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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2023 |
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or |
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from _____________ to ______________ |
Commission File Number 000-16867
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UTG, INC. |
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(Exact name of registrant as specified in its charter) |
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Delaware |
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20-2907892 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
205 North Depot Street, Stanford, KY |
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40484 |
(Address of principal executive offices) |
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(Zip code) |
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|
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Registrant’s telephone number, including area code: (217) 241-6300
Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class |
Name of each exchange on which registered |
None |
None |
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock, stated value $.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2023, shares of the Registrant’s common stock held by non-affiliates (based upon the price of the last sale of $38.63 per share), had an aggregate market value of approximately $35,889,858.
At January 31, 2024 the Registrant had 3,164,779 outstanding shares of common stock, stated value $.001 per share.
Documents incorporated by reference: None
UTG, Inc.
Form 10-K
Year Ended December 31, 2023
TABLE OF CONTENTS
PART I |
4 |
Item 1. Business |
4 |
Item 1A. Risk Factors |
8 |
Item 1B. Unresolved Staff Comment |
8 |
Item 1C. Cybersecurity |
9 |
Item 2. Properties |
10 |
Item 3. Legal Proceedings |
10 |
Item 4. Mine Safety Disclosures |
10 |
PART II |
10 |
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
10 |
Item 6. Reserved |
11 |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
11 |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk |
21 |
Item 8. Financial Statements and Supplementary Data |
21 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |
56 |
Item 9A. Controls and Procedures |
57 |
Item 9B. Other Information |
57 |
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
57 |
PART III |
58 |
Item 10. Directors, Executive Officers and Corporate Governance |
58 |
Item 11. Executive Compensation |
62 |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
63 |
Item 13. Certain Relationships and Related Transactions, and Director Independence |
65 |
Item 14. Principal Accountant Fees and Services |
66 |
PART IV |
67 |
Item 15. Exhibit and Financial Statement Schedules |
67 |
Item 16. Form 10-K Summary |
69 |
Forward-Looking Statements
This report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probably,” or similar expressions, we are making forward-looking statements.
Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur. Our forward-looking statements speak only as of the date made, and we undertake no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments, unless the securities laws require us to do so.
General
The Holding Company - UTG, Inc. (the “Registrant”, “Company” or “UTG”) is an insurance holding company incorporated in the state of Delaware in 2005 and headquartered in Stanford, KY. The Company’s principal subsidiary is Universal Guaranty Life Insurance Company (“UG”). The Registrant and its primary subsidiary have only one significant segment, insurance.
The holding company has no significant business operations of its own and relies on fees, dividends and other distributions from its operating subsidiary as the principal source of cash flows to meet its obligations. The Company may explore supplemental sources of income in the future. The cash outlays of the Company mainly consist of operational costs and the costs of repurchasing Company common stock.
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.
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, a Kentucky corporation, (“FSF”) and First Southern Bancorp, Inc. (“FSBI”), a financial services holding company. FSBI operates through its 100% owned subsidiary bank, First Southern National Bank (“FSNB”). Banking activities are conducted through multiple locations within south-central and western Kentucky. Mr. Correll is Chief Executive Officer and Chairman of the Board of Directors of UTG and is currently UTG’s largest shareholder through his ownership control of FSF, FSBI and affiliates. At December 31, 2023, Mr. Correll owns or controls directly and indirectly approximately 66% of UTG’s outstanding stock.
At December 31, 2023, the Company had consolidated assets of $442 million, consolidated liabilities of $280 million and total shareholders’ equity of $163 million. The Company’s consolidated liabilities include policyholder liabilities and accruals of $243 million.
The Company’s principal executive office is located at 205 North Depot Street, Stanford, Kentucky 40484. The Company’s telephone number is 217-241-6300.
The Insurance Company - Universal Guaranty Life Insurance Company is an Ohio domiciled life insurance company and is licensed in 37 states. The Company’s dominant business is individual life insurance, which includes the servicing of existing insurance business in-force, the acquisition of other companies in the insurance business, and the administration processing of life insurance business for other entities. The Insurance Company’s operations are conducted through its administrative office located in Stanford, Kentucky.
UG has several wholly-owned and majority-owned subsidiaries. The subsidiaries were formed to hold certain real estate and other investments. The investments were placed into the limited liability companies and partnerships to provide additional protection to the policyholders and to UG.
Reinsurance - As is customary in the insurance industry, the insurance subsidiary cedes insurance to, and assumes insurance from, other insurance companies under reinsurance agreements. Reinsurance agreements are intended to limit a life insurer’s maximum loss on a large or unusually hazardous risk or to obtain a greater diversification of risk. The ceding insurance company remains primarily liable with respect to ceded insurance should any reinsurer be unable to meet the obligations assumed by it. However, it is the practice of insurers to reduce their exposure to loss to the extent that they have been reinsured with other insurance companies. The Company sets a limit on the amount of insurance retained on the life of any one person. The Company will not retain more than $125,000, including accidental death benefits, on any one life.
The Company’s reinsured business is ceded to numerous reinsurers. The Company monitors the solvency of its reinsurers in seeking to minimize the risk of loss in the event of a failure by one of the parties. The Company is primarily liable to the insureds even if the reinsurers are unable to meet their obligations. The primary reinsurers of the Company are large, well-capitalized entities. See Note 4 - Reinsurance in the Notes to the Consolidated Financial Statements for additional information regarding the Company’s reinsurance activities.
Reserves - The applicable insurance laws under which the insurance subsidiary operates require that the insurance company report policy reserves as liabilities to meet future obligations on the policies in-force. These reserves are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated in accordance with applicable laws to be sufficient to meet the various policy and contract obligations as they mature. These laws specify that the reserves shall not be less than reserves calculated using certain mortality tables and interest rates.
The liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method. These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on the life insurance subsidiary’s experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations. The Company makes these assumptions at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 2% to 6% for life insurance and 2.5% to 7.5% for annuities. Benefit reserves for traditional life insurance policies include certain deferred profits on limited-payment policies that are being recognized in income over the policy term. Policy benefit claims are charged to expense in the period that the claims are incurred. The mortality rate assumptions for policies currently issued by the Company are based on 2017 CSO Ultimate tables. Withdrawal rate assumptions are based upon Linton B or Linton C, which are industry standard actuarial tables for forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims in excess of related policy account balances.
Business Strategy
UG’s product portfolio consists of a limited number of life insurance product offerings. All of the products are individual life insurance products, with design variations from each other to provide choices to the customer. These variations generally center around the length of the premium paying period, length of the coverage period and whether the product accumulates cash value or not.
While the Company does not actively sell any new policies today, it has the following products available for issue:
Tradition – The Tradition policy is a fixed premium whole life insurance policy. Premiums are level and payable for life. Issue ages are 0-75. The minimum face amount is the greater of $10,000 or the amount of coverage provided by a $100 annual premium.
Annuity - The annuity product is a 5-year, single premium product. The product offers a guaranteed minimum rate of 1% and the rate can be adjusted at any time. The maximum surrender charge is 5% and subject to waiver for certain qualifying events. The annuity product offers a 10% free withdrawal each year beginning in year 2.
Business Concentrations
The Company maintains cash balances in financial institutions that at times may exceed federally insured limits. The Company maintains its primary operating cash accounts with First Southern National Bank, an affiliate of the largest shareholder of UTG, Mr. Jesse T. Correll, the Company’s CEO and Chairman. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Because UG serves primarily individuals located in three states, the ability of our customers to pay their insurance premiums is impacted by the economic conditions in these areas. As of December 31, 2023 and 2022, respectively, approximately 51% and 50% 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 majority of the investments included in the Consolidated Balance Sheets are owned by UTG’s subsidiary, UG. As an insurance company, UG is subject to applicable state insurance laws and regulations, which limit the concentration of investments in any one category or class and further limit the investment in any one issuer. Generally, these limitations are imposed as a percentage of statutory assets or percentage of statutory capital and surplus of each company.
The Company owns a variety of investments associated with the oil and gas industry. These investments represented approximately 28% and 31% of the Company’s total invested assets at December 31, 2023 and 2022, respectively.
The Company’s investment real estate portfolio includes ownership in oil and gas royalties. As of December 31, 2023 and 2022, investments in oil and gas royalties represented 34% and 30%, respectively, of the total investment real estate portfolio.
See Note 13 - Concentrations of the Consolidated Financial Statements for additional disclosures regarding concentrations that have been identified by the Company.
Competition
The insurance business is a highly competitive industry and there are a number of other companies, both stock and mutual, doing business in areas where the Company operates. Many of these competing insurers are larger, have more diversified and established lines of insurance coverage, have substantially greater financial resources and brand recognition, as well as a greater number of agents. Other significant competitive factors in the insurance industry include policyholder benefits, service to policyholders, and premium rates.
In recent years, the Company has not placed an emphasis on new business production. Costs associated with supporting new business can be significant. Current sales primarily represent sales to existing customers through additional insurance needs or conservation efforts. The Company currently encourages policy retention as opposed to new sales in an attempt to maintain or improve current persistency levels.
The Company performs administrative work as a third-party administrator (“TPA”) for unaffiliated life insurance companies. The Company provides TPA services to insurance companies seeking business process outsourcing solutions. Revenue generated from TPA services is considered insignificant to the overall financial statements.
Human Capital
As of December 31, 2023, UTG and its subsidiaries had 40 full-time employees located in Kentucky and Illinois. These individuals are further supported by certain employees of First Southern National Bank (an affiliated entity) through a shared services arrangement. Under this arrangement, the two entities utilize the services of the other’s staff in certain instances for the betterment of both entities. Personnel within departments such as accounting, human resources and information technology are shared between the entities. UTG’s operations are headquartered in Stanford, Kentucky. The Company respects, values and invites diversity in our team members, customers, suppliers, and community. We seek to recognize the unique contribution each individual brings to our Company, and we are fully committed to supporting a rich culture of diversity as a cornerstone to our success. The Company strives to attract, develop, and retain talented individuals. To attract such individuals, we provide professional and personal development opportunities to team members. In addition, we seek to improve retention, development, and job satisfaction of team members from diverse groups by providing career skills training, peer mentoring and opportunities to interact with senior leaders. We encourage our team members to take initiative, accept challenges and achieve goals, all of which enables our team to work efficiently while providing excellent customer service which supports the Company’s strong performance.
UTG offers competitive compensation and benefits. Our pay for performance compensation philosophy is designed to reward employees for achievement and to align employee interests with the Company’s long-term growth. The Company’s benefits program includes health care, wellness initiatives, retirement offerings and paid time off.
Workplace health and safety is a vital aspect of running our business. We believe that safety must always be an integral part of any function or service performed, and the protection of our employees and visitors is our utmost priority. We have a business continuity plan in place that allows us to respond to threats to our health and safety, while ensuring that we can continue to provide quality service to our clients and shareholders at all times.
