Item 2. 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"). The following discussion of the financial condition and results of operations of the Company should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in the Company's annual report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.
Cautionary Statement Regarding Forward-Looking Statements
This report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "probably," or similar expressions, we are making forward-looking statements.
Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.
Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur. Our forward-looking statements speak only as of the date made, and we undertake no obligation to update or review any forward-looking statement, whether as a result of new information, future events or other developments, unless the securities laws require us to do so.
Overview
UTG, Inc., a Delaware corporation, is a life insurance holding company. The Company's dominant business is individual life insurance, which includes the servicing of existing insurance policies in force, the acquisition of other companies in the life insurance business and the administration and processing of life insurance business for other entities. The Company's focus for the future includes growing the administrative portion of the business.
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.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ significantly from those estimates. The Company has identified certain estimates that involve a higher degree of judgment and are subject to a significant degree of variability. The Company's critical accounting policies and the related estimates considered most significant by Management are disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Management has identified the accounting policies related to cost of insurance acquired, assumptions and judgments utilized in determining if declines in fair values of investments are other-than-temporary, and valuation methods for investments that are not actively traded as those, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Condensed Consolidated Financial Statements and this Management's Discussion and Analysis.
During the three-months ended March 31, 2023, there were no additions to or changes in the critical accounting policies disclosed in the 2022 Form 10-K, except for the January 1, 2023 adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). See Note 2 – Recently Adopted Accounting Principles for further information regarding the adoption of ASU No. 2016-13.
Results of Operations
On a consolidated basis, the Company reported net loss attributable to common shareholders of approximately $(6.9) million for the three-month period ended March 31, 2023, and net income attributable to commons shareholders of approximately $9.2 million for the three-month period ended March 31, 2022, respectively.
Revenues
For the three-month period ended March 31, 2023, the Company reported total revenues of approximately $(3) million and for the same period in 2022 total revenues of approximately $19 million. The variance in total revenue between periods is primarily the result of a decrease in the change in the fair value of equity securities. 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 these results can be material and volatile, most of the equity holdings of the Company were acquired with a long-term view, thus making these intermediate changes in value of less concern to Management. Management monitors its equity holdings looking more at the specific entity and market it is in relative to performance and less to changes due to general market swings that occur over the holding period of the investment.
The Company reported revenue before net investment gains (losses) of approximately $4.9 million and $6.0 million for the three-month periods ended March 31, 2023 and March 31, 2022, respectively. Revenue before net investment gains (losses) decreased primarily due to a decrease in net investment income when comparing current year and prior year results.
Premium and policy fee revenues, net of reinsurance, increased 2% for the three-months ended March 31, 2023 and March 31, 2022. In general, this line item is expected to decline slightly from period to period as policies in force continue to decline. In the current quarter, the direct premiums (premiums paid by the policyholder to the Company) did decline slightly as expected. The ceded reinsurance premiums (premiums the Company pays to other insurers to limit risk exposure) declined at a greater rate than the direct premiums decline. The Company writes minimal new business. Unless the Company acquires a new company or a block of in-force business, Management expects premium revenue to continue to decline on the existing block of business at a rate consistent with prior experience. Premium and policy fee revenues, net of reinsurance, was reported at approximately $1,539,000 and $1,507,000 for the three-months ended March 31, 2023, and 2022.
The following table summarizes the Company's investment performance.
