The following is Management's discussion and analysis of the financial condition
and results of operations of UTG, Inc. and its subsidiaries (collectively with
the Parent, the "Company"). The following discussion of the financial condition
and results of operations of the Company should be read in conjunction with, and
is qualified in its entirety by reference to, the Consolidated Financial
Statements of the Company and the related Notes thereto appearing in the
Company's annual report on Form 10-K for the year ended December 31, 2019, as
filed with the Securities and Exchange Commission, and our unaudited Condensed
Consolidated Financial Statements and related Notes thereto appearing elsewhere
in this quarterly report.
Cautionary Statement Regarding Forward-Looking Statements
This report on Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created by those laws. We have based our forward-looking statements on
our current expectations and projections about future events. Our
forward-looking statements include information about possible or assumed future
results of operations. All statements, other than statements of historical
facts, included or incorporated by reference in this report that address
activities, events or developments that we expect or anticipate may occur in the
future, including such things as the growth of our business and operations, our
business strategy, competitive strengths, goals, plans, future capital
expenditures and references to future successes may be considered
forward-looking statements. Also, when we use words such as "anticipate,"
"believe," "estimate," "expect," "intend," "plan," "probably," or similar
expressions, we are making forward-looking statements.
Numerous risks and uncertainties may impact the matters addressed by our
forward-looking statements, any of which could negatively and materially affect
our future financial results and performance.
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of these assumptions, and, therefore, the
forward-looking statements based on these assumptions, could themselves prove to
be inaccurate. In light of the significant uncertainties inherent in the
forward-looking statements that are included in this report, our inclusion of
this information is not a representation by us or any other person that our
objectives and plans will be achieved. In light of these risks, uncertainties
and assumptions, any forward-looking event discussed in this report may not
occur. Our forward-looking statements speak only as of the date made, and we
undertake no obligation to update or review any forward-looking statement,
whether as a result of new information, future events or other developments,
unless the securities laws require us to do so.
Overview
UTG, Inc., a Delaware corporation, is a life insurance holding company. The
Company's dominant business is individual life insurance, which includes the
servicing of existing insurance policies in force, the acquisition of other
companies in the life insurance business and the administration and processing
of life insurance business for other entities. The Company's focus for the
future is the servicing of the existing insurance policies in force.
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.
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 nine months ended September 30, 2020, there were no additions to or
changes in the critical accounting policies disclosed in the 2019 Form 10-K.
Results of Operations
During March 2020, a global pandemic was declared by the World Health
Organization related to the rapidly growing outbreak of a novel strain of
coronavirus (COVID-19). The pandemic has significantly impacted the economic
conditions in the U.S. and globally, accelerating during the first half of
March, as federal, state, and local governments 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 $(5.7) million for the nine-month period ended
September 30, 2020 and a net loss attributable to common shareholders' of
approximately $(2.4) million for the three-month period ended September 30,
2020. For the nine-month period ended September 30, 2019, the Company reported
net income attributable to common shareholders' of approximately $13.2 million
and a net loss attributable to common shareholders' of approximately $(1.1)
million for the three-month period ended September 30, 2019.
Revenues
The Company reported total revenues of approximately $9.9 million for the nine
months ended September 30, 2020, a decrease of approximately $25.2 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 $3.3 million for the three months ended September 30, 2020, a
decrease of approximately $954,000 as compared to the three-month period ended
September 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 $13.2
million and $14.2 million for the nine months ended September 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 and net investment income. For the three
months ended September 30, 2020, the Company reported revenue before net
investment gains and losses of $3.9 million, down from $4.6 million from the
same period in 2019.
Premium and policy fee revenues, net of reinsurance, are down 10% for the three
months ended September 30, 2020 compared to the same period in 2019. For the
nine months ended September 30, 2020, premium and policy fee revenues, net of
reinsurance are down 8% compared to 2019. Premium and policy fee revenues, net
of reinsurance, represented 37% of the Company's revenues before net investment
gains (losses) as of September 30, 2020 and 2019, respectively. The decline in
premiums is not unusual as the Company is not actively marketing new business.
