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, 2020, as
filed with the Securities and Exchange Commission, and our unaudited Condensed
Consolidated Financial Statements and related Notes thereto appearing elsewhere
in this quarterly report.
Cautionary Statement Regarding Forward-Looking Statements
This report on Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, which are intended to be covered by the safe
harbors created by those laws. We have based our forward-looking statements on
our current expectations and projections about future events. Our
forward-looking statements include information about possible or assumed future
results of operations. All statements, other than statements of historical
facts, included or incorporated by reference in this report that address
activities, events or developments that we expect or anticipate may occur in the
future, including such things as the growth of our business and operations, our
business strategy, competitive strengths, goals, plans, future capital
expenditures and references to future successes may be considered
forward-looking statements. Also, when we use words such as "anticipate,"
"believe," "estimate," "expect," "intend," "plan," "probably," or similar
expressions, we are making forward-looking statements.
Numerous risks and uncertainties may impact the matters addressed by our
forward-looking statements, any of which could negatively and materially affect
our future financial results and performance.
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of these assumptions, and, therefore, the
forward-looking statements based on these assumptions, could themselves prove to
be inaccurate. In light of the significant uncertainties inherent in the
forward-looking statements that are included in this report, our inclusion of
this information is not a representation by us or any other person that our
objectives and plans will be achieved. In light of these risks, uncertainties
and assumptions, any forward-looking event discussed in this report may not
occur. Our forward-looking statements speak only as of the date made, and we
undertake no obligation to update or review any forward-looking statement,
whether as a result of new information, future events or other developments,
unless the securities laws require us to do so.
Overview
UTG, Inc., a Delaware corporation, is a life insurance holding company. The
Company's dominant business is individual life insurance, which includes the
servicing of existing insurance policies in force, the acquisition of other
companies in the life insurance business and the administration and processing
of life insurance business for other entities. The Company's focus for the
future includes growing the administrative portion of the business.
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, 2020. Management has identified the accounting policies
related to cost of insurance acquired, assumptions and judgments utilized in
determining if declines in fair values of investments are other-than-temporary,
and valuation methods for investments that are not actively traded as those, due
to the judgments, estimates and assumptions inherent in those policies, are
critical to an understanding of the Company's Condensed Consolidated Financial
Statements and this Management's Discussion and Analysis.
During the three-months ended March 31, 2021, there were no additions to or
changes in the critical accounting policies disclosed in the 2020 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 regularly 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 net income attributable to common
shareholders' of approximately $14.2 million for the three-month period ended
March 31, 2021 and a net loss attributable to common shareholders' of
approximately $(15) million for the three-month period ended March 31, 2020.
Revenues
For the three-month period ended March 31, 2021, the Company reported total
revenues of approximately $24.1 million and for the same period in 2020 negative
total revenues of approximately $(12.9) million. The negative total revenue the
Company reported for the first quarter of 2020 is the result of the change in
the fair value of equity securities of approximately $(12) million that is
reported as a component of total revenue on the Condensed Consolidated
Statements of Operations.
The Company reported revenue before net investment gains (losses) of
approximately $3.8 million and $4.6 million for the three-month periods ended
March 31, 2021 and 2020, respectively. Revenue before net investment gains
(losses) decreased slightly when comparing the current year and prior year
results and is due to minor decreases in premium and policy fees and net
investment income.
Premium and policy fee revenues, net of reinsurance, were comparable for
the three-months ended March 31, 2021 and 2020. The Company writes minimal new
business. Premium and policy fee revenues, net of reinsurance, represented 45%
and 37% of the Company's revenue before net investment gains (losses) as
of March 31, 2021 and 2020, respectively.
The following table summarizes the Company's investment performance.
