SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission File No. 0-16867
UNITED TRUST GROUP, INC.
(Exact name of registrant as specified in its charter)
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5250 SOUTH SIXTH STREET
P.O. BOX 5147
SPRINGFIELD, IL 62705
(Address of principal executive offices, including zip code)
ILLINOIS 37-1172848
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (217) 241-6300
Securities registered pursuant to Section 12(b) of the Act
Name of each exchange
Title of each class on which registered
None NASDAQ
Title of each class
Common Stock
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X]
The aggregate market value of voting stock (Common Stock) held by non-affiliates of the registrant as of March 1, 2001, was $9,689,720.
At March 1, 2001, the Registrant had outstanding 4,175,066 shares of Common Stock, stated value $.02 per share.
DOCUMENTS INCORPORATED BY REFERENCE: None
UNITED TRUST GROUP, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PART I..............................................................................................3
ITEM 1. BUSINESS................................................................................3
ITEM 2. PROPERTIES.............................................................................17
ITEM 3. LEGAL PROCEEDINGS......................................................................18
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS....................................18
PART II............................................................................................19
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.....................19
ITEM 6. SELECTED FINANCIAL DATA................................................................20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................................21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................33
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................66
PART III...........................................................................................66
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF UTG...............................................66
ITEM 11. EXECUTIVE COMPENSATION UTG............................................................69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF UTG.................73
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................76
PART IV............................................................................................78
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................78
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING INFORMATION
Any forward-looking statement contained herein or in any other oral or written statement by the company or any of its officers, directors or employees is qualified by the fact that actual results of the company may differ materially from those projected in forward-looking statements. Additional information concerning factors that could cause actual results to differ from those in the forward-looking statements is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
OVERVIEW
United Trust Group, Inc. (the “Registrant”) was incorporated in 1984, under the laws of the State of Illinois to serve as an insurance holding company. The Registrant and its subsidiaries (the “Company”) have only one significant industry segment - insurance. The Company’s dominant business is individual life insurance which includes the servicing of existing insurance business in force, the solicitation of new individual life insurance, and the acquisition of other companies in the insurance business.
At December 31, 2000, significant majority-owned subsidiaries and affiliates of the Registrant were as depicted on the following organizational chart:
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This document at times will refer to the Company's largest shareholder, First Southern Funding LLC, a Kentucky corporation, ("FSF"). Mr. Jesse T. Correll is the majority shareholder of FSF, which is an affiliate of First Southern Bancorp, Inc., a bank holding company that operates out of 14 locations in central Kentucky. Mr. Correll is Chairman of the Board of Directors of UTG and is currently UTG's largest shareholder through his ownership control of FSF and its affiliates. At December 31, 2000 Mr. Correll owns or controls directly and indirectly approximately 51% of UTG.
The holding companies within the group, UTG and FCC, are life insurance holding companies. These companies became members of the same affiliated group through a history of acquisitions in which life insurance companies were involved. The focus of the holding companies is the acquisition of other companies in similar lines of business and management of the insurance subsidiaries. The companies have no activities outside the life insurance focus.
The insurance companies of the group, UG, APPL and ABE, all operate in the individual life insurance business. The primary focus of these companies has been the servicing of existing insurance business in force and the solicitation of new insurance business.
REC is a wholly owned subsidiary of UTG, which was incorporated under the laws of the State of Delaware on June 1, 1971, for the purpose of dealing and brokering in securities. REC acts as an agent for its customers by placing orders of mutual funds and variable annuity contracts which are placed in the customers’ names, the mutual fund shares and variable annuity accumulation units are held by the respective custodians, and the only financial involvement of REC is through receipt of commission (load). REC was originally established to enhance the life insurance sales by providing an additional option to the prospective client. The objective was to provide an insurance sale and mutual fund sale in tandem. REC functions at a minimum broker-dealer level. It does not maintain any of its customer accounts nor receives customer funds directly. Operating activity of REC accounts for less than $100,000 of earnings annually.
North Plaza is a wholly owned subsidiary of UTG, which owns for investment purposes, a shopping center in Somerset, Kentucky, approximately 12,000 acres of timberland in Kentucky, and a 50% partnership interest in an additional 11,000 acres of Kentucky timberland. Operating activity of North Plaza accounts for less than $100,000 of earnings annually.
HISTORY
UTG was incorporated December 14, 1984, as an Illinois corporation. The original name was United Trust, Inc. (“UTI”). The name was changed in 1999 following a merger with United Income Inc. (“UII”). During its first two and a half years, UTG was engaged in an intrastate public offering of its securities, raising over $12,000,000 net of offering costs. In 1986, UTG formed a life insurance subsidiary, United Trust Assurance Company (“UTAC”), and by 1987 began selling life insurance products.
On June 16, 1992, UTG and its affiliates acquired 67% of the outstanding common stock of the now dissolved Commonwealth Industries Corporation, (“CIC”) for a purchase price of $15,567,000. Following the acquisition UTG controlled eleven life insurance subsidiaries and six holding companies. The Company has taken several steps to streamline and simplify the corporate structure following the acquisitions, including dissolution of intermediate holding companies and mergers of several life insurance companies.
On November 20, 1998, First Southern Funding LLC, a Kentucky corporation, (“FSF”) and affiliates acquired 929,904 shares of common stock of UTG from UTG and certain UTG shareholders. As consideration for the shares, FSF paid UTG $10,999,995 and certain shareholders of UTG $999,990 in cash.
UTG granted, for nominal consideration, an irrevocable, exclusive option to FSF to purchase up to 1,450,000 shares of UTG common stock for a purchase price in cash equal to $15.00 per share, with such option to expire on July 1, 2001. UTG also caused three persons designated by FSF to be appointed, as part of the maximum of 11, to the Board of Directors of UTG.
Following the above transactions, and together with shares of UTG acquired in the market, FSF and affiliates became the largest shareholder of UTG. Through the shares acquired and options owned, FSF can ultimately own over 51% of UTG.
During 1999, the Company made several significant changes to streamline and simplify its corporate structure. Throughout this document references will be made to these changes in the corporate structure. Prior to these changes there were four holding companies which controlled four life insurance companies. However, in 1999 there were two mergers and a liquidation, reducing the number of holding companies to two and the number of life insurance companies to three (refer to the organizational chart on page 3). The first merger and Company liquidation took place in July of 1999. Prior to July 1999, UTG was known as United Trust, Inc. (“UTI”). UTI and United Income, Inc. (“UII”) owned 100% of the former United Trust Group, Inc., (which was formed in February of 1992 and liquidated in July of 1999 – referred to as “UTGL99”). Through a shareholder vote and special meeting on July 26, 1999, UII merged into UTI, and simultaneously with the merger, UTGL99 was liquidated and UTI changed its corporate name to United Trust Group, Inc. (“UTG”). The second merger occurred on December 29, 1999, when UG was the survivor to a merger with its 100% owned subsidiary United Security Assurance Company (“USA”).
The first merger transaction, and an anterior corresponding proposal to increase the number of authorized shares of UTG common stock from 3,500,000 to 7,000,000, received necessary shareholder approvals at a special meeting and vote held on July 26, 1999. The Board of Directors of the respective companies concluded that the merger would benefit the business operations of UTG and UII and their respective stockholders by creating a larger more viable life insurance holding group with lower administrative costs, a simplified corporate structure, and more readily marketable securities. The second merger was completed as a part of management’s efforts to reduce costs and simplify the corporate structure.
On December 31, 1999, UTG and Jesse T. Correll entered into a transaction whereby Mr. Correll, in combination with other individuals, made an equity investment in UTG. Under the terms of the Stock Acquisition Agreement, the Correll group contributed their 100% ownership of North Plaza of Somerset, Inc. to UTG in exchange for 681,818 authorized but unissued shares of UTG common stock. The Board of Directors of UTG approved the transaction at their regular quarterly board meeting held on December 7, 1999. North Plaza of Somerset, Inc. owns for investment purposes, a shopping center in Somerset, Kentucky, approximately 12,000 acres of timberland in Kentucky, and a 50% partnership interest in an additional 11,000 acres of Kentucky timberland. North Plaza has no debt. The net assets have been valued at $7,500,000, which equates to $11.00 per share for the new shares issued.
Mr. Correll is Chairman of the Board of Directors of UTG and currently UTG’s largest shareholder through his ownership control of FSF and its affiliates. Mr. Correll is the majority shareholder of FSF, which is an affiliate of First Southern Bancorp, Inc., a bank holding company that operates out of 14 locations in central Kentucky. Prior to the above transaction, and following the UTGL99 liquidation and subsequent merger of UII into UTG, FSF owned approximately 34% of UTG. As of December 31, 2000, Mr. Correll owns or controls directly and indirectly approximately 51% of UTG.
The affiliation with FSF provides the Company with increased opportunities. The additional capitalization has enabled UTG to significantly reduce its outside debt and has enhanced its ability to make future acquisitions through increased borrowing power and financial strength. Many synergies exist between the Company and FSF and its affiliates. The potential for cross selling of services to each customer base is currently being explored. Legislation was recently passed that eliminates many of the barriers previously existing between banks and insurance companies. Such alliances are already being formed within the two industries. Management believes the affiliation with FSF positions the Company for continued growth and competitiveness into the future as the financial industry changes.