The following table summarizes our investment performance.
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net investment income $ 2,231,360 $ 2,818,669 $ 8,083,200 $ 8,632,402
Net investment gains (losses) $ (523,587) $ (318,919) $ (3,307,910) $ 20,981,336
Change in net unrealized investment
gains (losses) on available-for-sale
securities, pre-tax $ 169,058 $ 3,184,769 $ 8,237,909 $ 12,044,690The Company reported total net investment losses of approximately $(524,000) and
$(3.3) million for the three- and nine-month periods ended September 30, 2020,
respectively. For the three- and nine-month periods ended September 30, 2020,
the Company reported approximately $1.8 million and $10.7 million, respectively,
in net realized investment gains comprised mainly from the sale of equity
securities.
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 ended December 31, 2019. The investments were then sold during
the first quarter of 2020. The Company recognized a gain of approximately $6.3
million on the sale.
The Company also sold equity securities in the area of oil & gas that resulted
in a realized gain of $3.2 million during second quarter 2020.
In addition, 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 $(2.3) million and $(14) million
for the three and nine-months ended September 30, 2020, respectively. For the
three and nine-months ended September 30, 2019, the Company reported $(4.1)
million and $10.8 million, respectively.
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 an estimated unrealized losses of
approximately $(24.7) million for the three months ending March 31, 2020. Since
the end of the first quarter 2020, the Company experienced a partial rebound on
these investments of approximately $11 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 continue experience significant
fluctuations in this line item in future periods.
The following table reflects net investment income of the Company:
Three Months Ended September Nine Months Ended September 30,
30,
2020 2019 2020 2019
Fixed maturities available $ 1,301,923 $ 1,445,341 $ 4,023,342 $ 4,371,895
for sale
Equity securities 238,082 287,462 1,182,308 1,256,794
Trading securities 1,581 - 1,581 -
Mortgage loans 147,202 83,528 392,286 369,132
Real estate 563,306 881,705 2,805,810 2,141,339
Notes receivable 244,473 485,288 783,406 1,435,947
Policy loans 139,602 149,979 444,280 460,995
Cash and cash equivalents 284 (1,407) 53,458 2,815
Short-term 38,429 59,980 141,509 143,620
Total consolidated 2,674,882 3,391,876 9,827,980 10,182,537
investment income
Investment expenses (443,522) (573,207) (1,744,780) (1,550,135)
Consolidated net investment $ 2,231,360 $ 2,818,669 $ 8,083,200 $ 8,632,402
income
Net investment income represented 61% of the Company's revenue before net
investment gains (losses) as of September 30, 2020 and 2019, respectively. The
Company reported net investment income of approximately $8.1 million for the
nine-month period ended September 30, 2020, comparable to 2019 net investment
income. For the three month period ended September 30, 2020, net investment
income decreased approximately 21%, compared to the same quarter in 2019. When
comparing the three and nine months ended September 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 nine-months ended September 30, 2020, real estate earnings were up
approximately 31% compared to the same period in 2019. Excluding a one-time
event that resulted in $1.2 million in earnings during second quarter 2020, real
estate income is lower compared to that of 2019.
For the nine-months ended September 30, 2020, notes receivable income is down
45% compared to September 30, 2019. The decrease is a result of fewer average
outstanding notes receivable, and consequently, a reduction in interest income.
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 $17.2
million for the nine month period ended September 30, 2020, a decrease of
approximately 4% from the same period in 2019. For the three month period ended
September 30, 2020, total benefits and other expenses increased approximately
9%, compared to the same quarter in 2019. Benefits, claims and settlement
expenses represented approximately 58% and 61% of the Company's total expenses
for the three and nine months ended September 30, 2020, respectively. The other
major expense category of the Company is operating expenses, which represented
approximately 39% and 36% of the Company's total expenses for the three and nine
month periods ended September 30, 2020, respectively.
