UTG INC - Annual Report: 2022 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 FORM 10-K

(Mark One)

Commission File Number 000-16867

Registrant’s telephone number, including area code: (217) 241-6300

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

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 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 has filed a report on and attestation to its management’s assessment of the effectiveness of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.   ☐   

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to 240.10D-1(b). ☐    

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, 2022, shares of the Registrant’s common stock held by non-affiliates (based upon the price of the last sale of $26.50 per share), had an aggregate market value of approximately $24,576,630.

At January 31, 2023 the Registrant had 3,190,306 outstanding shares of common stock, stated value $.001 per share.

Documents incorporated by reference: None

UTG, Inc.

Form 10-K

Year Ended December 31, 2022

TABLE OF CONTENTS

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

General

The Holding Company - UTG, Inc. (the “Registrant”, “Company” or “UTG”) is an insurance holding company incorporated in the state of Delaware in 2005 and headquartered in Stanford, KY. The Company’s principal subsidiary is Universal Guaranty Life Insurance Company (“UG”). The Registrant and its primary subsidiary have only one significant segment, insurance.

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.  The Company may explore supplemental sources of income in the future. The cash outlays of the Company mainly consist of operational costs and the costs of repurchasing Company common stock.

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.

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, 2022, Mr. Correll owns or controls directly and indirectly approximately 65% of UTG’s outstanding stock.

At December 31, 2022, the Company had consolidated assets of $448 million, consolidated liabilities of $290 million and total shareholders’ equity of $158 million. The Company’s consolidated liabilities include policyholder liabilities and accruals of $249 million.

The Company’s principal executive office is located at 205 North Depot Street, Stanford, Kentucky 40484. The Company’s telephone number is 217-241-6300.

The Insurance Company - Universal Guaranty Life Insurance Company is an Ohio domiciled life insurance company and is licensed in 37 states.  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 Insurance Company’s operations are conducted through its administrative office located in Stanford, Kentucky.

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.

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.

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 2017 CSO 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.

Business Strategy

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 products 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.

Annuity - The annuity product is a 5-year, single premium product. The product offers a guaranteed minimum rate of 1% and the rate can be adjusted at any time. The maximum surrender charge is 5% and subject to waiver for certain qualifying events. The annuity product offers a 10% free withdrawal each year beginning in year 2.

Business Concentrations

The Company maintains cash balances in financial institutions that at times may exceed federally insured limits. The Company maintains its primary operating cash accounts with First Southern National Bank, an affiliate of the largest shareholder of UTG, Mr. Jesse T. Correll, the Company’s CEO and Chairman. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.

Because UG serves primarily individuals located in three states, the ability of our customers to pay their insurance premiums is impacted by the economic conditions in these areas.  As of December 31, 2022 and 2021, respectively, approximately 50% and 51% of the Company’s total direct premium was collected from Illinois, Ohio, and Texas. Thus, results of operations are heavily dependent upon the strength of these economies.

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 Company owns a variety of investments associated with the oil and gas industry.  These investments represented approximately 31% and 22% of the Company’s total invested assets at December 31, 2022 and 2021, respectively.

The Company’s investment real estate portfolio includes ownership in oil and gas royalties. As of December 31, 2022 and 2021, investments in oil and gas royalties represented 42% and 43%, respectively, of the total investment real estate portfolio.

See Note 13 - Concentrations of the Consolidated Financial Statements for additional disclosures regarding concentrations that have been identified by the Company.

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 provides TPA services to insurance companies seeking business process outsourcing solutions. Revenue generated from TPA services is considered insignificant to the overall financial statements.

Human Capital

As of December 31, 2022, UTG and its subsidiaries had 40 full-time employees located in Kentucky and Illinois.  These individuals are further supported by certain employees of First Southern National Bank (an affiliated entity) through a shared services arrangement.  Under this arrangement, the two entities utilize the services of the other’s staff in certain instances for the betterment of both entities.  Personnel within departments such as accounting, human resources and information technology are shared between the entities.  UTG’s operations are headquartered in Stanford, Kentucky. The Company respects, values and invites diversity in our team members, customers, suppliers, and community.  We seek to recognize the unique contribution each individual brings to our Company, and we are fully committed to supporting a rich culture of diversity as a cornerstone to our success.  The Company strives to attract, develop, and retain talented individuals.  To attract such individuals, we provide professional and personal development opportunities to team members. In addition, we seek to improve retention, development, and job satisfaction of team members from diverse groups by providing career skills training, peer mentoring and opportunities to interact with senior leaders.  We encourage our team members to take initiative, accept challenges and achieve goals, all of which enables our team to work efficiently while providing excellent customer service which supports the Company’s strong performance.

UTG offers competitive compensation and benefits.  Our pay for performance compensation philosophy is designed to reward employees for achievement and to align employee interests with the Company’s long-term growth.  The Company’s benefits program includes health care, wellness initiatives, retirement offerings and paid time off.