Three Months Ended March 31,
2021 2020
Net investment income $ 1,959,667 $ 2,830,186
Net investment gains (losses) $ 20,324,925 $ (17,509,937 )Change in net unrealized investment gains (losses) on
available-for-sale securities, pre-tax
$ 20,179,879 $ (12,021,502 )
The following table reflects net investment income of the Company:
Three Months Ended
March 31,
2021 2020
Fixed maturities available for sale $ 1,203,482 $ 1,409,324
Equity securities 297,599 755,402
Trading securities 13,688 0
Mortgage loans 269,804 85,799
Real estate 554,724 606,657
Notes receivable 193,871 202,221
Policy loans 132,794 137,970
Short-term 0 16,227
Cash and cash equivalents 562 89,059
Total consolidated investment income 2,666,524 3,302,659
Investment expenses
(706,857 ) (472,473 )
Consolidated net investment income $ 1,959,667 $ 2,830,186
Net investment income represented approximately 52% and 62% of the Company's
revenue before net investment gains (losses) as of March 31, 2021 and 2020,
respectively. When comparing current and prior year results, net investment
income was comparable in a majority of the investment categories. Investment
income earned by the fixed maturities, equity securities, and real estate
investment portfolios represented approximately 77% and 84% of the total
consolidated investment income for the three-months ended March 31, 2021 and
2020, respectively.
In March 2020, with the onset of the pandemic in America, financial markets
became jittery experiencing a significant drop in the major market indices. In
response, the Federal Reserve dropped interest rates to near zero. This action
resulted in a drop in all other interest rates in the marketplace. While this
increased the fair value of the Company's current fixed income holdings, it made
finding investments to acquire with any type of historic yield nearly
impossible. The stock markets have experienced a rebound since that time;
however, interest rates remain at historic low levels with short term rates at
or near zero. Longer term bonds have experienced rate increases later in 2020
and into early 2021, but still remain below recent historic rates. Should rates
remain at these levels, it will become increasingly more difficult for the
Company to maintain its historic net investment income levels as existing
investments mature and are replaced with lower yielding investments.
Income from the fixed maturities investment portfolio represented approximately
45% and 43% of the total consolidated investment income for the three months
ended March 31, 2021 and 2020, respectively. When comparing earnings from the
fixed maturities portfolio for the three months ended March 31, 2021 and 2020
income was down approximately 15% or $206,000. Fixed maturities continue to
represent the largest investment type and asset class owned by the company.
Earnings from the equity securities investment portfolio represented
approximately 11% and 23% of the total consolidated investment income report by
the Company during the three months ended March 31, 2021 and 2020,
respectively. Income from the equity securities portfolio was down
approximately 61% or $458,000 when comparing 2021 and 2020 results. This
decrease is primarily due to the company partially selling their holdings in a
specific dividend paying security during 2020.
The earnings reported by the real estate investment portfolio represented
approximately 21% and 18% of the total consolidated investment income reported
by the Company during the three months ended March 31, 2021 and 2020,
respectively. Earnings from the real estate investment portfolio were down
approximately 9% or $52,000 when comparing 2021 and 2020 results. The 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 earnings reported by the mortgage loan investment portfolio represented
approximately 10% and 3% of the total consolidated investment income reported by
the Company during the three months ended March 31, 2021 and 2020, respectively.
Earnings from the mortgage loan investment portfolio were up approximately
$184,000 when comparing 2021 and 2020 results. The earnings from the mortgage
loan portfolio have increased due to the increase in size of the portfolio
itself. The mortgage loan investment portfolio increased by approximately $10.9
million when comparing the three-months ended March 31, 2021 and 2020,
respectively. With the low investment rates currently available in the bond
market, the Company has placed more emphasis on loans to improve investment
yields.
The following table reflects net realized investment gains (losses) for the
three months ended March 31:
2021 2020
Fixed maturities available for sale $ 0 $ 391,483
Equity securities 8,987 (508,483 )
Real estate 136,059 0
Consolidated net realized investment gains (losses) 145,046 (117,000 )
Change in fair value of equity securities
20,179,879 (17,392,937 )
Net investment gains (losses) $ 20,324,925 $ (17,509,937 )Realized investment gains are the result of one-time events and are expected to
vary during a given reporting period.
