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, 2021, 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, 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.
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, 2021. 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, 2022, there were no additions to or
changes in the critical accounting policies disclosed in the 2021 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
2020, 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. While the worst of the
disruption appears to be behind us, there remains uncertainty should a new
variant again appear. The Company cannot at this time predict the ultimate
impact the pandemic or recurrence of such, may have on its results of
operations, financial position, liquidity, or capital resources but such impact
could be material. During the nine-month period ended September 30, 2022 the
Company incurred 71 Covid claims totaling $1,104,522. The Company incurred 166
claims totaling $1,293,625 during the year ended December 31, 2021.
On a consolidated basis, the Company reported net income attributable to common
shareholders of approximately $16.5 million for the nine-month period ended
September 30, 2022, and a net income attributable to common shareholders' of
approximately $8.1 million for the three-month period ended September 30, 2022.
For the nine-month period ended September 30, 2021, the Company reported net
income attributable to common shareholders' of approximately $7.0 million and
net loss attributable to common shareholders' of approximately $(9.0) million
for the three-month period ended September 30, 2021.
Revenues
For the nine-month period ended September 30, 2022, the Company reported total
revenues of approximately $40.9 million and for the same period in 2021 total
revenues of approximately $26.5 million. The variance in total revenue between
periods is primarily the result of the change in the fair value of equity
securities and an increase in net investment income. The change in fair value of
equity securities 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. While both nine-month periods within
2022 and 2021 reflected positive results, 2021 results were 76% of that of
2022. The Company reported total revenues of approximately $16.7 million for
the three-month period ended September 30, 2022, and total revenues of $(5.5)
million for the same period of 2021. As stated in the nine-month periods,
changes in the fair value of equity securities were the primary reason for the
variance, with third quarter of 2022 showing a large gain in value on its equity
securities, while the same period of 2021 reported a large loss in value on its
equity securities. While these results can be material and volatile, most of
the equity holdings of the Company were acquired with a long-term view, thus
making these intermediate changes in value of less concern to Management.
Management monitors its equity holdings looking more at the specific entity and
market it is in relative to performance and less to changes due to general
market swings that occur over the holding period of the investment.
The Company reported revenue before net investment gains (losses) of
approximately $19.7 million and $11.3 million for the nine-month periods ended
September 30, 2022 and 2021, respectively. Revenue before net investment gains
(losses) increased primarily due to an increase in net investment income when
comparing current year and prior year results. For the three months ended
September 30, 2022 and 2021 the Company reported approximately $7.7 million and
$3.8 million, respectively.
Premium and policy fee revenues, net of reinsurance, declined 12% for
the nine-months ended September 30, 2022 and 2021 and declined 13% for the third
quarter ended September 30, 2022 and 2021. The Company writes minimal 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. Premium
and policy fee revenues, net of reinsurance, was reported at approximately $4.3
million and $4.9 million for the nine-months ended September 30, 2022, and
2021. For the third quarter ended September 30, 2022 these amounts were $1.3
million and $1.5 million in 2022 and 2021, respectively.
The following table summarizes our investment performance.
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net investment income $ 6,266,722 $ 2,134,293 $ 15,166,276 $ 6,176,319
Net investment gains (losses) $ 8,998,196 $ (9,234,806) $ 21,221,745 $ 15,161,132
Change in net unrealized investment
gains (losses) on equity securities,
pre-tax $ (7,122,856) $ (1,226,171) $ (23,436,015) $ (5,823,825)The following table reflects net investment income of the Company:
Three Months Ended September Nine Months Ended September 30,
30,
2022 2021 2022 2021
Fixed maturities available $ 1,025,578 $ 1,107,003 $ 3,125,400 $ 3,486,817
for sale
Equity securities 719,953 349,007 2,057,986 919,959
Trading securities 0 2,435 (13,283) 21,689
Mortgage loans 307,492 142,195 907,284 523,816
Real estate 4,924,772 914,425 11,103,517 2,247,754
Notes receivable 273,376 244,679 659,024 738,549
Policy loans 121,097 130,394 369,297 426,893
Cash and cash equivalents 43,812 755 53,746 1,903
Total consolidated 7,416,080 2,890,893 18,262,971 8,367,380
investment income
Investment expenses (1,149,358) (756,600) (3,096,695) (2,191,061)
Consolidated net investment $ 6,266,722 $ 2,134,293 $ 15,166,276 $ 6,176,319
income
Net investment income represented 77% and 55% of the Company's revenue before
net investment gains (losses) for the nine-month period ended September 30,
2022 and 2021, respectively. For the Third quarter only ended September 30,
net investment income represented 81% and 57% of revenue before net investment
gains (losses) for 2022 and 2021, respectively. When comparing current and
prior year results, net investment income was comparable in a majority of the
investment categories outside of the equity securities and real estate
investment portfolio. Investment income earned by the real estate investment
portfolio for both the nine months and the three months ended September 30,
2022, was materially larger than prior periods due to distributions from
specific real estate investments, primarily related to the oil & gas & timber
industries. Investment income earned by the fixed maturities, equity securities,
and real estate investment portfolios represented approximately 89% and 80% of
the total consolidated investment income for the nine months ended September 30,
2022 and 2021, 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. In recent periods our economy has heated up with inflation running
at higher than desired levels by Federal Reserve standards. In this regard, the
Federal Reserve has begun increasing interest rates in recent months with more
increases currently being predicted. This has resulted in an increase in the
yields available in the bond market and drives the unrealized loss on the bond
portfolio.