Code of Ethics
The Board of Directors has adopted a code of ethics for directors, officers, and financial personnel.
Regulation
Holding Company - States have enacted legislation requiring registration and periodic reporting by insurance companies domiciled within their respective jurisdictions that control or are controlled by other corporations so as to constitute a holding company system. Insurance holding company system statutes and regulations impose various limitations on investments in subsidiaries and may require prior regulatory approval for material transactions between insurers and affiliates and for the payment of certain dividends and other distributions.
Insurance - Insurance companies are subject to regulation and supervision in the states in which they do business. Generally the state supervisory agencies have broad administrative powers relating to granting and revoking licenses to transact business, licensing agents, approving policy forms, regulating trade practices, approving certain premium rates, setting minimum reserve and loss ratio requirements, determining the form and content of required financial statements, and prescribing the type and amount of investments permitted. Insurance companies are also required to file detailed annual reports with supervisory agencies, and records of their business are subject to examination at any time. Under the rules of the National Association of Insurance Commissioners (“NAIC”), insurance companies are examined periodically by one or more of the supervisory agencies.
Statutory Restrictions – Restrictions exist on the flow of funds to UTG from its insurance subsidiary. Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital and surplus. UG is required to maintain minimum statutory surplus of $2,500,000. At December 31, 2023, substantially all of the consolidated shareholders’ equity represents net assets of UTG’s subsidiaries.
Risk-Based Capital - The NAIC requires a risk-based capital formula be applied to all life and health insurers. The risk-based capital formula is a threshold formula rather than a target capital formula. It is designed only to identify companies that require regulatory attention and is not to be used to rate or rank companies that are adequately capitalized. UTG’s insurance subsidiary, UG, is more than adequately capitalized under the risk-based capital formula.
Guaranty Assessments – State guaranty laws provide for assessments from insurance companies to be placed into a fund which is used, in the event of failure or insolvency of an insurance company, to fulfill the obligations of that company to its policyholders. The amount which a company is assessed is determined according to the extent of these unsatisfied obligations in each state. Assessments are recoverable to a great extent as offsets against state premium taxes.
Stock Repurchase Program
The Board of Directors of UTG has authorized the repurchase in the open market or in privately negotiated transactions of UTG’s common stock. At a meeting of the Board of Directors in March of 2022, the Board of Directors of UTG authorized the repurchase of up to an additional $2 million of UTG’s common stock, for a total repurchase of $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 2023, the Company repurchased 30,646 shares through the stock repurchase program for $881,966. Through December 31, 2023, UTG has spent $20,191,403 in the acquisition of 1,356,859 shares under this program.
Transactions with Affiliates
The articles of incorporation of UG contain the following language under item 12 relative to related party transactions:
A director shall not be disqualified from-dealing with or contracting with the corporation as vendor, purchaser; employee, agent or otherwise; nor, in the absence of fraud, shall any transaction or contract or act of this corporation be void or in any way affected or invalidated by the fact that any director or any firm of which any director is a member or any corporation of which any director is a shareholder, director or officer is in any way interested in such transaction or contract or act, provided the fact that such director or such firm or such corporation so interested shall be disclosed or shall be known to the Board of Directors or such members thereof as shall be present at any meeting of the Board of Directors at which action upon any such contract or transaction or act shall be taken: nor shall any such director be accountable or responsible to the company for or in respect to such transaction or contract or act of. this corporation or for any gains or profits realized by him by reason of the fact that he or any firm of which he is a member or any corporation of which he is a shareholder, director or officer is interested in such action or contract; and any such director may be counted in determining the existence of a quorum of any meeting of the Board of Directors of the company which shall authorize or take action in respect to any such contract or transaction or act and may vote thereat to authorize, ratify, or approve any such contract or transaction or act, with like force and effect as if he or any firm of which he is a member or any corporation of which he is a shareholder, director or officer were not interested in such transaction or contract or act.
Note 11 – Related Party Transactions of the Consolidated Financial Statements provides disclosures regarding transactions with related parties.
Anti-Money Laundering Laws
A series of laws and regulations beginning with the Bank Secrecy Act of 1970 require financial institutions to prevent, detect, and report illicit or illegal financial activities to the federal government to prevent money laundering, international drug trafficking, and terrorism. Under the US PATRIOT Act of 2001, financial institutions are subject to prohibitions against specified financial transactions and account relationships, requirements regarding the Customer Identification Program, as well as enhanced due diligence and “know your customer” standards in their dealings with high-risk customers, foreign financial institutions, and foreign individuals and entities. These rules also mandate a variety of record keeping, reporting and employee training requirements.
Data Security
Increased global IT security threats and more sophisticated and targeted computer crime pose a risk to the security of systems and networks and the confidentiality, availability and integrity of data. Although the Company makes efforts to maintain the security and integrity of the networks and systems, there can be no assurance that the security efforts will be effective or that attempted security breaches or disruptions would not be successful or damaging. In the event a security breach or failure results in the disclosure of sensitive third-party data or the transmission of harmful/malicious code to third parties, the Company could be subject to liability claims. Depending on their nature and scope, such threats also could potentially lead to improper use of our systems and networks, manipulation and destruction of data, loss of trade secrets, system downtimes and operational disruptions, which in turn, could adversely affect our reputation, competitiveness and results of operations.
Available Information
The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports with the Securities and Exchange Commission (“SEC”) pursuant to section 13(a) or 15(d) of the Securities and Exchange Act of 1934.
The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC on its website at www.sec.gov. The Company’s website is www.utgins.com.
Item 1A. Risk Factors
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this item.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 1C. Cybersecurity
Overall Process
Cybersecurity risk management is an important and continuously evolving focus for the Company. The Company monitors its information systems to proactively assess, identify, and manage risks from vulnerabilities and assess cybersecurity threats. The Company’s process for identifying and assessing material risks from cybersecurity threats operates alongside the Company’s broader overall risk assessment process. The policies and procedures are managed by internal and external resources and are believed to be reasonably designed to prevent, detect, and respond to cybersecurity risks and incidents.
The Company’s processes and procedures include regular network, endpoint, and cloud monitoring, vulnerability assessments, and penetration testing. Periodically, the Company engages external partners to conduct periodic audits of our systems, test our systems infrastructure, and suggest improvements. Through these channels and others, we work to proactively identify potential vulnerabilities in our information security system. The assessments, external penetration testing and internal vulnerability analysis follow the standards of the National Institute of Standards and Technology (“NIST”) – Guidelines on Network Security Testing.
The Company provides mandatory initial and annual training thereafter for personnel regarding security awareness as a means to equip the Company’s personnel with the understanding of how to properly use and protect the computing resources entrusted to them, and to communicate the Company’s information security policies, standards, processes and practices. Training is supplemented by various testing initiatives, including social engineering testing.
Third-Party Access
The Company continues to make investments and partner with qualified third parties to enhance its cyber defense capabilities to monitor the evolving spectrum of cybersecurity risks in the operating environment, enhance defenses and improve resiliency against cybersecurity threats. The Company recognizes that we are exposed to cybersecurity threats associated with our use of third-party service providers. To minimize the risk and vulnerabilities to our own systems stemming from such use, we contract with a third-party consulting firm to assist us in identifying known cybersecurity threats and incidents of third-party service providers on a regular basis. In addition, we strive to minimize cybersecurity risks when we first select or renew a vendor by including cybersecurity risk as part of our overall vendor evaluation and due diligence process. A vendor management policy is in place. The vendor management policy calls for the evaluation of risk for each vendor based upon an assessment of the degree to which their relationship could expose the Company to risk in relation to the Company’s reliance on the vendor’s promise to perform and to protect customer privacy and based on the vendor’s fiscal strength.
Third parties that have access to our systems or customer data must have appropriate technical and organizational security measures and security control principles based on commercially acceptable security standards, and we require third parties in this class to agree by contract to manage their cybersecurity risks.
Enterprise Risk Management Process Integration
The Company leverages the expertise of independent consultants and audit firms to evaluate the effectiveness of our risk management systems and address potential cybersecurity incidents efficiently.
The Company utilizes a combination of third-party information security assessments, key technologies, and ongoing internal and external evaluations to provide a level of protection of non-public personal information, to continually monitor and attempt to safeguard information on its operating systems, in cloud-based solutions, and those of third-party service providers, and to prevent, quickly detect and respond to attacks. The Company also utilizes firewall technology, multi-factor authentication, complex password construction, and a combination of software and third-party monitoring to detect and prevent intrusion, and cybersecurity threats, guard against unauthorized access, and continuously identify and prevent computer viruses on the Company’s information solutions.
Material Incidents
We are not aware of any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, that have materially affected or are reasonably likely to materially affect the Company, including our business strategy, results of operations or financial condition. Although we have a robust cybersecurity program that is designed to assess, identify, and manage material risks from cybersecurity threats, we cannot provide absolute surety that we have properly identified or mitigated all vulnerabilities or risks of incidents. We, and the third parties that we engage, are subject to constant and evolving threats of attack and cybersecurity incidents may be more difficult to detect for periods of time. A cybersecurity incident could harm our business strategy, results of operations, financial condition, reputation, and/or subject us to regulatory actions or litigation which may result in fines, judgments or indictments.
Cybersecurity Governance
Cybersecurity risk management processes are an integral part of the Company’s enterprise risk management. The Company’s management team, with assistance from a third-party advisor, is responsible for the day-to-day management of cybersecurity risks faced by the Company. The Board of Directors oversees the risk management policies of the Company and is responsible for the periodic review and approval of the risk management policies.
As part of its oversight of cybersecurity and informational security risk, the Board of Directors periodically receives updates on the results of third-party testing of the systems, processes, and procedures. The Board of Directors also receives periodic updates on cybersecurity and information security risks, industry trends, and best practices. The Company has established written policies and procedures to ensure that significant cybersecurity incidents are immediately investigated, addressed through the coordination of various internal departments, and publicly reported (to the extent required by applicable rules and regulations).
Item 2. Properties
The Company rents a portion of the first floor and second floor of an 8,000 square foot, two-story office building, located in Stanford, KY. The first floor of the building is occupied by UTG and FSNB employees that are included in the shared services agreement between the two entities. The second floor is occupied by the customer service call centers for both UTG and FSNB employees. The building is owned by FSNB and UTG pays $2,000 per month in rent to FSNB for the portion of the building occupied by UTG employees. The Company paid rent of $24,000 to FSNB in 2023 and 2022.
Item 3. Legal Proceedings
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 these matters will not have a material adverse effect on the Company’s results of operations or financial position.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Registrant is a public company whose common stock is traded in the over-the-counter market. Over-the-counter quotations can be obtained using the UTGN stock symbol.