Workplace health and safety is a vital aspect of running our business.  We believe that safety must always be an integral part of any function or service performed, and the protection of our employees and visitors is our utmost priority.  We have a business continuity plan in place that allows us to respond to threats to our health and safety, while ensuring that we can continue to provide quality service to our clients and shareholders at all times.

Code of Ethics

The Board of Directors has adopted a code of ethics for directors, officers, and financial personnel.

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.

Statutory Restrictions – Restrictions exist on the flow of funds to UTG from its insurance subsidiary.  Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital and surplus. UG is required to maintain minimum statutory surplus of $2,500,000. At December 31, 2022, substantially all of the consolidated shareholders’ equity represents net assets of UTG’s subsidiaries.

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.

Stock Repurchase Program

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 March of 2022, the Board of Directors of UTG authorized the repurchase of up to an additional $2 million of UTG’s common stock, for a total repurchase of $22 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 2022, the Company repurchased 24,308 shares through the stock repurchase program for $685,808. Through December 31, 2022, UTG has spent $19,309,437 in the acquisition of 1,326,213 shares under this program.

Transactions with Affiliates

The articles of incorporation of UG contain the following language under item 12 relative to related party transactions:

A director shall not be disqualified from-dealing with or contracting with the corporation as vendor, purchaser; employee, agent or otherwise; nor, in the absence of fraud, shall any transaction or contract or act of this corporation be void or in any way affected or invalidated by the fact that any director or any firm of which any director is a member or any corporation of which any director is a shareholder, director or officer is in any way interested in such transaction or contract or act, provided the fact that such director or such firm or such corporation so interested shall be disclosed or shall be known to the Board of Directors or such members thereof as shall be present at any meeting of the Board of Directors at which action upon any such contract or transaction or act shall be taken: nor shall any such director be accountable or responsible to the company for or in respect to such transaction or contract or act of. this corporation or for any gains or profits realized by him by reason of the fact that he or any firm of which he is a member or any corporation of which he is a shareholder, director or officer is interested in such action or contract; and any such director may be counted in determining the existence of a quorum of any meeting of the Board of Directors of the company which shall authorize or take action in respect to any such contract or transaction or act and may vote thereat to authorize, ratify, or approve any such contract or transaction or act, with like force and effect as if he or any firm of which he is a member or any corporation of which he is a shareholder, director or officer were not interested in such transaction or contract or act.

Note 11 – Related Party Transactions of the Consolidated Financial Statements provides disclosures regarding transactions with related parties.

Anti-Money Laundering Laws

A series of laws and regulations beginning with the Bank Secrecy Act of 1970 require financial institutions to prevent, detect, and report illicit or illegal financial activities to the federal government to prevent money laundering, international drug trafficking, and terrorism. Under the US PATRIOT Act of 2001, financial institutions are subject to prohibitions against specified financial transactions and account relationships, requirements regarding the Customer Identification Program, as well as enhanced due diligence and “know your customer” standards in their dealings with high-risk customers, foreign financial institutions, and foreign individuals and entities. These rules also mandate a variety of record keeping, reporting and employee training requirements.

Data Security

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.  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.

Available Information

The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports with the Securities and Exchange Commission (“SEC”) pursuant to section 13(a) or 15(d) of the Securities and Exchange Act of 1934.

The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC on its website at www.sec.gov. The Company’s website is www.utgins.com.

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 owned an office complex in Springfield, Illinois, which housed a portion of the insurance operations. The Company sold this office complex during the fourth quarter of 2021. The employees located in Illinois now work from home.

The Company rents a portion of the first floor and second floor of an 8,000 square foot, two-story office building, located in Stanford, KY. The first floor of the building is occupied by UTG and FSNB employees that are included in the shared services agreement between the two entities. The second floor is occupied by the customer service call centers for both UTG and FSNB employees. The building is owned by FSNB and UTG pays $2,000 per month in rent to FSNB for the portion of the building occupied by UTG employees. The Company paid rent of $24,000 to FSNB in 2022 and 2021.

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.

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, 2023 there were 4,321 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, 2022 and total repurchases:

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 March of 2022, the Board of Directors of UTG authorized the repurchase of up to an additional $2 million of UTG’s common stock, for a total repurchase of $22 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 2022, the Company repurchased 24,308 shares through the stock repurchase program for $685,808. Through December 31, 2022, UTG has spent $19,309,437 in the acquisition of 1,326,213 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. Reserved

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, 2022 and 2021. 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.

On February 21, 2023 Mr. James Rousey submitted a letter of resignation stating his desire to retire. In this regard, he retired as President of UTG, Inc. and its subsidiary, Universal Guaranty Life Insurance Company as well as his position as a Director of both entities. This was effective as of the date of the letter. The Board of Directors of UTG, Inc. and Universal Guaranty Life Insurance Company formally accepted the resignation letter on February 22, 2023. Mr. Jesse Correll, CEO and Chairman of the Board of the companies, will assume the title of President initially. This information was filed on Form 8-K with the SEC on February 24, 2023.