When comparing earnings from the fixed maturities portfolio for the six months
ended June 30, 2022 and 2021 income was down approximately 10% or $361,000.
Income for the three-month period ended September 30 was down by 7% from the
prior year. This decrease can be primarily attributed to the maturity of
several investments that were not replaced within the portfolio. Rather the
proceeds were used to pay down the Company's outstanding debt or reinvested in a
different asset class. Fixed maturities continue to represent one of the largest
investment types and asset classes owned by the Company. As of September 30,
2022, fixed maturities represented 31% of the total investments owned by the
Company.
Earnings from the equity securities investment portfolio represented
approximately 11% and 11% of the total consolidated investment income report by
the Company during the nine months ended September 30, 2022 and 2021,
respectively. Income from the equity securities portfolio was up approximately
124% or $1,138,000 when comparing year to date 2022 and 2021 results. Third
quarter only results show an increase in the equity securities earnings of 106%
or $371,000 when comparing 2022 to 2021. This increase is primarily due to
dividend increases seen in 2022 from equity positions held by the Company in oil
and gas and from additional investments in dividend paying equities in the last
year.
The earnings reported by the real estate investment portfolio represented 61%
and 27% of the total consolidated investment income reported by the Company
during the nine months ended September 30, 2022 and 2021, respectively. Earnings
from the real estate investment portfolio were up approximately 394% or $8.8
million when comparing 2022 and 2021 results. Third quarter only results were up
439% when comparing 2022 and 2021. 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 real
estate investment portfolio are primarily related to the oil & gas and timber
industries. With the world economies beginning to reopen, demand for oil and
gas and other commodities has substantially increased, which in turn has
resulted in increases in prices in the marketplace. Add to this the issues
related to the Russian invasion of Ukraine; even more upward price pressure is
being felt. The Company holds several long-term investments within these
industries that have benefitted in recent periods from a rise in prices seen
both in real estate in general, but specifically within the Company's
concentrated industries. Oil has increased in 2022 averaging $105 per barrel
compared to an average price of $42 in 2020 and $70 in 2021. This change has
significantly increased the cashflow the Company is receiving from the royalty
interests it holds. While oil has recently dropped below $100 per barrel, it
remains well above recent historic levels.
The earnings reported by the mortgage loan investment portfolio represented 5%
and 6% of the total consolidated investment income reported by the Company
during the nine months ended September 30, 2022 and 2021, respectively, and
represented 4% and 5% for the three months ended September 30, 2022 and 2021,
respectively. The earnings from the mortgage loan portfolio have increased due
to the increase in size of the portfolio. The mortgage loan investment portfolio
increased by approximately 1% through the first nine months of 2022. With the
low investment rates available in the bond market in recent periods, the Company
has placed more emphasis on loans to improve investment yields.
The following table reflects net investment gains (losses):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Other-than-temporary $
impairments 0 $ 18,129 $ 0 $ (393,455)
Fixed maturities available
for sale 0 21,631 (527) 55,867
Equity securities 1,485,872 1,939 1,773,817 3,016,958
Real estate 414,586 104,205 4,986,426 1,487,457
Consolidated net realized
investment gains 1,900,458 145,904 6,759,716 4,166,827
Change in fair value of
equity securities 7,097,738 (9,380,710) 14,462,029 10,994,305
$ 8,998,196 $ (9,234,806) $ 21,221,745 $ 15,161,132Realized investment gains are the result of one-time events and are expected to
vary from year to year.