The following table shows the high and low closing prices for each quarterly period during the past two years, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The quotations below were acquired from the Yahoo Finance web site, which also provides quotes for over-the-counter traded securities such as UTG.
| |
|
2023 |
|
2022 |
| |
|
|
|
|
|
|
|
|
Period |
|
High |
|
Low |
|
High |
|
Low |
| |
|
|
|
|
|
|
|
|
First quarter |
|
26.75 |
|
24.18 |
|
30.00 |
|
27.10 |
Second quarter |
|
38.63 |
|
26.00 |
|
29.00 |
|
23.00 |
Third quarter |
|
38.63 |
|
29.60 |
|
33.28 |
|
23.60 |
Fourth quarter |
|
34.00 |
|
30.01 |
|
33.28 |
|
25.06 |
UTG has not declared or paid any dividends on its common stock in the past two fiscal years, and has no current plans to pay dividends on its common stock as it intends to retain all earnings for investment in and growth of the Company’s business. See Note 9 – Shareholders’ Equity in the Notes to the Consolidated Financial Statements for information regarding dividend restrictions, including applicable restrictions on the ability of the Company’s life insurance subsidiary to pay dividends.
As of January 31, 2024 there were 4,139 record holders of UTG common stock.
Purchases of Equity Securities
The following table provides information with respect to purchases we made of our common stock during the three months ended December 31, 2023 and total repurchases:
| |
|
Total Number of Shares Purchased |
|
|
Average Price Paid Per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Program |
|
|
Maximum Number of Shares That May Yet Be Purchased Under the Program |
|
|
Approximate Dollar Value That May Yet Be Purchased Under the Program |
|
Oct. 1 through Oct. 31, 2023 |
|
|
1,411 |
|
|
$ |
32.41 |
|
|
|
1,411 |
|
|
|
N/A |
|
|
$ |
1,879,781 |
|
Nov. 1 through Nov. 30, 2023 |
|
|
1,311 |
|
|
$ |
30.01 |
|
|
|
1,311 |
|
|
|
N/A |
|
|
$ |
1,840,438 |
|
Dec. 1 through Dec. 31, 2023 |
|
|
1,061 |
|
|
$ |
30.01 |
|
|
|
1,061 |
|
|
|
N/A |
|
|
$ |
1,808,597 |
|
Total |
|
|
3,783 |
|
|
|
|
|
|
|
3,783 |
|
|
|
|
|
|
|
|
|
The Board of Directors of UTG has authorized the repurchase in the open market or in privately negotiated transactions of UTG’s common stock. At a meeting of the Board of Directors in March of 2022, the Board of Directors of UTG authorized the repurchase of up to an additional $2 million of UTG’s common stock, for a total repurchase of $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 2023, the Company repurchased 30,646 shares through the stock repurchase program for $881,966. Through December 31, 2023, UTG has spent $20,191,403 in the acquisition of 1,356,859 shares under this program.
Stock Performance Graph
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this item.
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is Management’s discussion and analysis of the financial condition and results of operations of UTG, Inc. and its subsidiaries (collectively with the Parent, the “Company”) for the years ended December 31, 2023 and 2022. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.
Cautionary Statement Regarding Forward-Looking Statements
This report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probably,” or similar expressions, we are making forward-looking statements.
Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur. Our forward-looking statements speak only as of the date made, and we undertake no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments, unless the securities laws require us to do so.
Overview
UTG, Inc., a Delaware corporation, is a life insurance holding company. The Company’s dominant business is individual life insurance, which includes the servicing of existing insurance policies in-force, the acquisition of other companies in the life insurance business, 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 September 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
We have identified the accounting policies below as critical to the understanding of our results of operations and our financial condition. The application of these critical accounting policies in preparing our consolidated financial statements requires Management to use significant judgments and estimates concerning future results or other developments including the likelihood, timing or amount of one or more future transactions or amounts. Actual results may differ from these estimates under different assumptions or conditions. On an on-going basis, we evaluate our estimates, assumptions and judgments based upon historical experience and various other information that we believe to be reasonable under the circumstances. For a detailed discussion of other significant accounting policies, see Note 1 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
Future Policy Benefits – Because of the long-term nature of insurance contracts, the insurance company is liable for policy benefit payments that will be made in the future. The liability for future policy benefits is determined by standard actuarial procedures common to the life insurance industry. The accounting policies for determining this liability are disclosed in Note 1 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
Cost of Insurance Acquired – The costs of acquiring blocks of insurance from other companies or through the acquisition of other companies are deferred and recorded as deferred acquisition costs. The deferred amounts are recorded as an asset and amortized to expense in a systematic manner as indicated in Note 1 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.
Valuation of Securities – The Company’s investment portfolio consists of fixed maturities, equity securities, trading securities, mortgage loans, notes receivable and real estate to provide funding of future policy contractual obligations.
Fixed Maturity Investments – The Company classifies its fixed maturity investments, which include bonds, as available for sale. Investments classified as available for sale are carried at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income. Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Operations, using the constant yield method over the period to maturity. While the available-for-sale fixed maturity securities are generally expected to be held to maturity, they are classified as available-for-sale and are sold periodically to manage risk. Although all of the fixed maturity securities are classified as available-for-sale, the Company has the ability and intent to hold the securities until maturity. The Company has an evaluation process in place to monitor fixed maturity securities available for sale for credit loss. See Note 2 - Investments for further disclosure of the allowance for credit loss (“ACL”).
Equity Securities at Fair Value – Investments in equity securities, which include common and preferred stocks, are reported at fair value with unrealized gains and losses reported as a component of net income (loss).
Equity Securities at Cost – These investments are reported at their cost basis, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Mortgage Loans on Real Estate – Mortgage loans on real estate are reported at their unpaid principal balances, adjusted for amortization of premium or discount and valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. The Company recognizes an ACL in earnings at time of purchase or origination based on expected lifetime credit loss on mortgage loans carried at amortized cost, in an amount that represents the portion of the amortized cost basis of such financing receivables, that the Company does not expect to collect, resulting in mortgage loans being presented at the net amount expected to be collected. See Note 2 - Investments for further discussion of the ACL.
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. Real estate for which the Company commits to a plan to sell within one year and actively markets in its current condition, for a reasonable price, in comparison to its estimated fair value, is classified as held-for-sale. Real estate held-for-sale is stated at lower of depreciated cost or estimated fair value less expected disposition costs and is not depreciated.
Notes Receivable – Notes receivable are reported at their unpaid principal balances, adjusted for valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. Interest accruals are analyzed based on the likelihood of repayment. The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status. The Company recognizes an ACL in earnings at time of purchase or origination based on expected lifetime credit loss on notes receivable carried at amortized cost, in an amount that represents the portion of the amortized cost basis of such financing receivables, that the Company does not expect to collect, resulting in notes receivable being presented at the net amount expected to be collected. See Note 2 - Investments for further discussion of the ACL.
Deferred Income Taxes – The provision for deferred income taxes is based on the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized by applying enacted statutory tax rates to temporary differences between amounts reported in the Consolidated Financial Statements and the tax basis of existing assets and liabilities. A valuation allowance is recognized for the portion of deferred tax assets that, in Management’s judgment, is not likely to be realized.
Results of Operations
On a consolidated basis, the Company had net income attributable to common shareholders of approximately $2.0 million and $34.3 million in 2023 and 2022, respectively. In 2023, income before income taxes was approximately $2.0 million compared to $44.0 million in 2022. Total revenues were approximately $25.4 million in 2023 and $70.0 million in 2022.
One-time events, primarily reflected in realized gains, comprise a substantial portion of the net income and revenue reported by the Company during 2023 and 2022. The magnitude of realized investment gains and losses in a given year is a function of the timing of trades of investments relative to the markets themselves as well as the recognition of any impairments on investments. Future earnings will be significantly negatively impacted should earnings from these one-time items not be realizable in a future period. While Management believes there remain additional investments with such one-time earnings, when or if realized remains uncertain.
The Company reported a change in fair value of equity securities of approximately $(3.8) million and $33.7 million for the years ended December 31, 2023 and 2022, respectively. This line item is material to the results reported in the Consolidated Statements of Operations. This line item can also be extremely volatile, reflecting changes in the stock market. 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.
Total benefits and other expenses paid in 2023 were approximately $23.5 million compared to $25.8 million in 2022.
In summary, the Company’s basis for future revenue is expected to come from the following primary sources: Conservation of business currently in-force, the maximization of investment earnings and the acquisition of other companies or policy blocks in the life insurance business. Management has placed a significant emphasis on the development of these revenue sources to enhance these opportunities.
Revenues
Premiums and policy fee revenues, net of reinsurance premiums and policy fees, declined approximately 6% when comparing 2023 to 2022. The Company writes very little new business. Unless the Company acquires a new company or a block of in-force business, Management expects premium revenue to continue to decline on the existing block of business at a rate consistent with prior experience. The Company’s average persistency rate for all policies in-force for 2023 and 2022 was approximately 96.7% and 96.8%, respectively. Persistency is a measure of insurance in-force retained in relation to the previous year. A positive impact on premium income is the consistency of the lapse percentage. Persistency of the business has been consistent over the last several years. The lapse percentages were 3.3% and 3.2% for 2023 and 2022, respectively.
The following table summarizes the Company’s investment performance for the years ended December 31:
| |
|
2023 |
|
|
2022 |
|
Net investment income |
|
$ |
14,141,809 |
|
|
$ |
20,811,471 |
|
Net realized investment gains |
|
|
9,463,843 |
|
|
|
14,168,911 |
|
Change in fair value of equity securities |
|
|
(3,830,793 |
) |
|
|
33,690,712 |
|
The following table reflects net investment income of the Company for the years ended December 31:
| |
|
2023 |
|
|
2022 |
|
Fixed maturities |
|
$ |
4,184,070 |
|
|
$ |
4,318,591 |
|
Equity securities |
|
|
2,710,201 |
|
|
|
6,157,942 |
|
Trading securities |
|
|
0 |
|
|
|
(13,283 |
) |
Mortgage loans |
|
|
1,115,145 |
|
|
|
1,580,647 |
|
Real estate |
|
|
8,318,201 |
|
|
|
11,640,759 |
|
Notes receivable |
|
|
1,371,973 |
|
|
|
933,886 |
|
Policy loans |
|
|
433,556 |
|
|
|
489,823 |
|
Cash and cash equivalents |
|
|
1,007,840 |
|
|
|
203,250 |
|
Short-term investments |
|
|
529,125 |
|
|
|
5,056 |
|
Total consolidated investment income |
|
|
19,670,111 |
|
|
|
25,316,671 |
|
Investment expenses |
|
|
(5,528,302 |
) |
|
|
(4,505,200 |
) |
Consolidated net investment income |
|
$ |
14,141,809 |
|
|
$ |
20,811,471 |
|
Net investment income represented 71% and 78% of the Company’s revenue before net investment gains (losses) as of December 31, 2023 and 2022, respectively. Income from the fixed maturities, equity securities, and real estate portfolios represented 77% and 87%, respectively, of the gross investment income reported by the Company for 2023 and 2022.
