UTG INC

Previous wording

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ significantly from those estimates. The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability. The Company's critical accounting policies and the related estimates considered most significant by Management are disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Management has identified the accounting policies related to cost of insurance acquired, assumptions and judgments utilized in determining if declines in fair values of investments are other-than-temporary, and valuation methods for investments that are not actively traded as those, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Condensed Consolidated Financial Statements and this Management's Discussion and Analysis.

Current wording

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ significantly from those estimates. The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability. The Company's critical accounting policies and the related estimates considered most significant by Management are disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. Management has identified the accounting policies related to cost of insurance acquired, assumptions and judgments utilized in determining whether any decline in value is the result of a credit loss or other factors, and valuation methods for investments that are not actively traded as those, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Condensed Consolidated Financial Statements and this Management's Discussion and Analysis.

Previous wording

During the three-months ended March 31, 2024, there were no additions to or changes in the critical accounting policies disclosed in the 2023 Form 10-K.

Current wording

During the six-months ended June 30, 2024, there were no additions to or changes in the critical accounting policies disclosed in the 2023 Form 10-K.

Previous wording

On a consolidated basis, the Company reported net income attributable to common shareholders of approximately $9.1 million for the three-month period ended March 31, 2024.

Current wording

On a consolidated basis, the Company reported net income attributable to common shareholders of approximately $15.6 million for the six-month period ended June 30, 2024, and net income attributable to common shareholders of approximately $6.5 million for the three-month period ended June 30, 2024.

Previous wording

For the three-month period ended March 31, 2023, the Company reported a net loss attributable to common shareholders of approximately $(6.9) million.

Current wording

For the six-month period ended June 30, 2023, the Company reported a net loss attributable to common shareholders of approximately $(6.9) million, and net income attributable to common shareholders of approximately $80,000 for the three-month period ended June 30, 2023

Previous wording

For the three-month period ended March 31, 2024, the Company reported total revenues of approximately $16.6 million and for the same period in 2023 total revenues of approximately $(3.0) million.

Current wording

For the six-month period ended June 30, 2024, the Company reported total revenues of approximately $29.7 million and for the same period in 2023 total revenues of approximately $3.3 million. The Company reported total revenues of approximately $13.1 million and $6.4 million for the three-month period ended June 30, 2024 and 2023, respectively.

Previous wording

The variance in total revenue between first quarter 2023 and 2024 results is primarily the result of the change in the fair value of equity securities. The Company reported a year-to-date 2024 gain in the change in the fair value of equity securities of approximately $12.0 million and a first quarter 2023 loss of approximately $(8.6) million. The stock markets have experienced volatility in recent periods, which in general, should always be expected.

Current wording

The variance in total revenue between second quarter 2023 and 2024 results, and the year-to-date is primarily the result of the change in the fair value of equity securities. The Company reported a second quarter 2024 gain in the change in the fair value of equity securities of approximately $6.8 million and a year-to-date 2024 gain of approximately $18.9 million. In 2023, the Company reported a second quarter gain in the change in the fair value of equity securities of approximately $1.5 million and a year-to-date loss of approximately $(7.2) million. The stock markets have experienced volatility in recent periods, which in general, should always be expected.

Previous wording

The Company reported revenue before net investment gains (losses) of approximately $4.6 million and $4.9 million for the three-month-periods ended March 31, 2024 and 2023, respectively. The decline in the 2024 results, when compared to 2023, are the result of a decline in net investment income in the first quarter.

Current wording

The Company reported revenue before net investment gains (losses) of approximately $10.4 million and $9.5 million for the six-month-period ended 2024 and 2023, respectively. The Company reported $5.8 million and $4.6 million, respectively, of revenue before net investment gains (losses) for the second quarter of 2024 and 2023, respectively. The increase in the 2024 results, when compared to 2023, are the result of an increase in net investment income in the second quarter and year-to-date.