The Company had one equity security sale in first quarter which represents
approximately $370,000 of the realized investment gains from equity securities
during 2022. The Company sold a portion (approximately 20% of this holding) of
an equity security in third quarter of 2022 realizing a gain of $1,135,000. The
third quarter sale of a portion of an equity holding was a security in the oil
and gas sector. The Company had several other small equity sales during 2022,
which were not material to the operating results. Over the entire holding
period of the sold portion, the Company realized a gain of almost $4 million
dollars on an original cost basis of $300,000.
The 2022 real estate gains are the result of the sales of real estate in
Kentucky and Georgia, primarily occurring in the first quarter of 2022. The sale
of a land parcel in Kentucky produced a gain of approximately $3.5 million,
additionally, the Company sold a real estate parcel located in Georgia that
produced gains of approximately $812,000. The Company also sold a few
additional smaller properties in Kentucky that produced the remaining gains in
this category.
The Company reported a change in fair value of equity securities of
approximately $14.5 million and $11.0 million for the nine months ended
September 30, 2022, and 2021, respectively. For the third quarter ended
September 30, the Company reported a gain of $7.1 million and loss of $(9.4)
million in 2022 and 2021, 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. While
both nine-month periods within 2022 and 2021 reflected positive results, 2021
third quarter results were a significant loss. 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 in the last two years, 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 $19.4
million for the nine-month period ended September 30, 2022, an increase of
approximately 7% from the same period in 2021. Benefits, claims and settlement
expenses represented approximately 59% and 67% of the Company's total expenses
for the nine-month periods ended September 30, 2022, and 2021, respectively. The
other major expense category of the Company is operating expenses, which
represented approximately 39% and 31% of the Company's total expenses for
the nine-month periods ended September 30, 2022, and 2021, respectively.
Life benefits, claims and settlement expenses, net of reinsurance benefits and
claims were down approximately 6% or $(692,000) when comparing the nine months
ended September 30, 2022, and 2021. Policy claims vary from period to period
and therefore, fluctuations in mortality are to be expected and are not
considered unusual by Management.
Early in the COVID-19 pandemic, the Company implemented a process to monitor
death claims resulting from COVID-19. Prior to the pandemic, death benefits were
$12,624,000, $12,831,000 and $12,403,000 in 2017, 2018 and 2019, respectively.
During the two plus years of the pandemic, total death benefits were $14,293,000
and $15,985,000 in 2020 and 2021, respectively. First six-months of 2022
continued with higher than historic claims of $7,665,000 including total COVID
related deaths of approximately $985,000. Third quarter 2022 had total death
claims of $2,754,000 compared to $4,036,000 in third quarter 2021. Death
benefits of the Company have been higher than recent past experience, even when
adjusting for the identified COVID-19 claims. This anomaly is showing throughout
the entire U.S. insurance industry. Industry experts believe this increase in
death benefits while not always directly related to COVID-19, are 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. Third quarter claims experience have declined from recent levels,
returning closer to historic levels. While we hope the worst of the pandemic is
behind us, it is too early to determine with certainty.
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. The rulings varied by state and had all expired by July
1, 2021.
Operating expenses increased approximately 34% in the nine-month period
ended September 30, 2022 as compared to the same period in 2021 and increased
approximately 54% for the third quarter period ended September 30, 2022 as
compared to the same period in 2021. This increase for both compared periods is
primarily due to increased charitable contribution accruals based upon the
Company's taxable income which was significantly higher in 2022 compared to
2021. Additionally, the Company incurred a large maintenance expense relating to
the Company's partially owned aircraft. Expenses in the remaining categories are
largely comparable between years.
Effective January 1, 2017, the Company and FSNB began sharing certain services.
The shared services focuses on departments commonly utilized by both
organizations such as financial accounting, human resources and information
technology. The shared services did not initially make a noticeable difference
in operating expenses, but provides a larger team, which enhances capabilities
and quality.
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 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 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 86% and 85% of the Company's total
assets as of September 30, 2022, and December 31, 2021, respectively. Fixed
maturities consistently represented a substantial portion, 31% and 38%,
respectively, of the total investments during 2022 and 2021. The overall
investment mix, as a percentage of total investments, remained fairly consistent
when comparing the respective investments held as of September 30, 2022 and
December 31, 2021.
As of September 30, 2022, the carrying value of fixed maturity securities in
default as to principal or interest was immaterial in the context of
consolidated assets, shareholders' equity or results from operations. To
provide additional flexibility and liquidity, the Company has identified all
fixed maturity securities as "investments available for sale". Investments
available for sale are carried at market value, with changes in market value
charged directly to the other comprehensive component of shareholders' equity.
