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Investments

12 Months Ended

Dec. 31, 2022

Note 2 – Investments

Available for Sale Securities – Fixed Maturity Securities

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.

Investments in available for sale securities are summarized as follows for the years ended December 31:

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

The amortized cost and estimated market value of debt securities at December 31, 2022, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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

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

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

The Company held below investment grade investments with an estimated market value of $0 as of December 31, 2022 and 2021.

The fair value of investments with sustained gross unrealized losses are as follows as of December 31:

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)

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

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

Substantially all of the unrealized losses on fixed maturities available for sale at December 31, 2022 and 2021 are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position. Based upon the Company’s expected continuation of receipt of contractually required principal and interest payments and its intent and ability to retain the securities until price recovery, as well as the Company’s evaluation of other relevant factors, the Company deems these securities to be temporarily impaired as of December 31, 2022 and 2021.

Cost Method Investments

The Company held equity investments with an aggregate cost of $15,683,343 and $14,543,343 at December 31, 2022 and 2021, respectively. These equity investments were not reported at fair value because it is not practicable to estimate their fair values due to insufficient information being available. Management reviews and considers events or changes in circumstances that might have a significant adverse effect on the reported value of those investments. Based on Management’s evaluation of the equity securities reported at cost, the Company reported an other-than-temporary impairment of $5 million on one security during the fourth quarter of 2022. The other-than-temporary impairment was taken as a result of Management’s assessment and determination of value of the investment.

During 2022 and 2021, the Company acquired $7 million and $0, respectively, in equity securities reported at cost.

Trading Securities

Securities designated as trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized in net investment income on the Consolidated Statements of Operations. Trading Securities included exchange-traded equities and exchange-traded options. Trading securities carried as liabilities were securities sold short. A gain, limited to the price at which the security was sold short, or a loss, potentially unlimited in size, will be recognized upon the termination of the short sale. The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2022 was $0 and $0, respectively. The fair value of derivatives included in trading security assets and trading security liabilities as of December 31, 2021 was $1,116 and $0, respectively. Earnings from trading securities are classified in cash flows from operating activities. The derivatives held by the Company are for income generation purposes only.

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

	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

Mortgage Loans

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

During 2022 and 2021, the Company acquired $5,158,911 and $20,634,252 in mortgage loans, respectively. FSNB services the majority of the Company’s mortgage loan portfolio. The Company pays FSNB a 0.25% servicing fee on these loans and a one-time fee at loan origination of 0.50% of the original loan cost to cover costs incurred by FSNB relating to the processing and establishment of the loan.

During 2022 and 2021, the maximum and minimum lending rates for mortgage loans were:

	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 %

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

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

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

A mortgage loan reserve is established and adjusted based on Management’s quarterly analysis of the portfolio and any deterioration in value of the underlying property which would reduce the net realizable value of the property below its current carrying value. The mortgage loan reserve was $0 at December 31, 2022 and 2021.

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

	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

Investment Real Estate

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 tests for recoverability whenever events or changes in circumstances indicate the carrying value may not be recoverable. During 2022 and 2021, no impairments were recognized on the investment real estate.

Note 3 - Fair Value Measurements of the Consolidated Financial Statements provides further information regarding the fair value of financial instruments that are not measured at fair value. The investment real estate owned by the Company is included in this portion of the Note 3 - Fair Value Measurements disclosure.

The following table provides an allocation of the Company’s investment real estate by type for the periods ended December 31:

	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

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 information regarding the allocation of the oil and gas investment real estate holdings by industry type.

Gains and losses recognized on the disposition of the properties are recorded as realized gains and losses in the Consolidated Statements of Operations. During 2022 and 2021, the Company acquired $4,586,280 and $10,960,910 of investment real estate, respectively.

Notes Receivable

Notes receivable represent collateral loans and promissory notes issued by the Company and are reported at their unpaid principal balances, adjusted for valuation allowances. Valuation allowances are established for impaired loans when it is probable that contractual principal and interest will not be collected. The valuation allowance as of December 31, 2022 and 2021 was $0. Interest accruals are analyzed based on the likelihood of repayment. The Company does not utilize a specified number of days delinquent to cause an automatic non-accrual status. During 2022 and 2021, the Company acquired $9,030,657 and $8,680,000 of notes receivable, respectively.

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

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

Short-Term Investments

Short-term investments have remaining maturities exceeding three months and under 12 months at the time of purchase and are stated at amortized cost, which approximates fair value. The short-term investments consist of United States Treasury securities.

During 2022 and 2021, the Company acquired $3,591,885 and $0, respectively, in short-term investments.

Analysis of Investment Operations

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

	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

The following table presents net investment gains (losses) and the change in net unrealized gains on investments for the periods ended December 31:

	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)

Other-Than-Temporary Impairments

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

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

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

	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

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 investments. The investments were written down to better reflect their current expected value.

Investments on Deposit

The Company had investments with a fair value of $7,771,724 and $8,401,031 on deposit with various state insurance departments as of December 31, 2022 and 2021, respectively.