Previous wording

Net investment income represented 66% and 68% of the Company's revenue before net investment gains (losses) as of March 31, 2024 and 2023, respectively. When comparing current and prior year results, net investment income was comparable in a majority of the investment categories outside of the equity securities, mortgage loans, notes receivable and short term, cash and cash equivalents investment portfolios.

Current wording

Net investment income represented 71% and 69% of the Company's revenue before net investment gains (losses) as of June 30, 2024 and 2023, respectively. For the second quarter ended June 30, net investment income represented 74% and 71% of revenue before net investment gains (losses) for 2024 and 2023, respectively. When comparing current and prior year results, net investment income was comparable in a majority of the investment categories outside of the equity securities, mortgage loans, short term, and cash and cash equivalents investment portfolios.

Previous wording

Earnings from the equity securities investment portfolio represented approximately 9% and 20% of the total consolidated investment income reported by the Company during the three-month periods ended March 31, 2024 and 2023, respectively. Income from the equity securities portfolio was down approximately 56% or $540,000 when comparing first quarter 2024 and 2023 results. The majority of the decline in equity securities earnings is the result of lower dividends received on certain oil and gas equity holdings. Oil prices were high during much of 2022 and returned to more normalized levels during 2023 and has remained relatively stable into 2024. In early 2023, the dividends received on these investments remained elevated compared to recent history as the cash flows from the higher prices worked their way through the entities and out to investors through dividends. After first quarter 2023, the Company saw dividends from oil and gas equity investments decline with the change in the price of oil.

Current wording

Earnings from the equity securities investment portfolio represented approximately 12% and 15% of the total consolidated investment income reported by the Company during the six months ended June 30, 2024 and 2023, respectively. Income from the equity securities portfolio was up approximately 112% or $429,000 when comparing second quarter 2024 and 2023 results. This second quarter increase in equity securities earnings is the result of lease bonuses received for new drillings related to certain oil and gas equity holdings.

Previous wording

Mortgage loan investment income declined approximately 38%, or $130,000 when comparing first quarter 2024 to 2023. This is the result of a large pay-off on a mortgage loan in the latter part of 2023.

Current wording

Mortgage loan investment income declined approximately 38%, or $256,000 when comparing year-to-date 2024 to 2023. Second quarter earnings from mortgage loan investments were also down approximately 38%, or $127,000 when comparing 2024 to 2023. This is the result of two large payoffs on a mortgage loan in the first and second quarters of 2023.

Previous wording

The earnings reported by the cash and short-term investments represented 14% and 5% of the total consolidated investment income reported by the Company during the three-month periods ended March 31, 2024 and 2023, respectively. The increase in earnings in this category is the result of a combination of higher cash and short-term holdings in 2024 and from increased interest rates received from banks and other deposit institutions in 2024 compared to 2023.

Current wording

The earnings reported by the cash and short term investments represented 13% and 5% of the total consolidated investment income reported by the Company during the six months ended June 30, 2024 and 2023, respectively. Second quarter 2024 and 2023 earnings from cash and short term investments represented approximately 12% and 6% of the total investment income reported by the Company, respectively. The increase in earnings in this category is the result of a combination of higher cash and short term holdings in 2024 and from increased interest rates received from banks and other deposit institutions in 2024 compared to 2023.

Previous wording

The sale of one small equity security holding represents all the realized investment gains from equity securities during 2023. During the first quarter of 2024, the Company did not sell any of its equity holdings.

Current wording

The sale of two equity securities holdings represents approximately $181,000 of the realized investment gains from equity securities during 2023. In 2024, the sale of three equity securities represents all the realized investment gains from equity securities.

Previous wording

In first quarter 2024, the Company reported realized gains on real estate of $37,461. This was the result of the sale of two smaller parcels of property located in Kentucky. The 2023 real estate gains are the result of sales of real estate in Kentucky that included a land parcel that produced a gain of approximately $480,000.

