $7.1$0.3 million and $5.3 million for the nine month periods ended September 30, 2017 and 2016,in 2022, respectively. Sources of operating cash flows of the Company, as with most insurance entities, is comprised primarily of premiums received on life insurance products and income earned on investments. Uses of operating cash flows consist primarily of payments of benefits to policyholders and beneficiaries and operating expenses. The Company has not marketed any significant new products for several years. As such, premium revenues continue to decline. Management anticipates future cash flows from operations to remain similar to historic trends.
Net cash provided byDuring 2023, the Company’s investing activities wasprovided net cash of approximately $10.5$11.9 million and $11.6$10.8 million for the nine month period ended September 30, 2017in 2022, respectively. The Company recognized proceeds of approximately $59.6 million and 2016,$37.1 million from investments sold and matured in 2023 and 2022, respectively. The Company used approximately $47.6 million and $26.3 million to acquire investments during 2023 and 2022, respectively. The net cash provided by investing activities is expected to vary from quarteryear to quarteryear 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 operationsNet cash used in financing activities was approximately $20.0 million and $16.6 million during 2023 and 2022, respectively. As of its own. Funds required to meet its expenses, generally costs associated with maintainingSeptember 30, 2023 and December 31, 2022, the Company had $0 and $19 million, respectively, in good standingdebt outstanding with states in which it does businessthird parties.
The Company had cash and cash equivalents of approximately $27.6 million as of September 30, 2023. Additionally, the Company had short term investments of $23.4 million and a portfolio of marketable fixed maturity securities that could be sold, if an unexpected event were to occur. These securities had a fair value of approximately $101.7 million however, the strong cash flows from investing activities, investment maturities and the servicing of its debt, 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 September 30, 2017, substantially allavailability of the consolidated shareholders’ equity represented net assetsline 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 wherecredit facilities make it unlikely that the Company is domiciled. No dividends were paidwould need to shareholders in 2016 orsell securities for liquidity purposes.
Management believes the nine month period ended September 30, 2017.overall sources of liquidity available will be sufficient to satisfy its financial obligations.
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, 2016, UG had statutory net income of approximately $4.6 million. At December 31, 2016 UG’s statutory capital and surplus amounted to approximately $45.2 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 2016, UG paid UTG ordinary dividends of $1 million. During the second quarter of 2017, UG paid UTG an ordinary dividend of $2 million. UTG used the dividends received during 2016 and 2017 for general operations of the Company.
ITEMItem 4. CONTROLS AND PROCEDURESControls and Procedure
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In addition, the disclosure controls and procedures ensure that information required to be disclosed is accumulated and communicated to Management, including the principal executive officer and principal financial officer, allowing timely decisions regarding required disclosure. Under the supervision and with the participation of our Management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
PARTPart II. OTHER INFORMATIONOther Information
ITEMItem 1. LEGAL PROCEEDINGSLegal Proceedings
NONENone
ITEMItem 1A. RISK FACTORSRisk Factors
NONENone
ITEMItem 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSUnregistered Sales of Equity Securities and Use of Proceeds
NONENone
ITEMItem 3. DEFAULTS UPON SENIOR SECURITIESDefaults Upon Senior Securities
NONENone
ITEMItem 4. MINE SAFETY DISCLOSURESMine Safety Disclosures
NONENone
ITEMItem 5. OTHER INFORMATIONOther Information
NONENone
ITEMItem 6. EXHIBITSExhibits
| Exhibit Number | Description |
| *31.1 | Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Certification of Theodore C. Miller, Chief Financial Officer and Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| Certificate of Theodore C. Miller, Chief Financial Officer and Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| **101 | The following financial statements from the Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements of Shareholders' Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to the Condensed Consolidated Financial Statements (detail tagged). |
| **104 | Cover Page Interactive Data File (formatted in iXBRL and included in exhibit 101). |
*Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UTG, INC.
(Registrant)
| Date: | November 9, 201713, 2023 | | By | /s/ James P. RouseyJesse T. Correll |
| | | | | James P. RouseyJesse T. Correll |
| | | | | Chairman of the Board, Chief Executive Officer, President and Director (Principal Executive Officer) |
| Date: | November 9, 201713, 2023 | | By | /s/ Theodore C. Miller |
| | | | | Theodore C. Miller |
| | | | | Senior Vice President and Chief Financial Officer |
EXHIBIT INDEX
Exhibit Number | Description |
| Certification of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| Certification of Theodore C. Miller, Chief Financial Officer and Senior Vice President(Principal Financial and Corporate Secretary of UTG, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| Certificate of Jesse T. Correll, Chief Executive Officer and Chairman of the Board of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| Certificate of Theodore C. Miller, Chief Financial Officer, Senior Vice President and Corporate Secretary of UTG, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
**101 | Interactive Data File | |