PRODUCTS
UG’s portfolio consists of two universal life insurance products. Universal life insurance is a form of permanent life insurance that is characterized by its flexible premiums, flexible face amounts, and unbundled pricing factors. The primary universal life insurance product is referred to as the “Century 2000". This product was introduced to the marketing force in 1993 and has become the cornerstone of current marketing. This product has a minimum face amount of $25,000 and currently credits 5.0% interest with a guaranteed rate of 4.5% in the first 20 years and 3% in years 21 and greater. The policy values are subject to a $4.50 monthly policy fee, an administrative load and a premium load of 6.5% in all years. The premium and administrative loads are a general expense charge, which is added to a policy’s net premium to cover the insurer’s cost of doing business. A premium load is assessed upon the receipt of a premium payment. An administrative load is a monthly maintenance charge. The administrative load and surrender charge are based on the issue age, sex and rating class of the policy. A surrender charge is effective for the first 14 policy years. In general, the surrender charge is very high in the early years and then declines to zero at the end of 14 years. Policy loans are available at 7% interest in advance. The policy’s accumulated fund will be credited the guaranteed interest rate in relation to the amount of the policy loan.
The second universal life product referred to as the “UL90A”, has a minimum face amount of $25,000. The administrative load is based on the issue age, sex and rating class of the policy. Policy fees vary from $1 per month in the first year to $4 per month in the second and third years and $3 per month each year thereafter. The UL90A currently credits 5.0% interest with a 4.5% guaranteed interest rate. Partial withdrawals, subject to a remaining minimum $500 cash surrender value and a $25 fee, are allowed once a year after the first duration. Policy loans are available at 7% interest in advance. The policy’s accumulated fund will be credited the guaranteed interest rate in relation to the amount of the policy loan. Surrender charges are based on a percentage of target premium starting at 120% for years 1-5 then grading downward to zero in year 15. This policy contains a guaranteed interest credit bonus for the long-term policyholder. From years 10 through 20, additional interest bonuses are earned with a total in the twentieth year of 1.375%. The bonus is credited from the policy issue date and is contractually guaranteed.
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 impact the profitability of the Company. The minimum interest spread between earned and credited rates is 1% on the “Century 2000” universal life insurance product. The Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted interest spreads. Credited rates are reviewed and established by the Board of Directors of the respective life insurance subsidiaries.
APPL markets traditional non-participating products that include the 10 pay life traditional product and preferred whole life plans. The 10 pay life traditional product is a limited pay product whereby the owner pays premiums over a 10 year period. At the end of the 10th year, no further premiums are paid and the insurance remains in-force. The preferred whole life plan is a traditional whole life product similar to 10 pay life plan other than premiums are payable over the entire life of the contract.
The premium rates are competitive with other insurers doing business in the states in which the Company is marketing its products.
The Company markets other products, none of which is significant to operations. The Company has a variety of policies in force different from those, which are currently being marketed. Interest sensitive products including universal life and excess interest whole life (“fixed premium UL”) account for 55% of the insurance in force. Approximately 25% of the insurance in force is participating business, which represents policies under which the policyowner shares in the insurance companies statutory divisible surplus. The Company’s average persistency rate for its policies in force for 2000 and 1999 has been 89.8% and 89.4%, respectively. The Company does not anticipate any material fluctuations in rates in the future that may result from competition.
Interest sensitive life insurance products have characteristics similar to annuities with respect to the crediting of a current rate of interest at or above a guaranteed minimum rate and the use of surrender charges to discourage premature withdrawal of cash values. Universal life insurance policies also involve variable premium charges against the policyholder’s account balance for the cost of insurance and administrative expenses. Interest-sensitive whole-life products generally have fixed premiums. Interest-sensitive life insurance products are designed with a combination of front-end loads, periodic variable charges, and back-end loads or surrender charges.
Traditional life insurance products have premiums and benefits predetermined at issue; the premiums are set at levels that are designed to exceed expected policyholder benefits and Company expenses. Participating business is traditional life insurance with the added feature of an annual return of a portion of the premium paid by the policyholder through a policyholder dividend. This dividend is set annually by the Board of Directors of each insurance company and is completely discretionary.
MARKETING
The Company markets its products through separate and distinct agency forces. UG has a total of 49 general agents. Of the total agents, 13 are servicing general agents who had been managers under UG’s late 80‘s and early 90‘s Personal Producing General Agent initiative. These agents write little new business and focus primarily on the servicing of existing business. UG primarily markets its products in the Midwest region with most sales in the states of Illinois and Ohio. APPL has a total of 13 active agents who market primarily to rural customers in the state of West Virginia. ABE has no active agents. No individual sales agent accounted for over 10% of the Company’s premium volume in 2000. The Company’s sales agents do not have the power to bind the Company.
ABE is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and Missouri. During 2000, Illinois and Indiana accounted for 44% and 31%, respectively of ABE’s direct premiums collected.
APPL is licensed in Alabama, Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Missouri, Montana, Nebraska, Ohio, Oklahoma, Pennsylvania, Tennessee, Utah, Virginia, West Virginia and Wyoming. During 2000, West Virginia accounted for 87% of APPL’s direct premiums collected.
UG is licensed in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wisconsin. During 2000, Illinois accounted for 20%, and Ohio accounted for 35% of direct premiums collected. No other state accounted for more than 6% of direct premiums collected in 2000.
In 2000, $25,969,288 of total direct premium was collected by the insurance subsidiaries. Ohio accounted for 30%, Illinois accounted for 17%, and West Virginia accounted for 12% of total direct premiums collected.
New business production has been declining the past several years including declines of 33% from 1998 to 1999 and 32% from 1999 to 2000. Several factors have contributed to the impact on new business production. Increased competition for consumer dollars from other financial institutions, product illustration guideline changes by State Insurance Departments, and a decrease in the total number of insurance sales agents in the industry, have all had an impact, given the relatively small size of the Company. The Company has tried a variety of solutions to bolster new sales production including additional training, home office assistance in providing leads on prospective clients and a review of current product offerings.
In recent years, the insurance industry as a whole has experienced a decline in the total number of agents who sell insurance products, therefore competition has intensified for top producing sales agents. The relatively small size of the companies, and the resulting limitations, have made it challenging to compete in this area. With a continued decline in new business, costs associated with supporting new business, primarily salary costs, as a percentage of new business received continued to grow. In March of 1999, the Company determined it could no longer continue to support these fixed costs in light of the new business trend and no indication it would reverse any time soon. As such, in March of 1999, seven employees of the Company (approximately 8% of the total staff) were terminated due to lack of business activity. Existing agents were allowed to continue marketing Company products, but home office support was significantly reduced and leads to agents using existing inforce policies were eliminated.
The Company is currently reviewing the feasibility of a marketing opportunity with First Southern National Bank, an affiliate of UTG’s largest shareholder. The Company is looking at different types of products as a potential to sell to credit customers of First Southern National Bank. Other products are also being explored, including annuity type products and existing insurance products, as a possibility to market to all banking customers.
UNDERWRITING
The underwriting procedures of the insurance subsidiaries are established by management. Insurance policies are issued by the Company based upon underwriting practices established for each market in which the Company operates. Most policies are individually underwritten. Applications for insurance are reviewed to determine additional information required to make an underwriting decision, which depends on the amount of insurance applied for and the applicant’s age and medical history. Additional information may include inspection reports, medical examinations, and statements from doctors who have treated the applicant in the past and, where indicated, special medical tests. After reviewing the information collected, the Company either issues the policy as applied for or with an extra premium charge because of unfavorable factors or rejects the application. Substandard risks may be referred to reinsurers for full or partial reinsurance of the substandard risk.
The Company’s insurance subsidiaries require blood samples to be drawn with individual insurance applications for coverage over $45,000 (age 46 and above) or $95,000 (ages 16-45). Blood samples are tested for a wide range of chemical values and are screened for antibodies to the HIV virus. Applications also contain questions permitted by law regarding the HIV virus, which must be answered by the proposed insureds.
RESERVES
The applicable insurance laws under which the insurance subsidiaries operate require that each 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 law 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 subsidiaries’ 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. 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. Current mortality rate assumptions are based on 1975-80 select and 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. Interest crediting rates for universal life and interest sensitive products range from 4.5% to 5.5% for the years ended December 31, 2000, 1999 and 1998.
REINSURANCE
As is customary in the insurance industry, the insurance affiliates cede insurance to, and assume 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. At December 31, 2000, the Company had gross insurance in force of $2.879 billion of which approximately $735 million was ceded to reinsurers.
The Company’s reinsured business is ceded to numerous reinsurers. The Company believes the assuming companies are able to honor all contractual commitments, based on the Company’s periodic reviews of their financial statements, insurance industry reports and reports filed with state insurance departments.
Currently, the Company is utilizing reinsurance agreements with Business Mens’ Assurance Company, (“BMA”) and Life Reassurance Corporation, (“LIFE RE”) for new business. BMA and LIFE RE currenty hold an “A” (Excellent), and “A++” (Superior) rating, respectively, from A.M. Best, an industry rating company. The reinsurance agreements were effective December 1, 1993, and cover all new business of the Company. The agreements are a yearly renewable term (“YRT”) treaty where the Company cedes amounts above its retention limit of $100,000 with a minimum cession of $25,000.
One of the Company’s insurance subsidiaries, UG, entered a coinsurance agreement with First International Life Insurance Company (“FILIC”) as of September 30, 1996. Under the terms of the agreement, UG ceded to FILIC substantially all of its paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life insurance policies. During 1997, FILIC changed its name to Park Avenue Life Insurance Company (“PALIC”).
PALIC and its ultimate parent The Guardian Life Insurance Company of America (“Guardian”), currently hold an “A” (Excellent), and “A+” (Superior) rating, respectively, from A.M. Best, an industry rating company. The agreement with PALIC accounts for approximately 65% of the reinsurance receivables, as of December 31, 2000.