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, notes receivable and real estate to provide funding of future policy contractual obligations.  The Company’s fixed maturities are classified as available-for-sale.  Available-for-sale fixed maturity investments are carried at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) in the Consolidated Balance Sheets.

Equity securities reported at fair value, which include common and preferred stocks, are reported at fair value with unrealized gains and losses reported as a component of net income (loss).

Equity securities reported at cost 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 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.

Real estate held-for-investment is stated at cost less accumulated depreciation. Depreciation is computed on a straight-line-basis for financial reporting purposes using estimated useful lives of 3 to 30 years. The Company periodically reviews its real estate held-for-investment for impairment and test for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. Real estate for which the Company commits to a plan to sell within one year and actively markets in its current condition, for a reasonable price, in comparison to its estimated fair value, is classified as held-for-sale. Real estate held-for-sale is stated at lower of depreciated cost or estimated fair value less expected disposition costs and is not depreciated.

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.

The Company’s trading securities and equity 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.

While the available-for-sale fixed maturity securities are generally expected to be held to maturity, they are classified as available-for-sale and are sold periodically to manage risk. Although all of the fixed maturity securities are 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.

Impairment of Investments – The Company continually monitors the investment portfolio for investments that have become impaired; where fair value has declined below carrying value.  While the value of the investments in the Company’s portfolio continuously fluctuates 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 Taxes – The 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.

Results of Operations

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19).  The pandemic significantly impacted the economic conditions in the U.S. and globally, accelerating during the first half of March 2020, as federal, state, and local governments reacted to the public health crisis, creating significant uncertainties in the U.S. economy.  Over the ensuing months, the economy slowly began to return to a pre-pandemic norm.  At this time, it appears the pandemic is behind us, though there continues to be mutating variants of the virus and regional outbreaks around the world.  The impact of this seems to have been lessened by vaccines and immunity build up.  During this time the Company did not experience any significant slow-down in activities, however, the Company did see an increase in mortality experience.  The Company reported 138 Covid claims totaling $1,246,373 in 2020, 166 Covid claims totaling $1,293,625 in 2021 and 80 Covid claims totaling $1,229,875 in 2022.  The latter part of 2022 saw a significant decline in Covid claims.  While we believe our mortality experience has returned to pre-pandemic norms, we cannot be absolutely certain at this time.

On a consolidated basis, the Company had net income attributable to common shareholders of approximately $34.3 million and $9.7 million in 2022 and 2021, respectively.  In 2022, income before income taxes was approximately $44 million compared to $11.8 million in 2021.  Total revenues were approximately $70 million in 2022 and $35.6 million in 2021.

One-time events, primarily reflected in realized gains, comprise a substantial portion of the net income and revenue reported by the Company during 2022 and 2021.  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.

The Company reported a change in fair value of equity securities of approximately $33.7 million and $14.1 million for the years ended December 31, 2022 and 2021, respectively.  This line item is material to the results reported in the Consolidated Statements of Operations.  This line item can also be extremely volatile, reflecting changes in the stock market.  These results can be material and volatile, most of the equity holdings of the Company were acquired with a long-term view, thus making these intermediate changes in value of less concern to Management.  Management monitors its equity holdings looking more at the specific entity and market it is in relative to performance and less to changes due to general market swings that occur over the holding period of the investment.

While the Company has seen significant positive results on its equity investments in the last two years, a pull back or downward market adjustment could slow these gains or even result in losses in future periods.  Management believes its current equity investments continue to be solid investments for the Company and have further growth potential; however, changes in market conditions could cause volatility in market prices.

Total benefits and other expenses paid in 2022 were approximately $25.8 million compared to $23.8 million in 2021.

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.

Revenues

Premiums and policy fee revenues, net of reinsurance premiums and policy fees, declined approximately 11% when comparing 2022 to 2021.  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 2022 and 2021 was approximately 96.8% and 95.7%, respectively.  Persistency is a measure of insurance in-force retained in relation to the previous year. A positive impact on premium income is the consistency of the lapse percentage. Persistency of the business has been consistent over the last several years. The lapse percentages were 3.2% and 4.3% for 2022 and 2021, respectively.

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

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

Net investment income represented approximately 30% and 25% of the Company’s total revenues as of December 31, 2022 and 2021, respectively. Income from the fixed maturities, equity securities, and real estate portfolios represented 87% and 76%, respectively, of the gross investment income reported by the Company for 2022 and 2021. Income from the fixed maturities portfolio declined in 2022 as compared to 2021. The equity securities portfolio and the real estate portfolio performed very well in 2022, representing 71% of the total consolidated investment income.

In March 2020, with the onset of the pandemic in America, financial markets became jittery experiencing a significant drop in the major market indices. In response, the Federal Reserve dropped interest rates to near zero. This action resulted in a drop in all other interest rates in the marketplace. While this increased the fair value of the Company’s current fixed income holdings, it made finding investments to acquire, with any type of historic yield, nearly impossible. In recent periods our economy has heated up with inflation running at higher than desired levels by Federal Reserve standards. In this regard, the Federal Reserve began increasing interest rates in 2022. This has resulted in an increase in the yields available in the bond market and drives the unrealized loss on the bond portfolio.

