Company Quick10K Filing
Quick10K
UTG
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-02-05 Officers
8-K 2018-12-06 Officers
8-K 2018-12-06 Officers
8-K 2018-06-13 Shareholder Vote
8-K 2018-01-30 Officers
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LAUR Laureate Education 3,480
ICPT Intercept Pharmaceuticals 2,720
GNC GNC Holdings 210
PPHI Positive Physicians Holdings 58
VBFC Village Bank & Trust Financial 48
ABQQ AB International Group 0
YTFD Yacht Finders 0
FFLO Free Flow 0
DCAC Danielsorate Advisory Company 0
UTGN 2018-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1 - Summary of Significant Accounting Policies
Note 2 - Investments
Note 3 - Fair Value Measurements
Note 4 - Reinsurance
Note 5 - Cost of Insurance Acquired
Note 6 - Income Taxes
Note 7 - Credit Arrangements
Note 8 - Commitments and Contingencies
Note 9 - Shareholders' Equity
Note 10 - Statutory Accounting
Note 11 - Related Party Transactions
Note 12 - Other Cash Flow Disclosures
Note 13 - Concentrations
Note 14 - Selected Quarterly Financial Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
EX-10.19 promissorynoteinb.htm
EX-21.1 listofsubsidiaries.htm
EX-31.1 exhibit311.htm
EX-31.2 exhibit312.htm
EX-32.1 exhibit321.htm
EX-32.2 exhibit322.htm
EX-99.1 utgauditcommitteecharter.htm
EX-10.15 exhibit1015.htm
EX-10.16 exhibit1016.htm
EX-10.17 exhibit1017.htm

UTG Earnings 2018-12-31

UTGN 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 utg10k2018.htm  
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-K

[x]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2018
 
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________

Commission File Number 0-16867

 
UTG, INC.
 
 
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-2907892
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

205 North Depot Street, Stanford, KY
 
40484
(Address of principal executive offices)
 
(Zip code)
     
Registrant's telephone number, including area code: (217) 241-6300

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Name of each exchange on which registered
       None
                             None

Securities registered pursuant to Section 12(g) of the Act:

Title of class
Common Stock, stated value $.001 per share

  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes     No 
  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   Yes     No 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
  Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10- K. 
  Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and emerging growth company in Rule 12b-2 of the Exchange Act.
  Large accelerated filer   Accelerated filer   Non accelerated filer   Smaller reporting company
  Emerging growth company
  If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
  Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).  Yes     No 
  As of June 30, 2018, shares of the Registrant’s common stock held by non-affiliates (based upon the price of the last sale of $26.00 per share), had an aggregate market value of approximately $27,776,034.
  At January 31, 2019 the Registrant had 3,293,983 outstanding shares of common stock, stated value $.001 per share.
  Documents incorporated by reference: None
UTG, Inc.
Form 10-K
Year Ended December 31, 2018



TABLE OF CONTENTS

PART I
4
 
   Item 1.   Business
 
4
   Item 1A. Risk Factors
8
   Item 1B. Unresolved Staff Comment
8
   Item 2.   Properties
8
   Item 3.   Legal Proceedings
9
   Item 4.   Mine Safety Disclosures
9
 
PART II
 
9
 
     Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
9
   Item 6.   Selected Financial Data
10
   Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
10
   Item 7A. Quantitative and Qualitative Disclosures About Market Risk
19
   Item 8.   Financial Statements and Supplementary Data
19
   Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
45
   Item 9A. Controls and Procedures
45
   Item 9B. Other Information
46
 
PART III
 
46
 
   Item 10.  Directors, Executive Officers and Corporate Governance
 
46
   Item 11.  Executive Compensation
50
   Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
51
   Item 13.  Certain Relationships and Related Transactions, and Director Independence
53
   Item 14.  Principal Accounting Fees and Services
54
 
PART IV
 
55
 
   Item 15.  Exhibits and Financial Statement Schedules
 
 
55

Forward-Looking Statements

This report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probably,” or similar expressions, we are making forward-looking statements.

Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur.  Our forward-looking statements speak only as of the date made, and we undertake no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments, unless the securities laws require us to do so.

PART I

Item 1. Business

Business Overview

UTG, Inc. (the "Registrant", “Company” or “UTG”) is an insurance holding company incorporated in the state of Delaware in 2005. Its primary direct subsidiary is Universal Guaranty Life Insurance Company (“UG”). The Registrant and its primary subsidiary have only one significant segment, insurance.  The Company’s dominant business is individual life insurance, which includes the servicing of existing insurance business in-force, the acquisition of other companies in the insurance business, and the administration processing of life insurance business for other entities.

The holding company has no significant business operations of its own and relies on fees, dividends and other distributions from its operating subsidiary as the principal source of cash flows to meet its obligations.  Additional information regarding the cash flow and liquidity needs of the holding company can be found in the Liquidity and Capital Resources section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

UG has several wholly-owned and majority-owned subsidiaries.  The subsidiaries were formed to hold certain real estate and other investments.  The investments were placed into the limited liability companies and partnerships to provide additional protection to the policyholders and to UG.

Increased global IT security threats and more sophisticated and targeted computer crime pose a risk to the security of systems and networks and the confidentiality, availability and integrity of data.  Although the Company makes efforts to maintain the security and integrity of the networks and systems, there can be no assurance that the security efforts will be effective or that attempted security breaches or disruptions would not be successful or damaging.  In the event a security breach or failure results in the disclosure of sensitive third party data or the transmission of harmful/malicious code to third parties, the Company could be subject to liability claims.  The Company does not currently carry insurance coverage against such liabilities.  Depending on their nature and scope, such threats also could potentially lead to improper use of our systems and networks, manipulation and destruction of data, loss of trade secrets, system downtimes and operational disruptions, which in turn, could adversely affect our reputation, competitiveness and results of operations.

This document at times will refer to the Registrant’s largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll.  Mr. Correll holds a majority ownership of First Southern Funding LLC, a Kentucky corporation, (“FSF”) and First Southern Bancorp, Inc. (“FSBI”), a financial services holding company.  FSBI operates through its 100% owned subsidiary bank, First Southern National Bank (“FSNB”).  Banking activities are conducted through multiple locations within south-central and western Kentucky.  Mr. Correll is Chief Executive Officer and Chairman of the Board of Directors of UTG and is currently UTG’s largest shareholder through his ownership control of FSF, FSBI and affiliates.  At December 31, 2018, Mr. Correll owns or controls directly and indirectly approximately 65.29% of UTG’s outstanding stock.

UTG’s website is: www.utgins.com Information regarding the Company, including recent filings with the Securities and Exchange Commission, are accessible via this website.

Insurance

UG’s product portfolio consists of a limited number of life insurance product offerings. All of the products are individual life insurance products, with design variations from each other to provide choices to the customer. These variations generally center around the length of the premium paying period, length of the coverage period and whether the product accumulates cash value or not.

While the Company does not actively sell any new policies today, it has the following product available for issue:

Tradition – The Tradition policy is a fixed premium whole life insurance policy. Premiums are level and payable for life.  Issue ages are 0-75. The minimum face amount is the greater of $10,000 or the amount of coverage provided by a $100 annual premium.

Reinsurance

As is customary in the insurance industry, the insurance subsidiary cedes insurance to, and assumes insurance from, other insurance companies under reinsurance agreements.  Reinsurance agreements are intended to limit a life insurer's maximum loss on a large or unusually hazardous risk or to obtain a greater diversification of risk.  The ceding insurance company remains primarily liable with respect to ceded insurance should any reinsurer be unable to meet the obligations assumed by it.  However, it is the practice of insurers to reduce their exposure to loss to the extent that they have been reinsured with other insurance companies.  The Company sets a limit on the amount of insurance retained on the life of any one person.  The Company will not retain more than $125,000, including accidental death benefits, on any one life.

The Company's reinsured business is ceded to numerous reinsurers.  The Company monitors the solvency of its reinsurers in seeking to minimize the risk of loss in the event of a failure by one of the parties.  The Company is primarily liable to the insureds even if the reinsurers are unable to meet their obligations.  The primary reinsurers of the Company are large, well-capitalized entities.  See Note 4 - Reinsurance in the Notes to the Consolidated Financial Statements for additional information regarding the Company’s reinsurance activities.

Underwriting

The underwriting procedures of the insurance subsidiary are established by Management.  Insurance policies are issued by the Company based upon underwriting practices established for each market in which the Company operates.  Most policies are individually underwritten.  Applications for insurance are reviewed to determine additional information required to make an underwriting decision, which depends on the amount of insurance applied for and the applicant's age and medical history.  Additional information may include inspection reports, medical examinations, and statements from doctors who have treated the applicant in the past and, where indicated, special medical tests.  After reviewing the information collected, the Company either issues the policy as applied for, issues with an extra premium charge because of unfavorable factors, or rejects the application.  Substandard risks may be referred to reinsurers for full or partial reinsurance of the substandard risk.

Reserves

The applicable insurance laws under which the insurance subsidiary operates require that the insurance company report policy reserves as liabilities to meet future obligations on the policies in-force.  These reserves are the amounts which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are calculated in accordance with applicable laws to be sufficient to meet the various policy and contract obligations as they mature.  These laws specify that the reserves shall not be less than reserves calculated using certain mortality tables and interest rates.

The liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method.  These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on the life insurance subsidiary’s experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations.  The Company makes these assumptions at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date.  Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 2% to 6% for life insurance and 2.5% to 7.5% for annuities.  Benefit reserves for traditional life insurance policies include certain deferred profits on limited-payment policies that are being recognized in income over the policy term.  Policy benefit claims are charged to expense in the period that the claims are incurred.  The mortality rate assumptions for policies currently issued by the Company are based on 2001 select and ultimate tables.  Withdrawal rate assumptions are based upon Linton B or Linton C, which are industry standard actuarial tables for forecasting assumed policy lapse rates.

Benefit reserves for universal life insurance and interest sensitive life insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges.  Policy benefits and claims that are charged to expense include benefit claims in excess of related policy account balances.

Investments

The majority of the investments included in the Consolidated Balance Sheets are owned by UTG's subsidiary, UG. As an insurance company, UG is subject to applicable state insurance laws and regulations, which limit the concentration of investments in any one category or class and further limit the investment in any one issuer.  Generally, these limitations are imposed as a percentage of statutory assets or percentage of statutory capital and surplus of each company.

The following table summarizes the Company's fixed maturities distribution at December 31, 2018 by ratings category as issued by Standard and Poor's, a leading ratings analyst.

Rating
 
2018
Investment Grade
   
AAA
 
6%
AA+
 
26%
AA
 
2%
AA-
 
18%
A+
 
6%
A
 
10%
A-
 
10%
BBB+
 
8%
BBB
 
8%
BBB-
 
4%
Below Investment Grade
 
2%
   
100%

The following table shows the composition, average maturity and average yield on the average carrying value of the Company's investment portfolio at December 31, 2018.