Current wording

In 2024, the Company reported realized gains on real estate of $166,000. This was the result of the sale of several smaller parcels of property located in Kentucky resulting in gains of approximately $101,000, and the sale of one smaller parcel of property located in Illinois that produced a gain of approximately $65,000. The 2023 real estate gains are the result of sales of real estate in Kentucky that included a land parcel that produced a gain of approximately $480,000.

Previous wording

The Company reported a change in the fair value of equity securities of approximately $12.0 million and $(8.6) million for the threee-month periods ended March 31, 2024, and 2023, respectively. This line item is material to the results reported in the Condensed Consolidated Statements of Operations, and this line item can also be extremely volatile, as it reflects changes in the stock market. While these results can be material and volatile, most of the equity holdings of the Company were acquired with a long-term view, thus making these intermediate changes in value of less concern to Management. Management monitors its equity holdings looking more at the specific entity and market it is in relative to performance and less to changes due to general market swings that occur over the holding period of the investment.

Current wording

The Company reported a year-to-date 2024 change in the fair value of equity securities of approximately $18.9 million, and a second quarter 2024 gain of approximately $6.8 million. In 2023, The Company reported a year-to-date change in the fair value of equity securities of approximately $(7.2) million, and a second quarter gain of approximately $1.5 million. This line item is material to the results reported in the Condensed Consolidated Statements of Operations, and this line item can also be extremely volatile, as it reflects changes in the stock market. While these results can be material and volatile, most of the equity holdings of the Company were acquired with a long-term view, thus making these intermediate changes in value of less concern to Management. Management monitors its equity holdings looking more at the specific entity and market it is in relative to performance and less to changes due to general market swings that occur over the holding period of the investment.

Previous wording

Equity investments primarily in the oil and gas area represent almost all the unrealized gains reported in 2024 and unrealized losses reported in 2023. For 2023, most all of the negative results occurred in the first quarter. Since that time, we started to recognize a slight rebound, and it appears to be the result of market stabilization. Periodic pull backs and rallies are expected by Management. Management believes its current equity investments continue to be solid investments for the Company and have further growth potential; however, changes in market conditions could cause volatility in market prices.

Current wording

In 2023, the Company saw negative results in its equity investments. However, most all the negative results occurred in the first quarter of 2023. Since that time, we reported a slight rebound, and it appears to be the result of market stabilization. Equity investments primarily in the oil and gas area represent almost all the unrealized gains reported in 2024 and unrealized losses reported in 2023. Periodic pull backs and rallies are expected by management. Management believes its current equity investments continue to be solid investments for the Company and have further growth potential; however, changes in market conditions could cause volatility in market prices.

Previous wording

The Company reported total benefits and other expenses of approximately $5.0 million for the three-month period ended March 31, 2024, a decrease of approximately 13% from the same period in 2023. Benefits, claims and settlement expenses represented approximately 56% and 58% of the Company's total expenses for the three-month periods ended March 31, 2024 and 2023, respectively. The other major expense category of the Company is operating expenses, which represented approximately 41% and 39% of the Company's total expenses for the three-month periods ended March 31, 2024 and 2023, respectively.

Current wording

The Company reported total benefits and other expenses of approximately $10 million for the six month period ended June 30, 2024, a decrease of approximately 16% from the same period in 2023. Benefits, claims and settlement expenses represented approximately 55% and 61% of the Company's total expenses for the six month periods ended June 30, 2024 and 2023, respectively. The other major expense category of the Company is operating expenses, which represented approximately 42% and 36% of the Company's total expenses for the six month periods ended June 30, 2024 and 2023, respectively.

Previous wording

Life benefits, claims and settlement expenses, net of reinsurance benefits and claims were down approximately 17% when comparing the three-month periods ended March 31, 2024, and 2023. Policy claims net of reinsurance were approximately $557,000 less in the first quarter 2024 compared to first quarter 2023. Policy claims vary from period to period and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.