Since the start of 2022, we have seen more volatility in the U.S. markets in general and have seen an increase in bonds yields. This is due to the Federal Open Market Committee (“FOMC”) aggressively raising interest rates to fight the inflation that is currently being experienced. The interest rate environment experienced seven rate changes totaling 4.25% during 2022 and are expected to continue into early 2023. While these actions had a negative impact on some of our investments that we currently own, this will also allow for better yields on future investments acquired as current investments mature.

Income from the fixed maturities investment portfolio represented 16% and 38% of the total consolidated investment income for the years ended December 31, 2022 and 2021, respectively. When comparing earnings from the fixed maturities portfolio for the years ended December 31, 2022 and 2021 income was down approximately 9%. The decrease is due to the maturity of certain fixed maturity investments during 2022. The Company’s investment in fixed maturities continues to decline as we have, for the most part, chosen not to reinvest in fixed maturities and any reinvestment has been at lower rates.  As of December 31, 2022 and 2021, fixed maturities represented 30% and 38%, respectively, of the total investments owned by the Company.

Income from the equity securities portfolio was approximately double that of the prior year and represents approximately 10% of the total consolidated investment income for 2022. Distributions from four securities represented 62% of the 2022 income from the equity securities income. These four securities are associated with the oil and gas industry. During 2022, the Company disposed of a significant portion of two of these securities. Future results are expected to vary based upon these disposals and other investing decisions made by Management. The equity securities investment portfolio represents 45% and 37% of the total investment portfolio as of December 31, 2022 and 2021, respectively.

Income from the real estate portfolio represented 61% of the consolidated investment income for 2022 and is approximately $12.2 million higher than the amount reported in 2021. During 2022, the Company received $2.3 million of income from timber sales as compared to $217,000 in the prior year. Included in the 2022 real estate income is $10.4 million of income from oil and gas royalty distributions, which represents approximately 67% of the current year total income from the real estate portfolio. In 2021, the Company recorded less than $1 million of income from oil and gas royalties. During the latter part of 2021 and in 2022, several of the royalty interests fully depleted and there was in an increase in the number of wells coming online for production. As a result of the Russian invasion of the Ukraine, the United States placed a ban on Russian oil. This ban caused the price of oil to increase dramatically from an average price of $69 per barrel in 2021 to an average price per barrel of $97 in 2022. In 2021, total cash flows from oil and gas royalties were approximately $5.3 million of which $930,000 was reported as income. In 2022, total cash flows from oil and gas royalties were approximately $13.1 million of which $10.4 million was reported as income. In the first quarter of 2023, the average price per barrel of oil has declined to $80. While Management anticipates continued distributions from the oil and gas royalties, they are expected to vary depending on market conditions.

The earnings from the real estate investment portfolio are expected to vary depending on the real estate activities and market conditions. The real estate investment portfolio represents 10% and 11% of the total investment portfolio as of December 31, 2022 and 2021, respectively.

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

Realized gains and losses from equity securities represent the difference between the fair value at the beginning of the reporting period and the fair value at the time of sale. The total gains from equity securities sold in 2022 were approximately $23.4 million, of which $8.9 million is being reported as gains from equity securities and $14.5 million is reported as a component of the change in the fair value of equity securities. The disposal of two equity securities represented 89% of the total gains from the equity securities portfolio. The Company fully disposed of one equity security that produced a realized gain of $6.6 million in 2022. The Company disposed of 7,500 shares of an equity security, associated with the oil and gas industry, producing a realized gain of $14.3 million. The Company still owns 5,000 shares of this equity security as of December 31, 2022. This disposal will impact future dividend earnings of the Company as it represented a significant portion of the 2022 investment income from equity securities.

The total gains from equity securities sold in 2021 were approximately $4.6 million, of which $3.1 million is being reported as gains from equity securities and $1.5 million is reported as a component of the change in the fair value of equity securities. The Company disposed of 2,500 shares of an equity security, associated with the oil and gas industry, producing a realized gain of $2.2 million. During the year ended December 31, 2021, the Company also reported additional gains of approximately $851,000 from the sales of the music royalties.

The Company reported a change in fair value of equity securities of approximately $33.7 million and $14.1 million for the years ended December 31, 2022 and 2021, respectively.  This line item is material to the results reported in the Consolidated Statements of Operations.  This line item can also be extremely volatile, reflecting changes in the stock market.  While both 2021 and 2022 reflected positive results, 2022 results were more than double of that of 2021.  While these results can be material and volatile, most of the equity holdings of the Company were acquired with a long-term view, thus making these intermediate changes in value of less concern to Management.  Management monitors its equity holdings looking more at the specific entity and market it is in relative to performance and less to changes due to general market swings that occur over the holding period of the investment.