On September 30, 1998, UG entered into a coinsurance agreement with The Independent Order of Vikings, an Illinois fraternal organization (“IOV”). Under the terms of the agreement, UG agreed to assume on a coinsurance basis, 25% of the reserves and liabilities arising from all inforce insurance contracts issued by the IOV to its members. At December 31, 2000, the IOV insurance inforce was approximately $1,712,000, with reserves being held on that amount of approximately $408,648.
On June 1, 2000, UG assumed an already existing coinsurance agreement, dated January 1, 1992, between Lancaster Life Reinsurance Company, an Arizona corporation (“LLRC”) and Investors Heritage Life Insurance Company, a corporation organized under the laws of the Commonwealth of Kentucky (“IHL”). Under the terms of the agreement, LLRC agreed to assume from IHL a 90% quota share of new issues of credit life and accident and health policies that have been written on or after January 1, 1992 through various branches of the First Southern National Banks. The maximum amount of credit life insurance that can be assumed on any one individual’s life is $15,000. UG assumed all the rights and obligations formerly held by LLRC as the reinsurer in the agreement. LLRC liquidated its charter immediately following the transfer. At December 31, 2000, IHL has insurance inforce of approximately $4,107,000.
The Company does not have any short-duration reinsurance contracts. The effect of the Company’s long-duration reinsurance contracts on premiums earned in 2000, 1999 and 1998 was as follows:
Shown in thousands
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2000 1999 1998
Premiums Premiums Premiums
Earned Earned Earned
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Direct $ 22,970 $ 25,539 $ 30,919
Assumed 76 20 20
Ceded (3,556) (3,978) (4,543)
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Net premiums $ 19,490 $ 21,581 $ 26,396
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INVESTMENTS
Investment income represents a significant portion of the Company’s total income. Investments are 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 following table reflects net investment income by type of investment.
December 31,
------------------------------------------------
2000 1999 1998
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Fixed maturities and fixed maturities
held for sale $ 11,775,706 $ 11,886,968 $ 11,981,660
Equity securities 116,327 91,429 92,196
Mortgage loans 1,777,374 1,079,332 859,543
Real estate 611,494 389,181 842,724
Policy loans 997,381 991,812 984,761
Other long-term investments 655,418 63,528 62,477
Short-term investments 158,378 147,726 29,907
Cash 936,433 850,836 1,235,888
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Total consolidated investment income 17,028,511 15,500,812 16,089,156
Investment expenses (942,678) (971,275) (1,046,869)
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Consolidated net investment income $ 16,085,833 $ 14,529,537 $ 15,042,287
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At December 31, 2000, the Company had a total of $1,278,000 of investments, comprised of 1,078,000 in equity securities and $200,000 in other long-term investments, which did not produce income during 2000.
The following table summarizes the Company’s fixed maturities distribution at December 31, 2000 and 1999 by ratings category as issued by Standard and Poor’s, a leading ratings analyst.
Fixed Maturities
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Rating % of Portfolio
------ ------------------
2000 1999
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Investment Grade
AAA 48% 38%
AA 16% 19%
A 27% 35%
BBB 9% 7%
Below investment grade 0% 1%
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100% 100%
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The following table summarizes the Company's fixed maturities and fixed maturities held for sale by major classification.
Carrying Value
---------------------------------------
2000 1999
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U.S. government and government agencies $ 66,795,111 $ 53,484,481
States, municipalities and political subdivisions 15,524,611 17,634,547
Collateralized mortgage obligations 9,140,804 10,471,546
Public utilities 27,287,454 35,812,281
Corporate 46,303,263 57,539,613
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$ 165,051,243 $ 174,942,468
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The following table shows the composition and average maturity of the Company's investment portfolio at December 31, 2000.
Average
Carrying Average Average
Investments Value Maturity Yield
----------------------------- ------------- -------------- ---------
Fixed maturities and fixed
maturities held for sale $ 169,996,856 5 years 6.93%
Equity securities 3,647,564 Not applicable 3.19%
Mortgage Loans 24,190,222 6 years 7.35%
Investment real estate 15,099,205 Not applicable 4.05%
Policy loans 14,121,007 Not applicable 7.06%
Other long-term investments 553,139 3 years 118.49%
Short-term investments 1,958,331 190 days 8.09%
Cash and cash equivalents 18,046,440 On demand 5.19%
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Total Investments and Cash $ 247,612,764 6.88%
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At December 31, 2000, fixed maturities and fixed maturities held for sale have a combined market value of $165,751,843. Fixed maturities are carried at amortized cost. Management has the ability and intent to hold these securities until maturity. Fixed maturities held for sale are carried at market.
The Company holds $1,686,397 in short-term investments. Management monitors its investment maturities which in their opinion is sufficient to meet the Company’s cash requirements. Fixed maturities of $18,702,413 mature in one year and $104,095,139 mature in two to five years.
The Company holds $32,896,671 in mortgage loans, which represents 10% of the total assets. All mortgage loans are first position loans. 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. Loans issued are limited to no more than 80% of the appraised value of the property and must be first position against the collateral.
The Company has no mortgage loans, which are in default and in the process of foreclosure. The Company has one loan of $17,674, which is under a repayment plan. Letters are sent to each mortgagee when the loan becomes 30 days or more delinquent. Loans 90 days or more delinquent are placed on a non-performing status and classified as delinquent loans. Reserves for loan losses are established based on management’s analysis of the loan balances compared to the expected realizable value should foreclosure take place. Loans are placed on a non-accrual status based on a quarterly analysis of the likelihood of repayment. All delinquent and troubled loans held by the Company are loans, which were held in portfolios by acquired companies at the time of acquisition. 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.
The Company has in place a monitoring system to provide management with information regarding potential troubled loans. Management is provided with a monthly listing of loans that are 30 days or more past due along with a brief description of what steps are being taken to resolve the delinquency. Quarterly, coinciding with external financial reporting, the Company determines how each delinquent loan should be classified. All loans 90 days or more past due are classified as delinquent. Each delinquent loan is reviewed to determine the classification and status the loan should be given. 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 day’s delinquent to cause an automatic non-accrual status.
The national prime rate rose in late 1999 and early 2000. This results in higher earnings on short-term funds as well as on longer-term investments acquired. In 1999, the Company began investing more of its funds in mortgage loans. This is the result of its affiliation with First Southern Funding and its affiliates (“FSF”), which includes a bank, First Southern National Bank (“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. During 2000, the Company issued approximately $21,863,000 in new mortgage loans. All but $80,000 of these new loans were generated through FSNB and its personnel and funded by the Company through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. The loans issued in 2000 had an average yield of approximately 9%. The Company anticipates continuing to primarily invest in mortgage loans and government agency bonds for the short period.
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. During the fourth quarter of 2000, the Company recorded a $170,000 loss increasing the allowance to $240,000 maintained for potential mortgage loan losses. The current allowance represents approximately 50% of the total outstanding loan balances on certain loans identified by management. Although most of these loans are currently in good standing, due to economic depression in the region these loans are located, a significant potential for future losses exists.
In addition, the Company also makes sure that current and adequate insurance on the properties is being maintained. The Company requires proof of insurance on each loan and further requires to be shown as a lienholder on the policy so that any change in coverage status is reported to the Company. Proof of payment of real estate taxes is another monitoring technique utilized by the Company. Management believes a change in insurance status or non-payments of real estate taxes are indicators that a loan is potentially troubled. Correspondence with the mortgagee is performed to determine the reasons for either of these events occurring.
The following table shows a distribution of mortgage loans by type.
Mortgage Loans Amount % of
Total
---------------------------------------- ------------- ----------
Commercial - insured or guaranteed $ 6,134,273 19%
Commercial - all other 22,514,256 68%
Residential - insured or guaranteed 222,033 1%
Residential - all other 4,026,109 12%
The following table shows a geographic distribution of the mortgage loan portfolio and investment real estate.
Mortgage Real
Loans Estate
---------- -------
Alabama 8% 0%
Illinois 1% 27%
Indiana 3% 0%
Kentucky 56% 71%
Louisiana 1% 0%
Mississippi 13% 0%
North Carolina 2% 0%
New Hampshire 5% 0%
West Virginia 7% 2%
Other 4% 0%
---------- -------
Total 100% 100%
========== =======
The following table summarizes delinquent mortgage loan holdings.
Delinquent
90 days or More 2000 1999 1998
----------------------------- ---------- ----------- ----------
Non-accrual status $ 0 $ 0 $ 0
Other 83,972 58,074 278,000
Reserve on delinquent
loans 0 (10,000) (30,000)
---------- ----------- ----------
Total delinquent $ 83,972 $ 48,074 $ 248,000
========== =========== ==========
Interest income past due
(delinquent loans) $ 6,975 $ 1,296 $ 9,000
========== =========== ==========
In Process of Restructuring $ 0 $ 0 $ 0
Restructuring on other
than market terms 0 0 0
Other potential problem
loans 215,481 124,883 84,244
---------- ----------- ----------
Total problem loans $ 215,481 $ 124,883 $ 84,244
========== =========== ==========
Interest income foregone
(restructured loans) $ 0 $ 0 $ 0
========== =========== ==========
See Item 2, Properties, for description of real estate holdings.
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 lines of insurance coverage, have substantially greater financial resources and have a greater number of agents. Other significant competitive factors include policyholder benefits, service to policyholders, and premium rates.