Current wording

Life benefits, claims and settlement expenses, net of reinsurance benefits and claims were down approximately 24% when comparing the six months ended June 30, 2024, and 2023. When comparing second quarter 2024 and 2023 results, life benefits, claims and settlement expenses were down approximately 31%. Policy claims vary from period to period and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.

Previous wording

Operating expenses decreased approximately 8% in the three-month period ended March 31, 2024 as compared to the same period in 2023. There are two expense items that comprise the majority of the decrease in operating expenses, salary and charitable contributions. Salary expense was approximately $77,000 less in first quarter 2024 compared to 2023 and charitable expense was $85,000 less in first quarter 2024 compared to 2023. Charitable expense fluctuates based on reported taxable income of the Company. Expenses in the remaining categories are comparable between years.

Current wording

Operating expenses decreased approximately 2% in the six month period ended June 30, 2024 as compared to the same period in 2023. There is one expense item that comprises the majority of the decrease in operating expenses, charitable contributions. Charitable expense was approximately $91,000 less in the six month period ended June 30, 2024 as compared to the same period in 2023. Charitable expense fluctuates based on reported taxable income of the Company. Expenses in the remaining categories are comparable between years.

Previous wording

The following table reflects, by investment category, the investments held by the Company:

Current wording

The following table reflects, by investment category, the investments held by the Company as of June 30, 2024, and December 31, 2023:

Previous wording

The Company’s total investments represented 83% of the Company’s total assets as of March 31, 2024 and December 31, 2023, respectively. Fixed maturities and equity securities consistently represented a substantial portion, 80% and 77%, of the total investments during 2024 and 2023, respectively. The overall investment mix, as a percentage of total investments, remained fairly consistent when comparing the respective investments held as of March 31, 2024 and December 31, 2023.

Current wording

The Company’s total investments represented 85% and 83% of the Company’s total assets as of June 30, 2024, and December 31, 2023, respectively. Fixed maturities and equity securities consistently represented a substantial portion, 75% and 72%, of the total investments during 2024 and 2023, respectively. The overall investment mix, as a percentage of total investments, remained fairly consistent when comparing the respective investments held as of June 30, 2024 and December 31, 2023.

Previous wording

As of March 31, 2024, 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 $(1.1) million and $2.2 million as of March 31, 2024 and December 31, 2023, respectively. The variance in the net unrealized gains and losses is the result of normal market fluctuations mainly related to changes in interest rates in the marketplace.

Current wording

As of June 30, 2024, 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 $(1.7) million and $865,000 as of June 30, 2024 and 2023, respectively. The variance in the net unrealized gains and losses is the result of normal market fluctuations mainly related to changes in interest rates in the marketplace.

Previous wording

Total shareholders' equity increased by approximately 5% as of March 31, 2024, compared to December 31, 2023. The increase is mainly attributable to an increase in retained earnings, which is the result of the current year net income reported by the Company partially offset by the decline in market value of the available for sale fixed maturities portfolio.

Current wording

Total shareholders' equity decreased by approximately 9% as of June 30, 2024, compared to December 31, 2023. The increase is mainly attributable to an increase in retained earnings, which is the result of the current year net income reported by the Company partially offset by the decline in market value of the available for sale fixed maturities portfolio.

Previous wording

UTG is a holding company that has no day-to-day operations of its own. Cash flows from UTG’s insurance subsidiary, UG, are used to pay costs associated with maintaining the Company in good standing with states in which it does business and purchasing outstanding shares of UTG stock. UTG's cash flow is dependent on management fees received from its insurance subsidiary, stockholder dividends from its subsidiary and earnings received on cash balances. As of March 31, 2024, and December 31, 2023, substantially all of the consolidated shareholders’ equity represents net assets of its subsidiaries. As of March 31, 2024, the Parent company has received no dividends from its insurance subsidiary. 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 6 – Shareholders’ Equity in the Notes to the Condensed 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.

