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 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.

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, 2024. 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.

Previous wording

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

Current wording

During the three-months ended March 31, 2025, there were no additions to or changes in the critical accounting policies disclosed in the 2024 Form 10-K.

Previous wording

On a consolidated basis, the Company reported net income attributable to common shareholders of approximately $41.9 million for the nine-month period ended September 30, 2024, and net income attributable to common shareholders of approximately $26.3 million for the three-month period ended September 30, 2024.

Current wording

On a consolidated basis, the Company reported net income attributable to common shareholders of approximately $12.8 and $9.2 million for the three-month period ended March 31, 2025 and 2024.

Previous wording

For the nine-month period ended September 30, 2024, the Company reported total revenues of approximately $68.7 million and for the same period in 2023 total revenues of approximately $16.0 million. The Company reported total revenues of approximately $39.0 million and $12.7 million for the three-month period ended September 30, 2024 and 2023, respectively.

Current wording

For the three-month period ended March 31, 2025, the Company reported total revenues of approximately $21.9 million and for the same period in 2024 total revenues of approximately $16.9 million.

Previous wording

The variance in total revenue between third 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 third quarter 2024 gain in the change in the fair value of equity securities of approximately $32.3 million and a year-to-date 2024 gain of approximately $51.2 million. In 2023, the Company reported a third quarter loss in the change in the fair value of equity securities of approximately $(23,000) 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.

Current wording

The variance in total revenue between first quarter 2025 and 2024 is primarily the result of the change in the fair value of equity securities. The Company reported a first quarter 2025 gain in the change in the fair value of equity securities of approximately $16.3 million. In 2024, the Company reported a first quarter gain in the change in the fair value of equity securities of approximately $12.0 million. The stock markets have experienced volatility in recent periods, which in general, should always be expected.

Previous wording

Net investment income represented 71% and 70% of the Company's revenue before net investment gains (losses) as of 2024 and 2023, respectively. For the third quarter ended September 30, net investment income represented 72% and 72% 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.

Current wording

Net investment income represented 67% and 66% of the Company's revenue before net investment gains (losses) as of March 31, 2025 and 2024, respectively. When comparing current and prior year results, net investment income was comparable in most of the investment categories outside of the short term, cash, and cash equivalents investment portfolios.

Previous wording

Beginning in March 2022 and ending in July 2023, the Federal Open Market Committee (“FOMC”) aggressively raised interest rates to fight inflation. During this time period, the interest rate environment experienced eleven rate increases totaling 5.25%, including four increases during the first part of 2023. While these actions had a negative impact on some of our investments currently owned, this has also allowed for better yields on cash balances and recent investments acquired as investments mature. In September 2024, the FOMC declined the interest rate 0.50% making the current rate 4.75%. The Company anticipates a similar decline in earnings on cash balances and any new investments that are acquired as investments mature.

Current wording

In the second half of 2024, the Federal Open Market Committee (“FOMC”) cut the interest rate 3 times for a total of 1% making the current rate 4.50%. The Company anticipates a similar decline in earnings on cash balances and any new investments that are acquired as investments mature.

Previous wording

The earnings reported by the cash and short term investments represented 12% and 6% of the total consolidated investment income reported by the Company during the nine months ended September 30, 2024 and 2023, respectively. Third quarter 2024 and 2023 earnings from cash and short term investments represented approximately 11% and 8% 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 due to FOMC rate changes. With the September 2024 rate decline of 0.50%, the Company anticipates experiencing a similar decline in earnings on cash balances going forward.

Current wording

The earnings reported by the cash and short term investments represented 10% and 14% of the total consolidated investment income reported by the Company during the three months ended March 31, 2025 and 2024, respectively. The decrease in earnings in this category is the result of a combination of higher cash and short term holdings in 2024 and from decreased interest rates received from banks and other deposit institutions due to FOMC rate changes. With the 2024 rate declines of 1%, the Company anticipates experiencing a similar decline in earnings on cash balances going forward.

Previous wording

The sale of three equity securities holdings represents approximately $297,000 of the realized investment gains from equity securities during 2023. In 2024, the sale of four equity securities represents all the realized investment gains from equity securities.

Current wording

In 2025, the sale of one equity security represents all the realized investment gains from equity securities.

Previous 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 producing realized gains of approximately $760,000. Additionally, during third quarter 2023, the Company sold a large land parcel in West Virginia realizing a gain of $7.6 million.

Current wording

In 2024, the Company reported realized gains on real estate of $37,461. This was the result of the sale of several smaller parcels of property located in Kentucky.

Previous wording

The Company reported a year-to-date 2024 change in the fair value of equity securities of approximately $51.2 million, and a third quarter 2024 gain of approximately $32.3 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 third quarter loss of approximately $(23,403). 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 2025 change in the fair value of equity securities of approximately $16.3 million. In 2024, The Company reported a year-to-date change in the fair value of equity securities of approximately $12.4 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

In 2023, the Company saw negative results in its equity investments. However, most all the negative results occurred in the first quarter of 2023. 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.