   
Average
         
   
Carrying
 
Average
 
Average
 
Investments
 
Value
 
Maturity
 
Yield
 
               
Fixed maturities held for sale
 
$
169,758,005
 
9.94 years
   
4.28
%
Equity securities
   
69,315,795
 
Not applicable
   
2.35
%
Mortgage loans
   
13,191,794
 
7.56 years
   
9.36
%
Investment real estate
   
51,511,564
 
Not applicable
   
5.38
%
Notes receivable
   
21,360,664
 
Not applicable
   
4.59
%
Policy loans
   
9,381,682
 
Not applicable
   
6.90
%
Cash, cash equivalents and short term
   
22,792,181
 
On demand
   
1.64
%
Total investments
 
$
357,311,685
       
4.17
%

The Company, from time to time, acquires mortgage loans through participation agreements with FSNB.  FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market.  The Company is able to receive participations from FSNB for three primary reasons:  1) FSNB has already reached its maximum lending limit to a single borrower, but the borrower is still considered a suitable risk; 2) the interest rate on a particular loan may be fixed for a long period that is more suitable for UG given its asset-liability structure; and 3) FSNB’s loan growth might at times outpace its deposit growth, resulting in FSNB participating such excess loan growth rather than turning customers away.  For originated loans, the Company’s Management is responsible for the final approval of such loans after evaluation.  Before a new loan is issued, the applicant is subject to certain criteria set forth by Company Management to ensure quality control.  These criteria include, but are not limited to, a credit report, personal financial information such as outstanding debt, sources of income, and personal equity.  Once the loan is approved, the Company directly funds the loan to the borrower.  The Company bears all risk of loss associated with the terms of the mortgage with the borrower.

During 2018 and 2017, the Company acquired approximately $91,954 and $360,531 in mortgage loans, respectively, in participation mortgage loans.  FSNB services a majority of the mortgage loan portfolio of the Company.  The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan cost to cover costs incurred by FSNB relating to the processing and establishment of the loan.

Most mortgage loans are first position loans.  Loans issued are generally limited to no more than 80% of the appraised value of the property.

The Company has in place a monitoring system to provide Management with information regarding potential troubled loans.  Letters are sent to each mortgagee when the loan becomes 30 days or more delinquent.  Management is provided with a monthly listing of loans that are 60 days or more past due.  All loans 90 days or more past due are placed on a non-performing status and classified as delinquent loans.  Quarterly, coinciding with external financial reporting, the Company reviews each delinquent loan and determines how each delinquent loan should be classified.  Management believes the current internal controls surrounding the mortgage loan selection process provide a quality portfolio with minimal risk of negative financial impact.

Interest accruals are analyzed based on the likelihood of repayment.  In no event will interest continue to accrue when accrued interest along with the outstanding principal exceeds the net realizable value of the property.  The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status.

A mortgage loan reserve is established and adjusted based on Management's quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value.   The mortgage loan reserve was $0 at December 31, 2018 and 2017.

The following table shows a distribution of the Company’s mortgage loans and discounted mortgage loans by type as of December 31, 2018:

Mortgage Loans
 
Amount
   
% of Total
 
             
Farm – all other
 
$
357,372
     
4
%
Commercial – all other
   
8,694,606
     
95
%
Residential – all other
   
17,133
     
1
%
Total
 
$
9,069,111
     
100
%

The following table shows a geographic distribution of the Company’s mortgage loan portfolio including discounted mortgage loans and investment real estate as of December 31, 2018:

 
Mortgage Loans
 
Real Estate
Alabama
6%
 
0%
Arizona
21%
 
0%
California
0%
 
1%
Florida
3%
 
13%
Georgia
33%
 
14%
Kentucky
19%
 
21%
New Jersey
1%
 
0%
South Carolina
1%
 
4%
Tennessee
0%
 
3%
Texas
0%
 
25%
West Virginia
16%
 
19%
Total
100%
 
100%

See Note 2 – Investments in the Notes to the Consolidated Financial Statements and Management’s Discussion and Analysis for additional information regarding the Company’s investments.

Competition

The insurance business is a highly competitive industry and there are a number of other companies, both stock and mutual, doing business in areas where the Company operates.  Many of these competing insurers are larger, have more diversified and established lines of insurance coverage, have substantially greater financial resources and brand recognition, as well as a greater number of agents.  Other significant competitive factors in the insurance industry include policyholder benefits, service to policyholders, and premium rates.

In recent years, the Company has not placed an emphasis on new business production.  Costs associated with supporting new business can be significant.  Current sales primarily represent sales to existing customers through additional insurance needs or conservation efforts.  The Company currently encourages policy retention as opposed to new sales in an attempt to maintain or improve current persistency levels.

The Company performs administrative work as a third party administrator (“TPA”) for unaffiliated life insurance companies.  The Company intends to continue to pursue other TPA arrangements. The Company provides TPA services to insurance companies seeking business process outsourcing solutions. Revenue generated from TPA services is considered insignificant to the overall financial statements.
Regulation

Holding Company - States have enacted legislation requiring registration and periodic reporting by insurance companies domiciled within their respective jurisdictions that control or are controlled by other corporations so as to constitute a holding company system. Insurance holding company system statutes and regulations impose various limitations on investments in subsidiaries, and may require prior regulatory approval for material transactions between insurers and affiliates and for the payment of certain dividends and other distributions.

Insurance - Insurance companies are subject to regulation and supervision in the states in which they do business.  Generally the state supervisory agencies have broad administrative powers relating to granting and revoking licenses to transact business, licensing agents, approving policy forms, regulating trade practices, approving certain premium rates, setting minimum reserve and loss ratio requirements, determining the form and content of required financial statements, and prescribing the type and amount of investments permitted.  Insurance companies are also required to file detailed annual reports with supervisory agencies, and records of their business are subject to examination at any time.  Under the rules of the National Association of Insurance Commissioners (“NAIC”), insurance companies are examined periodically by one or more of the supervisory agencies.

Risk-Based Capital - The NAIC requires a risk-based capital formula be applied to all life and health insurers. The risk-based capital formula is a threshold formula rather than a target capital formula. It is designed only to identify companies that require regulatory attention and is not to be used to rate or rank companies that are adequately capitalized. UTG’s insurance subsidiary, UG, is more than adequately capitalized under the risk-based capital formula.

Guaranty Assessments – State guaranty laws provide for assessments from insurance companies to be placed into a fund which is used, in the event of failure or insolvency of an insurance company, to fulfill the obligations of that company to its policyholders.  The amount which a company is assessed is determined according to the extent of these unsatisfied obligations in each state.  Assessments are recoverable to a great extent as offsets against state premium taxes.

Personnel

At December 31, 2018, UTG and its subsidiaries had 40 full-time employees located in Kentucky and Illinois.  UTG’s operations are headquartered in Stanford, Kentucky.

Item 1A. Risk Factors

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this item.

Item 1B. Unresolved Staff Comments

Not applicable.


Item 2. Properties

The Company owns an office complex in Springfield, Illinois, which houses a portion of the insurance operations.  The office buildings in this complex contain 57,000 square feet of office and warehouse space. Excess space in Springfield, IL is currently being marketed for lease.

The Company leases space in Stanford, KY from an affiliate, FSNB, to house insurance operations.  The Company rents approximately 8,000 square feet of office space and pays $2,000 per month in rent.

Item 3. Legal Proceedings

In the normal course of business the Company is involved, from time to time, in various legal actions and other state and federal proceedings. Management is of the opinion that the ultimate disposition of these matters will not have a material adverse effect on the Company’s results of operations or financial position.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Registrant is a public company whose common stock is traded in the over-the-counter market.  Over-the-counter quotations can be obtained using the UTGN stock symbol.

The following table shows the high and low closing prices for each quarterly period during the past two years, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.  The quotations below were acquired from the Yahoo Finance web site, which also provides quotes for over-the-counter traded securities such as UTG.

   
2018
 
2017
                 
Period
 
High
 
Low
 
High
 
Low
                 
First quarter
 
25.20
 
22.95
 
18.25
 
17.00
Second quarter
 
28.25
 
24.00
 
21.75
 
17.50
Third quarter
 
34.00
 
26.00
 
21.00
 
18.85
Fourth quarter
 
33.00
 
31.00
 
28.00
 
19.25

UTG has not declared or paid any dividends on its common stock in the past two fiscal years, and has no current plans to pay dividends on its common stock as it intends to retain all earnings for investment in and growth of the Company’s business.  See Note 9 – Shareholders’ Equity in the Notes to the Consolidated Financial Statements for information regarding dividend restrictions, including applicable restrictions on the ability of the Company’s life insurance subsidiary to pay dividends.

As of January 31, 2019 there were 5,258 record holders of UTG common stock.

Purchases of Equity Securities

The following table provides information with respect to purchases we made of our common stock during the three months ended December 31, 2018 and total repurchases:

   
Total Number of Shares Purchased
   
Average Price Paid Per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Program
   
Maximum Number of Shares That May Yet Be Purchased Under the Program
   
Approximate Dollar Value That May Yet Be Purchased Under the Program
 
Oct. 1 through Oct. 31, 2018
   
1,062
   
$
33.00
     
1,062
     
N/A
   
$
2,212,572
 
Nov. 1 through Nov. 30, 2018
   
1,404
   
$
32.50
     
1,404
     
N/A
   
$
2,166,942
 
Dec. 1 through Dec. 31, 2018
   
1,398
   
$
32.24
     
798
     
N/A
   
$
2,121,872
 
Total
   
3,864
             
3,264
                 

The Board of Directors of UTG has authorized the repurchase in the open market or in privately negotiated transactions of UTG's common stock. At a meeting of the Board of Directors in September of 2018, the Board of Directors of UTG authorized the repurchase of up to an additional $1.5 million of UTG’s common stock, for a total repurchase of $16 million of UTG's common stock in the open market or in privately negotiated transactions. Company Management has broad authority to operate the program, including the discretion of whether to purchase shares and the ability to suspend or terminate the program. Open market purchases are made based on the last available market price but may be limited.  During 2018, the Company repurchased 50,922 shares through the stock repurchase program for $1,329,148. Through December 31, 2018, UTG has spent $13,863,727 in the acquisition of 1,140,106 shares under this program.

Stock Performance Graph

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this item.

Item 6. Selected Financial Data

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this item.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is Management’s discussion and analysis of the financial condition and results of operations of UTG, Inc. and its subsidiaries (collectively with the Parent, the “Company”) for the years ended December 31, 2018 and 2017. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.

Cautionary Statement Regarding Forward-Looking Statements

This report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probably,” or similar expressions, we are making forward-looking statements.

Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur.  Our forward-looking statements speak only as of the date made, and we undertake no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments, unless the securities laws require us to do so.

Overview

UTG, Inc., a Delaware corporation, is a life insurance holding company.  The Company’s dominant business is individual life insurance, which includes the servicing of existing insurance policies in-force, the acquisition of other companies in the life insurance business, the acquisition of blocks of business and the administration and processing of life insurance business for other entities.