While the Company has seen significant positive results from its equity investments in the last two years, a pull back or downward market adjustment could slow these gains or even result in losses in future periods.  Management believes its current equity investments continue to be solid investments for the Company and have further growth potential; however, changes in market conditions could cause volatility in market prices.

Included in the 2022 and 2021 net investment gains are other-than-temporary impairments of $5 million and $393,000, respectively. The other-than-temporary impairments recognized during 2022 and 2021 were taken as a result of Management’s assessment and determination of value of the investment. The investments were written down to better reflect their current expected value.

During 2022, the Company sold real estate located in Kentucky and recognized a gain of approximately $3.7 million from the sale. The 2021 real estate gains are mainly the result of the sale of real estate located in Illinois and Florida. During 2021, the Company sold its home office building located in Springfield, IL. The sale of this property produced a gain of approximately $1 million and represented approximately 36% of the investment gains from real estate. The Company sold real estate in Florida and recognized a gain of approximately $1.3 million, which represents approximately 44% of the gains reported for the real estate investment portfolio.

Realized investment gains are the result of one-time events and are expected to vary from year to 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 approximately $25.8 million and $23.8 million for the years ended December 31, 2022 and 2021, respectively. Benefits, claims and settlement expenses represented approximately 57% and 68% of the Company’s total expenses for 2022 and 2021, respectively.  The other major expense category of the Company is operating expenses, which represented 41% and 30% of the Company’s total expenses for 2022 and 2021, respectively.

Benefits, claims and settlement expenses, net of reinsurance benefits, were down approximately 9% when comparing 2022 and 2021 activity.  Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.

Early in the COVID-19 pandemic, the Company implemented a process to monitor death claims resulting from COVID-19. Prior to the pandemic, death benefits were $12.6 million, $12.8 million and $12.4 million in 2017, 2018 and 2019, respectively. During the two years of the pandemic, total death benefits were $14.3 million and $16 million in 2020 and 2021, respectively. In 2022, total death benefits, net of reinsurance, declined to $13.3 million. Death benefits of the Company have been higher than recent past experience, even when adjusting for the identified COVID-19 claims. This anomaly is showing throughout the entire U.S. insurance industry. Industry experts believe this increase is death benefits while not always directly related to COVID-19, are caused indirectly by the pandemic due to delays in medical care as a result of the lockdown in 2020 and then later, people’s fears of seeking out treatment and trouble making up appointments. This is further compounded by depression from isolation. While we believe our mortality experience has returned to pre-pandemic norms, we cannot be absolutely certain at this time.

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.

Overall, the Company’s persistency for business in-force remained relatively steady at 96.8% in 2022 compared to 95.7% in 2021. The Company’s actual experience for earned interest, persistency, and mortality varies from the assumptions applied to pricing and for determining premiums. Accordingly, differences between the Company’s actual experience and those assumptions applied may affect the profitability of the Company. The Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted interest spreads.

Operating expenses increased approximately 48% or $3.4 million in 2022 as compared to that of the same period in 2021.  Bonuses paid to employees were approximately $600,000 higher in 2022 as compared to 2021 and were driven by the Company’s 2022 performance.

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. In 2022, the Company paid approximately $2 million in charitable donations.

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:

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 81% and 85% of the Company’s total assets as of December 31, 2022 and 2021, respectively. Fixed maturities and equity securities, at fair value, consistently represent the majority, of the Company’s total investments – 71% in 2022 and 2021.

As of December 31, 2022, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets, shareholders’ equity or results from operations.  To provide additional flexibility and liquidity, the Company has identified all fixed maturity securities as “investments available-for-sale”.  Investments available-for-sale are carried at market value, with changes in market value charged directly to the other comprehensive income component of shareholders’ equity.  Changes in the market value of available for sale securities resulted in net unrealized gains (losses) of approximately $(27.8) million and $(7.1) million as of December 31, 2022 and 2021, respectively. The variance in the net unrealized gains and losses is the result of normal market fluctuations mainly related to changes in interest rates in the marketplace.

Management continues to view the Company’s investment portfolio with utmost priority. Significant time has been spent internally researching the Company’s risk and communicating with outside investment advisors about the current investment environment and ways to ensure preservation of capital and mitigate losses.  Management has put extensive efforts into evaluating the investment holdings.  Additionally, members of the Company’s Board of Directors and investment committee have been solicited for advice and provided with information.  Management reviews the Company’s entire portfolio on a security level basis to be sure all understand our holdings, potential risks and underlying credit supporting the investments.  Management intends to continue its close monitoring of its bond holdings and other investments for possible deterioration or market condition changes.  Future events may result in Management’s determination that certain current investment holdings may need to be sold which could result in gains or losses in future periods.  Such future events could also result in other than temporary declines in value that could result in future period impairment losses.

There are a number of significant risks and uncertainties inherent in the process of monitoring impairments and determining if impairment is other-than-temporary. These risks and uncertainties related to Management’s assessment of other-than-temporary declines in value include but are not limited to: the risk that Company’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer; the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated; the risk that fraudulent information could be provided to the Company’s investment professionals who determine the fair value estimates.