Current wording

In 2025 and 2024, the Company saw positive results in its equity investments. Equity investments primarily in the oil and gas area represent almost all the unrealized gains reported in 2025 and 2024. 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 $15.7 million for the nine month period ended September 30, 2024, a decrease of approximately 16% from the same period in 2023. Benefits, claims and settlement expenses represented approximately 58% of the Company's total expenses for the nine month periods ended September 30, 2024 and 2023, respectively. The other major expense category of the Company is operating expenses, which represented approximately 39% and 40% of the Company's total expenses for the nine month periods ended September 30, 2024 and 2023, respectively.

Current wording

The Company reported total benefits and other expenses of approximately $5.4 million for the the three month period ended March 31, 2025, an increase of approximately 6% from the same period in 2024. Benefits, claims and settlement expenses represented approximately 58% and 56% of the Company's total expenses for the three month periods ended March 31, 2025 and 2024, respectively. The other major expense category of the Company is operating expenses, which represented approximately 40% and 41% of the Company's total expenses for the three month periods ended March 31, 2025 and 2024, respectively.

Previous wording

Life benefits, claims and settlement expenses, net of reinsurance benefits and claims were down approximately 16% when comparing the nine months ended September 30, 2024, and 2023. When comparing third quarter 2024 and 2023 results, life benefits, claims and settlement expenses were down approximately 1%. 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 up approximately 11% when comparing the three months ended March 31, 2025 and 2024. 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 17% in the nine month period ended September 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 $791,000 less in the nine month period ended September 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.

Current wording

Operating expenses increased approximately 2% in the three month period ended March 31, 2025 as compared to the same period in 2024. Although it is a minor increase, there is one expense item that is attributable to the increase in operating expenses, charitable contributions. Charitable expense was approximately $85,000 more in the three month period ended March 31, 2025 as compared to the same period in 2024. Charitable expense fluctuates based on reported taxable income of the Company. Expenses in the remaining categories are comparable between years.

Previous wording

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.

Current wording

Net amortization of cost of insurance acquired decreased approximately 3% 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.

Previous wording

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

Current wording

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

Previous wording

The Company’s total investments represented 85% and 83% of the Company’s total assets as of September 30, 2024, and December 31, 2023, respectively. Fixed maturities and equity securities consistently represented a substantial portion, 77% 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 September 30, 2024 and December 31, 2023.

Current wording

The Company’s total investments represented 86% and 84% of the Company’s total assets as of March 31, 2025, and December 31, 2024, respectively. Fixed maturities and equity securities consistently represented a substantial portion, 83%, of the total investments during 2025 and 2024, respectively. The overall investment mix, as a percentage of total investments, remained fairly consistent when comparing the respective investments held as of March 31, 2025 and December 31, 2024.

Previous wording

As of September 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 $1.3 million and $(2.0) million as of September 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.

Current wording

As of March 31, 2025, 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 $729,000 and ($620,000) as of March 31, 2025 and 2024, 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

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.

Current wording

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.

Previous wording

Total shareholders' equity increased by approximately 26.8% as of September 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 and by the increase in market value of the available for sale fixed maturities portfolio.

Current wording

Total shareholders' equity increased by approximately 6.4% as of March 31, 2025, compared to December 31, 2024. 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 and by the increase in market value of the available for sale fixed maturities portfolio.

Previous wording

During October of 2024, 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 $20.2 million as of September 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.

Current wording

During October of 2024, 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 $21.6 million as of March 31, 2025. The Company has no outstanding borrowings on the CMA at March 31, 2025 nor had any borrowing activity during 2025.

Previous wording

Cash used in operating activities was approximately $552,000 in 2024 and cash used by operating activities was approximately $9.7 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.

Current wording

Cash used in operating activities was approximately $3.3 million in 2025 and cash used by operating activities was approximately $2.0 million in 2024. 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 $15.2 million and provided net cash of approximately $11.9 million in 2023. The Company recognized proceeds of approximately $45.5 million and $59.6 million from investments sold and matured in 2024 and 2023, respectively. The Company used approximately $30.3 million and $47.6 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 2025, the Company’s investing activities used net cash of approximately $5.0 million and provided net cash of approximately $20.7 million in 2024. The Company recognized proceeds of approximately $6.8 million and $26.0 million from investments sold and matured in 2025 and 2024, respectively. The Company used approximately $11.8 million and $5.3 million to acquire investments during 2025 and 2024, 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 $19.8 and $19.9 million during 2024 and 2023, respectively. As of September 30, 2024 and 2023, the Company had no debt outstanding with third parties.

Current wording

Net cash used in financing activities was approximately $229,000 and $19.0 million during 2025 and 2024, respectively. As of March 31, 2025 and 2024, the Company had no debt outstanding with third parties.

Previous wording

The Company had cash and cash equivalents of approximately $36.0 million and $41.2 million as of September 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 $99.9 million at September 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.

Current wording

The Company had cash and cash equivalents of approximately $36.8 million and $45.3 million as of March 31, 2025 and December 31, 2024, 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 $74.3 million at March 31, 2025. 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.