The insurance industry is a mature industry. In recent years, the industry has experienced virtually no growth in life insurance sales, though the aging population has increased the demand for retirement savings products. The products offered (see Products) are similar to those offered by other major companies. The product features are regulated by the states and are subject to extensive competition among major insurance organizations. The Company believes a strong service commitment to policyholders, efficiency and flexibility of operations, timely service to the agency force and the expertise of its key executives help minimize the competitive pressures of the insurance industry.
Congress recently passed legislation reducing or eliminating certain barriers, which existed between insurance companies, banks and brokerages. This new legislation opens markets for financial institutions to compete against one another and to acquire one another across previously established barriers. This creates a whole new arena in which the Company must compete. Exactly what this change will mean to the financial industries is still evolving, but the Company will continue to watch these changes and look for new opportunities within them.
GOVERNMENT REGULATION
The Company’s insurance subsidiaries are assessed contributions by life and health guaranty associations in almost all states to indemnify policyholders of failed companies. In several states the company may reduce, premium taxes paid to recover a portion of assessments paid to the states’ guaranty fund association. This right of “offset” may come under review by the various states, and the company cannot predict whether and to what extent legislative initiatives may affect this right to offset. In addition, some state guaranty associations have adjusted the basis by which they assess the cost of insolvencies to individual companies. The Company believes that its reserve for future guaranty fund assessments is sufficient to provide for assessments related to known insolvencies. This reserve is based upon management’s current expectation of the availability of this right of offset, known insolvencies and state guaranty fund assessment bases. However, changes in the basis whereby assessments are charged to individual companies and changes in the availability of the right to offset assessments against premium tax payments could materially affect the company’s results.
Currently, the Company’s insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including the power to: (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus; and (x) regulate the type and amount of permitted investments. Insurance regulation is concerned primarily with the protection of policyholders. The Company cannot predict the impact of any future proposals, regulations or market conduct investigations. The Company’s insurance subsidiaries, UG, APPL and ABE are domiciled in the states of Ohio, West Virginia and Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various states, the federal government and the National Association of Insurance Commissioners (“NAIC”). The NAIC is an association whose membership consists of the insurance commissioners or their designees of the various states. The NAIC has no direct regulatory authority over insurance companies. However, its primary purpose is to provide a more consistent method of regulation and reporting from state to state. This is accomplished through the issuance of model regulations, which can be adopted by individual states unmodified, modified to meet the state’s own needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes, which require registration and periodic reporting by insurance companies controlled by other corporations licensed to transact business within their respective jurisdictions. The insurance subsidiaries are subject to such legislation and registered as controlled insurers in those jurisdictions in which such registration is required. Statutes vary from state to state but typically require periodic disclosure, concerning the corporation that controls the registered insurers and all subsidiaries of such corporation. In addition, prior notice to, or approval by, the state insurance commission of material intercorporate transfers of assets, reinsurance agreements, management agreements (see Note 9 in the notes to the consolidated financial statements), and payment of dividends (see Note 2 in the notes to the consolidated financial statements) in excess of specified amounts by the insurance subsidiary, within the holding company system, are required.
Each year the NAIC calculates financial ratio results (commonly referred to as IRIS ratios) for each company. These ratios compare various financial information pertaining to the statutory balance sheet and income statement. The results are then compared to pre-established normal ranges determined by the NAIC. Results outside the range typically require explanation to the domiciliary insurance department.
At year-end 2000, UG had one ratio outside the normal range. The ratio is related to the decrease in premium income. The decrease was attributable to the continued business decline in new business writings combined with a decrease in renewal premiums from normal terminations of existing business. As a result, UG fell slightly outside the normal range for this ratio.
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 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. In addition, the formula defines new minimum capital standards that will supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the insurance company’s regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Insurance companies below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
---------------- -------------------------------
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 2000, each of the insurance subsidiaries has a Ratio that is in excess of 4, which is 400% of the authorized control level; accordingly, the insurance subsidiaries meet the RBC requirements.
The NAIC, in conjunction with state regulators, has been reviewing existing insurance laws and regulations. A committee of the NAIC proposed changes in the regulations governing insurance company investments and holding company investments in subsidiaries and affiliates which were adopted by the NAIC as model laws in 1996. The Company does not presently anticipate any material adverse change in its business because of these changes.
Congress recently passed legislation reducing or eliminating certain barriers, which existed between insurance companies, banks and brokerages. This new legislation opens markets for financial institutions to compete against one another and to acquire one another across previously established barriers. This creates a whole new arena in which the Company must compete. Exactly what this change will mean to the financial industries is still evolving, but the Company will continue to watch these changes and look for new opportunities within them.
The State of Florida began an investigation of industrial life insurance policies in the fall of 1999 regarding policies with race-based premiums. This investigation has quickly spread to other states and to other types of small face amount policies and was expanded to consider the fairness of premiums for all small policies including policies which did not have race-based premiums. The NAIC historically has defined a “small face amount policy” as one with a face amount of $15,000 or less. Under current reviews, some states have increased this amount to policies of $25,000 or less. These states are attempting to force insurers to refund “excess premiums” to insureds or beneficiaries of insureds based on the recent American General settlement. This issue has become very complex and may become a political “hot potato”. The Company’s insurance subsidiaries have no race-based premium products, but do have policies with face amounts under the above-scrutinized limitations. The outcome of this issue could be dramatic on the insurance industry as a whole as well as the Company itself. The Company will continue to monitor developments regarding this matter to determine to what extent, if any, the Company may be exposed.
Congress recently passed the Gramm-Leach-Bliley Financial Services Modernization Act, which requires financial institutions, including all insurers, to take certain steps to enhance privacy protections of nonpublic personal information for consumers. The new law is one of the most sweeping systems of privacy protection and regulation ever imposed in our nation’s history. It requires financial companies to tell consumers how their financial information is protected, and what a company’s financial information sharing practices are, both within a corporate family and with unrelated third parties. Companies must inform their customers of their privacy policies and practices at the start of their business relationship, and then at least once a year for the duration of the relationship. Companies also must disclose the types of information that are shared. The privacy protections under the act become effective November 13, 2000. Financial institutions will have until July 1, 2001, to establish and implement privacy policies. The Company has been monitoring developments regarding this new act and analyzing options and requirements to determine the best method to comply with these new requirements.
The NAIC adopted the Life Illustration Model Regulation. Many states have adopted the regulation effective January 1, 1997. This regulation requires products, which contain non-guaranteed elements, such as universal life and interest sensitive life, to comply with certain actuarially established tests. These tests are intended to target future performance and profitability of a product under various scenarios. The regulation does not prevent a company from selling a product that does not meet the various tests. The only implication is the way in which the product is marketed to the consumer. A product that does not pass the tests uses guaranteed assumptions rather than current assumptions in presenting future product performance to the consumer. The Company conducts an ongoing thorough review of its sales and marketing process and continues to emphasize its compliance efforts.
A task force of the NAIC undertook a project to codify a comprehensive set of statutory insurance accounting rules and regulations. Project results were recently approved by the NAIC with an implementation date of January 1, 2001. Individual states in which the Company does business must implement these new rules for them to become effective. Specific recommendations have been set forth in papers issued by the NAIC. The NAIC continues to modify and amend these papers. The Company has monitored the process and has determined codification would not have a material financial impact on the Company’s financial position or results of operations. The Company will continue to monitor this issue as changes and new proposals are made.
EMPLOYEES
There are approximately 66 persons who are employed by the Company and its affiliates.
ITEM 2. PROPERTIES
The following table shows a breakout of property, net of accumulated depreciation, owned and occupied by the Company and the distribution of real estate by type.
Property owned Amount % of Total
-------------- ---------- ------------
Home Office $ 2,437,122 16%
Investment real estate
----------------------
Commercial 10,050,942 65%
Residential development 3,045,303 19%
---------- ---
13,096,245 84%
---------- ---
Grand total $15,533,367 100%
=========== ====
Total investment real estate holdings represent approximately 4% of the total assets of the Company net of accumulated depreciation of $307,294 and $813,582 at year-end 2000 and 1999 respectively. The Company owns an office complex in Springfield, Illinois, which houses the primary insurance operations. The office buildings contain 57,000 square feet of office and warehouse space. The properties are carried at $2,303,105. In addition, an insurance subsidiary owns a home office building in Huntington, West Virginia. The building has 15,000 square feet and is carried at $134,017. The West Virginia property is currently listed for sale. The facilities occupied by the Company are adequate relative to the Company’s present operations.
Commercial property mainly consists of North Plaza, which owns for investment purposes, a shopping center in Somerset, Kentucky, approximately 12,000 acres of timberland in Kentucky, and a 50% partnership interest in an additional 11,000 acres of Kentucky timberland. The timberland is harvested and in various stages of maturity. The property is carried at $9,362,888. Other commercial properties owned are leased to various unaffiliated companies and organizations and are being marketed for sale.
Residential development property is primarily located in Springfield, Illinois, and entails several developments, each targeted for a different segment of the population. These targets include a development primarily for the first time home buyer, an upscale development for existing homeowners looking for a larger home, and duplex condominiums for those who desire maintenance free exteriors and surroundings. The Company’s primary focus has been on the development and sale of lots, with an occasional home construction to help stimulate interest.