In the December 31, 2020 Form 10-K filing, the Company disclosed that we
received an offer to purchase investments in certain music royalties held in the
form of equity securities. We continued to report on these transactions in MD&A
of Company's 2020 quarterly Form 10-Q filings. The reported gain (loss) changed
throughout 2020 as additional proceeds were received. The sales agreements
contained holdback provisions for a portion of the sales price. Under the terms
of the holdback, certain performance results must be achieved during 2020 to
release additional sales proceeds to the sellers. At the time of closing, it was
determined it was more likely than not that the royalty interests would not
perform at the levels necessary to receive the holdback funds. Performance was
reviewed throughout the year, and was better than anticipated, resulting in the
holdback proceeds being released to the seller. A portion of this transaction
flows through change in the fair value of equity securities and will be further
discussed below.
The sale of one equity security represented approximately $851,000 of the
realized losses on equity securities for the three-months ended March 31, 2020.
The Company sold 5,000 shares of this common stock holding that is associated
with the oil and gas industry. While this security produced a current period
realized loss, overall, the sale of this security produced a significant gain
for the Company over the period it was held. The other component of this
transaction flows through the change in the fair value of equity securities and
will be further discussed below.
The Company reported a change in fair value of equity securities of
approximately $20.2 million and $(17.4) million for the three-months ended March
31, 2021 and 2020, respectively. This line item is material to the results
reported in the Condensed Consolidated Statements of Operations. While the
three-months ended March 31, 2021, reflected very positive results, the onset of
the pandemic in March 2020 resulted in the stock market taking a major downward
swing. At March 31, 2020, the Company reflected a loss on this line of
approximately $(12.0) million. While these results can be material and
volatile, most of the equity holdings of the Company were acquired with a
long-term view, thus making these intermediate changes in value of less concern
to Management. Management monitors its equity holdings looking more at the
specific entity and market it is in relative to performance and less to changes
due to general market swings that occur over the holding period of the
investment.
While the Company has seen significant positive results on its equity
investments so far this year, a pull back or downward market adjustment could
slow these gains or even result in losses in future periods. Management
believes its current equity investments continue to be solid investments for the
Company and have further growth potential; however, changes in market conditions
could cause volatility in market prices.
In summary, the Company's basis for future revenue 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 $6.2
million for the three-months ended March 31, 2021, an increase of
approximately 15% from the same period in 2020. Benefits, claims and settlement
expenses represented approximately 63% and 60% of the Company's total expenses
for the three-month periods ended March 31, 2021 and 2020, respectively. The
other major expense category of the Company is operating expenses, which
represented approximately 34% and 37% of the Company's total expenses for
the three-month periods ended March 31, 2021 and 2020, respectively.
Life benefits, claims and settlement expenses, net of reinsurance benefits and
claims were up approximately 21% or $679,000 when comparing the three-months
ended March 31, 2021 and 2020. Policy claims vary from period to period and
therefore, fluctuations in mortality are to be expected and are not considered
unusual by Management.
Early in the COVID-19 pandemic, the Company implemented a process to monitor
death claims resulting from COVID-19. During the three-months ended March 31,
2021, the Company incurred total death benefits of approximately $388,000 with
COVID-19 listed as the cause of death. The average death benefit of these
policies was $7,500. The Company will continue to monitor COVID-19 death claims.
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. The surrender process has been
impacted by temporary state rulings that were implemented as a result of
COVID-19 and in some cases did not allow life insurance companies to lapse
policies temporarily during 2020.
Operating expenses increased approximately 6% in the three-month period
ended March 31, 2021 as compared to the same period in 2020. Overall, expenses
were comparable in all of the major expense categories.
As mentioned above in the Overview section of the Management Discussion and
Analysis, UTG has a strong philanthropic program. The Company generally
allocates a portion of its earnings to be used for its philanthropic efforts
primarily targeted to Christ-centered organizations or organizations that help
the weak or poor. Charitable contributions made by the Company are expected to
vary from year to year depending on the earnings of the Company.
