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Investments

12 Months Ended

Dec. 31, 2023

Note 2 – Investments

Investment Risks and Uncertainties

Investments are exposed to the following primary sources of risk: credit, interest rate, liquidity, market valuation, currency and real estate risk. The financial statement risks, stemming from such investment risks, are those associated with the determination of estimated fair values, the diminished ability to sell certain investments in times of strained market conditions, the recognition of ACL and impairments, and the recognition of income on certain investments. The use of different methodologies, assumptions and inputs relating to these financial statement risks may have a material effect on the amounts presented within the Consolidated Financial Statements.

The determination of ACL and impairments is highly subjective and is based upon quarterly evaluations and assessments of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available.

Investment in 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 fixed maturity securities are summarized by type as follows for the years ended December 31:

2023	Original or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Government and govt. agencies and authorities	$	14,316,976	$	0	$	(729,197	)	$	13,587,779
U.S. special revenue and assessments		7,528,985		0		(220,527	)		7,308,458
All other corporate bonds		87,708,777		89,004		(5,284,182	)		82,513,599
Redeemable preferred stock		2,500,000		0		0			2,500,000
Total	$	112,054,738	$	89,004	$	(6,233,906	)	$	105,909,836

2022 ⁽¹⁾	Original or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
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
Redeemable preferred stock		2,500,000		0		0			2,500,000
Total	$	119,779,820	$	65,529	$	(9,032,290	)	$	110,813,059

(1) The Company has elected to reclassify certain investments to conform with the presentation for the year ended December 31, 2023. These reclassifications had no impact on previously reported net income.

The amortized cost and estimated fair value of fixed maturity securities at December 31, 2023, by contractual maturity date, is shown below.

Fixed Maturity Securities December 31, 2023	Amortized Cost		Estimated Fair Value
Due in one year or less	$	10,990,370	$	10,832,220
Due after one year through five years		45,486,425		44,009,137
Due after five years through ten years		6,664,901		6,664,497
Due after ten years		21,851,378		20,078,690
Fixed maturities with no single maturity date		27,061,664		24,325,292
Total	$	112,054,738	$	105,909,836

Actual maturities may differ from contractual maturities due to the exercise of call or prepayment options.

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, 2023 and 2022.

The following table presents the estimated fair value and gross unrealized losses of fixed maturity securities in an unrealized loss position as of December 31:

2023	Less than 12 months					12 months or longer					Total
	Estimated fair value		Unrealized losses			Estimated fair value		Unrealized losses			Estimated fair value		Unrealized losses
U.S. Government and govt. agencies and authorities	$	1,497,390		(3,696	)	$	12,090,389		(725,501	)	$	13,587,779		(729,197	)
U.S. special revenue and assessments		0		0			7,308,458		(220,527	)		7,308,458		(220,527	)
All other corporate bonds		544,610		(2,319	)		73,678,567		(5,281,863	)		74,223,177		(5,284,182	)
Total fixed maturities	$	2,042,000		(6,015	)	$	93,077,414		(6,227,891	)	$	95,119,414		(6,233,906	)

2022⁽¹⁾	Less than 12 months					12 months or longer				Total
	Estimated fair value		Unrealized losses			Estimated fair value		Unrealized losses		Estimated 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	)

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, 2023
Fixed maturities	2	45	47
As of December 31, 2022
Fixed maturities	57	0	57

Allowance for Credit Loss - Available for Sale Securities

Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used in the credit loss evaluation process include, but are not limited to: (1) the extent to which the estimated fair value has been below amortized cost, (2) adverse conditions specifically related to a security, an industry sector, adverse change in the financial condition of the issuer of the security, (3) payment structure of the security and likelihood of the issuer being able to make payments, (4) failure of the issuer to make scheduled interest and principal payments, (5) whether the issuer, or series of issuers or an industry has suffered a catastrophic loss or has exhausted natural resources, (6) whether the Company has the intent to sell or will more likely than not be required to sell a particular security before the decline in estimated fair value below amortized cost recovers, (7) changes in the rating of the security by a rating agency, and (8) other subjective factors.

Substantially all of the unrealized losses on fixed maturity securities at December 31, 2023 and 2022 are attributable to changes in market interest rates and general disruptions in the credit market subsequent to purchase. At December 31, 2023, the Company did not intend to sell its securities in an unrealized loss position, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost. Therefore, the Company concluded that these securities had not incurred a credit loss and should not have an allowance for credit loss at December 31, 2023.

Future provisions for credit loss will depend primarily on economic fundamentals, issuer performance, and changes in credit ratings.

Net unrealized losses included in other comprehensive income (loss) for investments classified as available-for-sale, net of the effect of deferred income taxes, assuming that the depreciation had been realized as of December 31, 2023 and December 31, 2022:

	December 31, 2023			December 31, 2022
Unrealized appreciation (depreciation) on available-for-sale securities	$	(6,144,902	)	$	(8,966,761	)
Deferred income taxes		1,290,429			1,883,020
Net unrealized appreciation (depreciation) on available-for-sale securities	$	(4,854,473	)	$	(7,083,741	)

Cost Method Investments

The Company held equity investments with an aggregate cost of $15,977,368 and $21,891,896 at December 31, 2023 and 2022, 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.