In the third quarter of 2000, the Company sold remaining real estate properties identified for disposal in prior years at a net realized gain of $728,000. In the fourth quarter 2000, remaining real estate consisted of the North Plaza holdings and development real estate located in Springfield, IL. In December 2000, management studied its development properties, analyzing such issues as remaining time to fully develop without over saturation, historic sales trends, management time and resources to continue development and other alternatives such as modifying current plans or discontinuing entirely. Management determined it would be in the long term best interests of the Company to discontinue development and attempt to liquidate the remaining properties. As such, a realized loss of $913,000 was recorded in December 2000 to reduce the book value of these properties to the amount management determined it would accept net of selling costs to facilitate liquidation.
Springfield is the State Capital of Illinois. The City’s economy is service oriented with the main employers being the State of Illinois, two major area hospitals and two large insurance companies. This provides for a very stable economy not as dramatically affected by economic conditions in other parts of the United States.
ITEM 3. LEGAL PROCEEDINGS
David A. Morlan and Louis Black vs. Universal Guaranty Life Insurance Company and United Trust Insurance Company, (U.S. District Court, Southern District of Illinois, No. 99-274-PER)
On April 26, 1999, the above lawsuit was filed against Universal Guaranty Life Insurance Company on behalf of the two named individuals. The plaintiffs were former insurance salesmen of United Trust Assurance Company (merged into UG in 1992). The plaintiffs are alleging that their employment status was as an employee rather than an independent contractor and allege violation of various employment laws. The plaintiffs are seeking class action status and judgement for fair and reasonable employee benefits. Class status was certified on October 26, 2000.
Since the certification of the class action, Louis Black dropped out as a class representative. Due to David Morlan having filed bankruptcy prior to instituting the action, the Court has opined that he may not maintain the action. As a result three new class representatives have been proposed. Discovery was recently begun to determine the adequacy of the three newly proposed class representatives. Although the proposed trial month is May, 2001, it would appear same is premature since questions regarding the three newly proposed class representatives have not been resolved and notification to the class has not yet occurred. As a result, a request is pending to reestablish a trial date.
UG believes it has no liability to the plaintiffs or other potential class members, has taken a meritorious position, and intends to defend the lawsuit vigorously. During the fourth quarter of 2000, the Company established a liability of $500,000 to cover estimated legal costs associated with the defense of this matter.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Registrant's common stock is traded on the NASDAQ Stock Market's Small-Cap Issues system. NASDAQ quotations are listed under the symbol UTGI. UTG was incorporated December 14, 1984, as an Illinois corporation. The original name was United Trust, Inc. ("UTI"). The name was changed in July 1999, following a merger with United Income Inc. ("UII"). Prior to July 1999, the stock symbol was UTIN. The change in stock symbol was due to the aforementioned merger.
The following table shows the high and low bid quotations for each quarterly period during the past two years, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
BID
---
PERIOD LOW HIGH
------ --- ----
2000
----
First quarter 8.000 9.000
Second quarter 6.063 8.313
Third quarter 6.250 6.500
Fourth quarter 4.000 6.500
BID
---
PERIOD LOW HIGH
------ --- ----
1999
----
First quarter 7.375 9.250
Second quarter 7.750 10.125
Third quarter 8.000 8.563
Fourth quarter 7.625 8.438
Primary Market Makers are: Herzog, Heine, Geduld Inc. J.J.B. Hilliard, W.L. Lyons 800-966-7022 800-627-3557
The Company has no current plans to pay dividends on its common stock and intends to retain all earnings for investment in and growth of the Company’s business. The payment of future dividends, if any, will be determined by the Board of Directors in light of existing conditions, including the Company’s earnings, financial condition, business conditions and other factors deemed relevant by the Board of Directors. See Note 2 in the accompanying consolidated financial statements for information regarding dividend restrictions.
Number of Common Shareholders as of March 1, 2001 is 10,570.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
2000 1999 1998 1997 1996
---------- --------- --------- --------- ----------
Premium income
net of reinsurance $ 19,490 $ 21,581 $ 26,396 $ 28,639 $ 30,944
Total revenues $ 35,747 $ 36,057 $ 40,885 $ 43,992 $ 46,976
Net income (loss)* $ (696) $ 1,076 $ (679) $ (559) $ (938)
Basic income (loss) per share $ (0.17) $ 0.38 $ (0.39) $ (0.32) $ (0.50)
Total assets $ 333,620 $ 339,161 $ 343,196 $ 349,300 $ 355,474
Total long-term debt $ 1,817 $ 5,918 $ 9,529 $ 21,460 $ 19,574
Dividends paid per share NONE NONE NONE NONE NONE
* Includes equity earnings of investees.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company’s consolidated results of operations, financial condition and liquidity and capital resources. This analysis should be read in conjunction with the consolidated financial statements and related notes, which appear elsewhere in this report. The Company reports financial results on a consolidated basis. The consolidated financial statements include the accounts of UTG and its subsidiaries at December 31, 2000.
Cautionary Statement Regarding Forward-Looking Statements
Any forward-looking statement contained herein or in any other oral or written statement by the company or any of its officers, directors or employees is qualified by the fact that actual results of the company may differ materially from any such statement due to the following important factors, among other risks and uncertainties inherent in the company’s business:
| 1. | Prevailing interest rate levels, which may affect the ability of the company to sell its products, the market value of the company’s investments and the lapse ratio of the company’s policies, notwithstanding product design features intended to enhance persistency of the company’s products. |
| 2. | Changes in the federal income tax laws and regulations, which may affect the relative tax advantages of the company's products. |
| 3. | Changes in the regulation of financial services, including bank sales and underwriting of insurance products, which may affect the competitive environment for the company’s products. |
| 4. | Other factors affecting the performance of the company, including, but not limited to, market conduct claims, insurance industry insolvencies, stock market performance, and investment performance. |
Results of Operations
(a) Revenues
Premiums and policy fee revenues, net of reinsurance premiums and policy fees, decreased 10% when comparing 2000 to 1999 and 18% from 1999 to 1998. The Company currently writes little new traditional business, consequently, traditional premiums will decrease as the amount of traditional business in-force decreases. Collected premiums on universal life and interest sensitive products is not reflected in premiums and policy revenues because Generally Accepted Accounting Principles (“GAAP”) requires that premiums collected on these types of products be treated as deposit liabilities rather than revenue. Unless the Company acquires a block of in-force business or marketing significantly increases on traditional business, premium revenue will continue to decline at a rate consistent with prior experience. The Companies’ average persistency rate for all policies in force for 2000 and 1999 has been approximately 89.8% and 89.4%, respectively. Persistency is a measure of insurance in force retained in relation to the previous year.
During 1998, the Boards of UG and USA approved a permanent premium reduction on certain of its participating products in force commonly referred to as the initial contract and the presidents plan. The premium reduction was generally 20% with 35% used on initial contract plans of UG with original issue ages less than 56 years old. The dividends were also reduced, and the net effect to the policyholder was a slightly lower net premium. This change became effective with the 1999 policy anniversary. This action was taken by the Boards to ensure these policyholders will be protected in future periods from potential dividend reductions at least to the extent of the permanent premium reduction amount. By reducing the required premium payment, it makes replacement activity by other insurance companies more difficult as ongoing premium payments are compared from the current policy to a potential replacement policy. This premium reduction accounted for approximately 8% of the total premium revenue decline in 1999. A corresponding decline is reflected in the policy benefits line item dividends to policyholders.
New business production decreased significantly over the last several years. New business production decreased 33% or approximately $1,079,000 when comparing 1999 to 1998 and decreased 39% the previous year. In recent years, the insurance industry as a whole has experienced a decline in the total number of agents who sell insurance products, therefore competition has intensified for top producing sales agents. The relatively small size of the companies, and the resulting limitations, have made it challenging to compete in this area. With a continued decline in new business, costs associated with supporting new business, primarily salary costs, as a percentage of new business received continued to grow. In March of 1999, the Company determined it could no longer continue to support these fixed costs in light of the new business trend and no indication it would reverse any time soon. As such, in March of 1999, seven employees of the Company (approximately 8% of the total staff) were terminated due to lack of business activity. Existing agents were allowed to continue marketing Company products, but home office support was significantly reduced and leads to agents using existing inforce policies were eliminated.
The Company is currently reviewing the feasibility of a marketing opportunity with First Southern National Bank, an affiliate of UTG’s largest shareholder. The Company is looking at different types of products as a potential to sell to credit customers of First Southern National Bank. Other products are also being explored, including annuity type products and existing insurance products, as a possibility to market to all banking customers.
Net investment income increased 11% when comparing 2000 to 1999 and decreased 3% when comparing 1999 to 1998. During 2000, the Company received $632,000 in investment earnings from a joint venture real estate development project that is in its latter stages. The Company expects to receive a small amount of income from this property’s final disposition. The earnings from this activity represent approximately 4% of the increase in investment income from the previous period.
The national prime rate rose in late 1999 and early 2000. This results in higher earnings on short-term funds as well as on longer-term investments acquired. In 1999, the Company began investing more of its funds in mortgage loans. This is the result of its affiliation with First Southern Funding and its affiliates (“FSF”), which includes a bank, First Southern National Bank (“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. During 2000, the Company issued approximately $21,863,000 in new mortgage loans. All but $80,000 of these new loans were generated through FSNB and its personnel and funded by the Company through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. The loans issued in 2000 had an average yield of approximately 9%. The Company anticipates continuing to primarily invest in mortgage loans and government agency bonds for the short period.
The decrease in net investment income in 1999 is due to the decline of the national prime rate during September and October of 1998. During September and October of 1998, the national prime rate declined three quarters of one percent (.75%). This decline reduced the yields on investments available in the marketplace in which the Company invests primarily fixed maturities. The interest rate environment improved later in 1999. The national prime rate rose a total of three-quarters of one percent (.75%) in the second half of 1999.
