UTG, INC. The following is Management's discussion and analysis of the financial condition and results of operations ofUTG, Inc. and its subsidiaries (collectively with the Parent, the "Company"). The following discussion of the financial condition and results of operations of the Company should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in the Company's annual report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSecurities and Exchange Commission , and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report. Cautionary Statement Regarding Forward-Looking Statements This report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "probably," or similar expressions, we are making forward-looking statements.
Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of these assumptions, and, therefore, the
forward-looking statements based on these assumptions, could themselves prove to
be inaccurate. In light of the significant uncertainties inherent in the
forward-looking statements that are included in this report, our inclusion of
this information is not a representation by us or any other person that our
objectives and plans will be achieved. In light of these risks, uncertainties
and assumptions, any forward-looking event discussed in this report may not
occur. Our forward-looking statements speak only as of the date made, and we
undertake no obligation to update or review any forward-looking statement,
whether as a result of new information, future events or other developments,
unless the securities laws require us to do so.
Overview
UTG, Inc. , a Delaware corporation, is a life insurance holding company. The
Company's dominant business is individual life insurance, which includes the
servicing of existing insurance policies in force, the acquisition of other
companies in the life insurance business, 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.
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Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ significantly from those estimates. The Company has
identified certain estimates that involve a higher degree of judgment and are
subject to a significant degree of variability. The Company's critical
accounting policies and the related estimates considered most significant by
Management are disclosed in the Company's Annual Report on Form 10-K for the
year ended December 31, 2019 . Management has identified the accounting policies
related to cost of insurance acquired, assumptions and judgments utilized in
determining if declines in fair values of investments are other-than-temporary,
and valuation methods for investments that are not actively traded as those, due
to the judgments, estimates and assumptions inherent in those policies, are
critical to an understanding of the Company's Condensed Consolidated Financial
Statements and this Management's Discussion and Analysis.
During the six months ended
Results of Operations
During March 2020 , a global pandemic was declared by the World Health
Organization related to the rapidly growing outbreak of a novel strain of
coronavirus (COVID-19). The pandemic has significantly impacted the economic
conditions in the U.S. and globally, accelerating during the first half of
March, as federal, state, and local governments reacted to the public health
crisis, creating significant uncertainties in the U.S. economy. The Company has
not experienced a slow-down in activities, however government restrictions and
client-imposed delays are evaluated daily and this could change. While the
disruption is expected to be temporary, there continues to be uncertainty around
the duration or effects of resurgence of the virus. The Company cannot at this
time predict the ultimate impact the pandemic will have on its results of
operations, financial position, liquidity, or capital resources, but such impact
could be material.
On a consolidated basis, the Company reported a net loss attributable to common
shareholders' of approximately $(3.3) million for the six-month period ended
June 30, 2020 and net income attributable to common shareholders' of
approximately $11.7 million for the three-month period ended June 30, 2020 . The
variance in the first and second quarter 2020 earnings are driven by the change in the unrealized gains (losses) reported by the Company. During the first quarter of 2020, the Company reported approximately$24.7 million of unrealized losses due to the change in the fair value of equity securities. During the second quarter of 2020, the Company experienced a partial rebound in the performance of its equity securities and recognized a change in the fair value of its equity securities of approximately$13 million . For the six-month period endedJune 30, 2019 , the Company reported net income attributable to common shareholders' of approximately$14.4 million and net income attributable to common shareholders' of approximately$2.7 million for the three-month period endedJune 30, 2019 .