UTG has a strong philanthropic program.  The Company generally allocates a portion of its earnings to be used for its philanthropic efforts primarily targeted to Christ-centered organizations or organizations that help the weak or poor.  The Company also encourages its staff to be involved on a personal level through monetary giving, volunteerism and use of their talents to assist those less fortunate than themselves.  Through these efforts, the Company hopes to make a positive difference in the local community, state, nation and world.

Critical Accounting Policies

We have identified the accounting policies below as critical to the understanding of our results of operations and our financial condition.  The application of these critical accounting policies in preparing our consolidated financial statements requires Management to use significant judgments and estimates concerning future results or other developments including the likelihood, timing or amount of one or more future transactions or amounts.  Actual results may differ from these estimates under different assumptions or conditions.  On an on-going basis, we evaluate our estimates, assumptions and judgments based upon historical experience and various other information that we believe to be reasonable under the circumstances.  For a detailed discussion of other significant accounting policies, see Note 1 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.

Future Policy Benefits – Because of the long-term nature of insurance contracts, the insurance company is liable for policy benefit payments that will be made in the future.  The liability for future policy benefits is determined by standard actuarial procedures common to the life insurance industry.  The accounting policies for determining this liability are disclosed in Note 1 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.

Cost of Insurance Acquired – The costs of acquiring blocks of insurance from other companies or through the acquisition of other companies are deferred and recorded as deferred acquisition costs. The deferred amounts are recorded as an asset and amortized to expense in a systematic manner as indicated in Note 1 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements.

Valuation of Securities – The Company’s investment portfolio consists of fixed maturities, equity securities, trading securities, mortgage loans and real estate to provide funding of future policy contractual obligations.  The Company’s fixed maturities and equity securities are classified as available-for-sale.  Available-for-sale investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets.

The Company’s trading securities are carried at fair value with unrealized gains and losses reported in income in the Consolidated Statements of Operations. Fair value is the price that the Company would expect to receive upon sale of the asset in an orderly transaction.

Mortgage loans on real estate are carried at their unpaid principal balances, adjusted for amortization of premium or discount and valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. A portion of the mortgage loan balance consists of discounted mortgage loans that were purchased at deep discounts through an auction process led by the Federal Government.  In general, the discounted mortgage loans are non-performing and there is a significant amount of uncertainty surrounding the timing and amount of cash flows to be received by the Company.  Accordingly, the Company records its investment in the discounted mortgage loans at its original purchase price adjusted for any principal receipts received.

Investment real estate held for sale is reported at the lower of cost or fair value less cost to sell. Expenses to maintain the property are expensed as incurred.

Notes receivable are reported at their unpaid principal balances, adjusted for valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. Interest accruals are analyzed based on the likelihood of repayment. The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status.

While the available-for-sale securities are generally expected to be held to maturity, they are classified as available-for-sale and are sold periodically to manage risk. Although a majority of the investment portfolio is classified as available-for-sale, the Company has the ability and intent to hold the securities until maturity. See Note 2 – Investments in the Notes to the Consolidated Financial Statements for detailed disclosures regarding the Company’s investment portfolio.

As a result of ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities, changes in the fair value of equity securities are now recognized in net income rather than other comprehensive income. On January 1, 2018, cumulative net unrealized gains on equity securities of $18.3 million, net of deferred taxes of $4.9 million, were reclassified from accumulated other comprehensive income (loss) into retained earnings.

Impairment of Investments – The Company continually monitors the investment portfolio for investments that have become impaired in value; where fair value has declined below carrying value.  While the value of the investments in the Company’s portfolio continuously fluctuate due to market conditions, an other-than-temporary impairment charge is recorded only when a security has experienced a decline in fair market value which is deemed to be other than temporary.  The policies and procedures the Company uses to evaluate and account for impairments of investments are disclosed in Note 1 – Summary of Significant Accounting Policies and Note 2 – Investments in the Notes to the Consolidated Financial Statements. The Company makes every effort to appropriately assess the status and value of the securities with the information available regarding an other-than-temporary impairment. However, it is difficult to predict the future prospects of a distressed or impaired security.

Deferred Income TaxesThe provision for deferred income taxes is based on the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized by applying enacted statutory tax rates to temporary differences between amounts reported in the Consolidated Financial Statements and the tax basis of existing assets and liabilities. A valuation allowance is recognized for the portion of deferred tax assets that, in Management's judgment, is not likely to be realized. The effect on deferred income taxes of a change in tax rates or laws is recognized in income tax expense in the period that includes the enactment date.  The Tax Cuts & Jobs Act ("TCJA"), signed into law on December 22, 2017, reduces the corporate Federal income tax rate from 35% to 21%, effective for years beginning after December 31, 2017.  Refer to Note 1 – Summary of Significant Accounting Policies and Note 6 – Income Taxes in the Notes to the Consolidated Financial Statements for further disclosure regarding the TCJA.

Results of Operations

On a consolidated basis, the Company had net income attributable to common shareholders of $12.4 million and $4.8 million in 2018 and 2017, respectively.  In 2018, income before income taxes was $16.5 million compared to $3.3 million in 2017.  Total revenue was $41.3 million in 2018 and $28.7 million in 2017.

One-time events, primarily reflected in realized gains, comprise a substantial portion of the net income and revenue reported by the Company during 2018 and 2017.  The magnitude of realized investment gains and losses in a given year is a function of the timing of trades of investments relative to the markets themselves as well as the recognition of any impairments on investments.  Future earnings will be significantly negatively impacted should earnings from these one-time items not be realizable in a future period.  While Management believes there remain additional investments with such one-time earnings, when or if realized remains uncertain.

Total benefits and other expenses paid in 2018 were $24.8 million compared to $25.4 million in 2017.

The 2017 net earnings of the Company include approximately $1.5 million attributable to a one-time net benefit from the enactment of the TCJA on December 22, 2017.  Refer to Note 1 – Summary of Significant Accounting Policies and Note 6 – Income Taxes in the Notes to the Consolidated Financial Statements for further disclosure regarding the TCJA. The benefit is the result of a one-time non-cash reduction of the Company's net deferred tax liabilities that arose from the reduction in the statutory U.S. corporate income tax rate from 35% to 21%. The Company does not anticipate the TCJA to have a material impact going forward as the Company historically paid an average corporate income tax rate of 20% and will now pay a corporate income tax rate of 21%.

Revenues

Premiums and policy fee revenues, net of reinsurance premiums and policy fees, were comparable for 2018 to 2017.  The Company writes very little new business. Unless the Company acquires a new company or a block of in-force business, Management expects premium revenue to continue to decline on the existing block of business at a rate consistent with prior experience. The Company’s average persistency rate for all policies in-force for 2018 and 2017 was approximately 96.1% and 96.7%, respectively.  Persistency is a measure of insurance in-force retained in relation to the previous year.

The following table summarizes the Company's investment performance for the years ended December 31:

   
2018
   
2017
 
Net investment income
 
$
11,202,668
   
$
11,700,998
 
Net investment gains (losses) (1)
   
22,456,835
     
9,117,125
 
Change in net unrealized investment gains (losses) on available-for-sale securities
   
(7,744,899
)
   
17,174,126
 

(1)
Effective January 1, 2018, the Company adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale with unrealized gains and losses recognized in other comprehensive income, rather, changes in fair value of equity securities are now recognized in net income.  Prior periods have not been restated to conform to the current presentation. See Note 1 of the notes to consolidated financial statements.

The following table reflects net investment income of the Company for the years ended December 31:

   
2018
   
2017
 
             
Fixed maturities
 
$
7,273,157
   
$
8,685,698
 
Equity securities
   
1,628,649
     
1,213,922
 
Trading securities
   
0
     
(1,061
)
Mortgage loans
   
1,234,115
     
1,191,865
 
Real estate
   
2,771,348
     
1,990,844
 
Notes receivable
   
979,742
     
1,322,675
 
Policy loans
   
646,993
     
664,116
 
Cash and cash equivalents
   
355,276
     
23,445
 
Short-term
   
18,159
     
1,263
 
Total consolidated investment income
   
14,907,439
     
15,092,767
 
Investment expenses
   
(3,704,771
)
   
(3,391,769
)
Consolidated net investment income
 
$
11,202,668
   
$
11,700,998
 

Net investment income represented approximately 27% and 41% of the Company's total revenues as of December 31, 2018 and 2017, respectively. When comparing current and prior year results, net investment income was comparable in the majority of the investment categories, with the largest vairance being found in the fixed maturities and real estate investment categories.

Income from the fixed maturities investment portfolio is down approximately 16% when comparing 2018 and 2017 results.  The decrease is attributable to the Company holding fewer bonds combined with upgrading credit quality. During 2017 and 2018, the Company sold some lower rated, higher yielding securities and replaced them with higher rated, lower yielding securities.

Income from the real estate portfolio was up approximately 39% as compared to the prior year.  The increased earnings are the result of the Company receiving additional rental income from real estate owned. The Company also recognized an increase of approximately 82%, as compared to the prior year, in oil and gas royalties from real estate owned. The earnings from real estate are expected to vary from year to year depending on the occupancy of the real estate and the oil and gas market.

The following table reflects net realized investment gains (losses) for the years ended December 31:

   
2018
   
2017
 
             
Fixed maturities available for sale
 
$
10,751,955
   
$
3,877,454
 
Equity securities
   
0
     
2,902,278
 
Real estate
   
1,588,122
     
3,099,554
 
Mortgage loans – OTTI
   
0
     
(72,161
)
Real estate – OTTI
   
(300,000
)
   
(690,000
)
Consolidated net realized investment gains
   
12,040,077
     
9,117,125
 
Change in fair value of equity securities
   
10,416,758
     
0
 
Net investment gains
 
$
22,456,835
   
$
9,117,125
 

Net realized investment gains were up approximately 25% in 2018 as compared to 2017. As seen in the table above, the 2018 gains were the result of the sale of certain fixed maturities and real estate, which were offset by the recognition of an other-than-temporary impairment on a parcel of real estate.  Realized investment gains are the result of one-time events and are expected to vary from year to year.

During 2018, the Company sold a substantial bond holding.  The bond holding was initially acquired during 2016 over a period of time at a deep discount, with an average cost of 25% of its par value.  During the third quarter of 2018, the value of this security had recovered sufficiently enough that Management determined the time was right to sell a majority of the holding, realizing a gain of approximately $10 million. At December 31, 2018, the Company still holds $5 million of par value of this security at a cost basis of $651,000.

The 2018 realized gains from real estate are the result of the Company selling three real estate parcels.  The 2017 realized gains from real estate are mainly attributable to the sale of two real estate parcels, which produced realized gains of approximately $3.5 million.

During 2018 and 2017, realized gains were offset by other-than-temporary impairments of $300,000 and $762,161, respectively.  The other-than-temporary impairments were taken as a result of Management’s assessment and consideration of the length of time the securities have remained in an unrealized loss position and as a result of management’s analysis and determination of value.  The investments were written down to better reflect their current estimated fair value.

Realized investment gains are the result of one-time events and are expected to vary from year to year.