The overall investment yields for 2000, 1999 and 1998, are 7.01%, 6.45% and 6.69%, respectively.
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. The Company monitors investment yields, and when necessary adjusts credited interest rates on its insurance products to preserve targeted interest spreads, ranging from 1% to 2%. It is expected that monitoring of the interest spreads by management will provide the necessary margin to adequately provide for associated costs on the insurance policies the Company currently has in force and will write in the future. At the September 1998 Board of Directors meeting, the Boards of the insurance subsidiaries lowered crediting rates one half percent on all products crediting 5.5% or more. The change affected approximately $60,000,000 of policy reserves and will result in interest crediting reductions of $300,000 per year. At the March 1999 Board of Directors meeting, the Boards of the insurance subsidiaries again lowered crediting rates one half percent on all products that could be lowered. The change will result in interest crediting reductions of approximately $600,000 per year. These adjustments were in response to continued declines in interest rates in the marketplace. Policy interest crediting rate changes become effective on an individual policy basis on the next policy anniversary. Therefore, it will take a full year from the time the change is determined for the full impact of such change to be realized.
At December 31, 2000, approximately 56% of the Company’s total reserve liability relates to products with adjustable crediting interest rates. Of this total, 32% of these reserves are currently crediting the guaranteed minimum rates as established in the policies, 61% are crediting .50% above the guaranteed minimum rates and 7% are crediting more than .50% above the guaranteed minimum rates. The guaranteed minimum crediting rates on these products range from 4% to 5.5%.
Realized investment losses, net of realized gains, were $260,078, $530,894 and $1,119,156 in 2000, 1999 and 1998, respectively. During late 1998 and early 1999, the Company re-evaluated its real estate holdings, especially those properties acquired through acquisitions of other companies and mortgage loan foreclosures, and determined it would be in the long term interest of the Company to dispose of certain of these parcels. Parcels targeted for sale were generally non-income or low income producing and located in parts of the country where management has little other reason to travel.
During 2000, real estate continued to account for almost all of the realized gain and loss activity. By third quarter of 2000, the Company had sold the remaining real estate properties identified for disposal in prior years. The Company recorded net realized gains of $728,000 from these sales. By fourth quarter 2000, remaining real estate consisted of the North Plaza holdings and development real estate located in Springfield, IL. In December 2000, management studied its development properties, analyzing such issues as remaining time to fully develop without over saturation, historic sales trends, management time and resources to continue development and other alternatives such as modifying current plans or discontinuing entirely. Management determined it would be in the long term best interests of the Company to discontinue development and attempt to liquidate the remaining properties. As such, a realized loss of $913,000 was recorded in December 2000 to reduce the book value of these properties to the amount management determined it would accept net of selling costs to facilitate liquidation. During the fourth quarter of 2000, the Company recorded a $170,000 loss increasing the allowance to $240,000 maintained for potential mortgage loan losses. The current allowance represents approximately 50% of the total outstanding loan balances on certain loans identified by management. Although most of these loans are currently in good standing, due to economic depression in the region these loans are located, a significant potential for future losses exists. The allowance established represents the difference in the current loan balance and management’s estimate of realizable value in today’s circumstances should foreclosure occur.
Approximately 99% of the realized loss in 1999 is from two parcels of real estate. In June 1999, the Company sold its shopping center in Gulfport, MS realizing a loss on sale of $401,000. This property was originally acquired through the foreclosure of a mortgage loan. The property was income producing, but due to the distance from the Company’s headquarters, was difficult to manage and required the use of an outside property manager. Given this circumstance and the eventual need for updates and improvements, the Company determined it was in its best long-term interest to sell the property. At year-end the Company wrote down another parcel of real estate $178,000 that it determined to attempt to and ultimately did sell during 2000. The write down was the result of Management’s determination of the amount it would be willing to accept for the property. Approximately $440,000 of realized losses in 1998 is due to the sale of real estate. The Company reduced its non-income producing investments approximately $1,610,000 during 1998, as a result of these actions. The Company incurred losses of approximately $339,000 on the foreclosure of three mortgage loans during the second quarter of 1998. The foreclosed properties were sold before the end of 1998. As a result of these foreclosures, management reassessed its remaining mortgage loan portfolio and determined an allowance of $70,000 was appropriate to cover potential future losses in the portfolio. The Company realized a loss of approximately $88,000 on the investment in John Alden Financial Corporation common stock. Under the terms of an acquisition agreement beween Fortis, Inc. and John Alden all outstanding common shares of John Alden were acquired. The Company had other gains and losses during the periods that comprised the remaining amounts reported but were immaterial on an individual basis.
(b) Expenses
Benefits, claims and settlement expenses net of reinsurance benefits and claims, increased 5% in 2000 as compared to 1999 and decreased 16% in 1999 as compared to 1998. The decrease in premium revenues from normal policy terminations resulted in lower benefit reserve increases in each of the periods presented compared to the previous period. Fluctuations in death claim experience from year to year typically has a significant impact on variances in this line item. Death claims were $2,574,000 greater in 2000 than in 1999 and $202,000 greater in 1999 than 1998. There is no single event that caused the mortality variances. Policy claims vary from year to year and therefore, fluctuations in mortality are to be expected and are not considered unusual by management. Two events occurred in 1999, which differ from 1998 experience. Approximately 8% of the decrease from 1998 to 1999 is from the premium reduction on certain participating policies resulting in a lower dividend to policyholders expense than in the previous year. See discussion above in premiums and policy fee revenues for a more detailed explanation of this event. At the September 1998 Board of Directors meeting, the Boards of the insurance subsidiaries lowered crediting rates one half percent on all products crediting 5.5% or more. The change affected approximately $60,000,000 of policy reserves and will result in interest crediting reductions of $300,000 per year. At the March 1999 Board of Directors meeting, the Boards of the insurance subsidiaries again lowered crediting rates one half percent on all products that could be lowered. The change will result in interest crediting reductions of approximately $600,000 per year. These adjustments were in response to continued declines in interest rates in the marketplace. Policy interest crediting rate changes become effective on an individual policy basis on the next policy anniversary. Therefore, it will take a full year from the time the change is determined for the full impact of such change to be realized.
Commissions and amortization of deferred policy acquisition costs decreased 28% in 2000 compared to 1999 and decreased 55% in 1999 compared to 1998. At year-end 1998, the Company recorded an impairment write off of deferred policy acquisition costs of $2,983,000. The Company performs actuarial analysis of the recoverability of the asset based on current trends and known events compared to assumptions used in the establishment of the original asset. The impairment in 1998 was the result of declines in interest rates in the marketplace combined with lower than expected new policy writings which left the Company with greater per policy costs as a result of fixed costs being spread over fewer policies. No impairments were recorded in 2000 or 1999.
Amortization of cost of insurance acquired decreased 14% in 2000 compared to 1999 and decreased 17% in 1999 compared to 1998. Cost of insurance acquired is established when an insurance company is acquired. The Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. Cost of insurance acquired is comprised of individual life insurance products including whole life, interest sensitive whole life and universal life insurance products. 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 utilized in the amortization calculation are 9% on approximately 25% of the balance and 15% on the remaining balance. The interest rates vary due to risk analysis performed at the time of acquisition on the business acquired. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. The Company did not have any charge-offs during the periods covered by this report. Amortization of cost of insurance acquired is particularly sensitive to changes in persistency of certain blocks of insurance in-force. Persistency is a measure of insurance in force retained in relation to the previous year. The Company’s average persistency rate for all policies in force for 2000, 1999 and 1998 has been approximately 89.8%, 89.4% and 89.9%, respectively.
Operating expenses increased 34% in 2000 compared to 1999 and decreased 29% in 1999 compared to 1998. During the fourth quarter of 2000, Mr. Jesse Correll as Board Chairman, requested the resignation of James E. Melville as President of UTG and its subsidiaries. A special joint meeting of the Boards of Directors of United Trust Group, Inc. and its subsidiaries was held January 8, 2001, at which the termination of the employment agreement between First Commonwealth Corporation and James E. Melville, and the termination of James E. Melville as an officer or agent of United Trust Group, Inc. and all of its subsidiaries were approved by the Boards of Directors of each of the companies. An accrual of $562,000 was established through a charge to general expenses at year end 2000 for the remaining payments required pursuant to the terms of Mr. Melville’s employment contract and other settlement costs. A $500,000 accrual was also established at year-end 2000 for expected legal costs associated with the defense of a legal matter. See Item 3 legal proceedings for a more complete analysis of this matter. During the third quarter 2000, the Company settled a legal matter for $550,000 and incurred an additional $150,000 in legal fees. At the March 27, 2000 Board of Directors meeting, United Trust Group, Inc. and each of its affiliates accepted the resignation of Larry E. Ryherd as Chairman of the Board of Directors and Chief Executive Officer. Mr. Ryherd had 28 months remaining on an employment contract with the Company at the end of March 2000. As such, a charge of $933,000 was incurred in first quarter 2000 for the remainder of this contract. Exclusive of the above accruals, operating expenses declined 2% from the prior year, primarily as the result of lower salary and related employee costs.
During the fourth quarter of 1999, the Company transferred the policy administration functions of its insurance subsidiary APPL from Huntington, WV to its Springfield, IL location. The transfer was completed to reduce operating costs. APPL policy administration was then converted to the same computer system used to administer the other insurance subsidiaries. Following the transfer and system conversion, all insurance administration is located at the Springfield, IL office and administered on the same computer system. This action resulted in cost savings of approximately $250,000 per year in administrative costs.