Revenues
The Company reported total revenues of approximately$6.6 million for the six months endedJune 30, 2020 , a decrease of approximately$24.3 million as compared to the same period in 2019. The variance in total revenues from the prior year to the current year is mainly attributable to the change in the fair value of equity securities between periods. The Company reported total revenues of approximately$19.5 million for the three months endedJune 30, 2020 , an increase of approximately$9.7 million as compared to the three-month period endedJune 30, 2019 . For the quarter, the fluctuations are also largely related to the change in the fair value of equity securities between the periods that is reported as a component of total revenue on the Condensed Consolidated Statements of Operations. The Company reported revenue before net investment gains of approximately$9.4 million and$9.6 million for the six months endedJune 30, 2020 and 2019, respectively. Revenue before net investment gains decreased only slightly when comparing the current year and prior year results and is due to minor decreases in premium and policy fee revenue. For the three months endedJune 30, 2020 , the Company reported revenue before net investment gains and losses of$4.8 million , up from$4.4 million from the same period in 2019. The increase between periods is largely attributable to real estate investment income. 22 -------------------------------------------------------------------------------- Premium and policy fee revenues, net of reinsurance, were comparable for the six-month periods endedJune 30, 2020 and 2019. Premium and policy fee revenues, net of reinsurance, represented 36% and 38% of the Company's revenues before net investment gains (losses) as ofJune 30, 2020 and 2019, respectively. The decline in premiums is not unusual as the Company is not actively marketing new business. The Company reported total net investment gains (losses) of approximately$14.7 million and$(2.7) million for the three and six-month periods endedJune 30, 2020 , respectively. For the three and six month periods endedJune 30, 2020 , the Company reported approximately$1.8 million and$9 million , respectively, in net realized investment gains comprised mainly from the sale of equity securities. Also, in the total net investment gains are unrealized gains (losses) related to the change in the fair value of equity securities. The Company reported unrealized equity gains (losses) of$12.9 million and$(11.7) million for the three and six-months endedJune 30, 2020 and$97,000 and$14.9 million for the three and six-months endedJune 30, 2019 . Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net investment income$ 3,021,654 $ 2,701,709 $ 5,851,840 $ 5,813,733 Net investment gains (losses)$ 14,725,614 $ 5,398,926 $ (2,784,323 ) $ 21,300,255 Change in net unrealized investment gains (losses) on available-for-sale securities, pre-tax$ 6,595,986 $ 3,925,070 $ 8,068,851 $ 8,859,921 The Company holds certain investments that have been negatively impacted by ongoing market reactions to the pandemic. These investments primarily relate to marketable equity securities, particularly in the area of oil and gas. The drop in the markets in March, resulted in estimated unrealized losses of approximately$(24.7) million for the three months endingMarch 31, 2020 . For the three months endedJune 30, 2020 , the Company experienced a partial rebound on these investments of approximately$13 million in unrealized gains. The Company recognized and disclosed in prior filings that a pullback in the stock market, particularly in the oil and gas arena, could slow these gains or even result in future-period unrealized losses. Management believes these equity investments continue to be solid investments for the Company and have further growth potential. However, current market conditions remain volatile and Management anticipates the Company will experience significant fluctuations in this line item in future periods.