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Net investment income |
|
$ |
3,318,165 |
|
|
$ |
4,459,368 |
|
Net investment gains (losses) |
|
$ |
716,300 |
|
|
$ |
4,780,149 |
|
Change in net unrealized investment gains (losses) on available-for-sale securities, pre-tax |
|
$ |
(8,645,474 |
) |
|
$ |
8,154,629 |
|
The following table reflects net investment income of the Company:
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2023 |
|
|
2022 |
|
Fixed maturities available for sale |
|
$ |
1,014,590 |
|
|
$ |
1,066,980 |
|
Equity securities |
|
|
416,188 |
|
|
|
383,208 |
|
Trading securities |
|
|
0 |
|
|
|
(2,986 |
) |
Mortgage loans |
|
|
338,409 |
|
|
|
288,218 |
|
Real estate |
|
|
2,199,704 |
|
|
|
3,193,085 |
|
Notes receivable |
|
|
445,318 |
|
|
|
256,562 |
|
Policy loans |
|
|
107,363 |
|
|
|
106,723 |
|
Short-term investments |
|
|
57,376 |
|
|
|
0 |
|
Cash and cash equivalents |
|
|
157,873 |
|
|
|
712 |
|
Total consolidated investment income |
|
|
4,736,821 |
|
|
|
5,292,502 |
|
Investment expenses |
|
|
(1,418,656 |
) |
|
|
(833,134 |
) |
Consolidated net investment income |
|
$ |
3,318,165 |
|
|
$ |
4,459,368 |
|
Net investment income represented 68% and 74% of the Company's revenue before net investment gains (losses) as of March 31, 2023 and March 31, 2022, respectively. When comparing current and prior year results, net investment income was comparable in a majority of the investment categories outside of the real estate, notes receivable, and cash & short-term investment portfolios. Investment income earned by the real estate investment portfolio for the three months ended March 31, 2022, was materially higher than the current period due to distributions from specific real estate investments, primarily related to the oil & gas & timber industries. Investment income earned by the cash & short-term portfolios were significantly higher this year when compared to prior year due to an increase in interest rates available on cash balances in the marketplace. Investment income earned by the fixed maturities, equity securities, and real estate investment portfolios represented approximately 77% and 88% of the total consolidated investment income for the three months ended March 31, 2023 and 2022, respectively.
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 ten rate increases totaling 5% over the last 12 months. 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.
When comparing earnings from the fixed maturities portfolio for the three months ended March 31, 2023 and 2022 income was down approximately 5% or $52,000. This decrease can be primarily attributed to the maturity of holdings that were not replaced within the portfolio. Fixed maturities continue to represent one of the largest investment types and asset classes owned by the Company. As of March 31, 2023 and 2022, fixed maturities represented 31% and 34%, respectively, of the total investments owned by the Company.
Earnings from the equity securities investment portfolio represented approximately 9% and 7% of the total consolidated investment income report by the Company during the three months ended March 31, 2023 and 2022, respectively. Income from the equity securities portfolio was up approximately 9% or $33,000 when comparing 2023 and 2022 results. This increase is primarily due to a dividend increase by a specific dividend paying security during 2023.
The earnings reported by the cash & short-term investment portfolio represented 4% of the total consolidated investment income reported by the Company during the three months ended March 31, 2023, respectively. Earnings from the cash & short-term investment portfolios are the result of banks and other deposit institutions increasing interest rates on deposits.
The earnings reported by the real estate investment portfolio represented 46% and 60% of the total consolidated investment income reported by the Company during the three months ended March 31, 2023 and 2022, respectively. Earnings from the real estate investment portfolio were down approximately 31% or $993,000 when comparing 2023 and 2022 results. The earnings from the real estate investment portfolio are expected to vary depending on the real estate activities and the potential distributions that may occur. The decrease in income is mainly attributable to timber sales, in 2022 the Company received $1 million in income as compared to $0 in the current year.
The earnings reported by the mortgage loan investment portfolio represented 7% and 5% of the total consolidated investment income reported by the Company during the three months ended March 31, 2023 and 2022, respectively. Earnings from the mortgage loan investment portfolio were up approximately 17% or $50,000 when comparing 2023 and 2022 results. The earnings from the mortgage loan portfolio have increased due to the Company issuing new loans at higher interest rates. The mortgage loan investment portfolio’s average interest rate was approximately 5.1% and 4.9% during the three months ended March 31, 2023 and 2022, respectively.
The following table reflects net realized investment gains (losses) for the three months ended March 31:
|
|
2022 |
|
|
2021 |
|
Fixed maturities available for sale |
|
$ |
20,833 |
|
|
$ |
4,369 |
|
Equity securities |
|
|
85,184 |
|
|
|
317,338 |
|
Real estate |
|
|
586,774 |
|
|
|
4,458,442 |
|
Short-term investments |
|
|
23,509 |
|
|
|
0 |
|
Consolidated net realized investment gains |
|
|
716,300 |
|
|
|
4,780,149 |
|
Change in fair value of equity securities |
|
|
(8,645,474 |
) |
|
|
8,154,629 |
|
Net investment gains (losses) |
|
$ |
(7,929,174 |
) |
|
$ |
12,934,778 |
|
Realized investment gains are the result of one-time events and are expected to vary from year to year.