Included in operating expenses in 1998 is $2,534,317 from the release of discounts associated with the Company’s notes payable. The Company’s subordinated debt was issued at rates considered favorable to the Company at time of issue, therefore the notes were discounted to reflect an effective interest rate of 15%. With the payment of part of this debt in November 1998, the unamortized discount was written off. Management’s plan to repay the remaining debt in a much shorter period of time from required repayment resulted in the determination to write off the entire remaining note discount. The decrease in operating expenses in 1999 is due in part, to a decrease in salaries from staff reduction. In most instances, the workload was absorbed into the remaining workforce. First year sales production has shown a declining trend in the last several years. The Company had tried a variety of solutions to bolster new sales production including additional training, home office assistance in providing leads on prospective clients and a review of current product offerings. First year production in the first quarter of 1999 resulted in cash received from new sales of only 54% of that received in first quarter 1998, or $560,000 less. With continued declining new business, costs associated with supporting new business, primarily salary costs, as a percentage of new business received continued to grow. In March of 1999, the Company determined it could no longer continue to support these fixed costs in light of the new business trend and no indication it would reverse any time soon. As such, in March 1999 seven employees of the Company (approximately 8% of the total staff), were terminated due to lack of business activity. This action resulted in expense savings of approximately $275,000 per year. Existing agents were allowed to continue marketing Company products, but home office support was significantly reduced and existing policy leads to agents were eliminated.
Interest expense declined 41% comparing 2000 to 1999 and declined 71% comparing 1999 to 1998. In November 1998, UTG, received approximately $11,000,000 from the issuance of common stock to First Southern Funding and its affiliates. These funds were used to retire outside debt. On November 23, 1998, the Company paid a $6,300,000 principal payment on its senior debt, paid a $2,608,099 principal payment on its 10 year subordinated debt and retired $1,917,952 of other outside debt. With the early retirement of this debt, the Company realized a write-off of $341,852 in interest expense in 1998 from unamortized discounts associated with the debt. As of December 31, 1998, there were no unamortized note discounts remaining on the balance sheet. During 1999 and 2000, the Company continued to reduce its outside debt through operating cashflows and dividends from UG to FCC. On July 31, 2000, $2,560,000 in convertible debt of UTG held by First Southern was converted to equity. At December 31, 2000, UTG had $1,817,169 in notes payable. The remaining debt bears interest at a fixed rate of 8.5% with no principal payments due until its maturity in 2012. Management believes overall sources available are more than adequate to service this debt. These sources include current cash balances of UTG, expected future operating cashflows and repayment of affiliate receivables held by UTG.
Deferred taxes are established to recognize future tax effects attributable to temporary differences between the financial statements and the tax return. As these differences are realized in the financial statement or tax return, the deferred income tax established on the difference is recognized in the financial statements as an income tax expense or credit. In 1998, the insurance company subsidiaries incurred taxable income for federal income tax purposes, which was offset through utilization of federal tax loss carryforwards. Since these carryforwards had an allowance established against them for deferred tax purposes, no corresponding expense was incurred in the financial statements. Additionally, the Company incurred deferred tax credits of $2,050,709 in 1998 from the deferred policy acquisition costs impairment and the notes payable discounts write-offs.
(c) Net income loss)
The Company had a net income (loss) of $(696,426), $1,075,909 and $(679,492) in 2000, 1999 and 1998 respectively. Significant one time charges and accruals to operating expenses combined with an increase in death claims during 2000 were the primary differences in the 2000 to 1999 results. The additional capital received from FSF significantly enhanced the Company’s financial position and improved earnings primarily through interest expense savings from debt retirement. The 1998 results included one time charges for a deferred policy acquisition costs impairment write down and the write off of the remaining discounts associated with notes payable. The Company continues to monitor and adjust those items within its control.
Financial Condition
(a) Assets
Investments are the largest asset group of the Company. The Company’s insurance subsidiaries are regulated by insurance statutes and regulations as to the type of investments that they are permitted to make and the amount of funds that may be used for any one type of investment. In light of these statutes and regulations, and the Company’s business and investment strategy, the Company generally seeks to invest in United States government and government agency securities and other high quality low risk investments.
The liabilities are predominantly long-term in nature and therefore, the Company invests in long-term fixed maturity investments that are reported in the financial statements at their amortized cost. The Company has the ability and intent to hold these investments to maturity; consequently, the Company does not expect to realize any significant loss from these investments. The Company does not own any derivative investments or “junk bonds”. As of December 31, 2000, the carrying value of fixed maturity securities in default as to principal or interest was immaterial in the context of consolidated assets or shareholders’ equity. The Company has identified securities it may sell and classified them as “investments held for sale”. Investments held for sale are carried at market, with changes in market value charged directly to shareholders’ equity. To provide additional flexibility and liquidity, the Company has categorized almost all fixed maturity investments acquired in 2000 as available for sale. It was determined it would be in the Company’s best financial interest to classify these new purchases as available for sale to provide additional liquidity. All of the fixed maturity acquisitions in 2000 were U.S. government and government agency securities.
The following table summarizes the Company’s fixed maturities distribution at December 31, 2000 and 1999 by ratings category as issued by Standard and Poor’s, a leading ratings analyst.
Fixed Maturities
----------------
Rating % of Portfolio
------ --------------
2000 1999
------ ------
Investment Grade
AAA 48% 38%
AA 16% 19%
A 27% 35%
BBB 9% 7%
Below investment grade 0% 1%
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100% 100%
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In 1999, the Company began investing more of its funds in mortgage loans. This is the result of its affiliation with First Southern Funding and its affiliates (“FSF”), which includes a bank, First Southern National Bank (“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. During 2000, the Company issued approximately $21,863,000 in new mortgage loans. All but $80,000 of these new loans were generated through FSNB and its personnel and funded by the Company through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. The Company pays FSNB a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. The loans issued in 2000 had an average yield of approximately 9%. The Company anticipates continuing to primarily invest in mortgage loans and government agency bonds for the short period. All mortgage loans held by the Company are first position loans. The Company has no loans that are in default and in the process of foreclosure at December 31, 2000.
Investment real estate and real estate acquired in satisfaction of debt decreased 23% in 2000 compared to 1999. During late 1998 and early 1999, the Company re-evaluated its real estate holdings, especially those properties acquired through acquisitions of other companies and mortgage loan foreclosures, and determined it would be in the long term interest of the Company to dispose of certain of these parcels. Parcels targeted for sale were generally non-income or low income producing and located in parts of the country where management has little other reason to travel to. By third quarter of 2000, the Company had sold the remaining real estate properties identified for disposal in prior years. By fourth quarter 2000, remaining real estate consisted of the North Plaza holdings and development real estate located in Springfield, IL. In December 2000, management studied its development properties, analyzing such issues as remaining time to fully develop without over saturation, historic sales trends, management time and resources to continue development and other alternatives such as modifying current plans or discontinuing entirely. Management determined it would be in the long term best interests of the Company to discontinue development and attempt to liquidate the remaining properties. Investment real estate holdings represent approximately 4% of the total assets of the Company. Total investment real estate is separated into two categories: Commercial 77% and Residential Development 23%.
Policy loans remained consistent for the periods presented. Industry experience for policy loans indicates few policy loans are ever repaid by the policyholder other than through termination of the policy. Policy loans are systematically reviewed to ensure that no individual policy loan exceeds the underlying cash value of the policy. Policy loans will generally increase due to new loans and interest compounding on existing policy loans.
Deferred policy acquisition costs decreased 23% in 2000 compared to 1999. Deferred policy acquisition costs, which vary with, and are primarily related to producing new business, are referred to as (“DAC”). DAC consists primarily of commissions and certain costs of policy issuance and underwriting, net of fees charged to the policy in excess of ultimate fees charged. To the extent these costs are recoverable from future profits, the Company defers these costs and amortizes them with interest in relation to the present value of expected gross profits from the contracts, discounted using the interest rate credited by the policy. The Company had $273,000 in policy acquisition costs deferred, $100,000 in interest accretion and $1,552,040 in amortization in 2000.
Cost of insurance acquired decreased 4% in 2000 compared to 1999. At December 31, 2000, cost of insurance acquired was $35,239,256 and amortization totaled $1,592,812 for the year. When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. 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.
(b) Liabilities
Total liabilities decreased 3% in 2000 compared to 1999. Policy liabilities and accruals, which represents approximately 93% of total liabilities, decreased slightly from the prior year. The decline is attributable to a shrinking policy base and declining new business production.
Notes payable decreased 69% in 2000 compared to 1999. During 2000, the Company repaid $4,100,800 of its debt. Included in this amount was $2,560,000 of convertible debt owned by First Southern that was converted to 204,800 shares of UTG common stock in July 2000. At December 31, 2000, UTG had $1,817,169 in notes payable. The remaining debt bears interest at a fixed rate of 8.5% with no principal payments due until its maturity in 2012. Management believes overall sources available are more than adequate to service this debt. These sources include current cash balances of UTG, expected future operating cashflows and repayment of affiliate receivables held by UTG. The Company’s long-term debt is discussed in more detail in Note 11 of the Notes to the Financial Statements.
(c) Shareholders’ Equity
Total shareholders’ equity increased 8% in 2000 compared to 1999. In July 2000, equity increased $2,560,000 from the issuance of 204,800 shares of common stock through the conversion of notes. Losses during the year of $(696,426), unrealized gains on investments held for sale of $1,474,187 also influenced total shareholders’ equity.