Life benefits, claims and settlement expenses, net of reinsurance benefits and
claims, decreased approximately 9% in the nine month period ended September 30,
2020, compared to the same period in 2019. For the three months ended September
30, 2020, life benefits, claims and settlement expenses, net of reinsurance
benefits and claims are comparable to that of the same quarter in 2019. Overall,
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 nine month periods ended September 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 increased by 32% for the three-month period ended September
30, 2020 compared to that of the same period in 2019. For the nine-months ended
September 30, 2020 operating expenses increased by 6% compared to that of the
same period in 2019. Charitable contributions are primarily the reason for the
increase during the quarter and year-to-date. Charitable contributions are a
function of the Company's taxable earnings. UTG has a strong philanthropic
program and 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. Otherwise, expenses were comparable in
the remainder of the major expense categories.
Management continues to place significant emphasis on expense monitoring and
cost containment. Maintaining administrative efficiencies directly affects net
income.
Financial Condition
Investment Information
Investments represent approximately 85% and 84% of total assets at September 30,
2020 and December 31, 2019, respectively. Accordingly, investments are the
largest asset group of the Company. The Company's insurance subsidiary is
regulated by insurance statutes and regulations as to the type of investments
that it is permitted to make and the amount of funds that may be used for any
one type of investment. Considering these statutes and regulations, the
majority of the Company's investment portfolio is invested in a diverse set of
securities.
As of September 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 $169,000 and $8.2 million
for the three and nine-month periods ended September 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 decreased by approximately 2% as of September 30,
2020 compared to December 31, 2019. The decrease is largely attributable to the
net loss of $(5.7) million and the net decrease of additional paid-in capital of
$(3.0) million for the nine-months ended September 30, 2020. However, the
decrease was offset by the increase in accumulated other comprehensive income of
$6.2 million, resulting in a net decrease of $(2.3) million.
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.
During the third quarter of 2020, the Company purchased 88,341 shares from
Cumberland Lake Shell, Inc. at a price of $29 per share for a total cost of
$2,561,889. This single transaction represented a majority of the third quarter
activity related to the share repurchase program. Note 6 - Shareholders' Equity
provides additional information regarding the Company's stock repurchase
program.
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 6% and 7% of total assets as of September
30, 2020 and December 31, 2019, respectively. Fixed maturities, as a percentage
of total assets, were approximately 43% and 41% as of September 30, 2020 and
December 31, 2019, respectively.
The Company currently has access to funds for operating liquidity. UTG has an
$8,000,000 revolving credit note with Illinois National Bank. At September 30,
2020, the Company had no outstanding borrowings against the UTG line of credit.
UG has a $10 million line of credit with the Federal Home Loan Bank. At
September 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 $8.8 million and $5.3
million for the nine-months ended September 30, 2020 and 2019, respectively. The
difference between periods is largely a result of change in the deferred income
taxes. Sources of operating cash flows of the Company, as with most insurance
entities, is comprised primarily of premiums received on life insurance products
and income earned on investments. Uses of operating cash flows consist
primarily of payments of benefits to policyholders and beneficiaries and
operating expenses. The Company has not marketed any significant new products
for several years. As such, premium revenues continue to decline. Management
anticipates future cash flows from operations to remain similar to historic
trends.
Net cash provided by investing activities was approximately $7.5 million and
$12.3 million for the nine-month period ended September 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 arrangements.
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. At
September 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
nine months ended September 30, 2020.
UG is an Ohio domiciled insurance company, which requires notification within
five business days to the insurance commissioner following the declaration of
any ordinary dividend and at least ten calendar days prior to payment of such
dividend. Ordinary dividends are defined as the greater of: a) prior year
statutory net income or b) 10% of statutory capital and surplus. For the year
ended December 31, 2019, UG had statutory net income of approximately $8.3
million. At December 31, 2019 UG's statutory capital and surplus amounted to
approximately $66 million. Extraordinary dividends (amounts in excess of
ordinary dividend limitations) require prior approval of the insurance
commissioner and are not restricted to a specific calculation. During 2019, UG
paid UTG ordinary dividends of $6 million. During the second quarter of 2020,
UG paid UTG an ordinary dividend of $1 million and another $2 million dividend
in the third quarter. 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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UTG, INC. 