Since the start of 2022, we have seen more volatility in the U.S. markets in general and have 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 December 31, 2023, the interest rate environment experienced eleven rate increases totaling 5.25% over the past two 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 fixed maturities investment portfolio represented 30% and 21% of the total consolidated net investment income for the years ended December 31, 2023 and 2022, respectively. When comparing earnings from the fixed maturities portfolio for the years ended December 31, 2023 and 2022 income was down approximately 3%. The decrease is due to the maturity of certain fixed maturity investments during 2023. The Company’s investment in fixed maturities continues to decline as we have, for the most part, chosen not to reinvest in fixed maturities. As of December 31, 2023 and 2022, fixed maturities represented 29% and 30%, respectively, of the total investments owned by the Company.
Earnings from the equity securities portfolio represented 19% and 30% of the total consolidated net investment income for the years ended December 31, 2023 and 2022, respectively. Earnings were down approximately $3.4 million when comparing current year and prior year results. The 2022 investment income from equity securities was exceptionally high, and the result of dividends from oil and gas equity securities. While the oil and gas equity securities continued to pay dividends in 2023, they were down substantially from the prior year.
Earnings from the real estate portfolio represented 59% and 56% of the total consolidated net investment income for the years ended December 31, 2023 and 2022, respectively. Earnings were down about $3.3 million when comparing current year and prior year results.
During 2023, the Company received $550,000 of income from timber sales as compared to $2.3 million in the prior year. Included in the 2023 and 2022 real estate income is approximately $4.2 million and $10.4 million of income from oil and gas royalty distributions, respectively. Income from oil and gas royalties represented approximately 50% and 55% of the real estate income for 2023 and 2022, respectively.
Earnings from the equity securities and real estate investment portfolios are primarily related to the oil and gas and timber industries. In 2022, we experienced the reopening of the world 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 Ukraine, and more upward pricing pressure was felt. In 2022, oil averaged $95 per barrel compared to an average price of $78 in 2023. Earnings from the real estate investment portfolio are expected to vary depending on the real estate activities and the potential distributions that may occur.
The following table reflects net realized investment gains (losses) for the years ended December 31:
| |
|
2023 |
|
|
2022 |
|
Fixed maturities available for sale |
|
$ |
58,333 |
|
|
$ |
(528 |
) |
Equity securities |
|
|
812,035 |
|
|
|
8,877,148 |
|
Real estate |
|
|
8,577,155 |
|
|
|
5,292,291 |
|
Short term investments |
|
|
16,320 |
|
|
|
0 |
|
Equity securities - OTTI |
|
|
0 |
|
|
|
(5,000,000 |
) |
Consolidated net realized investment gains |
|
|
9,463,843 |
|
|
|
9,168,911 |
|
| |
|
|
|
|
|
|
|
|
Change in fair value of equity securities - held |
|
|
(5,875,079 |
) |
|
|
19,212,045 |
|
Change in fair value of equity securities - sold |
|
|
2,044,286 |
|
|
|
14,478,667 |
|
Total change in fair value of equity securities |
|
|
(3,830,793 |
) |
|
|
33,690,712 |
|
| |
|
|
|
|
|
|
|
|
Net investment gains |
|
$ |
5,633,050 |
|
|
$ |
42,859,623 |
|
Realized investment gains are the result of one-time events and are expected to vary from year to year.
Realized gains and losses from equity securities represent the difference between the fair value at the beginning of the reporting period and the fair value at the time of sale. The total gains from equity securities sold in 2023 were approximately $2.9 million, of which $812,035 is being reported as gains from equity securities and $2.0 million is reported as a component of the change in the fair value of equity securities. The gains were the result of selling several small equity securities holdings.
The total gains from equity securities sold in 2022 were approximately $23.4 million, of which $8.9 million is being reported as gains from equity securities and $14.5 million is reported as a component of the change in the fair value of equity securities. The disposal of two equity securities represented 89% of the total gains from the equity securities portfolio. The Company fully disposed of one equity security that produced a realized gain of $6.6 million in 2022. The Company disposed of 7,500 shares of an equity security, associated with the oil and gas industry, producing a realized gain of $14.3 million. The Company still owns 5,000 shares of this equity security as of December 31, 2022. This disposal will impact future dividend earnings of the Company as it represented a significant portion of the 2022 investment income from equity securities.
The Company reported a change in fair value of equity securities of approximately $(3.8) million and $33.7 million for the years ended December 31, 2023 and 2022, respectively. This line item is material to the results reported in the Consolidated Statements of Operations, and this line item can also be extremely volatile. 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 less of a 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 2022, the Company recognized an other-than-temporary impairments of $5 million on an equity security. The other-than-temporary impairment recognized during 2023 was taken as a result of Management’s assessment and determination of value of the investment. The investment was written down to better reflect its current expected value.
During 2023, the Company sold several pieces of real estate located in Kentucky producing realized gains of approximately $940,000. Additionally, during third quarter 2023, the Company sold a large land parcel in West Virginia realizing a gain of approximately $7.6 million. During 2022, the Company sold a real estate parcel in Kentucky that produced a gain of $3.0 million and a parcel in Georgia that produced a gain of $812,000.
In summary, the Company’s basis for future revenue is expected to come from the following primary sources: Conservation of business currently in-force, the maximization of investment earnings and the acquisition of other companies or policy blocks in the life insurance business. Management has placed a significant emphasis on the development of these revenue sources to enhance these opportunities.
Expenses
The Company reported total benefits and other expenses of approximately $23.5 million and $25.8 million for the years ended December 31, 2023 and 2022, respectively. Benefits, claims and settlement expenses represented approximately 62% and 57% of the Company’s total expenses for 2023 and 2022, respectively. The other major expense category of the Company is operating expenses, which represented 36% and 41% of the Company’s total expenses for 2023 and 2022, respectively.
Life benefits, claims and settlement expenses, net of reinsurance benefits, were comparable for 2022 and 2023. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.
Early in the COVID-19 pandemic, the Company implemented a process to monitor death claims resulting from COVID-19. Prior to the pandemic, death benefits were $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. 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. During 2023, the Company paid approximately $75,000 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.
Overall, the Company’s persistency for business in-force remained relatively steady at 96.7% in 2023 compared to 96.8% in 2022. The Company’s actual experience for earned interest, persistency, and mortality varies from the assumptions applied to pricing and for determining premiums. Accordingly, differences between the Company’s actual experience and those assumptions applied may affect the profitability of the Company. Interest crediting rates on adjustable rate policies have been reduced to their guaranteed minimum rates, and as such, cannot be lowered any further.
Operating expenses decreased approximately 20% or $2.1 million in 2023 as compared to that of the same period in 2022. When comparing 2023 and 2022 expenses, two expense categories make up the majority of the decline - charitable contributions and aircraft maintenance.
Charitable expenses fluctuate based on reported taxable income of the Company. Repairs and maintenance expenses related to an aircraft partially owned by the Company were down approximately 73% when comparing 2023 and 2022 activity. In 2022, there were significant maintenance needs that were addressed. Expenses in the remaining categories were 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. In 2023, the Company paid approximately $582,000 in charitable donations as compared to $2.1 million in 2022.
Net amortization of cost of insurance acquired decreased approximately 4% when comparing current and prior year activity. Cost of insurance acquired is established when an insurance company is acquired or when the Company acquires a block of in-force business. The Company assigns a portion of its cost to the right to receive future profits from insurance contracts existing at the date of the acquisition. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates may vary due to risk analysis performed at the time of acquisition on the business acquired. The Company utilizes a 12% discount rate on the remaining unamortized business. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force. This expense is expected to decrease, unless the Company acquires a new block of business.
Management continues to place significant emphasis on expense monitoring and cost containment. Maintaining administrative efficiencies directly impacts net income.
Financial Condition
Investment Information
Investments are the largest asset group of the Company. The Company’s insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments they are permitted to make, and the amount of funds that may be used for any one type of investment.
The following table reflects, by investment category, the investments held by the Company as of December 31:
| |
|
2023 |
|
|
As a % of Total Investments |
|
|
As a % of Total Assets |
|
Fixed maturities |
|
$ |
105,909,836 |
|
|
|
29 |
% |
|
|
24 |
% |
Equity securities, at fair value |
|
|
156,550,812 |
|
|
|
43 |
% |
|
|
35 |
% |
Equity securities, at cost |
|
|
15,977,368 |
|
|
|
4 |
% |
|
|
4 |
% |
Mortgage loans |
|
|
15,318,176 |
|
|
|
4 |
% |
|
|
3 |
% |
Real estate |
|
|
21,975,120 |
|
|
|
6 |
% |
|
|
5 |
% |
Notes receivable |
|
|
14,009,225 |
|
|
|
4 |
% |
|
|
3 |
% |
Policy loans |
|
|
6,018,248 |
|
|
|
2 |
% |
|
|
1 |
% |
Short-term investments |
|
|
29,132,236 |
|
|
|
8 |
% |
|
|
7 |
% |
Total investments |
|
$ |
364,891,021 |
|
|
|
100 |
% |
|
|
82 |
% |
| |
|
2022 |
|
|
As a % of Total Investments |
|
|
As a % of Total Assets |
|
Fixed maturities |
|
$ |
110,813,059 |
|
|
|
31 |
% |
|
|
25 |
% |
Equity securities, at fair value |
|
|
150,053,686 |
|
|
|
41 |
% |
|
|
34 |
% |
Equity securities, at cost |
|
|
21,891,896 |
|
|
|
6 |
% |
|
|
5 |
% |
Mortgage loans |
|
|
30,698,694 |
|
|
|
8 |
% |
|
|
7 |
% |
Real estate |
|
|
26,225,799 |
|
|
|
7 |
% |
|
|
6 |
% |
Notes receivable |
|
|
14,424,127 |
|
|
|
4 |
% |
|
|
3 |
% |
Policy loans |
|
|
6,567,434 |
|
|
|
2 |
% |
|
|
1 |
% |
Short-term investments |
|
|
3,596,941 |
|
|
|
1 |
% |
|
|
1 |
% |
Total investments |
|
$ |
364,271,636 |
|
|
|
100 |
% |
|
|
82 |
% |
The Company’s investments are generally managed to match related insurance and policyholder liabilities. The comparison of investment return with insurance or investment product crediting rates establishes an interest spread. Interest crediting rates on adjustable rate policies have been reduced to their guaranteed minimum rates, and as such, cannot be lowered any further. Policy interest crediting rate changes and expense load changes become effective on an individual policy basis on the next policy anniversary. Therefore, it takes a full year from the time the change was determined for the full impact of such change to be realized. If interest rates decline in the future, the Company will not be able to lower rates and both net investment income and net income will be impacted negatively.