As a result of adopting ASU 2016-01, the 2018 net investment gains included an increase in the fair value of equity securities of $10.4 million.  The 2017 increase in the fair value of equity securities of $8.4 million was included in the change in net unrealized investment gains in other comprehensive income. See Note 2 to the Consolidated Financial Statements for details regarding the components of net investments gains (losses) and the change in net unrealized gains (losses) from investments.

The Company has seen significant unrealized gains on its equity investments during 2018.  A significant portion of these gains are from two equity holdings, both in the area of oil and gas.  While the Company has had very strong unrealized gains during 2018, a pull back 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, changes in market conditions could cause volatility in market prices.

The reclassification of the change in the fair value of equity securities to a component of net income, as a result of ASU 2016-01, resulted in several larger variances when comparing current and prior year numbers.  As a result of ASU 2016-01, approximately $10.4 million of unralized gains from the change in the fair value of equity securities was reported as a component of net income in 2018 rather than as a component of accumulated other comprehensive income.  If you excluded the change in the fair value of equity securities from the calculations, the revenues and expenses, as a percentage of the total, are comparable from the current and prior year.

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 $24.8 million and $25.4 million for the twelve-month periods ended December 31, 2018 and 2017, respectively. Benefits, claims and settlement expenses represented approximately 63% and 66% of the Company’s total expenses for 2018 and 2017, respectively.  The other major expense category of the Company is operating expenses, which represented 34% and 31% of the Company’s total expenses for 2018 and 2017, respectively.

Benefits, claims and settlement expenses, net of reinsurance benefits, decreased approximately 8% in 2018 compared to 2017.  The decrease primarily relates to changes in the Company’s death claim experience.  Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.

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.

Operating expenses increased approximately 9% in 2018 as compared to 2017.  When analyzing 2018 and 2017 results, the operating expenses in two of the major expense categories, salaries and charitable contributions, were higher in 2018 and driving the variance from the prior year to the current year . The increase in salary expense is the result of increased bonuses paid to employees and officers of the Company. Bonuses are not contractual or dependent upon meeting certain financial goals. They are not necessarily paid each year, and when they are paid, the amounts will vary depending on the decision of Management, the Compensation Committee, and the Board of Directors. Charitable contributions are a function of the Company’s earnings. Expenses in all of the other categories were comparable for the current and prior year.

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 following table reflects, by investment category, the investments held by the Company as of December 31:

   
2018
   
As a % of Total Investments
   
As a % of Total Assets
 
                   
Fixed maturities
 
$
160,960,784
     
48
%
   
41
%
Equity securities
   
79,783,099
     
24
%
   
20
%
Mortgage loans
   
9,069,111
     
3
%
   
2
%
Real estate
   
52,518,577
     
16
%
   
13
%
Notes receivable
   
23,717,312
     
7
%
   
6
%
Policy loans
   
9,204,222
     
2
%
   
3
%
Total investments
 
$
335,253,105
     
100
%
   
85
%


   
2017
   
As a % of Total Investments
   
As a % of Total Assets
 
                   
Fixed maturities
 
$
178,555,225
     
53
%
   
44
%
Equity securities
   
58,848,491
     
18
%
   
15
%
Mortgage loans
   
17,314,477
     
5
%
   
4
%
Real estate
   
50,504,550
     
15
%
   
12
%
Notes receivable
   
19,004,016
     
6
%
   
5
%
Policy loans
   
9,559,142
     
3
%
   
2
%
Total investments
 
$
333,785,901
     
100
%
   
82
%

The Company's investments are generally managed to match related insurance and policyholder liabilities.  The comparison of investment return with insurance or investment product crediting rates establishes an interest spread.  Interest crediting rates on adjustable rate policies have been reduced to their guaranteed minimum rates, and as such, cannot be lowered any further.  Policy interest crediting rate changes and expense load changes become effective on an individual policy basis on the next policy anniversary.  Therefore, it takes a full year from the time the change was determined for the full impact of such change to be realized.  If interest rates decline in the future, the Company will not be able to lower rates and both net investment income and net income will be impacted negatively.

The Company’s total investments represented 85% and 82% of the Company’s total assets as of December 31, 2018 and 2017, respectively. Fixed maturities consistently represented a substantial portion, 48% and 53%, respectively, of the total investments during 2018 and 2017.  The overall investment mix, as a percentage of total investments, remained fairly consistent when comparing the investments held as of December 31, 2018 and 2017.

As of December 31, 2018, 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 $(7.7) million and $17.2 million as of December 31, 2018 and 2017, 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 market place.

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.

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 a portfolio of marketable securities and line of credit facilities.  The Company has two principal needs for cash – the insurance company’s contractual obligations to policyholders and the payment of operating expenses.

Parent Company Liquidity

UTG is a holding company that has no day-to-day operations of its own.  Cash flows from UTG’s insurance subsidiary, UG, are used to pay costs associated with maintaining the Company in good standing with states in which it does business and purchasing outstanding shares of UTG stock.  UTG's cash flow is dependent on management fees received from its insurance subsidiary, stockholder dividends from its subsidiary and earnings received on cash balances.  As of December 31, 2018 and 2017, substantially all of the consolidated shareholders’ equity represents net assets of its subsidiaries.  In 2018, the Parent company received $5 million in dividends from its insurance subsidiary and $2 million in 2017. Certain restrictions exist on the payment of dividends from the insurance subsidiary to the Parent company.  For further information regarding the restrictions on the payment of dividends by the insurance subsidiary, see Note 9 – Shareholders’ Equity in the Notes to the Consolidated Financial Statements.  Although these restrictions exist, dividend availability from the insurance subsidiary has historically been sufficient to meet the cash flow needs of the Parent company.

Insurance Subsidiary Liquidity

Sources of cash flows for the insurance subsidiary primarily consist of premium and investment income.  Cash outflows from operations include policy benefit payments, administrative expenses, taxes and dividends to the Parent company.

Short-Term Borrowings

An additional source of liquidity to the Parent company and its subsidiaries is the line of credit facilities extended to them. As of December 31, 2018 and 2017, the Company and its subsidiaries had available $18 million in line of credit facilities.  The Company did not utilize its available credit facilities during 2017 or 2018.  For additional information regarding the line of credit facilities, see Note 7 – Credit Arrangements in the Notes to the 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.

Consolidated Liquidity

Cash used in operating activities was approximately $5.4 million and $13.2 million in 2018 and 2017, 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 2018 and 2017, the Company’s investing activities provided net cash of approximately $2 million and $27 million, respectively. The Company recognized proceeds of approximately $107.7 million and $56.2 million from investments sold and matured in 2018 and 2017, respectively.  The Company used approximately $105.7 million and $29.2 million to acquire investments.  The net cash provided by investing activities is expected to vary from year to year depending on market conditions and management’s ability to find and negotiate favorable investment contracts.

Net cash used in financing activities was approximately $1.9 million and $3.5 million during 2018 and 2017, respectively. As of December 31, 2018, the Company had no debt outstanding with third parties.

The Company had cash and cash equivalents of approximately $20.2 million and $25.4 million as of December 31, 2018 and 2017, respectively.  The Company has a portfolio of marketable fixed and equity securities that are available for sale, if an unexpected event were to occur.  These securities had a fair value of approximately $240.7 million and $238 million at December 31, 2018 and 2017, respectively. However, the strong cash flows from investing activities, investment maturities and the availability of the line of credit facilities make it unlikely that the Company would need to sell securities for liquidity purposes.  See Note 2 – Investments in the Notes to the Consolidated Financial Statements for detailed disclosures regarding the Company’s investment portfolio.

Management believes the overall sources of liquidity available will be sufficient to satisfy its financial obligations.

Capital Resources

The Company’s capital structure consists of available short-term debt, long-term debt and shareholders’ equity. A complete analysis and description of the short-term and long-term debt issues available as of December 31, 2018 and 2017 are presented in Note 7 – Credit Arrangements in the Notes to the Consolidated Financial Statements.

The Company had $0 debt outstanding as of December 31, 2018 and 2017.

The NAIC's risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula.  The risk-based capital (RBC) formula measures the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching and other business factors.  The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized.

At December 31, 2018, UG has a ratio of approximately 5.20, which is 520% of the authorized control level.  Accordingly, the Company meets the RBC requirements.

The Board of Directors of UTG has authorized the repurchase in the open market or in privately negotiated transactions of UTG's common stock. At a meeting of the Board of Directors in September of 2018, the Board of Directors of UTG authorized the repurchase of up to an additional $1.5 million of UTG’s common stock, for a total repurchase of $16 million. Repurchased shares are available for future issuance for general corporate purposes. Company Management has broad authority to operate the program, including the discretion of whether to purchase shares and the ability to suspend or terminate the program. Open market purchases are made based on the last available market price but may be limited.  During 2018, the Company repurchased 50,922 shares through the stock repurchase program for approximately $1,329,148. Through December 31, 2018, UTG has spent approximately $13.9 million in the acquisition of 1,140,106 shares under this program.

Shareholders’ equity was approximately $106 million and $110 million as of December 31, 2018 and 2017, respectively. Total shareholders' equity decreased approximately 3% in 2018 compared to 2017.  The decrease is primarily attributable to the change in accumulated other comprehensive income and retained earnings. As of December 31, 2018 and 2017, the Company reported  accumulated other comprehensive income of approximately $62,000 and $32.9 million, respectively.The decrease is the result of the adoption of ASU 2016-01 and a decline in the market value of fixed maturity securities.

Effective January 1, 2018, the Company adopted ASU 2016-01. As a result equity securities are no longer classified as available-for-sale with unrealized gains and losses recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now recognized in net income. The Company reclassified approximately $18.3 million of unrealized gains from equity securities from being a component of accumulated other comprehensive income to a component of retained earnings.

At December 31, 2018, accumulated other comprehensive income was reduced by approximately $14.6 million as a result of unrealized losses on fixed maturity securities. The variance in the net unrealized gains and losses is the result of normal market fluctuations mainly related to changes in interest rates in the market place.

As a result of the TCJA, the Company has recognized a decrease to their net deferred tax liability as of December 31, 2017 of approximately $7.3 million. The Company has determined that no other changes are required to the deferred tax liability, and the current income tax expense is unaffected by this change in law. Refer to Note 1 – Summary of Significant Accounting Policies and Note 6 – Income Taxes in the Notes to the Consolidated Financial Statements for further disclosure regarding the TCJA.

The Company's investments provide sufficient return to cover future obligations. The Company carries all of its fixed maturity holdings as available for sale, which are reported in the Consolidated Financial Statements at their fair value.

New Accounting Pronouncements

See Note 1 – Summary of Significant Account Policies in the Notes to the Consolidated Financial Statements for information regarding new accounting pronouncements.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements, financing activities or other relationships with unconsolidated entities or other persons.

Contractual Obligations

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this item.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and Item 10(f)(1) of Regulation S-K, the Company has elected to comply with certain scaled disclosure reporting obligations, and therefore does not have to provide the information required by this item.


Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

 
Page No.
UTG, Inc. and Consolidated Subsidiaries
 
Report of Independent Registered Public Accounting Firm
20
Consolidated Balance Sheets
21
Consolidated Statements of Operations
22
Consolidated Statements of Comprehensive Income
23
Consolidated Statements of Shareholders’ Equity
24
Consolidated Statements of Cash Flows
25
Notes to Consolidated Financial Statements
26






Report of Independent Registered Public Accounting Firm

Board of Directors and
Shareholders of UTG, Inc. and Subsidiaries

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of UTG, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes to the consolidated financial statements (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Brown Smith Wallace, LLP

We have served as the Company’s auditor since 2005.
St. Louis, Missouri
March 26, 2019



UTG, Inc.
Consolidated Balance Sheets
As of December 31, 2018 and 2017

ASSETS
 
             
   
2018
   
2017
 
             
Investments:
           
Investments available for sale:
           
Fixed maturities, at fair value (amortized cost $160,895,869 and $159,912,511)
 
$
160,960,784
   
$
178,555,225
 
Equity securities, at fair value (cost $0 and $35,712,633)
   
0
     
58,848,491
 
   Equity securities, at fair value (cost $34,885,107 and $0)
   
67,664,482
     
0
 
Equity securities, at cost
   
12,118,617
     
0
 
Mortgage loans on real estate at amortized cost
   
9,069,111
     
17,314,477
 
Investment real estate, net
   
52,518,577
     
50,504,550
 
Notes receivable
   
23,717,312
     
19,004,016
 
Policy loans
   
9,204,222
     
9,559,142
 
Total investments
   
335,253,105
     
333,785,901
 
                 
Cash and cash equivalents
   
20,150,162
     
25,434,199
 
Accrued investment income
   
2,119,882
     
2,990,721
 
Reinsurance receivables:
               
Future policy benefits
   
26,117,936
     
26,488,346
 
Policy claims and other benefits
   
4,053,882
     
3,882,047
 
Cost of insurance acquired
   
5,622,227
     
6,428,292
 
Property and equipment, net of accumulated depreciation
   
688,567
     
1,118,826
 
Income taxes receivable
   
279,333
     
549,851
 
Other assets
   
1,263,242
     
5,766,901
 
Total assets
 
$
395,548,336
   
$
406,445,084
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Policy liabilities and accruals:
               
Future policy benefits
 
$
253,852,368
   
$
259,469,205
 
Policy claims and benefits payable
   
4,267,481
     
3,777,175
 
Other policyholder funds
   
372,072
     
408,790
 
Dividend and endowment accumulations
   
14,608,838
     
14,601,645
 
Deferred income taxes
   
9,113,480
     
10,996,404
 
Other liabilities
   
6,257,387
     
6,760,347
 
Total liabilities
   
288,471,626
     
296,013,566
 
                 
Shareholders' equity:
               
Common stock - no par value, stated value $0.001 per share. Authorized 7,000,000 shares - 3,295,870 and 3,333,377 shares issued and outstanding
   
3,296
     
3,333
 
Additional paid-in capital
   
36,567,865
     
37,536,164
 
Retained earnings
   
69,708,901
     
39,040,456
 
Accumulated other comprehensive income
   
62,495
     
32,952,338
 
Total UTG shareholders' equity
   
106,342,557
     
109,532,291
 
Noncontrolling interest
   
734,153
     
899,227
 
Total shareholders' equity
   
107,076,710
     
110,431,518
 
Total liabilities and shareholders' equity
 
$
395,548,336
   
$
406,445,084
 
See accompanying notes.



UTG, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2018 and 2017

   
2018
   
2017
 
             
Revenue:
           
Premiums and policy fees
 
$
10,076,351
   
$
10,413,346
 
Ceded reinsurance premiums and policy fees
   
(2,862,701
)
   
(2,955,989
)
Net investment income
   
11,202,668
     
11,700,998
 
Other income
   
400,034
     
458,663
 
Revenues before net investment gains (losses)
   
18,816,352
     
19,617,018
 
Net investment gains (losses):
               
Other-than-temporary impairments
   
(300,000
)
   
(762,161
)
Other realized investment gains, net
   
12,340,077
     
9,879,286
 
Change in fair value of equity securities
   
10,416,758
     
0
 
Total net investment gains
   
22,456,835
     
9,117,125
 
Total revenues
   
41,273,187
     
28,734,143
 
                 
Benefits and other expenses:
               
Benefits, claims and settlement expenses:
               
Life
   
16,751,922
     
17,428,286
 
Ceded reinsurance benefits and claims
   
(2,610,586
)
   
(1,893,986
)
Annuity
   
1,044,397
     
975,196
 
Dividends to policyholders
   
390,368
     
370,847
 
Commissions
   
(147,922
)
   
(145,722
)
Amortization of cost of insurance acquired
   
806,065
     
839,105
 
Operating expenses
   
8,531,113
     
7,854,301
 
Total benefits and other expenses
   
24,765,357
     
25,428,027
 
                 
Income before income taxes
   
16,507,830
     
3,306,116
 
Income tax expense (benefit)
   
3,907,536
     
(1,507,016
)
                 
Net income
   
12,600,294
     
4,813,132
 
                 
Net income attributable to noncontrolling interest
   
(209,177
)
   
(2,983
)
                 
Net income attributable to common shareholders
 
$
12,391,117
   
$
4,810,149
 
                 
Amounts attributable to common shareholders:
               
                 
Basic income per share
 
$
3.75
   
$
1.44
 
                 
Diluted income per share
 
$
3.75
   
$
1.44
 
                 
Basic weighted average shares outstanding
   
3,307,448
     
3,346,774
 
                 
Diluted weighted average shares outstanding
   
3,307,448
     
3,346,774
 

See accompanying notes.



UTG, Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2018 and 2017

   
2018
   
2017
 
             
Net income
 
$
12,600,294
   
$
4,813,132
 
                 
Other comprehensive income (loss):
               
                 
Unrealized holding gains (losses) arising during period, pre-tax
   
(7,744,899
)
   
17,174,126
 
Tax (expense) benefit on unrealized holding gains (losses) arising during the period
   
1,626,429
     
(6,010,944
)
Deferred tax adjustment from tax rate change
   
0
     
5,842,290
 
Unrealized holding gains (losses) arising during period, net of tax
   
(6,118,470
)
   
17,005,472
 
                 
Less reclassification adjustment for gains included in net income
   
(10,751,955
)
   
(6,779,732
)
Tax expense for gains included in net income
   
2,257,911
     
2,372,906
 
Reclassification adjustment for gains included in net income, net of tax
   
(8,494,044
)
   
(4,406,826
)
Subtotal: Other comprehensive income (loss), net of tax
   
(14,612,514
)
   
12,598,646
 
                 
Comprehensive income (loss)
   
(2,012,220
)
   
17,411,778
 
                 
Less comprehensive income attributable to noncontrolling interests
   
(209,177
)
   
(2,983
)
                 
Comprehensive income (loss) attributable to UTG, Inc.
 
$
(2,221,397
)
 
$
17,408,795
 

See accompanying notes.



UTG, Inc.
Consolidated Statements of Shareholders' Equity

Year ended December 31, 2018
 
Common Stock
   
Additional Paid-In Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Income
   
Noncontrolling Interest
   
Total Shareholders' Equity
 
                                     
Balance at December 31, 2017
 
$
3,333
   
$
37,536,164
   
$
39,040,456
   
$
32,952,338
   
$
899,227
   
$
110,431,518
 
Adoption of Accounting Standards Update No 2016-01 (Note 1)
   
0
     
0
     
18,277,328
     
(18,277,328
)
   
0
     
0
 
     
3,333
     
37,536,164
     
57,317,784
     
14,675,010
     
899,227
     
110,431,518
 
Common stock issued during year
   
13
     
360,799
     
0
     
0
     
0
     
360,812
 
Treasury shares acquired and retired
   
(50
)
   
(1,329,098
)
   
0
     
0
     
0
     
(1,329,148
)
Net income attributable to common shareholders
   
0
     
0
     
12,391,117
     
0
     
0
     
12,391,117
 
Unrealized holding loss on securities net of noncontrolling interest and reclassification adjustment and taxes
   
0
     
0
     
0
     
(14,612,515
)
   
0
     
(14,612,515
)
Contributions
   
0
     
0
     
0
     
0
     
0
     
0
 
Distributions
   
0
     
0
     
0
     
0
     
(374,252
)
   
(374,252
)
Gain attributable to noncontrolling interest
   
0
     
0
     
0
     
0
     
209,178
     
209,178
 
Balance at December 31, 2018
 
$
3,296
   
$
36,567,865
   
$
69,708,901
   
$
62,495
   
$
734,153
   
$
107,076,710
 

Year ended December 31, 2017
 
Common Stock
   
Additional Paid-In Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Income
   
Noncontrolling Interest
   
Total Shareholders' Equity
 
Balance at January 1, 2017
 
$
3,350
   
$
37,878,712
   
$
34,230,307
   
$
20,353,692
   
$
1,835,781
   
$
94,301,842
 
Common stock issued during year
   
13
     
261,474
     
0
     
0
     
0
     
261,487
 
Treasury shares acquired and retired
   
(30
)
   
(604,022
)
   
0
     
0
     
0
     
(604,052
)
Net income attributable to common shareholders
   
0
     
0
     
4,810,149
     
0
     
0
     
4,810,149
 
Unrealized holding loss on securities net of noncontrolling interest and reclassification adjustment and taxes
   
0
     
0
     
0
     
12,598,646
     
0
     
12,598,646
 
Contributions
   
0
     
0
     
0
     
0
     
0
     
-
 
Distributions
   
0
     
0
     
0
     
0
     
(939,537
)
   
(939,537
)
Gain attributable to noncontrolling interest
   
0
     
0
     
0
     
0
     
2,983
     
2,983
 
Balance at December 31, 2017
 
$
3,333
   
$
37,536,164
   
$
39,040,456
   
$
32,952,338
   
$
899,227
   
$
110,431,518
 

See accompanying notes.