Liquidity

Liquidity provides the Company with the ability to meet on demand the cash commitments required by its business operations and financial obligations.  The Company’s liquidity is primarily derived from cash balances, a portfolio of marketable securities and line of credit facilities.  The Company has two principal needs for cash – the insurance company’s contractual obligations to policyholders and the payment of operating expenses.

Parent Company Liquidity

UTG is a holding company that has no day-to-day operations of its own.  Cash flows from UTG’s insurance subsidiary, UG, are used to pay costs associated with maintaining the Company in good standing with states in which it does business and purchasing outstanding shares of UTG stock.  UTG’s cash flow is dependent on management fees received from its insurance subsidiary, stockholder dividends from its subsidiary and earnings received on cash balances.  As of December 31, 2022 and 2021, substantially all of the consolidated shareholders’ equity represents net assets of its subsidiaries.  In 2022, the Parent company received $3 million in dividends from its insurance subsidiary and $5 million in 2021. 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

During October of 2022, the Federal Home Loan Bank approved 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 $2.3 million. During the fourth quarter of 2022, the Company borrowed $19 million and planned to utilize the funds for investing activities. The interest rate on the borrowed funds is variable and currently is 4.42%. During the first quarter of 2023, the Company repaid the entire outstanding principal balance.

Consolidated Liquidity

Cash used in operating activities was approximately $5.3 million and $12.5 million in 2022 and 2021, respectively.  Sources of operating cash flows of the Company, as with most insurance entities, is comprised primarily of premiums received on life insurance products and income earned on investments.  Uses of operating cash flows consist primarily of payments of benefits to policyholders and beneficiaries and operating expenses.  The Company has not marketed any significant new products for several years.  As such, premium revenues continue to decline.  Management anticipates future cash flows from operations to remain similar to historic trends.

During 2022 and 2021, the Company’s investing activities provided (used) net cash of approximately $26.2 million and $(18.1) million, respectively. The Company recognized proceeds of approximately $79.7 million and $59.3 million from investments sold and matured in 2022 and 2021, respectively.  The Company used approximately $53.5 million and $78.7 million to acquire investments during 2022 and 2021, respectively.  The net cash provided by investing activities is expected to vary from year to year depending on market conditions and management’s ability to find and negotiate favorable investment contracts.

Net cash provided by (used in) financing activities was approximately $(6.4) million and $22.3 million during 2022 and 2021, respectively. As of December 31, 2022 and 2021, the Company had $19 million and $24 million in debt outstanding with third parties, respectively.

The Company had cash and cash equivalents of approximately $45.3 million and $30.8 million as of December 31, 2022 and 2021, 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 $108.3 million and $141 million at December 31, 2022 and 2021, 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, 2022 and 2021 are presented in Note 7 – Credit Arrangements in the Notes to the Consolidated Financial Statements.

The Company had $19 million and $24 million of debt outstanding as of December 31, 2022 and 2021, respectively.

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, 2022, UG has a ratio of approximately 6.10, which is 610% 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 March of 2022, the Board of Directors of UTG authorized the repurchase of up to an additional $2 million of UTG’s common stock, for a total repurchase of $22 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 2022, the Company repurchased 24,308 shares through the stock repurchase program for $685,808. Through December 31, 2022, UTG has spent $19,309,437 in the acquisition of 1,326,213 shares under this program.

Shareholders’ equity was approximately $157.6 million and $140.8 million as of December 31, 2022 and 2021, respectively. Total shareholders’ equity increased approximately 12% in 2022 as compared to 2021.  The increase is primarily attributable to net income from operations. As of December 31, 2022 and 2021, the Company reported accumulated other comprehensive income (loss) of approximately $(7.1) million and $10.3 million, respectively.

For the periods ended December 31, 2022 and 2021, the decrease in accumulated other comprehensive income was approximately $(17.4) million and $(5.3) million, respectively, 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 marketplace.

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

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, 2022 and 2021, 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, 2022, 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 consolidated financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, 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 consolidated 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, whether due to error or fraud, 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 supporting 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.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Future Policy Benefits

Critical Audit Matter Description

The estimated valuation of future policy benefits is measured based on actuarial methodologies and underlying economic and future policyholder behavior assumptions. 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.

As described in Note 1, the liability for future policy benefits on traditional life insurance products and accident and health insurance policy benefits are calculated using a net level method, including assumptions as to investment yields, mortality, withdrawals and other assumptions based on the Company's experience. The liability for future policy benefits for universal life contracts is calculated using a retrospective deposit method and represents the policy account balances.

Auditing estimates for future policy benefits required a high degree of judgment, including the need to involve an actuarial specialist, due to the nature of the data utilized in the complex actuarial models and the significant amount of judgment applied by management in determining these liabilities.

How the Critical Audit Matter was Addressed in the Audit

Our audit procedures related to the liability for future policy benefits included the following procedures, among others:

•	We obtained an understanding and evaluated the design of controls, including those related to the performance of experience studies and the setting of best estimate assumptions.