Changes in the market value of available for sale securities resulted in net
unrealized gains (losses) of approximately $(18.5) and $(4.6) million as of
September 30, 2022 and 2021, 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.
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. Such future
events could also result in other than temporary declines in value that could
result in future period impairment losses.
There are a number of significant risks and uncertainties inherent in the
process of monitoring impairments and determining if impairment is
other-than-temporary. These risks and uncertainties related to Management's
assessment of other-than-temporary declines in value include but are not limited
to: the risk that Company's assessment of an issuer's ability to meet all of its
contractual obligations will change based on changes in the credit
characteristics of that issuer; the risk that the economic outlook will be worse
than expected or have more of an impact on the issuer than anticipated; the risk
that fraudulent information could be provided to the Company's investment
professionals who determine the fair value estimates.
Capital Resources
Total shareholders' equity decreased by approximately 1% as of September 30,
2022, compared to December 31, 2021. The decrease is mainly attributable to the
decline in market value of the Company's fixed income portfolio due to current
rate increases in the marketplace. This was partially offset by an 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.
The Company had $8 million and $24 million of debt outstanding as of September
30, 2022 and December 31, 2021, respectively. During October, the Company
repaid the total balance outstanding on its line of credit.
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 September 30, 2022, and December 31, 2021,
substantially all of the consolidated shareholders' equity represents net assets
of its subsidiaries. Through the first nine months of 2022, UTG received
dividends from its subsidiary, UG, totaling $3 million. 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.
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, 2021, UG had statutory net income of approximately $451,000.
At December 31, 2021 UG's statutory capital and surplus amounted to
approximately $64.7 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 2021, UG
paid UTG ordinary dividends of $5 million. During the third quarter of 2022, UG
paid UTG total dividends of $3 million. UTG used the dividends received during
2021 and 2022 to purchase outstanding shares of UTG stock and for general
operations of the Company.
Short-Term Borrowings - During the fourth quarter of 2021, Management made the
business decision to pledge additional collateral to the Federal Home Loan Bank
in order to increase the Company's borrowing capacity. The Company submitted,
and the Federal Home Loan Bank approved, a new Cash Management Advance (CMA)
with a collateral lendable value of $25 million This CMA replaces the CMA that
was approved in May of 2021 for $10 million. During the fourth quarter 2021, the
Company borrowed $24 million on the CMA and Management utilized the funds for
investing activities. The interest rate on the borrowed funds is variable.
During the first nine months of 2022 the Company repaid $35.5 million and
borrowed $19.5 million on the CMA leaving $8 million outstanding on September
30, 2022. In October of 2022, the Company repaid $8.0 million on this line
bringing the total outstanding borrowings to zero.
The CMA is a source of overnight liquidity utilized to address the day-to-day
cash needs of a Company. In order to provide the Company with multiple lending
options, Management also applied for, and the FHLB approved, the Company's
Repurchase (REPO) Advance Application for $25 million. The REPO Advance requires
a minimum borrowing of $15 million and provides financing for one day to one
year at a fixed rate of interest. The Company has enough qualifying investments
for collateral pledging of $18.9 million total against these two borrowing
vehicles. In early fourth quarter, the Company chose to renew only the CMA and
allowed the REPO to lapse given the lack of collateral to sustain both borrowing
sources. The Company believes the CMA provides it with the flexibility and
liquidity it needs for its operations and investment activities.
Consolidated Liquidity
Cash used in operating activities was approximately $0.3 million and $10.2
million in 2022 and 2021, 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 2022 and 2021, the Company's investing activities provided net cash of
approximately $10.8 million and $(3.3) million, respectively. The Company
recognized proceeds of approximately $37.1 million and $40.6 million from
investments sold and matured in 2022 and 2021, respectively. The Company used
approximately $26.3 million and $43.9 million to acquire investments during 2022
and 2021, 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 $16.6 million and $1.4
million during 2022 and 2021, respectively. As of September 30, 2022, the
Company had $8 million in debt outstanding with third parties. Subsequent to
the end of the quarter, the Company repaid an additional $28 million on its
borrowings leaving no outstanding balance. The Company will continue to utilize
this line of credit as needed for its operations and investing activities.
The Company had cash and cash equivalents of approximately $24.8 million as of
September 30, 2022. The Company has a portfolio of marketable fixed maturity
securities that could be old, if an unexpected event were to occur. These
securities had a fair value of approximately $110 million at September 30, 2022.
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.
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UTG, INC. 