UTG, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2018 and 2017

   
2018
   
2017
 
Cash flows from operating activities:
           
Net income attributable to common shares
 
$
12,391,117
   
$
4,810,149
 
Adjustments to reconcile net income to net cash used in operating activities:
               
Amortization (accretion) of investments
   
(142,519
)
   
94,608
 
Other-than-temporary impairments
   
300,000
     
762,161
 
Realized investment gains, net
   
(12,340,077
)
   
(9,879,286
)
Change in fair value of equity securities
   
(10,416,758
)
   
0
 
Unrealized trading (gains) losses included in income
   
0
     
111,531
 
Realized trading (gains) losses included in income
   
0
     
(110,470
)
Amortization of cost of insurance acquired
   
806,065
     
839,105
 
Depreciation
   
1,067,297
     
701,809
 
Net income attributable to noncontrolling interest
   
209,177
     
2,983
 
Charges for mortality and administration of universal life and annuity products
   
(6,602,846
)
   
(6,636,270
)
Interest credited to account balances
   
4,221,969
     
4,346,943
 
Change in accrued investment income
   
870,839
     
(117,871
)
Change in reinsurance receivables
   
198,575
     
556,891
 
Change in policy liabilities and accruals
   
(2,237,947
)
   
(2,794,247
)
Change in income taxes receivable (payable)
   
270,518
     
673,831
 
Change in other assets and liabilities, net
   
5,985,699
     
(6,560,115
)
Net cash provided by (used in) operating activities
   
(5,418,891
)
   
(13,198,248
)
Cash flows from investing activities:
               
Proceeds from investments sold and matured:
               
Fixed maturities available for sale
   
66,408,611
     
29,744,619
 
Equity securities
   
2,169,989
     
7,479,886
 
Mortgage loans
   
8,878,073
     
1,840,610
 
Real estate
   
14,341,204
     
13,014,387
 
Notes receivable
   
6,783,702
     
2,170,322
 
Policy loans
   
1,599,896
     
1,951,222
 
Short-term investments
   
7,549,076
     
0
 
Total proceeds from investments sold and matured
   
107,730,551
     
56,201,046
 
Cost of investments acquired:
               
Fixed maturities available for sale
   
(56,940,883
)
   
(15,615,699
)
Equity securities
   
(12,687,839
)
   
(3,275,532
)
Mortgage loans
   
(91,954
)
   
(360,531
)
Real estate
   
(15,704,151
)
   
(4,226,106
)
Notes receivable
   
(11,496,998
)
   
(4,297,853
)
Policy loans
   
(1,244,976
)
   
(1,440,230
)
Short-term investments
   
(7,549,076
)
   
0
 
Total cost of investments acquired
   
(105,715,877
)
   
(29,215,951
)
Purchase of property and equipment
   
0
     
0
 
Net cash provided by (used in) investing activities
   
2,014,674
     
26,985,095
 
Cash flows from financing activities:
               
Policyholder contract deposits
   
4,696,980
     
4,812,703
 
Policyholder contract withdrawals
   
(5,234,212
)
   
(4,139,797
)
Payments of principal on notes payable/line of credit
   
0
     
(2,900,000
)
Purchase of treasury stock
   
(1,329,148
)
   
(604,052
)
Issuance of stock
   
360,812
     
261,487
 
Noncontrolling contributions/(distributions) of consolidated subsidiary
   
(374,252
)
   
(939,537
)
Net cash provided by (used in) financing activities
   
(1,879,820
)
   
(3,509,196
)
Net increase (decrease) in cash and cash equivalents
   
(5,284,037
)
   
10,277,651
 
Cash and cash equivalents at beginning of year
   
25,434,199
     
15,156,548
 
Cash and cash equivalents at end of year
 
$
20,150,162
   
$
25,434,199
 

See accompanying notes.


UTG, Inc.
Notes to Consolidated Financial Statements


Note 1 – Summary of Significant Accounting Policies


Business – UTG, Inc. is an insurance holding company. The Company’s dominant business is individual life insurance, which includes the servicing of existing insurance in-force and the acquisition of other companies in the life insurance business. UTG and its subsidiaries are collectively referred to as the “Company”.

This document at times will refer to the Registrant’s largest shareholder, Mr. Jesse T. Correll and certain companies controlled by Mr. Correll.  Mr. Correll holds a majority ownership of First Southern Funding, LLC (“FSF”), a Kentucky corporation, and First Southern Bancorp, Inc. (“FSBI”), a financial services holding company.  FSBI operates through its 100% owned subsidiary bank, First Southern National Bank (“FSNB”).  Banking activities are conducted through multiple locations within south-central and western Kentucky.  Mr. Correll is Chief Executive Officer and Chairman of the Board of Directors of UTG and is currently UTG’s largest shareholder through his ownership control of FSF, FSBI and affiliates.  At December 31, 2018, Mr. Correll owns or controls directly and indirectly approximately 65.29% of UTG’s outstanding stock.

UTG’s life insurance subsidiary has several wholly-owned and majority-owned subsidiaries. The subsidiaries were formed to hold certain real estate and other investments. The investments were placed into the limited liability companies and partnerships to provide additional protection to the policyholders and to UG.

Basis of Presentation – The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), under guidance issued by the Financial Accounting Standards Board (“FASB”).  The preparation of financial statements in accordance with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Principles of Consolidation – The accompanying consolidated financial statements include the accounts of the Registrant and its wholly and majority-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated during consolidation.

Business Segments – The Company has only one business segment – life insurance.

Investments – The Company reports its investments as follows:

Fixed Maturity Investments – The Company classifies its fixed maturity investments, which include bonds, as available for sale. Investments classified as available for sale are carried at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income.  Premiums and discounts on debt securities purchased at other than par value are amortized and accreted, respectively, to interest income in the Consolidated Statements of Operations, using the constant yield method over the period to maturity.  Net realized gains and losses on sales of available for sale securities, and unrealized losses considered to be other-than-temporary, are recorded to net realized investment gains (losses) in the Consolidated Statements of Operations.

Equity Securities at Fair Value – Investments in equity securities, which include common and preferred stocks, are reported at fair value with unrealized gains and losses reported as a component of net income (loss) upon adoption of ASU 2016-01.

Equity Securities at Cost – The Company adopted ASU 2016-01 during the current year and transferred equity securities of $12,118,617, that do not have a readily determinable fair value, from equity securities at fair value to equity securities at cost on the financial statements.  There was no impact to the Consolidated Statements of Operations or net Shareholders' Equity as a result of the change. These investments are reported at their cost basis, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Mortgage Loans on Real Estate – Mortgage loans on real estate are reported at their unpaid principal balances, adjusted for amortization of premium or discount and valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. Included in the mortgage loans balance is discounted mortgage loans on real estate. Discounted mortgage loans on real estate are loans that the Company purchased at a deep discount through an auction process led by the Federal Government or other intermediary.  In general, the discounted loans are non-performing and there is a significant amount of uncertainty surrounding the timing and amount of cash flows to be received by the Company.  Accordingly, the Company records its investment in the discounted loans at its original purchase price adjusted for any principal receipts received.  Management works with the borrower to reach a settlement on the loan or they foreclose on the underlying collateral which is primarily commercial real estate.  For cash payments received during the work out process, the Company records these payments to interest income on a cash basis.  For loan settlements reached, the Company records the amount in excess of the carrying amount of the loan as a discount accretion to investment income at the closing date.  Management reviews the discount loan portfolio regularly for impairment.  If an impairment is identified (after consideration of the underlying collateral), the Company records an impairment to earnings in the period the information becomes known.

Investment Real Estate – Investment real estate held for sale is reported at the lower of cost or fair value less cost to sell. Expenses to maintain the property are expensed as incurred.

Notes Receivable – Notes receivable are reported at their unpaid principal balances, adjusted for valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. Interest accruals are analyzed based on the likelihood of repayment. The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status.

Policy Loans – Policy loans are reported at their unpaid balances, including accumulated interest, but not in excess of the cash surrender value of the related policy.

Short-Term Investments – Short-term investments are reported at amortized cost, which approximates fair value.

Gains and Losses – Realized gains and losses include sales of investments and investment impairments.  If any, other-than-temporary impairments in fair value are recognized in net income on the specific identification basis.

Fair Value – Fair values for cash, short-term investments, short-term debt, receivables and payables approximate carrying value. Fair values for fixed maturities, equity securities and certain other assets are determined in accordance with specific accounting guidance.  Fair values are based on quoted market prices, where available.  Otherwise, fair values are based on quoted market prices of comparable instruments in active markets, quotes in inactive markets, or other observable criteria. Mortgage loans on real estate are estimated using discounted cash flow analyses. Discounted mortgage loans on real estate are reported at original purchase price, which Management believes approximates fair value.  For more specific information regarding the Company’s measurements and procedures in valuing financial instruments, see Note 3 – Fair Value Measurements.

Impairment of Investments – The Company evaluates its investment portfolio for other-than-temporary impairments as described in Note 2 – Investments.  If a security is deemed to be other-than-temporarily impaired, the cost basis of the security is written down to fair value and is treated as a realized loss.

Current accounting guidance states that if an entity intends to sell or if it is more likely than not that it will be required to sell an impaired security prior to recovery of its cost basis, the security is to be considered other-than-temporarily impaired and the full amount of impairment must be charged to earnings.  Otherwise, losses on fixed maturities which are other-than-temporarily impaired are separated into two categories, the portion of the loss which is considered credit loss and the portion of the loss which is due to other factors.  The credit loss portion is charged to earnings while the loss due to other factors is charged to other comprehensive income.

Cash Equivalents – The Company considers certificates of deposit and other short-term instruments with an original purchased maturity of three months or less to be cash equivalents.

Cash – Cash consists of balances on hand and on deposit in banks and financial institutions.

Reinsurance - In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts.  The Company retains a maximum of $125,000 of coverage per individual life.

Reinsurance receivables are recognized in a manner consistent with the liabilities relating to the underlying reinsured contracts. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.

Cost of Insurance Acquired - When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition.  The cost of policies purchased represents the actuarially determined present value of the projected future profits from the acquired policies.  Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits.  The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.

Property and Equipment - Company-occupied property, data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of  $5,655,593 and $5,225,333 at December 31, 2018 and 2017, respectively. Depreciation is computed on a straight-line basis for financial reporting purposes using estimated useful lives of 3 to 30 years.  Depreciation expense was $430,260 and $446,117 for the years ended December 31, 2018 and 2017, respectively.

Future Policy Benefits and Expenses - The liabilities for traditional life insurance and accident and health insurance policy benefits are computed using a net level method. These liabilities include assumptions as to investment yields, mortality, withdrawals, and other assumptions based on the life insurance subsidiary’s experience adjusted to reflect anticipated trends and to include provisions for possible unfavorable deviations. The Company makes these assumptions at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date.  Future policy benefits for individual life insurance and annuity policies are computed using interest rates ranging from 2.0% to 6.0% for life insurance and 2.5% to 7.5% for annuities. Benefit reserves for traditional life insurance policies include certain deferred profits on limited-payment policies that are being recognized in income over the policy term. Policy benefit claims are charged to expense in the period that the claims are incurred. The mortality rate assumptions for policies currently issued by the Company are based on 2001 select and ultimate tables.  Withdrawal rate assumptions are based upon Linton B or C, which are industry standard actuarial tables for forecasting assumed policy lapse rates.

Benefit reserves for universal life insurance and interest sensitive life insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges.  Policy benefits and claims that are charged to expense include benefit claims in excess of related policy account balances.  Interest crediting rates for universal life and interest sensitive products range from 3.0% to 6.0% as of December 31, 2018 and 2017.

Policy Claims and Benefits Payable - Policy and contract claims include provisions for reported claims in process of settlement, valued in accordance with the terms of the policies and contracts, as well as provisions for claims incurred and unreported. The estimate of incurred and unreported claims is based on prior experience. The Company makes an estimate after careful evaluation of all information available to the Company.  There is no certainty the stated liability for policy claims and benefits payable, including the estimate for incurred but unreported claims, will be the Company’s ultimate obligation.

Income Taxes – Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax impact attributable to differences between the financial statement book values and tax bases of assets and liabilities.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Tax Cuts & Jobs Act ("TCJA"), signed into law on December 22, 2017, reduces the corporate Federal income tax rate from 35% to 21%, effective for years beginning after December 31, 2017.  More information concerning income taxes is provided in Note 6 – Income Taxes.