The Company’s total investments represented 83% and 81% of the Company’s total assets as of December 31, 2023 and 2022, respectively. Fixed maturities and equity securities, at fair value, consistently represent the majority, of the Company’s total investments – 72% in 2023 and 2022. The overall investment mix, as a percentage of total investments, remained fairly consistent when comparing the respective investments held as of December 31, 2023 and 2022.
As of December 31, 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 income component of shareholders’ equity. Changes in the market value of available for sale securities resulted in net unrealized gains (losses) of approximately $2.2 million and $(17.4) million as of December 31, 2023 and 2022, respectively. The variance in the net unrealized gains and losses is the result of normal market fluctuations mainly related to changes in interest rates in the marketplace.
In 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.
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 allowance for credit losses on loans of $524,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded commitments of $51,000, 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. See Note 1 – Recently Issued Accounting Standards – of the Consolidated Financial Statements for 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 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.
Liquidity
Liquidity provides the Company with the ability to meet on demand the cash commitments required by its business operations and financial obligations. The Company’s liquidity is primarily derived from cash balances, a portfolio of marketable securities and line of credit facilities. The Company has two principal needs for cash – the insurance company’s contractual obligations to policyholders and the payment of operating expenses.
Parent Company Liquidity
UTG is a holding company that has no day-to-day operations of its own. Cash flows from UTG’s insurance subsidiary, UG, are used to pay costs associated with maintaining the Company in good standing with states in which it does business and purchasing outstanding shares of UTG stock. UTG’s cash flow is dependent on management fees received from its insurance subsidiary, stockholder dividends from its subsidiary and earnings received on cash balances. As of December 31, 2023 and 2022, substantially all of the consolidated shareholders’ equity represents net assets of its subsidiaries. In 2023, the Parent company received $2 million in dividends from its insurance subsidiary and $3 million in 2022. 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 dividends to the Parent company.
Short-Term Borrowings
During October of 2023, the Federal Home Loan Bank approved UG’s Cash Management Advance Application (“CMA”). The CMA is a source of overnight liquidity utilized to address the day-to-day cash needs of a 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 $20.3 million. During the fourth quarter of 2023, the Company borrowed $19 million and planned to utilize the funds for investing activities. The interest rate on the borrowed funds is variable and currently is 5.47%. During the first quarter of 2024, the Company repaid the entire outstanding principal balance.
Consolidated Liquidity
Cash used in operating activities was approximately $9.8 million and $5.3 million in 2023 and 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.
During 2023 and 2022, the Company’s investing activities provided net cash of approximately $6.9 million and $26.2 million, respectively. The Company recognized proceeds of approximately $79.6 million and $79.7 million from investments sold and matured in 2023 and 2022, respectively. The Company used approximately $(72.7) million and $(53.5) million to acquire investments during 2023 and 2022, respectively. The net cash provided by investing activities is expected to vary from year to year depending on market conditions and management’s ability to find and negotiate favorable investment contracts.
Net cash used in financing activities was approximately $1.2 million and $6.4 million during 2023 and 2022, respectively. As of December 31, 2023 and 2022, the Company had $19 million in debt outstanding with third parties.
The Company had cash and cash equivalents of approximately $41.2 million and $45.3 million as of December 31, 2023 and 2022, respectively. The Company has a portfolio of marketable fixed maturity securities that could be sold, if an unexpected event were to occur. These securities had a fair value of approximately $103.4 million and $108.3 million at December 31, 2023 and 2022, respectively. However, the strong cash flows from investing activities, investment maturities and the availability of the line of credit facilities make it unlikely that the Company would need to sell securities for liquidity purposes. See Note 2 – Investments in the Notes to the Consolidated Financial Statements for detailed disclosures regarding the Company’s investment portfolio.
Management believes the overall sources of liquidity available will be sufficient to satisfy its financial obligations.
Capital Resources
The Company’s capital structure consists of available short-term debt, long-term debt and shareholders’ equity. A complete analysis and description of the short-term and long-term debt issues available as of December 31, 2023 and 2022 are presented in Note 7 – Credit Arrangements in the Notes to the Consolidated Financial Statements.
The Company had $19 million of debt outstanding as of December 31, 2023 and 2022.
The NAIC’s risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The risk-based capital (RBC) formula measures the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized.
At December 31, 2023, UG has a ratio of approximately 6.19, which is 619% of the authorized control level. Accordingly, the Company meets the RBC requirements.
The Board of Directors of UTG has authorized the repurchase in the open market or in privately negotiated transactions of UTG’s common stock. At a meeting of the Board of Directors in March of 2022, the Board of Directors of UTG authorized the repurchase of up to an additional $2 million of UTG’s common stock, for a total repurchase of $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 2023, the Company repurchased 30,646 shares through the stock repurchase program for $881,966. Through December 31, 2023, UTG has spent $20,191,403 in the acquisition of 1,356,859 shares under this program.
Total shareholders’ equity was approximately $161.7 million and $158.0 million as of December 31, 2023 and 2022, respectively. Total shareholders’ equity increased approximately 2% in 2023 as compared to 2022. The increase is primarily attributable to net income from operations. As of December 31, 2023 and 2022, the Company reported accumulated other comprehensive loss of approximately $(4.9) million and $(7.1) million, respectively.
For the period ended December 31, 2023, the Company recognized an increase in accumulated other comprehensive income of approximately $2.2 million and a decrease in accumulated other comprehensive income of approximately $(17.4) million for the same period in the prior year. The fluctuations in accumulated other comprehensive income (loss) are the result of unrealized gains (losses) on fixed maturity securities. The variance in the net unrealized gains and losses is the result of normal market fluctuations mainly related to changes in interest rates in the marketplace.
The Company’s investments provide sufficient return to cover future obligations. The Company carries all of its fixed maturity holdings as available for sale, which are reported in the Consolidated Financial Statements at their fair value.
New Accounting Pronouncements
See Note 1 – Summary of Significant Account Policies in the Notes to the Consolidated Financial Statements for information regarding new accounting pronouncements.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements, financing activities or other relationships with unconsolidated entities or other persons.
Contractual Obligations
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this item.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this item.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
| |
Page No. |
UTG, Inc. and Consolidated Subsidiaries |
|
Report of Independent Registered Public Accounting Firm (PCAOB ID #718) |
23 |
Report of Independent Registered Public Accounting Firm (PCAOB ID #32) |
26 |
Consolidated Balance Sheets |
27 |
Consolidated Statements of Operations |
28 |
Consolidated Statements of Comprehensive Income |
29 |
Consolidated Statements of Shareholders’ Equity |
30 |
Consolidated Statements of Cash Flows |
31 |
Notes to Consolidated Financial Statements |
34 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of UTG, Inc. and Subsidiaries
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of
UTG, Inc. and Subsidiaries (the Company) as of
December 31, 2023, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2023, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Classification, Valuation and Disclosure of Investments in Equity Securities – Refer to Notes 1 and 3
Critical Audit Matter Description
The Company invests in numerous equity securities including common stocks, limited partnerships and limited liability companies that are not publicly traded and may not have readily determinable fair values. These investments require a detailed analysis of the type of investment on an investment by investment basis to determine the appropriate classification of the investment as to whether the investment should be reported using the cost basis, the equity method or whether the investment should be reported at fair value based on the accounting literature. Since these investments are not publicly traded, the Company employs various methods in determining the appropriate valuation of the investments reported at fair value. These methods at times includes utilizing industry specialists in assisting them in determining the fair value method and at other times, management is able to utilize the practical expedient of net asset value when the investment is in an investment company. These methods at times depend on key inputs and assumptions crucial to determining fair value that may not be observable requires managerial judgment and estimation. Last, the disclosure of this information in the Company’s financial statements can be challenging to management due to the volume of data and information needed to appropriately provide the necessary and generally accepted information so that a reader to understand the classification and valuation decisions made by management.
The audit of these equity investments requires a substantial amount of time and effort in order to obtain the necessary audit evidence and opine on management’s classification, valuation and disclosure of the investments.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the equity investments that are not publicly traded included the following procedures, among others:
• |
We gained an understanding of the processes and procedures utilized by management to classify these investments and determine their values |
• |
We obtained documentation supporting the investments including purchase agreements, partnership agreements and limited liability company operating agreements as appropriate for each investment |
• |
We discussed and documented management’s determination of the classification of each investment as to cost method, equity method or fair value, including whether management asserted significant influence over operations of the investment |
• |
We obtained confirmation of the investment from investment entity personnel, and if appropriate, audited financial statements of the investment entity |
• |
We obtained and discussed valuation information from industry specialists when appropriate and when utilized by management in determining the fair value of an equity investment and considered and evaluated the valuation information provided by the specialist in concluding on the fair value estimated by management for financial reporting |
• |
For a selection of equity investments, we recalculated the Company’s valuation based on information obtained via confirmation, agreements and/or valuation specialists |
• |
We obtained and accumulated detailed information on the investments provided by management for disclosure of these investments in the financial statements and agreed this information to the documents obtained as a part of our audit procedures for purposes of classification and valuation |
Future Policy Benefits – Refer to Note 1
Critical Audit Matter Description
Liabilities for amounts payable under the Company’s life insurance products are recorded as future policy benefits liabilities. Such liabilities are established based on actuarial assumptions at the time policies are issued, or in the case of contracts acquired by purchase, at the purchase date. The liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method. These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on the life insurance subsidiary’s experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations. The Company’s future policy benefits liability was $ 223.8 million as of December 31, 2023.
The audit of future policy benefits requires the utilization of an actuarial specialist when considering the complex methods, assumptions and models management utilizes in determining the value of these liabilities.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the liability for future policy benefits included the following procedures, among others:
• |
We gained an understanding of the processes utilized and controls implemented in determining the valuation of future policy benefits |
• |
We tested the underlying data used by management in developing the valuation and the completeness and accuracy of the data |
• |
We performed various analytical procedures |
• |
We obtained an opinion from management’s actuarial specialist confirming that the actuarial assumptions and methodologies used were reasonable and in accordance with presently accepted actuarial standards |
• |
We confirmed the independence of management’s consulting actuarial specialist and reviewed her qualifications as appointed consulting actuary |
We have served as the Company’s auditor since 2023.
/s/ Kerber, Eck & Braeckel LLP
Springfield, Illinois
March 29, 2024
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of UTG, Inc. and Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of UTG, Inc. and Subsidiaries (collectively the "Company" or “UTG”) as of December 31, 2022, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows, for the year ended December 31, 2022, and the related notes (collectively referred to as the "consolidated financial statements").