The following table reflects net investment income of the Company:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Fixed maturities available for sale
$ 2,721,419 $ 2,926,554 Equity securities 188,824 146,438 944,226 969,332 Trading securities - 111,693 - - Mortgage loans 159,285 166,992 245,084 285,604 Real estate 1,635,847 629,888 2,242,504 1,259,634 Notes receivable 336,712 515,504 538,933 950,659 Policy loans 166,708 169,464 304,678 311,016 Short term 46,836 41,731 53,174 83,640 Cash and cash equivalents 4,132 4,767 103,080 4,222 Total consolidated investment income 3,850,439 3,123,046 7,153,098 6,790,661 Investment expenses (828,785 ) (421,337 ) (1,301,258 ) (976,928 ) Consolidated net investment income$ 3,021,654 $ 2,701,709 $ 5,851,840 $ 5,813,733 23
-------------------------------------------------------------------------------- Net investment income represented 63% and 61% of the Company's revenue before net investment gains (losses) as ofJune 30, 2020 and 2019, respectively. The Company reported net investment income of approximately$5.9 million for the six-month period endedJune 30, 2020 , comparable to 2019 net investment income. For the three month period endedJune 30, 2020 , net investment income increased approximately 12%, compared to the same quarter in 2019. When comparing the three and six months endedJune 30, 2020 and 2019, income from investing activities was comparable in the majority of the investment categories, with the largest variance being found in the real estate and notes receivable categories. Earnings from the real estate portfolio are expected to vary depending on the activities of the subsidiaries and the potential distributions that will occur. For the six-months endedJune 30, 2020 , real estate earnings were up approximately 78% compared to the same period in 2019. The difference was attributable to a one-time earnings event that was received in second quarter 2020. Excluding this one-time event in 2020, real estate income was comparable between periods. For the six-months endedJune 30, 2020 , notes receivable income is down approximately 43% compared toJune 30, 2019 . The decrease is a result of fewer average outstanding notes receivable, and consequently, a reduction in interest income. During 2019, the Company received an offer to purchase investments in certain music royalties held in the form of equity investments. As a result of this event, the Company elected to change its valuation methodology from using discounted cash flow models to estimate fair value to marking the investment to the offer price to estimate the fair value. The change in methodology resulted in recording an unrealized gain on investment of approximately$3.3 million during the year endedDecember 31, 2019 . The investments were then sold during the first quarter of 2020. The Company recognized a gain of approximately$4.1 million on the sale. The 2020 net income is unaffected by the sale as the realized gain is offset by the unrealized gain reversal at the time of sale. In summary, the Company's basis for future revenue growth is expected to come from the following primary sources: conservation of business currently in-force, the maximization of investment earnings and the acquisition of other companies or policy blocks in the life insurance business. Management has placed a significant emphasis on the development of these revenue sources to enhance these opportunities.
Expenses
The Company reported total benefits and other expenses of approximately$10.7 million for the six month period endedJune 30, 2020 , a decrease of approximately 11% from the same period in 2019. For the three month period endedJune 30, 2020 , total benefits and other expenses decreased approximately 17%, compared to the same quarter in 2019. Benefits, claims and settlement expenses represented approximately 65% and 62% of the Company's total expenses for the three and six month periods endedJune 30, 2020 , respectively. The other major expense category of the Company is operating expenses, which represented approximately 32% and 35% of the Company's total expenses for the three and six month periods endedJune 30, 2020 , respectively. Life benefits, claims and settlement expenses, net of reinsurance benefits and claims, decreased approximately 13% in the six month period endedJune 30, 2020 , compared to the same period in 2019. For the three months endedJune 30, 2020 , life benefits, claims and settlement expenses, net of reinsurance benefits and claims, decreased approximately 22%, compared to the same quarter in 2019. The decrease is not considered unusual by Management as fluctuations in mortality are to be expected. Net amortization of cost of insurance acquired decreased 4% during the three month and six month periods endedJune 30, 2020 compared to the same period in 2019. Cost of insurance acquired is established when an insurance company is acquired or when the Company acquires a block of in-force business. The Company assigns a portion of its cost to the right to receive future profits from insurance contracts existing at the date of the acquisition. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates may vary due to risk analysis performed at the time of acquisition on the business acquired. The Company utilizes a 12% discount rate on the remaining unamortized business. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force. This expense is expected to decrease, unless the Company acquires a new block of business. Operating expenses decreased by 5% for the three-month period endedJune 30, 2020 compared to that of the same period in 2019. For the six-months endedJune 30, 2020 operating expenses decreased by 6% compared to that of the same period in 2019. Overall, expenses were comparable in all of the major expense categories. Management continues to place significant emphasis on expense monitoring and cost containment. Maintaining administrative efficiencies directly affects net income. 24 -------------------------------------------------------------------------------- Financial Condition
Investment Information
Investments represent approximately 84% of total assets atJune 30, 2020 andDecember 31, 2019 . Accordingly, investments are the largest asset group of the Company. The Company's insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments that it is permitted to make and the amount of funds that may be used for any one type of investment. In light of these statutes and regulations, the majority of the Company's investment portfolio is invested in a diverse set of securities. As ofJune 30, 2020 , the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets, shareholders' equity or results from operations. To provide additional flexibility and liquidity, the Company has identified all fixed maturity securities as "investments available for sale". Investments available for sale are carried at market, with changes in market value charged directly to shareholders' equity. Changes in the market value of available for sale securities resulted in net unrealized gains of$6.6 million and$8.1 million for the three and six-month periods endedJune 30, 2020 , respectively. The variance in the net unrealized gains and losses is the result of normal market fluctuations and lower interest rates.