The sale of one equity security represents all the realized investment gains from equity securities during 2023 and 2022. The equity security sold in 2022 was much larger than the one sold in 2023.
The 2023 real estate gains are the result of the sales of real estate in Kentucky. The sale of a land parcel in Kentucky produced a gain of approximately $480,000 and represented approximately 82% of the net investment gains from real estate. The Company also sold a few additional smaller properties that produced gains of approximately $107,000 in gains. When compared to 2022, 2023’s real estate gains are much smaller. This is mainly due to the sale of a Kentucky land parcel producing a gain of approximately $3.5 million in 2022.
The sales of short-term bonds represent all the realized investment gains from short-term investments during 2023.
The Company reported a change in fair value of equity securities of approximately $(8.6) million and $8.2 million for the three months ended March 31, 2023, and 2022, 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 these results can be material and volatile, most of the equity holdings of the Company were acquired with a long-term view, thus making these intermediate changes in value of less concern to Management. Management monitors its equity holdings looking more at the specific entity and market it is in relative to performance and less to changes due to general market swings that occur over the holding period of the investment.
The Company has seen negative results on its equity investments in the recent quarter. Equity investments primarily in the oil and gas area represent almost all of the unrealized losses reported in first quarter 2023. The Company experienced significant unrealized gains on these same investments in 2022. Oil prices declined in first quarter 2023 as concerns of recession intensified leading to a reduction in world demand for oil temporarily causing the price to decline. Periodic pull backs and downward market adjustments are expected by management. Management believes its current equity investments continue to be solid investments for the Company and have further growth potential; however, changes in market conditions could cause volatility in market prices.
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 $5.8 million for the three-month period ended March 31, 2023, a decrease of approximately 18% from the same period in 2022. Benefits, claims and settlement expenses represented approximately 58% and 57% of the Company's total expenses for the three-month periods ended March 31, 2023 and 2022, respectively. The other major expense category of the Company is operating expenses, which represented approximately 39% and 41% of the Company's total expenses for the three-month periods ended March 31, 2023 and 2022, respectively.
Life benefits, claims and settlement expenses, net of reinsurance benefits and claims were down approximately 16% or $649,000 when comparing the three months ended March 31, 2023, and 2022. Policy claims vary from period to period and therefore, fluctuations in mortality are to be expected and are not considered unusual by Management.
Early in the COVID-19 pandemic, the Company implemented a process to monitor death claims resulting from COVID-19. Prior to the pandemic, death benefits were $12.6 million, $12.8 million and $12.4 million in 2017, 2018 and 2019, respectively. During the three plus years of the pandemic, total death benefits were $14.3 million, $16.0 million, and $13.3 million in 2020, 2021, and 2022, respectively. When comparing first quarter of 2023 and 2022, there was a decline of approximately $1.1 million in death benefits, net of reinsurance. Death benefits of the Company have been higher than recent past experience, even when adjusting for the identified COVID-19 claims. This anomaly showed throughout the entire U.S. insurance industry. Industry experts believe this increase in death benefits while not always directly related to COVID-19, were 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. In the latter half of 2022, claims appeared to be moving back to pre-pandemic levels. This has continued through first quarter 2023. 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.
Operating expenses decreased approximately 22% in the three-month period ended March 31, 2023 as compared to the same period in 2022. This decrease is primarily due to two expenses items, charitable contributions and aircraft maintenance. The charitable contributions in 2023 were approximately $480,000 lower when comparing to 2022. This expense item fluctuates based on reported taxable income of the Company. Additionally, in 2022 the Company incurred maintenance expenses relating to the Company’s partially owned aircraft. First quarter 2023 aircraft maintenance expense is $166,000 less than first quarter 2022. Expenses in the remaining categories are comparable between years.
As mentioned above in the Overview section of the Management Discussion and Analysis, UTG has a strong philanthropic program. The Company generally allocates a portion of its earnings to be used for its philanthropic efforts primarily targeted to Christ-centered organizations or organizations that help the weak or poor. Charitable contributions made by the Company are expected to vary from year to year depending on the earnings of the Company.