Net amortization of cost of insurance acquired decreased approximately 4% 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 represent approximately 85% and 82% of total assets at March 31,
2021 and December 31, 2020, respectively. Accordingly, investments are the
largest asset group of the Company. The Company's insurance subsidiary is
regulated by insurance statutes and regulations as to the type of investments
that it is permitted to make and the amount of funds that may be used for any
one type of investment. In light of these statutes and regulations, the
majority of the Company's investment portfolio is invested in a diverse set of
securities.
As of March 31, 2021, the carrying value of fixed maturity securities in default
as to principal or interest was immaterial in the context of consolidated
assets, shareholders' equity or results from operations. To provide additional
flexibility and liquidity, the Company has identified all fixed maturity
securities as "investments available for sale". Investments available-for-sale
are carried at market, with changes in market value charged directly to
shareholders' equity. Changes in the market value of available for sale
securities resulted in a net unrealized losses of approximately $(6) million and
net unrealized gains of approximately $1.2 million for the three-month periods
ended March 31, 2021 and 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 6% as of March 31,
2021 compared to December 31, 2020. The increase is mainly attributable to a
increase in retained earnings, which is the result of the current year net
income reported by the Company.
The Company's investments are predominately in fixed maturity investments such
as bonds, which provide sufficient return to cover future obligations. The
Company carries all of its fixed maturity holdings as available for sale, which
are reported in the Condensed Consolidated Financial Statements at their market
value.
Liquidity
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 March 31, 2021, substantially all of the
consolidated shareholders' equity represents net assets of its subsidiaries.
During the second quarter of 2021, UG paid UTG a dividend of $3 million. Certain
restrictions exist on the payment of dividends from the insurance subsidiary to
the Parent company. 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.
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, 2020, UG had statutory net income of approximately $6.3
million. At December 31, 2020 UG's statutory capital and surplus amounted to
approximately $70.6 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 2020, UG
paid UTG ordinary dividends of $4 million. During the second quarter of 2021, UG
paid UTG a dividend of $3 million. UTG used the dividends received during 2020
and 2021 to purchase outstanding shares of UTG stock and for general operations
of the Company.
Short-Term Borrowings - An additional source of liquidity to the Parent company
and its subsidiaries is the line of credit facilities extended to them. As of
March 31, 2021, the Company and its subsidiaries had available $18 million in
line of credit facilities. The Company did not utilize its available credit
facilities during 2020 or so far in 2021. For additional information regarding
the line of credit facilities, see Note 5 - Credit Arrangements in the Notes to
the Condensed Consolidated Financial Statements.
The Company expects to have readily available funds for the foreseeable future
to conduct its operations and to maintain target capital ratios in the insurance
subsidiary through internally generated cash flow and the credit facilities. In
the unlikely event that more liquidity is needed, the Company could generate
additional funds through such sources as a short-term credit facility and
intercompany borrowing.
Cash used in operating activities was approximately $3.7 million and $5.2
million in the three-month periods ended March 31, 2021 and 2020, 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 the three-month period ended March 31, 2021, the Company's investing
activities used net cash of approximately $6.4 million. During the three-month
period ended March 31, 2020, the Company's investing activities provided net
cash of approximately $3.1 million. The Company recognized proceeds of
approximately $3.4 million and $28.3 million from investments sold and matured
during the three-month periods ended March 31, 2021 and 2020, respectively. The
Company used approximately $9.9 million and $25.2 million to acquire investments
during the three-month periods ended March 31, 2021 and 2020, 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 $738,000 and $215,000
during the three-month periods ended March 31, 2021 and 2020, respectively. As
of March 31, 2021 and December 31, 2020, the Company had no debt outstanding
with third parties.
The Company had cash and cash equivalents of approximately $28.2 million and
$39.0 million as of March 31, 2021 and December 31, 2020, 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 $157.9 million and $165.8 million at March 31, 2021 and
December 31, 2020, 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 3 - Investments in the Notes to the Condensed
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.
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UTG, INC. 