Earnings Per Share – The objective of both basic earnings per share (“EPS”) and diluted EPS is to measure the performance of an entity over the reporting period.  The Company presents basic and diluted EPS on the face of the Consolidated Statements of Operations. Basic EPS is computed by dividing income available to common shareholders by the weighted average common shares outstanding for the period.  Diluted EPS is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or contracts, such as stock options, which could be exercised or converted into common shares.

Recognition of Revenues and Related Expenses - Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits, consist principally of whole life insurance policies, and certain annuities with life contingencies are recognized as revenues when due. Limited payment life insurance policies defer gross premiums received in excess of net premiums, which is then recognized in income in a constant relationship with insurance in-force. Accident and health insurance premiums are recognized as revenue pro rata over the terms of the policies. Benefits and related expenses associated with the premiums earned are charged to expense proportionately over the lives of the policies through a provision for future policy benefit liabilities and through deferral and amortization of deferred policy acquisition costs. For universal life and investment products, generally there is no requirement for payment of premium other than to maintain account values at a level sufficient to pay mortality and expense charges. Consequently, premiums for universal life policies and investment products are not reported as revenue, but as deposits. Policy fee revenue for universal life policies and investment products consists of charges for the cost of insurance and policy administration fees assessed during the period. Expenses include interest credited to policy account balances and benefit claims incurred in excess of policy account balances.

Recently Issued Accounting Standards

In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement or ASU 2018-13. ASU 2018-13 modifies certain disclosure requirements related to fair value measurements including requiring disclosures on changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements and a requirement to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

In August 2018, the FASB issued Accounting Standards Update No. 2018-12, Financial Services-Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts or ASU 2018-12.  ASU 2018-12 significantly changes how insurers account for long-duration insurance contracts. The new guidance will require insurers to review and update, if necessary, the assumptions used to measure insurance liabilities periodically, rather than retain assumptions used at contract inception. The updated guidance also changes the recognition and measurement of deferred acquisition costs (DAC) and created a new category of benefit features called market risk benefits (MRB) that will be measured at fair value. The guidance also significantly expands the disclosure requirements for long-duration contracts.  The ASU is effective for fiscal years, and interim periods within those years, for years beginning after December 15, 2020 and early adoption is permitted.  The guidance on measuring the liabilities for future policy benefits and DAC will be adopted on a modified retrospective basis as of the earliest period presented in the year of adoption. The guidance on MRB will be adopted on a retrospective basis as of the earliest period presented in the year of adoption. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

In June 2018, the FASB issued Accounting Standards Update No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Non-Employee Share Based Payment Accounting or ASU 2018-07. The amendment in ASU 2018-07 simplifies the accounting for nonemployee share based payments by aligning the measurement and classification guidance for share based payments to nonemployees with share based payments to employees. Under this guidance, the measurement of equity classified awards will be fixed at the grant date. This guidance is effective in annual periods beginning after December 15, 2018. The Company has evaluated the impact of the ASU, and determined that it does not significantly impact the Company’s financial statements.

In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income or ASU 2018-02.  ASU 2018-02 was issued as a result of the enactment of the Tax Cuts and Jobs Act of 2017 (“TCJA”) on December 22, 2017.  Accounting guidance required deferred tax items to be revalued based on the new tax laws (the most significant of which reduced the corporate tax rate to 21% percent from 35% percent) and to include the change in income from continuing operations.  ASU 2018-02 is effective for annual and interim reporting periods beginning after December 15, 2018, with early adoption permitted.  The Company adopted ASU 2018-02 for the year ended December 31, 2017.

Accounting Standards Update (ASU 2016-13), Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments – The amendments included in ASU 2016-13 require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better evaluate their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for public companies for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 change the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments. The Company adopted ASU 2016-01 on January 1, 2018 as a cumulative net effect adjustment and reclassified $18,277,328 of unrealized gains on equity investments, net of tax, from accumulated other comprehensive income (loss) to retained earnings on the Company's Condensed Consolidated Balance Sheet. Prior periods have not been restated to conform to current presentation. Effective January 1, 2018, the Company's results of operations include the changes in fair value of these financial instruments. During 2018, the FASB implemented ASU 2018-03, which clarifies ASU 2016-01 regarding the measurement alternative for equity securities without a readily determinable fair value as well as clarification for other presentation items. These amendments are effective for interim periods beginning after June 15, 2018.

Note 2 – Investments

Available for Sale Securities – Fixed Maturity and Equity Securities

The following tables provide a summary of fixed maturities available for sale by original or amortized cost and estimated fair value:

December 31, 2018
 
Original or Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
                         
Investments available for sale:
                       
Fixed maturities
                       
U.S. Government and govt. agencies and authorities
 
$
25,649,410
   
$
149,006
   
$
(138,222
)
 
$
25,660,194
 
U.S. special revenue and assessments
   
16,350,486
     
334,300
     
(4,406
)
   
16,680,380
 
All other corporate bonds
   
118,895,973
     
2,569,287
     
(2,845,050
)
   
118,620,210
 
Total
 
$
160,895,869
   
$
3,052,593
   
$
(2,987,678
)
 
$
160,960,784
 

December 31, 2017
 
Original or Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
                         
Investments available for sale:
                       
Fixed maturities
                       
U.S. Government and govt. agencies and authorities
 
$
2,679,325
   
$
33,802
   
$
(73,530
)
 
$
2,639,597
 
U.S. special revenue and assessments
   
9,012,232
     
620,789
     
0
     
9,633,021
 
All other corporate bonds
   
148,220,954
     
18,359,816
     
(298,163
)
   
166,282,607
 
     
159,912,511
     
19,014,407
     
(371,693
)
   
178,555,225
 
Equity securities (1)
   
35,712,633
     
23,648,201
     
(512,343
)
   
58,848,491
 
Total
 
$
195,625,144
   
$
42,662,608
   
$
(884,036
)
 
$
237,403,716
 

(1) Effective January 1, 2018, the Company adopted ASU 2016-01 and equity securities are no longer classified as available-for-sale. Prior periods have not been restated to conform to the current presentation. See Note 1 to the Consolidated Financial Statements for additional information.

The following table provides a summary of fixed maturities by contractual maturity as of December 31, 2018. Actual maturities could differ from contractual maturities due to call or prepayment provisions:

Fixed Maturities Available for Sale
December 31, 2018
 
Amortized
Cost
   
Estimated
Fair Value
 
             
Due in one year or less
 
$
6,498,249
   
$
6,537,005
 
Due after one year through five years
   
43,015,419
     
44,106,710
 
Due after five years through ten years
   
60,011,083
     
60,985,500
 
Due after ten years
   
51,371,118
     
49,331,569
 
Total
 
$
160,895,869
   
$
160,960,784
 

By insurance statute, the majority of the Company's investment portfolio is invested in investment grade securities to provide ample protection for policyholders.

Below investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers.  In addition, the trading market for these securities is usually more limited than for investment grade debt securities.  Debt securities classified as below-investment grade are those that receive a Standard & Poor's rating of BB+ or below.

The Company held below investment grade investments with an estimated market value of $2,618,594 and $21,108,077 as of December 31, 2018 and December 31, 2017, respectively. The investments are all classified as “All other corporate bonds”.

The fair value of investments with sustained gross unrealized losses at December 31, 2018 and 2017 are as follows:

December 31, 2018
Less than 12 months
 
12 months or longer
 
Total
 
                               
 
Fair value
   
Unrealized losses
 
Fair value
   
Unrealized losses
 
Fair value
   
Unrealized losses
 
U.S. Government and govt. agencies and authorities
 
$
6,429,700
     
(49,904
)
 
$
1,592,679
     
(88,318
)
 
$
8,022,379
     
(138,222
)
U.S. special revenue and assessments
   
4,023,920
     
(4,406
)
   
0
     
0
     
4,023,920
     
(4,406
)
All other corporate bonds
   
49,270,729
     
(2,033,507
)
   
15,337,739
     
(811,543
)
   
64,608,468
     
(2,845,050
)
Total fixed maturities
 
$
59,724,349
     
(2,087,817
)
 
$
16,930,418
     
(899,861
)
 
$
76,654,767
     
(2,987,678
)

December 31, 2017
Less than 12 months
 
12 months or longer
 
Total
 
                               
 
Fair value
   
Unrealized losses
 
Fair value
   
Unrealized losses
 
Fair value
   
Unrealized losses
 
U.S. Government and govt. agencies and authorities
 
$
0
     
0
   
$
1,604,987
     
(73,530
)
 
$
1,604,987
     
(73,530
)
All other corporate bonds
   
9,732,635
     
(91,757
)
   
11,164,317
     
(206,406
)
   
20,896,952
     
(298,163
)
Total fixed maturities
 
$
9,732,635
     
(91,757
)
 
$
12,769,304
     
(279,936
)
 
$
22,501,939
     
(371,693
)
Equity securities (1)
 
$
4,130,260
     
(270,774
)
 
$
1,526,868
     
(241,569
)
 
$
5,657,128
     
(512,343
)

The following table provides additional information regarding the number of securities that were in an unrealized loss position for greater than or less than twelve months:

 
Less than 12 months
 
12 months or longer
 
Total
As of December 31, 2018
         
Fixed maturities
30
 
10
 
40
As of December 31, 2017
         
Fixed maturities
6
 
6
 
12
Equity securities (1)
2
 
2
 
4

(1) Effective January 1, 2018, the Company adopted ASU 2016-01 and equity securities are no longer classified as available-for-sale. Prior periods have not been restated to conform to the current presentation. See Note 1 to the Consolidated Financial Statements for additional information.

Substantially all of the unrealized losses on fixed maturities available for sale at December 31, 2018 and 2017 are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase.  The unrealized losses on equity investments were primarily attributable to normal market fluctuations.  The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position.  Based upon the Company’s expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company’s evaluation of other relevant factors, the Company deems these securities to be temporarily impaired as of  December 31, 2018 and 2017.

Cost Method Investments

The Company held equity investments with an aggregate cost of $12,118,617 at December 31, 2018.  These equity investments were not reported at fair value because it is not practicable to estimate their fair values due to insufficient information being available. Management did not identify any events or changes in circumstances that might have a significant adverse effect on the reported value of those investments.  Based on Management's evaluation of the expected cash flow of the investments, and the Company's ability and intent to hold the investments for a reasonable period of time, the Company does not deem an other-than-temporary impairment necessary at December 31, 2018.

Trading Securities

Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in net investment income on the Consolidated Statements of Operations.  Trading Securities included exchange-traded equities and exchange-traded options.  Trading securities carried as liabilities were securities sold short.  A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, was recognized upon the termination of the short sale.  Earnings from trading securities were classified in cash flows from operating activities. The Company did not hold any trading securities at December 31, 2018 or 2017.