Net amortization of cost of insurance acquired decreased approximately 4% when comparing current and prior year activity. Cost of insurance acquired is established when an insurance company is acquired or when the Company acquires a block of in-force business. The Company assigns a portion of its cost to the right to receive future profits from insurance contracts existing at the date of the acquisition. Cost of insurance acquired is amortized with interest in relation to expected future profits, including direct charge-offs for any excess of the unamortized asset over the projected future profits. The interest rates may vary due to risk analysis performed at the time of acquisition on the business acquired. The Company utilizes a 12% discount rate on the remaining unamortized business. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. Amortization of cost of insurance acquired is particularly sensitive to changes in interest rate spreads and persistency of certain blocks of insurance in-force. This expense is expected to decrease unless the Company acquires a new block of business.
Management continues to place significant emphasis on expense monitoring and cost containment. Maintaining administrative efficiencies directly impacts net income.
Financial Condition
Investment Information
Investments are the largest asset group of the Company. The Company's insurance subsidiary is regulated by insurance statutes and regulations as to the type of investments they are permitted to make, and the amount of funds that may be used for any one type of investment.
The following table reflects, by investment category, the investments held by the Company as of March 31, 2023, and December 31, 2022:
|
|
March 31, 2023 |
|
|
As a % of Total Investments |
|
|
As a % of Total Assets |
|
Fixed maturities |
|
$ |
111,140,163 |
|
|
|
31 |
% |
|
|
26 |
% |
Equity securities, at fair value |
|
|
141,927,670 |
|
|
|
40 |
% |
|
|
34 |
% |
Equity securities, at cost |
|
|
15,683,343 |
|
|
|
4 |
% |
|
|
4 |
% |
Mortgage loans |
|
|
29,341,107 |
|
|
|
8 |
% |
|
|
7 |
% |
Real estate |
|
|
34,675,349 |
|
|
|
10 |
% |
|
|
8 |
% |
Notes receivable |
|
|
15,665,605 |
|
|
|
4 |
% |
|
|
4 |
% |
Policy loans |
|
|
6,495,606 |
|
|
|
2 |
% |
|
|
2 |
% |
Short-term investments |
|
|
3,638,309 |
|
|
|
1 |
% |
|
|
1 |
% |
Total investments |
|
$ |
358,567,152 |
|
|
|
100 |
% |
|
|
86 |
% |
|
|
December 31, 2022 |
|
|
As a % of Total Investments |
|
|
As a % of Total Assets |
|
Fixed maturities |
|
$ |
108,313,059 |
|
|
|
30 |
% |
|
|
24 |
% |
Equity securities, at fair value |
|
|
150,053,686 |
|
|
|
41 |
% |
|
|
33 |
% |
Equity securities, at cost |
|
|
15,683,343 |
|
|
|
4 |
% |
|
|
4 |
% |
Mortgage loans |
|
|
30,698,694 |
|
|
|
8 |
% |
|
|
7 |
% |
Real estate |
|
|
34,934,352 |
|
|
|
10 |
% |
|
|
8 |
% |
Notes receivable |
|
|
14,424,127 |
|
|
|
4 |
% |
|
|
3 |
% |
Policy loans |
|
|
6,567,434 |
|
|
|
2 |
% |
|
|
1 |
% |
Short-term investments |
|
|
3,596,941 |
|
|
|
1 |
% |
|
|
1 |
% |
Total investments |
|
$ |
364,271,636 |
|
|
|
100 |
% |
|
|
81 |
% |
The Company's investments are generally managed to match related insurance and policyholder liabilities. The comparison of investment return with insurance or investment product crediting rates establishes an interest spread. Interest crediting rates on adjustable-rate policies have been reduced to their guaranteed minimum rates, and as such, cannot be lowered any further. Policy interest crediting rate changes and expense load changes become effective on an individual policy basis on the next policy anniversary. Therefore, it takes a full year from the time the change was determined for the full impact of such change to be realized. If interest rates decline in the future, the Company will not be able to lower rates and both net investment income and net income will be impacted negatively.