Current wording

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 June 30, 2024, and December 31, 2023, substantially all of the consolidated shareholders’ equity represents net assets of its subsidiaries. As of June 30, 2024, the Parent company has received no dividends from its insurance subsidiary. 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 6 – 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.

Previous wording

During October of 2023, the Federal Home Loan Bank approved the renewal of UG’s Cash Management Advance Application (“CMA”). The CMA is a source of overnight liquidity utilized to address the day-to-day cash needs of a Company. The CMA gives the company the option of selecting a variable rate of interest for up to 90 days or a fixed rate for a maximum of 30 days. The variable rate CMA is prepayable at any time without a fee, while the fixed CMA is not prepayable prior to maturity. The Company has pledged bonds with a collateral lendable value of $19.7 million as of March 31, 2024. During the fourth quarter of 2023, the Company borrowed $19 million and planned to utilize the funds for investing activities. During the first quarter of 2024, the Company repaid the entire outstanding principal balance.

Current wording

During October of 2023, the Federal Home Loan Bank approved the renewal of UG’s Cash Management Advance Application (“CMA”). The CMA is a source of overnight liquidity utilized to address the day-to-day cash needs of a Company. The CMA gives the company the option of selecting a variable rate of interest for up to 90 days or a fixed rate for a maximum of 30 days. The variable rate CMA is prepayable at any time without a fee, while the fixed CMA is not prepayable prior to maturity. The Company has pledged bonds with a collateral lendable value of $19.8 million as of June 30, 2024. During the fourth quarter of 2023, the Company borrowed $19 million and planned to utilize the funds for investing activities. During the first quarter of 2024, the Company repaid the entire outstanding principal balance.

Previous wording

Cash used in operating activities was approximately $2 million in 2024 and cash provided by operating activities was approximately $2 million in 2023. 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.

Current wording

Cash used in operating activities was approximately $1.4 million in 2024 and cash used by operating activities was approximately $6.1 million in 2023. 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 with the exception of fluctuations in reinsurance premiums. Management anticipates future cash flows from operations to remain similar to historic trends.

Previous wording

During 2024, the Company’s investing activities provided net cash of approximately $20.7 million and used net cash of approximately $58,000 in 2023. The Company recognized proceeds of approximately $26.0 million and $14.1 million from investments sold and matured in 2024 and 2023, respectively. The Company used approximately $5.3 million and $14.2 million to acquire investments during 2024 and 2023, respectively. The net cash provided by or used in 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.

Current wording

During 2024, the Company’s investing activities provided net cash of approximately $15.2 million and provided net cash of approximately $4.1 million in 2023. The Company recognized proceeds of approximately $38.2 million and $27.3 million from investments sold and matured in 2024 and 2023, respectively. The Company used approximately $23.0 million and $23.2 million to acquire investments during 2024 and 2023, respectively. The net cash provided by or used in 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.

Previous wording

Net cash used in financing activities was approximately $19 million during the first quarter of 2024 and 2023. As of March 31, 2024 and 2023, the Company had no debt outstanding with third parties.

Current wording

Net cash used in financing activities was approximately $19.4 and $19.5 million during 2024 and 2023, respectively. As of June 30, 2024 and 2023, the Company had no debt outstanding with third parties.

Previous wording

The Company had cash and cash equivalents of approximately $40.8 million and $41.2 million as of March 31, 2024 and December 31, 2023, respectively. The Company has a portfolio of marketable fixed maturity securities that could be sold, if an unexpected event were to occur. These securities had a fair value of approximately $99.5 million at March 31, 2024. 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.

Current wording

The Company had cash and cash equivalents of approximately $35.5 million and $41.2 million as of June 30, 2024 and December 31, 2023, respectively. The Company has a portfolio of marketable fixed maturity securities that could be sold, if an unexpected event were to occur. These securities had a fair value of approximately $96.1 million at June 30, 2024. 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.