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 2023 and 2022, the Company acquired $2,654,293 and $5,158,911 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 2023 and 2022, the maximum and minimum lending rates for mortgage loans were:

	2023		2022
	Maximum rate	Minimum rate	Maximum rate	Minimum rate
Farm loans	5.00 %	5.00 %	5.00 %	4.50 %
Commercial loans	8.75 %	4.00 %	7.00 %	4.00 %
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.

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

	2023		2022
In good standing	$	15,318,176	$	30,698,694
Total mortgage loans	$	15,318,176	$	30,698,694
Total foreclosed loans during the year	$	0	$	0

The following is a summary of the mortgage loans outstanding and the related allowance for credit losses:

	December 31, 2023			December 31, 2022
Farm	$	332,417		$	383,278
Commercial		13,764,209			28,767,888
Residential		1,495,550			1,547,528
Total mortgage loans		15,592,176			30,698,694
Less allowance for credit losses		(274,000	)		0
Total mortgage loans, net	$	15,318,176		$	30,698,694

There were no past due loans as of December 31, 2023 and December 31, 2022.

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 2023 and 2022, 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:

	2023		2022
Raw land	$	6,971,930	$	11,634,472
Commercial		4,106,938		4,169,847
Residential		3,512,408		2,489,858
Land, minerals and royalty interests		7,383,844		7,931,622
Total investment real estate	$	21,975,120	$	26,225,799

(1)	The Company has elected to reclassify certain investments to conform with the presentation for the year ended December 31, 2023. These reclassifications had no impact on previously reported net income.

The Company’s investment real estate portfolio includes ownership in oil and gas royalties. As of December 31, 2023 and 2022, investments in oil and gas royalties represented 34% and 30%, 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 2023 and 2022, the Company acquired $3,417,744 and $4,586,280 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. 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 2023 and 2022, the Company acquired $4,779,241 and $9,030,657 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.

The following is a summary of the notes receivable outstanding and the related allowance for credit losses:

	December 31, 2023			December 31, 2022
Notes receivable	$	14,259,225		$	14,424,127
Less allowance for credit losses		(250,000	)		0
Total notes receivable, net	$	14,009,225		$	14,424,127

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 2023 and 2022, the Company acquired $48,473,476 and $3,591,885, respectively, in short-term investments.

Allowance for Credit Loss - Loans

The allowance for credit loss (“ACL”) is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when Management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The allowance for credit losses represents Management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by Management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments - mortgage loans on real estate and notes receivable.

The allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for risk tolerance, loan review and audit results, asset quality and portfolio trends, industry concentrations, external factors and economic conditions.

Loans that do not share risk characteristics are evaluated on an individual basis. When Management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date unadjusted for selling costs as appropriate.

Allowance for Credit Loss - Unfunded Commitments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well a any third-party guarantees. The allowance for unfunded commitments as of December 31, 2023 and 2022 is $51,000 and $0, respectively, and is included in other liabilities on the Company’s Consolidated Balance Sheets.

Allowance for Credit Loss - Accrued Interest

Accrued interest is not included in the ACL and if deemed uncollectible, it is charged against interest income when determined to be uncollectible.

Analysis of Investment Operations

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

	2023			2022
Fixed maturities	$	4,184,070		$	4,318,591
Equity securities		2,710,201			6,157,942
Trading securities		0			(13,283	)
Mortgage loans		1,115,145			1,580,647
Real estate		8,318,201			11,640,759
Notes receivable		1,371,973			933,886
Policy loans		433,556			489,823
Cash and cash equivalents		1,007,840			203,250
Short-term investments		529,125			5,056
Total consolidated investment income		19,670,111			25,316,671
Investment expenses		(5,528,302	)		(4,505,200	)
Consolidated net investment income	$	14,141,809		$	20,811,471

(1)	The Company has elected to reclassify certain investments to conform with the presentation for the year ended December 31, 2023. These reclassifications had no impact on previously reported net income.

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

	2023			2022
Realized gains:
Sales of fixed maturities	$	58,333		$	4,683
Sales of equity securities		820,001			8,986,784
Sales of real estate		8,577,155			5,326,838
Sales of short-term investments		23,509			0
Total realized gains		9,478,998			14,318,305
Realized losses:
Sales of fixed maturities		0			(5,211	)
Sales of equity securities		(7,966	)		(109,636	)
Sales of real estate		0			(34,547	)
Sales of short-term investments		(7,189	)		0
Other-than-temporary impairments		0			(5,000,000	)
Total realized losses		(15,155	)		(5,149,394	)
Net realized investment gains		9,463,843			9,168,911
Change in fair value of equity securities:
Change in fair value of equity securities held at the end of the period		(3,830,793	)		33,690,712
Change in fair value of equity securities		(3,830,793	)		33,690,712
Net investment gains	$	5,633,050		$	42,859,623
Change in net unrealized gains (losses) on available-for-sale investments included in other comprehensive income:
Fixed maturities	$	2,867,943		$	(21,981,097	)
Net increase (decrease)	$	2,867,943		$	(21,981,097	)

Investments on Deposit

The Company had investments with a fair value of $7,959,076 and $7,771,724 on deposit with various state insurance departments as of December 31, 2023 and 2022, respectively.