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of their operations and their cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Armanino LLP
St. Louis, Missouri
We began serving as the Company’s auditors in 2005. In 2023, we became the predecessor auditor.
March 24, 2023, except for the effects of the tables reflecting the impact of the revisions as of and for the year ended December 31, 2022, discussed in Note 15 (not presented herein) to the consolidated financial statements appearing under Item 8 of the Company’s annual report (Form 10-K) as to which the date is March 29, 2024.
UTG, Inc.
Consolidated Balance Sheets
As of December 31, 2023 and 2022
ASSETS |
|
| |
|
|
|
|
|
|
| |
|
2023 |
|
|
2022 |
|
| |
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
Investments available for sale: |
|
|
|
|
|
|
Fixed maturities, at fair value (amortized cost $109,554,738 and $117,279,820) |
|
$ |
103,409,836 |
|
|
$ |
108,313,059 |
|
Held to maturity redeemable preferred stock, at amortized cost |
|
|
2,500,000 |
|
|
|
2,500,000 |
|
Equity securities, at fair value (cost $89,387,893 and $77,015,688) |
|
|
156,550,812 |
|
|
|
150,053,686 |
|
Equity securities, at cost |
|
|
15,977,368 |
|
|
|
21,891,896 |
|
Mortgage loans on real estate at amortized cost (net of credit loss reserve of $274,000 and $0) |
|
|
15,318,176 |
|
|
|
30,698,694 |
|
Investment real estate, net |
|
|
21,975,120 |
|
|
|
26,225,799 |
|
Notes receivable (net of credit loss reserve of $250,000 and $0) |
|
|
14,009,225 |
|
|
|
14,424,127 |
|
Policy loans |
|
|
6,018,248 |
|
|
|
6,567,434 |
|
Short-term investments |
|
|
29,132,236 |
|
|
|
3,596,941 |
|
Total investments |
|
|
364,891,021 |
|
|
|
364,271,636 |
|
| |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
41,185,196 |
|
|
|
45,290,385 |
|
Accrued investment income |
|
|
2,001,064 |
|
|
|
1,371,677 |
|
Reinsurance receivables: |
|
|
|
|
|
|
|
|
Future policy benefits |
|
|
23,847,623 |
|
|
|
24,318,030 |
|
Policy claims and other benefits |
|
|
4,734,575 |
|
|
|
4,638,857 |
|
Cost of insurance acquired |
|
|
2,036,896 |
|
|
|
2,698,153 |
|
Income taxes receivable |
|
|
2,128,027 |
|
|
|
0 |
|
Other assets |
|
|
884,531 |
|
|
|
4,945,627 |
|
Total assets |
|
$ |
441,708,933 |
|
|
$ |
447,534,365 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Policy liabilities and accruals: |
|
Future policy benefits |
|
$ |
223,757,860 |
|
|
$ |
229,582,664 |
|
Policy claims and benefits payable |
|
|
4,188,917 |
|
|
|
4,072,879 |
|
Other policyholder funds |
|
|
260,892 |
|
|
|
318,096 |
|
Dividend and endowment accumulations |
|
|
14,749,258 |
|
|
|
14,802,746 |
|
Income taxes payable |
|
|
0 |
|
|
|
4,189,081 |
|
Deferred income taxes |
|
|
12,426,840 |
|
|
|
11,582,138 |
|
Notes payable |
|
|
19,000,000 |
|
|
|
19,000,000 |
|
Other liabilities |
|
|
5,635,373 |
|
|
|
5,958,385 |
|
Total liabilities |
|
|
280,019,140 |
|
|
|
289,505,989 |
|
| |
|
|
|
|
|
|
|
|
Shareholders' equity: |
|
|
|
|
|
|
|
|
Common stock - no par value, stated value $0.001 per share. Authorized 7,000,000 shares - 3,165,320 and 3,164,809 shares issued and outstanding |
|
|
|
|
|
|
|
|
| |
|
|
3,167 |
|
|
|
3,166 |
|
Additional paid-in capital |
|
|
32,613,817 |
|
|
|
32,693,972 |
|
Retained earnings |
|
|
133,491,797 |
|
|
|
131,989,352 |
|
Accumulated other comprehensive loss |
|
|
(4,882,317 |
) |
|
|
(7,111,586 |
) |
Total UTG shareholders' equity |
|
|
161,226,464 |
|
|
|
157,574,904 |
|
Noncontrolling interest |
|
|
463,329 |
|
|
|
453,472 |
|
Total shareholders' equity |
|
|
161,689,793 |
|
|
|
158,028,376 |
|
Total liabilities and shareholders' equity |
|
$ |
441,708,933 |
|
|
$ |
447,534,365 |
|
See accompanying notes.
UTG, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2023 and 2022
|
|
2023 |
|
|
2022 |
|
| |
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
Premiums and policy fees |
|
$ |
7,918,235 |
|
|
$ |
8,384,604 |
|
Ceded reinsurance premiums and policy fees |
|
|
(2,553,010 |
) |
|
|
(2,697,382 |
) |
Net investment income |
|
|
14,141,809 |
|
|
|
20,811,471 |
|
Other income |
|
|
280,303 |
|
|
|
350,519 |
|
Revenues before net investment gains (losses) |
|
|
19,787,337 |
|
|
|
26,849,212 |
|
Net investment gains (losses): |
|
|
|
|
|
|
|
|
Other-than-temporary impairments |
|
|
0 |
|
|
|
(5,000,000 |
) |
Other realized investment gains, net |
|
|
9,463,843 |
|
|
|
14,168,911 |
|
Change in fair value of equity securities |
|
|
(3,830,793 |
) |
|
|
33,690,712 |
|
Total net investment gains |
|
|
5,633,050 |
|
|
|
42,859,623 |
|
Total revenues |
|
|
25,420,387 |
|
|
|
69,708,835 |
|
| |
|
|
|
|
|
|
|
|
Benefits and other expenses: |
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses: |
|
|
|
|
|
|
|
|
Life |
|
|
16,089,474 |
|
|
|
15,703,526 |
|
Ceded reinsurance benefits and claims |
|
|
(2,882,312 |
) |
|
|
(2,449,533 |
) |
Annuity |
|
|
1,029,885 |
|
|
|
1,029,156 |
|
Dividends to policyholders |
|
|
302,685 |
|
|
|
311,400 |
|
Commissions |
|
|
(102,971 |
) |
|
|
(116,571 |
) |
Amortization of cost of insurance acquired |
|
|
661,257 |
|
|
|
688,348 |
|
Operating expenses |
|
|
8,368,135 |
|
|
|
10,497,302 |
|
Interest expense |
|
|
28,389 |
|
|
|
108,722 |
|
Total benefits and other expenses |
|
|
23,494,542 |
|
|
|
25,772,350 |
|
| |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
1,925,845 |
|
|
|
43,936,485 |
|
Income tax expense (benefit) |
|
|
(144,247 |
) |
|
|
9,572,139 |
|
| |
|
|
|
|
|
|
|
|
Net income |
|
|
2,070,092 |
|
|
|
34,364,346 |
|
| |
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest |
|
|
(113,397 |
) |
|
|
(106,341 |
) |
| |
|
|
|
|
|
|
|
|
Net income attributable to common shareholders |
|
$ |
1,956,695 |
|
|
$ |
34,258,005 |
|
| |
|
|
|
|
|
|
|
|
Amounts attributable to common shareholders: |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Basic income per share |
|
$ |
0.62 |
|
|
$ |
10.81 |
|
| |
|
|
|
|
|
|
|
|
Diluted income per share |
|
$ |
0.62 |
|
|
$ |
10.81 |
|
| |
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
3,176,757 |
|
|
|
3,167,719 |
|
| |
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
3,176,757 |
|
|
|
3,167,719 |
|
See accompanying notes.
UTG, Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2023 and 2022
|
|
2023 |
|
|
2022 |
|
| |
|
|
|
|
|
|
Net income |
|
$ |
2,070,092 |
|
|
$ |
34,364,346 |
|
| |
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during period, pre-tax |
|
|
2,867,943 |
|
|
|
(21,981,097 |
) |
Tax (expense) benefit on unrealized holding gains (losses) arising during the period |
|
|
(592,591 |
) |
|
|
4,615,943 |
|
Unrealized holding gains (losses) arising during period, net of tax |
|
|
2,275,352 |
|
|
|
(17,365,154 |
) |
| |
|
|
|
|
|
|
|
|
Less reclassification adjustment for (gains) losses included in net income |
|
|
(58,333 |
) |
|
|
528 |
|
Tax expense (benefit) for (gains) losses included in net income |
|
|
12,250 |
|
|
|
(111 |
) |
Reclassification adjustment for (gains) losses included in net income, net of tax |
|
|
(46,083 |
) |
|
|
417 |
|
Subtotal: Other comprehensive income (loss), net of tax |
|
|
2,229,269 |
|
|
|
(17,364,737 |
) |
| |
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
4,299,361 |
|
|
|
16,999,609 |
|
| |
|
|
|
|
|
|
|
|
Less comprehensive income attributable to noncontrolling interests |
|
|
(113,397 |
) |
|
|
(106,341 |
) |
| |
|
|
|
|
|
|
|
|
Comprehensive income attributable to UTG, Inc. |
|
$ |
4,185,964 |
|
|
$ |
16,893,268 |
|
See accompanying notes.
UTG, Inc.