•

Procedures also included, among others, testing the completeness and accuracy of data provided by management and the involvement of professionals with specialized skill and knowledge to assist in evaluating the appropriateness of management's actuarial techniques and evaluating the reasonableness of assumptions used in those techniques.

•	Engaging an independent actuarial specialist to evaluate whether the methodologies and assumptions used by management in developing the liabilities were appropriate and reasonable.

Valuation of Non-Marketable Investments Reported at Fair Value

Critical Audit Matter Description

The Company holds certain investments that are not actively traded and are classified as Level 3 assets. These investments include equity securities, valued using either the Company's pricing models to estimate future cash flows or net asset value. Since such securities trade infrequently and have little or no price transparency, the Company's techniques for determining the estimated fair value of such securities rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from or corroborated by observable market data. The determination of these unobservable inputs involves significant management judgment and estimation and typically cannot be supported by reference to market activity.

The principal considerations for our determination that performing procedures relating to the valuation of Level 3 investments is a critical audit matter are that there was significant judgment by management to determine the fair value of these Level 3 investments, which included significant unobservable inputs related to comparable market data and discount rates.

Auditing of unobservable inputs used by management to estimate the fair value of Level 3 securities required a high degree of auditor judgement, subjectivity and an increased extent of effort.

How the Critical Audit Matter was Addressed in the Audit

Our audit procedures related to the proprietary models and unobservable inputs used by management to estimate the fair value of Level 3 securities included the following, among others:

•	We obtained an understanding and evaluated the appropriateness of the Company's pricing sources.

•	We tested the completeness, accuracy, reliability, and relevance of key data used in the models.

•	We assessed the consistency by which management has applied significant unobservable valuation assumptions.

•	For a selection of securities, we compared the accuracy of the Company's estimated fair value price to a price independently developed by the audit team.

We have served as the Company's auditor since 2005.

/s/ Armanino LLP

St. Louis, Missouri

March 24, 2023

UTG, Inc.

As of December 31, 2022 and 2021

See accompanying notes.

UTG, Inc.

Consolidated Statements of Operations

For the Years Ended December 31, 2022 and 2021

See accompanying notes.

UTG, Inc.

Consolidated Statements of Comprehensive Income (Loss)

For the Years Ended December 31, 2022 and 2021

See accompanying notes.

UTG, Inc.

Consolidated Statements of Shareholders’ Equity

See accompanying notes.

UTG, Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2022 and 2021

See accompanying notes.

UTG, Inc.

Notes to Consolidated Financial Statements

2022		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		$	18,315,321			$	0			$	(1,104,146	)		$	17,211,175
U.S. special revenue and assessments			7,535,018				0				(335,918	)			7,199,100
All other corporate bonds			91,429,481				65,529				(7,592,226	)			83,902,784
Total		$	117,279,820			$	65,529			$	(9,032,290	)		$	108,313,059

2021		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		$	25,312,358			$	355,623			$	(17,078	)		$	25,650,903
U.S. special revenue and assessments			7,540,867				982,668				0				8,523,535
All other corporate bonds			95,096,738				11,692,705				0				106,789,443
Total		$	127,949,963			$	13,030,996			$	(17,078	)		$	140,963,881

Fixed Maturities Available for Sale December 31, 2022		Amortized Cost			Estimated Fair Value
Due in one year or less		$	7,501,489		$	7,393,130
Due after one year through five years			45,914,985			43,837,255
Due after five years through ten years			14,876,371			14,341,653
Due after ten years			22,013,592			19,389,980
Fixed maturities with no single maturity date			26,973,383			23,351,041
Total		$	117,279,820		$	108,313,059

2022		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		$	17,211,175		(1,104,146)		$	0		0		$	17,211,175		(1,104,146)
U.S. special revenue and assessments			7,199,100		(335,918)			0		0			7,199,100		(335,918)
All other corporate bonds			80,144,564		(7,592,226)			0		0			80,144,564		(7,592,226)
Total fixed maturities		$	104,554,839		(9,032,290)		$	0		0		$	104,554,839		(9,032,290)

2021		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		$	4,042,825		(17,078)		$	0		0		$	4,042,825		(17,078)
Total fixed maturities		$	4,042,825		(17,078)		$	0		0		$	4,042,825		(17,078)

	Less than 12 months		12 months or longer		Total
As of December 31, 2022
Fixed maturities	57		0		57
As of December 31, 2021
Fixed maturities	3		0		3

		2022				2021
Net unrealized gains (losses)		$	(1,086	)		$	2,059
Net realized gains (losses)			(12,197	)			20,509
Net unrealized and realized gains (losses)		$	(13,283	)		$	22,568

	2022				2021
	Maximum rate		Minimum rate		Maximum rate		Minimum rate
Farm loans	5.00 %		4.50 %		6.00 %		4.50 %
Commercial loans	7.00 %		4.00 %		5.50 %		4.10 %
Residential loans	5.00 %		4.15 %		5.00 %		4.15 %