Capital Resources
Total shareholders' equity increased by approximately 2% as ofJune 30, 2020 compared toDecember 31, 2019 . The increase in total shareholders' equity is a combination of the net loss reported for the period of$(3.3) million and an increase of$6.1 million of accumulated other comprehensive income. The Company's investments are predominately in fixed maturity investments such as bonds. The Company carries all of its fixed maturity holdings as available for sale, which are reported in the Condensed Consolidated Financial Statements at their market value. Liquidity The Company has two principal needs for cash - the insurance company's contractual obligations to policyholders and the payment of operating expenses. Cash and cash equivalents represented 7% of total assets as ofJune 30, 2020 andDecember 31, 2019 . Fixed maturities, as a percentage of total assets, were approximately 42% and 41% as ofJune 30, 2020 andDecember 31, 2019 , respectively. The Company currently has access to funds for operating liquidity. UTG has an$8 million revolving credit note withIllinois National Bank . AtJune 30, 2020 , the Company had no outstanding borrowings against the UTG line of credit. UG has a$10 million line of credit with theFederal Home Loan Bank . AtJune 30, 2020 , the Company had no outstanding borrowings against the UG line of credit. Future policy benefits are primarily long-term in nature and therefore, the Company's investments are predominantly long-term and provide sufficient return to cover these obligations. Many of the Company's products contain surrender charges and other features that reward persistency and penalize the early withdrawal of funds. Net cash used in operating activities was approximately$4.9 million and$4.7 million for the six-months endedJune 30, 2020 and 2019, 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. 25
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Net cash provided by investing activities was approximately$5.7 million and$10.9 million for the six-month period endedJune 30, 2020 and 2019, respectively. The net cash provided by investing activities is expected to vary from quarter to quarter depending on market conditions and management's ability to find and negotiate favorable investment contracts. UTG is a holding Company that has no day-to-day operations of its own. Funds required to meet its expenses and general costs associated with maintaining the Company in good standing with states in which it does business are primarily provided by its subsidiaries. On a parent only basis, UTG's cash flow is dependent on Management fees received from its insurance subsidiary, stockholder dividends from its subsidiary and earnings received on cash balances. AtJune 30, 2020 , substantially all of the consolidated shareholders' equity represented net assets of its subsidiary. The Company's insurance subsidiary has maintained adequate statutory capital and surplus. The payment of cash dividends to shareholders by UTG is not legally restricted. However, the state insurance department regulates insurance Company dividend payments where the Company is domiciled. No dividends were paid to shareholders in 2019 or the six months endedJune 30, 2020 . UG is anOhio domiciled insurance company, which requires notification within five business days to the insurance commissioner following the declaration of any ordinary dividend and at least ten calendar days prior to payment of such dividend. Ordinary dividends are defined as the greater of: a) prior year statutory net income or b) 10% of statutory capital and surplus. For the year endedDecember 31, 2019 , UG had statutory net income of approximately$8.3 million . AtDecember 31, 2019 UG's statutory capital and surplus amounted to approximately$66 million . Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. During 2019, UG paid UTG ordinary dividends of$6 million . During the second quarter of 2020, UG paid UTG an ordinary dividend of$1 million . UTG used the dividends received during 2019 and 2020 to purchase outstanding shares of UTG stock and for general operations of the Company.
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