Consolidated Statements of Shareholders’ Equity
Year ended December 31, 2023 |
|
Common Stock |
|
|
Additional Paid-In Capital |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
Noncontrolling Interest |
|
|
Total Shareholders' Equity |
|
Balance at January 1, 2023 |
|
$ |
3,166 |
|
|
|
32,693,972 |
|
|
|
131,989,352 |
|
|
|
(7,111,586 |
) |
|
|
453,472 |
|
|
|
158,028,376 |
|
Adoption of new accounting standard |
|
|
0 |
|
|
|
0 |
|
|
|
(454,250 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
(454,250 |
) |
| |
|
|
3,166 |
|
|
|
32,693,972 |
|
|
|
131,535,102 |
|
|
|
(7,111,586 |
) |
|
|
453,472 |
|
|
|
157,574,126 |
|
Common stock issued during year |
|
|
31 |
|
|
|
801,781 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
801,812 |
|
Treasury shares acquired and retired |
|
|
(30 |
) |
|
|
(881,936 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(881,966 |
) |
Net income attributable to common shareholders |
|
|
0 |
|
|
|
0 |
|
|
|
1,956,695 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,956,695 |
|
Unrealized holding gain on securities net of noncontrolling interest and reclassification adjustment and taxes |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,229,269 |
|
|
|
0 |
|
|
|
2,229,269 |
|
Distributions |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(103,540 |
) |
|
|
(103,540 |
) |
Gain attributable to noncontrolling interest |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
113,397 |
|
|
|
113,397 |
|
Balance at December 31, 2023 |
|
$ |
3,167 |
|
|
|
32,613,817 |
|
|
|
133,491,797 |
|
|
|
(4,882,317 |
) |
|
|
463,329 |
|
|
|
161,689,793 |
|
Year ended December 31, 2022 |
|
Common Stock |
|
|
Additional Paid-In Capital |
|
|
Retained Earnings |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
Noncontrolling Interest |
|
|
Total Shareholders' Equity |
|
Balance at January 1, 2022 |
|
$ |
3,167 |
|
|
|
32,780,587 |
|
|
|
97,731,347 |
|
|
|
10,253,151 |
|
|
|
476,555 |
|
|
|
141,244,807 |
|
Common stock issued during year |
|
|
23 |
|
|
|
599,169 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
599,192 |
|
Treasury shares acquired and retired |
|
|
(24 |
) |
|
|
(685,784 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(685,808 |
) |
Net income attributable to common shareholders |
|
|
0 |
|
|
|
0 |
|
|
|
34,258,005 |
|
|
|
0 |
|
|
|
0 |
|
|
|
34,258,005 |
|
Unrealized holding loss on securities net of noncontrolling interest and reclassification adjustment and taxes |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(17,364,737 |
) |
|
|
0 |
|
|
|
(17,364,737 |
) |
Distributions |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(128,824 |
) |
|
|
(128,824 |
) |
Gain attributable to noncontrolling interest |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
105,741 |
|
|
|
105,741 |
|
Balance at December 31, 2022 |
|
$ |
3,166 |
|
|
|
32,693,972 |
|
|
|
131,989,352 |
|
|
|
(7,111,586 |
) |
|
|
453,472 |
|
|
|
158,028,376 |
|
See accompanying notes.
UTG, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2023 and 2022
|
|
2023 |
|
|
2022 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net income |
|
$ |
2,070,092 |
|
|
$ |
34,364,346 |
|
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Amortization (accretion) of investments |
|
|
(314,042 |
) |
|
|
138,587 |
|
Other-than-temporary impairments |
|
|
0 |
|
|
|
5,000,000 |
|
Realized investment gains, net |
|
|
(9,463,843 |
) |
|
|
(14,168,911 |
) |
Change in fair value of equity securities |
|
|
3,830,793 |
|
|
|
(33,690,712 |
) |
Unrealized trading losses included in income |
|
|
0 |
|
|
|
1,086 |
|
Realized trading losses included in income |
|
|
0 |
|
|
|
12,197 |
|
Amortization of cost of insurance acquired |
|
|
661,257 |
|
|
|
688,348 |
|
Provision for deferred income tax expense |
|
|
372,861 |
|
|
|
2,517,685 |
|
Depreciation and depletion |
|
|
728,887 |
|
|
|
2,032,627 |
|
Stock-based compensation |
|
|
801,812 |
|
|
|
599,192 |
|
Charges for mortality and administration of universal life and annuity products |
|
|
(5,692,118 |
) |
|
|
(5,943,417 |
) |
Interest credited to account balances |
|
|
3,646,515 |
|
|
|
3,767,177 |
|
Change in accrued investment income |
|
|
(629,387 |
) |
|
|
(107,518 |
) |
Change in reinsurance receivables |
|
|
374,689 |
|
|
|
210,672 |
|
Change in policy liabilities and accruals |
|
|
(3,535,674 |
) |
|
|
(2,836,498 |
) |
Change in income taxes receivable (payable) |
|
|
(6,317,108 |
) |
|
|
5,164,454 |
|
Change in other assets and liabilities, net |
|
|
3,679,893 |
|
|
|
(3,083,634 |
) |
Net cash used in operating activities |
|
|
(9,785,373 |
) |
|
|
(5,334,319 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from investments sold and matured: |
|
|
|
|
|
|
|
|
Fixed maturities available for sale |
|
|
7,558,333 |
|
|
|
13,128,136 |
|
Equity securities |
|
|
7,838,385 |
|
|
|
36,126,454 |
|
Trading securities |
|
|
0 |
|
|
|
17,983 |
|
Mortgage loans |
|
|
17,770,810 |
|
|
|
3,655,779 |
|
Real estate |
|
|
16,531,219 |
|
|
|
12,659,854 |
|
Notes receivable |
|
|
4,944,143 |
|
|
|
12,329,505 |
|
Policy loans |
|
|
1,453,634 |
|
|
|
1,752,613 |
|
Short-term investments |
|
|
23,490,815 |
|
|
|
0 |
|
Total proceeds from investments sold and matured |
|
|
79,587,339 |
|
|
|
79,670,324 |
|
Cost of investments acquired: |
|
|
|
|
|
|
|
|
Fixed maturities available for sale |
|
|
0 |
|
|
|
(2,614,165 |
) |
Equity securities |
|
|
(12,454,268 |
) |
|
|
(27,523,161 |
) |
Trading securities |
|
|
0 |
|
|
|
(32,382 |
) |
Mortgage loans |
|
|
(2,654,293 |
) |
|
|
(5,158,911 |
) |
Real estate |
|
|
(3,417,744 |
) |
|
|
(4,586,280 |
) |
Notes receivable |
|
|
(4,779,241 |
) |
|
|
(9,030,657 |
) |
Policy loans |
|
|
(904,446 |
) |
|
|
(929,549 |
) |
Short-term investments |
|
|
(48,473,476 |
) |
|
|
(3,591,885 |
) |
Total cost of investments acquired |
|
|
(72,683,468 |
) |
|
|
(53,466,990 |
) |
Net cash provided by investing activities |
|
|
6,903,871 |
|
|
|
26,203,334 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Policyholder contract deposits |
|
|
4,056,116 |
|
|
|
4,555,115 |
|
Policyholder contract withdrawals |
|
|
(4,294,297 |
) |
|
|
(5,106,391 |
) |
Proceeds from notes payable/line of credit |
|
|
21,500,000 |
|
|
|
58,500,000 |
|
Payments of principal on notes payable/line of credit |
|
|
(21,500,000 |
) |
|
|
(63,500,000 |
) |
Purchase of treasury stock |
|
|
(881,966 |
) |
|
|
(685,808 |
) |
Noncontrolling contributions/(distributions) of consolidated subsidiary |
|
|
(103,540 |
) |
|
|
(128,824 |
) |
Net cash used in financing activities |
|
|
(1,223,687 |
) |
|
|
(6,365,908 |
) |
Net increase (decrease) in cash and cash equivalents |
|
|
(4,105,189 |
) |
|
|
14,503,107 |
|
Cash and cash equivalents at beginning of year |
|
|
45,290,385 |
|
|
|
30,787,278 |
|
Cash and cash equivalents at end of year |
|
$ |
41,185,196 |
|
|
$ |
45,290,385 |
|
See accompanying notes.
UTG, Inc.
Notes to Consolidated Financial Statements
Note 1 – Summary of Significant Accounting Policies
Business – UTG, Inc. is an insurance holding company. The Company’s dominant business is individual life insurance, which includes the servicing of existing insurance in-force and the acquisition of other companies in the life insurance business. UTG and its subsidiaries are collectively referred to as the “Company”.
This document at times will refer to the Registrant’s largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll. Mr. Correll holds a majority ownership of First Southern Funding, LLC (“FSF”), a Kentucky corporation, and First Southern Bancorp, Inc. (“FSBI”), a financial services holding company. FSBI operates through its 100% owned subsidiary bank, First Southern National Bank (“FSNB”). Banking activities are conducted through multiple locations within south-central and western Kentucky. Mr. Correll is Chief Executive Officer, President, and Chairman of the Board of Directors of UTG and is currently UTG’s largest shareholder through his ownership control of FSF, FSBI and affiliates. At December 31, 2023, Mr. Correll owns or controls directly and indirectly approximately 66% of UTG’s outstanding stock.
UTG’s life insurance subsidiary has several wholly-owned and majority-owned subsidiaries. The subsidiaries were formed to hold certain real estate and other investments. The investments were placed into the limited liability companies and partnerships to provide additional protection to the policyholders and to UG.
Basis of Presentation – The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), under guidance issued by the Financial Accounting Standards Board (“FASB”). The preparation of financial statements in accordance with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Registrant and its wholly and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated during consolidation.
Business Segments – The Company has only one business segment – life insurance.
Investments – The Company reports its investments as follows:
Investments in Fixed Maturity Securities – The Company classifies its investments in fixed maturity securities on the acquisition date and at each balance sheet date. Securities classified as held-to-maturity consist of redeemable preferred stock, and are carried at amortized cost, reflecting the ability and intent to hold the securities to maturity. Securities classified as available-for-sale consist of bonds and are carried at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income. Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Operations, using the constant yield method over the period to maturity. The Company has an evaluation process in place to monitor fixed maturity securities available for sale for credit loss. See Note 2 - Investments for further disclosure of the allowance for credit loss (“ACL”).
Equity Securities at Fair Value – Investments in equity securities, which include common and perpetual preferred stocks, are reported at fair value with unrealized gains and losses reported as a component of net income (loss).
Equity Securities at Cost – These investments are reported at their cost basis, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Mortgage Loans on Real Estate – Mortgage loans on real estate are reported at their unpaid principal balances, adjusted for amortization of premium or discount and valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. The Company recognizes an ACL in earnings at time of purchase or origination based on expected lifetime credit loss on mortgage loans carried at amortized cost, in an amount that represents the portion of the amortized cost basis of such financing receivables, that the Company does not expect to collect, resulting in mortgage loans being presented at the net amount expected to be collected. See Note 2 - Investments for further discussion of the ACL.
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. Real estate for which the Company commits to a plan to sell within one year and actively markets in its current condition, for a reasonable price, in comparison to its estimated fair value, is classified as held-for-sale. Real estate held-for-sale is stated at lower of depreciated cost or estimated fair value less expected disposition costs and is not depreciated.
Notes Receivable – Notes receivable are reported at their unpaid principal balances, adjusted for valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. Interest accruals are analyzed based on the likelihood of repayment. The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status. The Company recognizes an ACL in earnings at time of purchase or origination based on expected lifetime credit loss on notes receivable carried at amortized cost, in an amount that represents the portion of the amortized cost basis of such financing receivables, that the Company does not expect to collect, resulting in notes receivable being presented at the net amount expected to be collected. See Note 2 - Investments for further discussion of the ACL.
Policy Loans – Policy loans are reported at their unpaid balances, including accumulated interest, but not in excess of the cash surrender value of the related policy.
Short-Term Investments – Short-term investments have remaining maturities exceeding three months and under 12 months at the time of purchase and are stated at amortized cost, which approximates fair value.
Gains and Losses – Realized gains and losses include sales of investments and investment impairments. If any, other-than-temporary impairments in fair value are recognized in net income on the specific identification basis.