The Company’s total investments represented 86% and 81% of the Company’s total assets as of March 31, 2023, and December 31, 2022, respectively. Fixed maturities and equity securities consistently represented a substantial portion, 71%, respectively, of the total investments during 2023 and 2022. The overall investment mix, as a percentage of total investments, remained fairly consistent when comparing the respective investments held as of March 31, 2023 and December 31, 2022.
As of March 31, 2023, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets, shareholders’ equity or results from operations. To provide additional flexibility and liquidity, the Company has identified all fixed maturity securities as "investments available for sale". Investments available for sale are carried at market value, with changes in market value charged directly to the other comprehensive component of shareholders' equity. Changes in the market value of available for sale securities resulted in net unrealized gains (losses) of approximately $2.2 million and $(7.3) million as of March 31, 2023 and 2022, 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.
On January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposure such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.
The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposure. The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses of $545,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded commitments of $30,000, which is recorded within other liabilities. The Company recorded a net decrease to retained earnings of $454,250 as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards ("Incurred Loss").
Management continues to view the Company’s investment portfolio with utmost priority. Significant time has been spent internally researching the Company’s risk and communicating with outside investment advisors about the current investment environment and ways to ensure preservation of capital and mitigate losses. Management has put extensive efforts into evaluating the investment holdings. Additionally, members of the Company’s Board of Directors and investment committee have been solicited for advice and provided with information. Management reviews the Company’s entire portfolio on a security level basis to be sure all understand our holdings, potential risks and underlying credit supporting the investments. Management intends to continue its close monitoring of its bond holdings and other investments for possible deterioration or market condition changes. Future events may result in Management’s determination that certain current investment holdings may need to be sold which could result in gains or losses in future periods. Such future events could also result in other than temporary declines in value that could result in future period impairment losses.
There are a number of significant risks and uncertainties inherent in the process of monitoring impairments and determining if impairment is other-than-temporary. These risks and uncertainties related to Management’s assessment of other-than-temporary declines in value include but are not limited to: the risk that Company's assessment of an issuer's ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer; the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated; the risk that fraudulent information could be provided to the Company's investment professionals who determine the fair value estimates.
Capital Resources
Total shareholders' equity decreased by approximately 3% as of March 31, 2023, compared to December 31, 2022. The decrease is mainly attributable to a decrease in retained earnings, which is the result of the current year net loss reported by the Company.
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 March 31, 2023, and December 31, 2022, substantially all of the consolidated shareholders’ equity represents net assets of its subsidiaries. As of March 31, 2023, the Parent company has received $2 million in dividends from its insurance subsidiary. Certain restrictions exist on the payment of dividends from the insurance subsidiary to the Parent company. For further information regarding the restrictions on the payment of dividends by the insurance subsidiary, see Note 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 $20 million. During the fourth quarter of 2022, the Company borrowed $19 million and planned to utilize the funds for investing activities. During the first quarter of 2023, the Company repaid the entire outstanding principal balance.
Consolidated Liquidity
Cash provided by operating activities was approximately $2 million in 2023 and cash used in operating activities was approximately $2.2 million in 2022, 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 2023, the Company’s investing activities used net cash of approximately $58,000 and provided net cash of approximately $10.1 million in 2022, respectively. The Company recognized proceeds of approximately $14.1 million and $19.5 million from investments sold and matured in 2023 and 2022, respectively. The Company used approximately $14.2 million and $9.5 million to acquire investments during 2023 and 2022, respectively. The net cash provided by investing activities is expected to vary from year to year depending on market conditions and management’s ability to find and negotiate favorable investment contracts.
Net cash used in financing activities was approximately $18.9 and $14.4 million during 2023 and 2022, respectively. As of March 31, 2023 and 2022, the Company had $0 and $10 million in debt outstanding with third parties.
The Company had cash and cash equivalents of approximately $28.3 million and $45.3 million as of March 31, 2023 and December 31, 2022, 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 $117.3 million at March 31, 2023 and December 31, 2022. However, the strong cash flows from investing activities, investment maturities and the availability of the line of credit facilities make it unlikely that the Company would need to sell securities for liquidity purposes.
Management believes the overall sources of liquidity available will be sufficient to satisfy its financial obligations.