The following table reflects trading securities revenue charged to net investment income for the periods ended December 31:

 
2018
 
2017
 
         
Net unrealized gains (losses)
 
$
0
   
$
(111,531
)
Net realized gains (losses)
   
0
     
110,470
 
Net unrealized and realized gains (losses)
 
$
0
   
$
(1,061
)

Mortgage Loans on Real Estate

The Company, from time to time, acquires mortgage loans through participation agreements with FSNB.  FSNB has been able to provide the Company with additional expertise and experience in underwriting commercial and residential mortgage loans, which provide more attractive yields than the traditional bond market.  The Company is able to receive participations from FSNB for three primary reasons:  1) FSNB has already reached its maximum lending limit to a single borrower, but the borrower is still considered a suitable risk; 2) the interest rate on a particular loan may be fixed for a long period that is more suitable for UG given its asset-liability structure; and 3) FSNB’s loan growth might at times outpace its deposit growth, resulting in FSNB participating such excess loan growth rather than turning customers away.  For originated loans, the Company’s Management is responsible for the final approval of such loans after evaluation.  Before a new loan is issued, the applicant is subject to certain criteria set forth by Company Management to ensure quality control.  These criteria include, but are not limited to, a credit report, personal financial information such as outstanding debt, sources of income, and personal equity.  Once the loan is approved, the Company directly funds the loan to the borrower.  The Company bears all risk of loss associated with the terms of the mortgage with the borrower.

During 2018 and 2017, the Company acquired $91,954 and $360,531 in mortgage loans, respectively, of participation mortgage loans.  FSNB services the majority of the Company’s mortgage loan portfolio. The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan cost to cover costs incurred by FSNB relating to the processing and establishment of the loan.

During 2018 and 2017, the maximum and minimum lending rates for mortgage loans were:

 
2018
 
2017
 
Maximum
rate
 
Minimum
rate
 
Maximum
rate
 
Minimum
rate
               
Farm loans
5.00 %
 
5.00 %
 
5.00 %
 
5.00 %
Commercial loans
7.50 %
 
4.00 %
 
7.50 %
 
4.00 %
Residential loans
8.00 %
 
8.00 %
 
8.00 %
 
4.00 %

Most mortgage loans are first position loans.  Loans issued are generally limited to no more than 80% of the appraised value of the property.

The Company has in place a monitoring system to provide Management with information regarding potential troubled loans.  Letters are sent to each mortgagee when the loan becomes 30 days or more delinquent.  Management is provided with a monthly listing of loans that are 60 days or more past due.  All loans 90 days or more past due are placed on a non-performing status and classified as delinquent loans.  Quarterly, coinciding with external financial reporting, the Company reviews each delinquent loan and determines how each delinquent loan should be classified.  Management believes the current internal controls surrounding the mortgage loan selection process provide a quality portfolio with minimal risk of foreclosure and/or negative financial impact.

Changes in the current economy could have a negative impact on the loans, including the financial stability of the borrowers, the borrowers’ ability to pay or to refinance, the value of the property held as collateral and the ability to find purchasers at favorable prices.  Interest accruals are analyzed based on the likelihood of repayment.  In no event will interest continue to accrue when accrued interest along with the outstanding principal exceeds the net realizable value of the property.  The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status.

A mortgage loan reserve is established and adjusted based on Management's quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value.  The mortgage loan reserve was $0 at December 31, 2018 and December 31, 2017.

The following table summarizes the mortgage loan holdings of the Company for the periods ended December 31:

   
2018
   
2017
 
             
In good standing
 
$
7,169,272
   
$
15,310,941
 
Overdue interest over 90 days
   
1,899,839
     
0
 
Restructured
   
0
     
0
 
In process of foreclosure
   
0
     
2,003,536
 
Total mortgage loans
 
$
9,069,111
   
$
17,314,477
 
Total foreclosed loans during the year
 
$
0
   
$
0
 

Investment Real Estate

Investment Real estate acquired through foreclosure, consisting of properties obtained through foreclosure proceedings or acceptance of a deed in lieu of foreclosure, is reported on an individual asset basis at the lower of cost or fair value, less disposal costs. Fair value is determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. When properties are acquired through foreclosure, any excess of the loan balance at the time of foreclosure over the fair value of the real estate held as collateral is recognized and charged to the Consolidated Statements of Operations. Based upon Management’s evaluation of the real estate acquired through foreclosure, additional expense is recorded when necessary in an amount sufficient to reflect any declines in estimated fair value. Gains and losses recognized on the disposition of the properties are recorded as realized gains and losses in the Consolidated Statements of Operations.

Notes Receivable

Notes receivable represent collateral loans and promissory notes issued by the Company and are reported at their unpaid principal balances, adjusted for valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. The valuation allowance as of December 31, 2018 and 2017 was $0. Interest accruals are analyzed based on the likelihood of repayment.  The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status.

Before a new note is issued, the applicant is subject to certain criteria set forth by Company Management to ensure quality control.  Once the note is approved, the Company directly funds the note to the borrower. Several of the notes have participation agreements in place, whereas the Company has reduced its investment in the note receivable by participating a portion of the note to a third party.

Similar to the mortgage loans, FSNB services several of the notes receivable. The Company, and the participants in the notes, share in the risk of loss associated with the terms of the note with the borrower, based upon their ownership percentage in the note.  The Company has in place a monitoring system to provide Management with information regarding potential troubled loans. 

Analysis of Investment Operations

The following table reflects the Company’s net investment income for the periods ended December 31:

   
2018
   
2017
 
             
Fixed maturities
 
$
7,273,157
   
$
8,685,698
 
Equity securities
   
1,628,649
     
1,213,922
 
Trading securities
   
0
     
(1,061
)
Mortgage loans
   
1,234,115
     
1,191,865
 
Real estate
   
2,771,348
     
1,990,844
 
Notes receivable
   
979,742
     
1,322,675
 
Policy loans
   
646,993
     
664,116
 
Cash and cash equivalents
   
355,276
     
23,445
 
Short-term
   
18,159
     
1,263
 
Total consolidated investment income
   
14,907,439
     
15,092,767
 
Investment expenses
   
(3,704,771
)
   
(3,391,769
)
Consolidated net investment income
 
$
11,202,668
   
$
11,700,998
 

The following table presents the Company’s net realized investments gains (losses) and the change in net unrealized gains on available-for-sale investments for the periods ended December 31:

   
2018
   
2017
 
             
Realized gains on available-for-sale investments:
           
   Sales of fixed maturities
 
$
11,708,320
   
$
3,950,014
 
   Sales of equity securities (1)
   
0
     
2,902,278
 
   Sales of real estate
   
1,588,122
     
3,622,519
 
   Other
   
0
     
0
 
   Total realized gains
   
13,296,442
     
10,474,811
 
Realized losses on available-for-sale investments:
               
   Sales of fixed maturities
   
(956,365
)
   
(72,560
)
   Sales of equity securities (1)
   
0
     
0
 
   Sales of real estate
   
0
     
(522,965
)
   Other-than-temporary impairments
   
(300,000
)
   
(762,161
)
   Other
   
0
     
0
 
   Total realized losses
   
(1,256,365
)
   
(1,357,686
)
      Net realized investment gains (losses)
   
12,040,077
     
9,117,125
 
Change in fair value of equity securities: (1)
               
   Realized gains (losses) on equity securities sold during the period (1)
   
0
     
0
 
   Change in fair value of equity securities held at the end of the period
   
10,416,758
     
0
 
   Change in fair value of equity securities (1)
   
10,416,758
     
0
 
      Net investment gains (losses)
 
$
22,456,835
   
$
9,117,125
 
Change in net unrealized gains (losses) on available-for-sale investments included in other comprehensive income:
               
   Fixed maturities
 
$
(7,744,899
)
 
$
3,470,929
 
   Equity securities (1)
   
0
     
13,703,197
 
   Net increase (decrease)
 
$
(7,744,899
)
 
$
17,174,126
 

(1) Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale with unrealized gains and losses recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now recognized in net income. Prior periods have not been restated to conform to the current presentation. See Note 1.

Other-Than-Temporary Impairments

The Company regularly reviews its investment securities for factors that may indicate that a decline in fair value of an investment is other than temporary.  The factors considered by Management in its regular review to identify and recognize other-than-temporary impairment losses on fixed maturities include, but are not limited to: the length of time and extent to which the fair value has been less than cost; the Company’s intent to sell, or be required to sell, the debt security before the anticipated recovery of its remaining amortized cost basis; the financial condition and near-term prospects of the issuer; adverse changes in ratings announced by one or more rating agencies; subordinated credit support, whether the issuer of a debt security has remained current on principal and interest payments; current expected cash flows; whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions, including the effect of changes in market interest rates.  If the Company intends to sell a debt security, or it is more likely than not that it would be required to sell a debt security before the recovery of its amortized cost basis, the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date would be recognized by a charge to other-than-temporary losses in the Condensed Consolidated Statements of Operations.

Management regularly reviews its real estate portfolio in comparison to appraisal valuations and current market conditions for indications of other-than-temporary impairments. If a decline in value is judged by Management to be other-than-temporary, a loss is recognized by a charge to other-than-temporary impairment losses in the Consolidated Statements of Operations.

The other-than-temporary impairments recognized during 2017 and 2018 were taken as a result of Management's assessment and determination of value of the investments. The investments were written down to better reflect their current expected value.

Based on Management’s review of the investment portfolio, the Company recorded the following losses for other-than-temporary impairments in the Consolidated Statements of Operations for the periods ended December 31:

   
2018
   
2017
 
             
Other than temporary impairments:
           
Real estate
 
$
300,000
   
$
690,000
 
   Mortgage loans
   
0
     
72,161
 
Total other than temporary impairments
 
$
300,000
   
$
762,161
 

Investments on Deposit

The Company had investments with a fair value of $8,317,514 and $8,642,633 on deposit with various state insurance departments as of December 31, 2018 and 2017, respectively.

Note 3 – Fair Value Measurements

The Company measures its assets and liabilities recorded at fair value in the Consolidated Balance Sheets based on the framework set forth in the GAAP fair value accounting guidance.  The framework establishes a fair value hierarchy of three levels based upon the transparency of information used in measuring the fair value of assets or liabilities as of the measurement date.  The fair value hierarchy prioritizes the inputs in the valuation techniques used to measure fair value into three categories.

Level 1 – Valuation is based upon quoted prices for identical assets or liabilities in active markets that the Company is able to access.  Level 1 fair value is not subject to valuation adjustments.

Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets or quoted prices for identical or similar instruments in markets that are not active. In addition, the Company may use various valuation techniques or pricing models that use observable inputs to measure fair value.

Level 3 – Valuation is based upon unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability.

The Company determines the existence of an active market for an asset or liability based on its judgment as to whether transactions for the asset or liability occur in such market with sufficient frequency and volume to provide reliable pricing information.  If the Company concludes that there has been a significant decrease in the volume and level of activity for an investment in relation to normal market activity for such investment, adjustments to transactions and quoted prices are made to estimate fair value.

The inputs used in the valuation techniques employed by the Company are provided by nationally recognized pricing services, external investment managers and internal resources.  To assess these inputs, the Company’s review process includes, but is not