Fair Value – Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Subsequent to initial recognition, fair values are based on unadjusted quoted prices for identical assets or liabilities in active markets that are readily and regularly obtainable. When such unadjusted quoted prices are not available, estimated fair values are based on quoted prices in markets that are not active, quoted prices for similar but not identical assets or liabilities, or other observable inputs. If these inputs are not available, or observable inputs are not determinable, unobservable inputs and/or adjustments to observable inputs requiring significant management judgment are used to determine the estimated fair value of assets and liabilities. These unobservable inputs can be based on Management’s judgment, assumptions or estimation and may not be observable in market activity. Unobservable inputs are based on Management’s assumptions about the inputs market participants would use in pricing the assets. For more specific information regarding the Company’s measurements and procedures in valuing financial instruments, see Note 3 – Fair Value Measurements.
Cash Equivalents – Cash equivalents consist of money market accounts and investments with maturities of three months or less when purchased.
Cash – Cash consists of balances on hand and on deposit in banks and financial institutions.
Reinsurance - In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts. The Company retains a maximum of $125,000 of coverage per individual life.
Reinsurance receivables are recognized in a manner consistent with the liabilities relating to the underlying reinsurance contracts. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. In the event that reinsurers do not meet their obligations to the Company under the terms of the reinsurance agreements, or when events or changes in circumstances indicate that its carrying amount may not be recoverable, reinsurance recoverable balances could become uncollectible. In such instances, reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance, consistent with the credit loss guidance which requires recording an allowance for credit loss (“ACL”). See Note 4 - Reinsurance for additional information.
Cost of Insurance Acquired - When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future profits from the acquired policies. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.
Future Policy Benefits and Expenses - The liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method. These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on the life insurance subsidiary’s experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations. The Company makes these assumptions at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 2.0% to 6.0% for life insurance and 2.5% to 7.5% for annuities. Benefit reserves for traditional life insurance policies include certain deferred profits on limited-payment policies that are being recognized in income over the policy term. Policy benefit claims are charged to expense in the period that the claims are incurred. The mortality rate assumptions for policies currently issued by the Company are based on 2017 CSO Ultimate tables. Withdrawal rate assumptions are based upon Linton B or C, which are industry standard actuarial tables for forecasting assumed policy lapse rates.
Benefit reserves for universal life insurance and interest sensitive life insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims in excess of related policy account balances. Interest crediting rates for universal life and interest sensitive products range from 3.0% to 6.0% as of December 31, 2023 and 2022.
Policy Claims and Benefits Payable - Policy and contract claims include provisions for reported claims in process of settlement, valued in accordance with the terms of the policies and contracts, as well as provisions for claims incurred and unreported. The estimate of incurred and unreported claims is based on prior experience. The Company makes an estimate after careful evaluation of all information available to the Company. There is no certainty the stated liability for policy claims and benefits payable, including the estimate for incurred but unreported claims, will be the Company’s ultimate obligation.
Income Taxes – Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax impact attributable to differences between the financial statement book values and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. More information concerning income taxes is provided in Note 6 – Income Taxes.
Earnings Per Share – The objective of both basic earnings per share (“EPS”) and diluted EPS is to measure the performance of an entity over the reporting period. The Company presents basic and diluted EPS on the face of the Consolidated Statements of Operations. Basic EPS is computed by dividing income available to common shareholders by the weighted average common shares outstanding for the period. Diluted EPS is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or contracts, such as stock options, which could be exercised or converted into common shares.
Recognition of Revenues and Related Expenses - Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits, consist principally of whole life insurance policies, and certain annuities with life contingencies are recognized as revenues when due. Limited payment life insurance policies defer gross premiums received in excess of net premiums, which is then recognized in income in a constant relationship with insurance in-force. Accident and health insurance premiums are recognized as revenue pro rata over the terms of the policies. Benefits and related expenses associated with the premiums earned are charged to expense proportionately over the lives of the policies through a provision for future policy benefit liabilities and through deferral and amortization of deferred policy acquisition costs. For universal life and investment products, generally there is no requirement for payment of premium other than to maintain account values at a level sufficient to pay mortality and expense charges. Consequently, premiums for universal life policies and investment products are not reported as revenue, but as deposits. Policy fee revenue for universal life policies and investment products consists of charges for the cost of insurance and policy administration fees assessed during the period. Expenses include interest credited to policy account balances and benefit claims incurred in excess of policy account balances.
Recently Issued Accounting Standards
The following Accounting Standard Update (“ASU)”) was adopted in 2023:
In 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 (ASC 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.
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 allowance for credit losses on loans of $524,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded commitments of $51,000, 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”).
ASUs not listed below were assessed and either determined to be not applicable or are not expected to have a material impact on the Company’s consolidated financial statements or disclosures. ASUs issued but not yet adopted as of December 31, 2023 that are currently being assessed and may or may not have a material impact on the Company’s consolidated financial statements or disclosures are disclosed below:
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. Amendments in this update require that public business entities, on an annual basis: (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold. In addition, the amendments in this updated require that all entities disclose on an annual basis the following information about income taxes: (1) the amounts of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and (2) the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5% of total income taxes paid (net of refunds received). ASU 2023-09 is effective for public business entities for annual periods beginning after December 15, 2024. The Company is evaluating the impact of the guidance on its consolidated financial statements.
The FASB issued Accounting Standards Update No. 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures. ASU 2023-07 is intended to improve disclosures about a public entity’s reportable segments and addresses requests from investors and other allocators of capital for additional, more detailed information about a reportable segment’s expenses. This ASU applies to all public entities that are required to report segment information in accordance with Topic 280. All public entities will be required to report segment information in accordance with the new guidance starting in annual periods beginning after December 15, 2023. The Company does not expect ASU 2023-07 to have a material impact on its consolidated financial statements.
The FASB issued Accounting Standards Update No. 2022-05, Financial Services-Insurance (Topic 944): Transition for Sold Contracts. ASU 2022-05 amends transition guidance in ASU No. 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI), for contracts that have been derecognized because of a sale or disposal of individual or a group of contracts or legal entities before the LDTI effective date. This ASU amends the LDTI transition guidance to allow an insurance entity to make an accounting policy election to exclude certain contracts or legal entities from applying the LDTI guidance when, as of the LDTI effective date, (a) the insurance contracts have been derecognized because of a sale or disposal and (b) the insurance entity has no significant continuing involvement with the derecognized contracts. See below for further analysis regarding ASU No. 2018-12.
The FASB issued Accounting Standards Update No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts or ASU 2018-12. ASU 2018-12 significantly changes how insurers account for long-duration insurance contracts. The new guidance will require insurers to review and update, if necessary, the assumptions used to measure insurance liabilities periodically, rather than retain assumptions used at contract inception. The updated guidance also changes the recognition and measurement of deferred acquisition costs (DAC) and created a new category of benefit features called market risk benefits (MRB) that will be measured at fair value. The guidance also significantly expands the disclosure requirements for long-duration contracts. The ASU was originally effective for fiscal years, and interim periods within those years, for years beginning after December 15, 2020 and early adoption is permitted. The guidance on measuring the liabilities for future policy benefits and DAC will be adopted on a modified retrospective basis as of the earliest period presented in the year of adoption. The guidance on MRB will be adopted on a retrospective basis as of the earliest period presented in the year of adoption. In November of 2019, the FASB issued ASU 2019-09, which delayed the effective date of ASU 2018-12 to fiscal years beginning after December 15, 2024 for smaller reporting companies. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
Reclassifications - Certain reclassifications have been made to the 2022 Consolidated Financial Statements to make them comparable to the current year Consolidated Financial Statements. The Company has elected to reclassify certain investments on the Consolidated Balance Sheets and related footnotes for prior periods to conform with the presentation in the fiscal year ended December 31, 2023. The Company has elected to reclassify $8.7 million out of investment in real estate, net, into equity securities, at cost and to reclassify $2.5 million out of equity securities, at cost, to a new item titled held to maturity, redeemable preferred stock, at amortized cost. There were no revisions to the Consolidated Statements of Operations or the Consolidated Statements of Shareholders’ Equity. There were no changes to net income attributable to common shareholders or total shareholders’ equity.
Revision of previously issued financial statements – The Company identified an error in its previously issued Consolidated Financial Statements related to the presentation of the Consolidated Statements of Comprehensive Income (Loss). The impact of the error to the prior period’s Consolidated Financial Statements was not considered to be material. In order to improve the consistency and comparability of the Consolidated Financial Statements, Management revised the Consolidated Financial Statements to include the revision discussed herein. See Note 15 - Revision of Previously Issued Consolidated Financial Statements for details of the revision.
Note 2 – Investments
Investment Risks and Uncertainties
Investments are exposed to the following primary sources of risk: credit, interest rate, liquidity, market valuation, currency and real estate risk. The financial statement risks, stemming from such investment risks, are those associated with the determination of estimated fair values, the diminished ability to sell certain investments in times of strained market conditions, the recognition of ACL and impairments, and the recognition of income on certain investments. The use of different methodologies, assumptions and inputs relating to these financial statement risks may have a material effect on the amounts presented within the Consolidated Financial Statements.
The determination of ACL and impairments is highly subjective and is based upon quarterly evaluations and assessments of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available.
Investment in Fixed Maturity Securities
The Company’s insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments they are permitted to make, and the amount of funds that may be used for any one type of investment.
Investments in fixed maturity securities are summarized by type as follows for the years ended December 31:
2023 |
|
Original or Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Estimated Fair Value |
|
U.S. Government and govt. agencies and authorities |
|
$ |
14,316,976 |
|
|
$ |
0 |
|
|
$ |
(729,197 |
) |
|
$ |
13,587,779 |
|
U.S. special revenue and assessments |
|
|
7,528,985 |
|
|
|
0 |
|
|
|
(220,527 |
) |
|
|
7,308,458 |
|
All other corporate bonds |
|
|
87,708,777 |
|
|
|
89,004 |
|
|
|
(5,284,182 |
) |
|
|
82,513,599 |
|
Redeemable preferred stock |
|
|
2,500,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,500,000 |
|
Total |
|
$ |
112,054,738 |
|
|
$ |
89,004 |
|
|
$ |
(6,233,906 |
) |
|
$ |
105,909,836 |
|
2022 (1) |
|
Original or Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Estimated Fair Value |
|
U.S. Government and govt. agencies and authorities |
|
$ |
18,315,321 |
|
|
$ |
0 |
|
|
$ |
(1,104,146 |
) |
|
$ |
17,211,175 |
|
U.S. special revenue and assessments |
|
|
7,535,018 |
|
|
|
0 |
|
|
|
(335,918 |
) |
|
|
7,199,100 |
|
All other corporate bonds |
|
|
91,429,481 |
|
|
|
65,529 |
|
|
|
(7,592,226 |
) |
|
|
|