		2022				2021
In good standing		$	30,698,694			$	27,102,789
Overdue interest over 90 days			0				2,080,773
Total mortgage loans		$	30,698,694			$	29,183,562
Total foreclosed loans during the year		$	0			$	0

		2022				2021
Raw land		$	11,634,472			$	14,538,507
Commercial			5,124,847				4,347,423
Residential			3,402,502				3,813,936
Land, minerals and royalty interests			14,772,531				17,048,395
Total investment real estate		$	34,934,352			$	39,748,261

		2022				2021
Fixed maturities		$	4,153,453			$	4,566,293
Equity securities			2,539,579				1,274,147
Trading securities			(13,283	)			22,568
Mortgage loans			1,580,647				706,883
Real estate			15,424,260				3,241,689
Notes receivable			933,886				1,558,406
Policy loans			489,823				606,347
Cash and cash equivalents			203,250				2,567
Short-term investments			5,056				0
Total consolidated investment income			25,316,671				11,978,900
Investment expenses			(4,505,200	)			(2,928,575	)
Consolidated net investment income		$	20,811,471			$	9,050,325

		2022			2021
Realized gains:
Sales of fixed maturities		$	4,683		$	55,867
Sales of equity securities			8,986,784			3,142,720
Sales of real estate			5,326,838			2,877,808
Total realized gains			14,318,305			6,076,395
Realized losses:
Sales of fixed maturities			(5,211)			0
Sales of equity securities			(109,636)			(54,742)
Sales of real estate			(34,547)			0
Other-than-temporary impairments			(5,000,000)			(393,455)
Total realized losses			(5,149,394)			(448,197)
Net realized investment gains (losses)			9,168,911			5,628,198
Change in fair value of equity securities:
Change in fair value of equity securities held at the end of the period			33,690,712			14,121,883
Change in fair value of equity securities			33,690,712			14,121,883
Net investment gains (losses)		$	42,859,623		$	19,750,081
Change in net unrealized gains (losses) on available-for-sale investments included in other comprehensive income:
Fixed maturities		$	(27,824,173)		$	(7,085,803)
Net increase (decrease)		$	(27,824,173)		$	(7,085,803)

	2022			2021
Other than temporary impairments:
Fixed maturities	$	0		$	393,455
Equity securities, at cost		5,000,000			0
Total other than temporary impairments	$	5,000,000		$	393,455

2022		Level 1				Level 2				Level 3				Net Asset Value				Total
Financial assets:
Fixed maturities available for sale:
U.S. Government and government agencies and authorities		$	17,211,175			$	0			$	0			$	0			$	17,211,175
U.S. special revenue and assessments			0				7,199,100				0				0				7,199,100
Corporate securities			0				83,902,784				0				0				83,902,784
Total fixed maturities			17,211,175				91,101,884				0				0				108,313,059
Equity securities:
Common stocks			45,999,477				6,651,800				6,720,643				89,434,766				148,806,686
Preferred stocks			0				0				1,247,000				0				1,247,000
Total equity securities			45,999,477				6,651,800				7,967,643				89,434,766				150,053,686
Total financial assets		$	63,210,652			$	97,753,684			$	7,967,643			$	89,434,766			$	258,366,745
Liabilities
Trading Securities		$	0			$	0			$	0			$	0			$	0

2021		Level 1				Level 2				Level 3				Net Asset Value				Total
Financial assets:
Fixed maturities available for sale:
U.S. Government and government agencies and authorities		$	25,650,903			$	0			$	0			$	0			$	25,650,903
U.S. special revenue and assessments			0				8,523,535				0				0				8,523,535
Corporate securities			0				106,789,443				0				0				106,789,443
Total fixed maturities			25,650,903				115,312,978				0				0				140,963,881
Equity securities:
Common stocks			40,784,660				16,711,180				5,861,486				57,603,597				120,960,923
Preferred stocks			0				21,198				1,247,000				0				1,268,198
Total equity securities			40,784,660				16,732,378				7,108,486				57,603,597				122,229,121
Total financial assets		$	66,435,563			$	132,045,356			$	7,108,486			$	57,603,597			$	263,193,002
Liabilities
Trading Securities		$	(1,116	)		$	0			$	0			$	0			$	(1,116	)

		Equity Securities, Fair Value				Equity Securities, Net Asset Value				Total
Balance at December 31, 2021		$	7,108,486			$	57,603,597			$	64,712,083
Realized gains (losses)			198,125				327,863				525,988
Unrealized gains (losses)			202,208				19,628,294				19,830,502
Purchases			866,668				14,394,717				15,261,385
Sales			(407,844	)			(2,519,705	)			(2,927,549	)
Balance at December 31, 2022		$	7,967,643			$	89,434,766			$	97,402,409

Financial Assets			Fair Value at December 31, 2022			Fair Value at December 31, 2021	Valuation Technique
Common stocks		$	89,434,766		$	57,603,597	Net Asset Value
Common stocks			7,967,643			7,108,486	Pricing Model
Total		$	97,402,409		$	64,712,083