Liquidity and Capital Resources
The Company has three principal needs for cash - the insurance companies’ contractual obligations to policyholders, the payment of operating expenses and the servicing of its long-term debt. Cash and cash equivalents as a percentage of total assets were 5% and 6% as of December 31, 2000 and 1999, respectively. Fixed maturities as a percentage of total invested assets were 71% and 77% as of December 31, 2000 and 1999, respectively.
Future policy benefits are primarily long-term in nature and therefore, the Company’s investments are predominantly in long-term fixed maturity investments such as bonds and mortgage loans which provide sufficient return to cover these obligations. The Company has the ability and intent to hold these investments to maturity; consequently, the Company’s investment in long-term fixed maturities is reported in the financial statements at their amortized cost.
Many of the Company’s products contain surrender charges and other features which reward persistency and penalize the early withdrawal of funds. With respect to such products, surrender charges are generally sufficient to cover the Company’s unamortized deferred policy acquisition costs with respect to the policy being surrendered.
Cash provided by (used in) operating activities was $(2,155,491), $(627,939) and $2,166,173 in 2000, 1999 and 1998, respectively. Reporting regulations require cash inflows and outflows from universal life insurance products to be shown as financing activities when reporting on cash flows. The net cash provided by (used in) operating activities plus policyholder contract deposits less policyholder contract withdrawals equaled $(393,571) in 2000, $2,325,455 in 1999 and $5,244,388 in 1998. Management utilizes this measurement of cash flows as an indicator of the performance of the Company’s insurance operations.
Cash provided by (used in) investing activities was $(3,940,958), $(4,928,225) and $5,555,757, for 2000, 1999 and 1998, respectively. The most significant aspect of cash provided by (used in) investing activities are the fixed maturity transactions. Fixed maturities account for 42%, 68% and 84% of the total cost of investments acquired in 2000, 1999 and 1998, respectively. The Company has not directed its investable funds to so-called “junk bonds” or derivative investments.
Net cash provided by financing activities was $133,721, $205,505 and $2,550,600 for 2000, 1999 and 1998, respectively. The Company continues to pay down on its outstanding debt. Such payments are included within this category.
Policyholder contract deposits decreased 10% in 2000 compared to 1999, and decreased 8% in 1999 when compared to 1998. The decrease in policyholder contract deposits relates to the decline in new business production experienced in the last few years by the Company. Policyholder contract withdrawals have decreased 2% in 2000 compared to 1999, and decreased 10% in 1999 compared to 1998. The change in policyholder contract withdrawals is not attributable to any one significant event. Factors that influence policyholder contract withdrawals are fluctuation of interest rates, competition and other economic factors.
At December 31, 2000, the Company had a total of $1,817,169 in long-term debt outstanding. The remaining debt bears interest at a fixed rate of 8.5% with no principal payments due until its maturity in 2012. Management believes overall sources available are more than adequate to service this debt. These sources include current cash balances of UTG, expected future operating cashflows and repayment of affiliate receivables held by UTG.
UTG is a holding company that has no day to day operations of its own. Funds required to meet its expenses, generally costs associated with maintaining the company in good standing with states in which it does business, are primarily provided by its subsidiaries. On a parent only basis, UTG’s cash flow is dependent on its earnings received on invested assets (primarily notes receivable from FCC) and cash balances. At December 31, 2000, substantially all of the consolidated shareholders equity represents net assets of its subsidiaries and receivables from its subsidiaries. The Company’s insurance subsidiaries have maintained adequate statutory capital and surplus and have not used surplus relief or financial reinsurance, which have come under scrutiny by many state insurance departments. The payment of cash dividends to shareholders is not legally restricted. However, the state insurance department regulates insurance company dividend payments where the company is domiciled. UTG is the ultimate parent of UG through ownership of FCC. UG can not pay a dividend directly to UTG due to the ownership structure. However, if UG paid a dividend to its direct parent, FCC, and FCC paid a dividend equal to the amount it received, UTG would receive 81% of the original dividend paid by UG. Please refer to Note 1 of the Notes to the Consolidated Financial Statements. UG’s dividend limitations are described below without effect of the ownership structure.
Ohio domiciled insurance companies require five days prior notification to the insurance commissioner for the payment of an ordinary dividend. Ordinary dividends are defined as the greater of: a) prior year statutory earnings or b) 10% of statutory capital and surplus. For the year ended December 31, 2000, UG had a statutory gain from operations of $75,150. At December 31, 2000, UG’s statutory capital and surplus amounted to $14,288,015. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation. UG paid ordinary dividends of $2,000,000 to FCC during 2000.
A life insurance company’s statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners (“NAIC”), as modified by the insurance company’s state of domicile. Statutory accounting rules are different from generally accepted accounting principles and are intended to reflect a more conservative view by, for example, requiring immediate expensing of policy acquisition costs. The achievement of long-term growth will require growth in the statutory capital of the Company’s insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as internally generated statutory earnings or equity contributions by the Company from funds generated through debt or equity offerings.
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 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. In addition, the formula defines new minimum capital standards that will supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the insurance company’s regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Insurance companies below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
---------------- -------------------------------
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 2000, each of the insurance subsidiaries has a Ratio that is in excess of 4, which is 400% of the authorized control level; accordingly the insurance subsidiaries meet the RBC requirements.
The Company is not aware of any litigation that will have a material adverse effect on the financial position of the Company. In addition, the Company does not believe that the regulatory initiatives currently under consideration by various regulatory agencies will have a material adverse impact on the Company. The Company is not aware of any material pending or threatened regulatory action with respect to the Company or any of its subsidiaries. The Company does not believe that any insurance guaranty fund assessments will be materially different from amounts already provided for in the financial statements.
Management believes the overall sources of liquidity available will be sufficient to satisfy its financial obligations.
REGULATORY ENVIRONMENT
The Company’s insurance subsidiaries are assessed contributions by life and health guaranty associations in almost all states to indemnify policyholders of failed companies. In several states the company may reduce premium taxes paid to recover a portion of assessments paid to the states’ guaranty fund association. This right of “offset” may come under review by the various states, and the company cannot predict whether and to what extent legislative initiatives may affect this right to offset. Also, some state guaranty associations have adjusted the basis by which they assess the cost of insolvencies to individual companies. The Company believes that its reserve for future guaranty fund assessments is sufficient to provide for assessments related to known insolvencies. This reserve is based upon management’s current expectation of the availability of this right of offset, known insolvencies and state guaranty fund assessment bases. However, changes in the basis whereby assessments are charged to individual companies and changes in the availability of the right to offset assessments against premium tax payments could materially affect the company’s results.
Currently, the Company’s insurance subsidiaries are subject to government regulation in each of the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the insurance business, including the power to: (i) grant and revoke licenses to transact business; (ii) regulate and supervise trade practices and market conduct; (iii) establish guaranty associations; (iv) license agents; (v) approve policy forms; (vi) approve premium rates for some lines of business; (vii) establish reserve requirements; (viii) prescribe the form and content of required financial statements and reports; (ix) determine the reasonableness and adequacy of statutory capital and surplus; and (x) regulate the type and amount of permitted investments. Insurance regulation is concerned primarily with the protection of policyholders. The Company cannot predict the impact of any future proposals, regulations or market conduct investigations. The Company’s insurance subsidiaries, UG, APPL and ABE are domiciled in the states of Ohio, West Virginia and Illinois, respectively.
The insurance regulatory framework continues to be scrutinized by various states, the federal government and the National Association of Insurance Commissioners (“NAIC”). The NAIC is an association whose membership consists of the insurance commissioners or their designees of the various states. The NAIC has no direct regulatory authority over insurance companies, however its primary purpose is to provide a more consistent method of regulation and reporting from state to state. This is accomplished through the issuance of model regulations, which can be adopted by individual states unmodified, modified to meet the state’s own needs or requirements, or dismissed entirely.
Most states also have insurance holding company statutes, which require registration and periodic reporting by insurance companies controlled by other corporations licensed to transact business within their respective jurisdictions. The insurance subsidiaries are subject to such legislation and registered as controlled insurers in those jurisdictions in which such registration is required. Statutes vary from state to state but typically require periodic disclosure, concerning the corporation, that controls the registered insurers and all subsidiaries of such corporation. In addition, prior notice to, or approval by, the state insurance commission of material intercorporate transfers of assets, reinsurance agreements, management agreements (see Note 9 in the Notes to the Consolidated Financial Statements), and payment of dividends (see Note 2 in the Notes to the Consolidated Financial Statements) in excess of specified amounts by the insurance subsidiary, within the holding company system, are required.
Each year the NAIC calculates financial ratio results (commonly referred to as IRIS ratios) for each company. These ratios compare various financial information pertaining to the statutory balance sheet and income statement. The results are then compared to pre-established normal ranges determined by the NAIC. Results outside the range typically require explanation to the domiciliary insurance department.
At year-end 2000, UG had one ratio outside the normal range. The ratio is related to the decrease in premium income. The decrease was attributable to the continued business decline in new business writings combined with a decrease in renewal premiums from normal terminations of existing business. As a result, UG fell slightly outside the normal range for this ratio.
The NAIC, in conjunction with state regulators, has been reviewing existing insurance laws and regulations. A committee of the NAIC proposed changes in the regulations governing insurance company investments and holding company investments in subsidiaries and affiliates which were adopted by the NAIC as model laws in 1996. The Company does not presently anticipate any material adverse change in its business because of these changes.
Congress recently passed legislation reducing or eliminating certain barriers, which existed between insurance companies, banks and brokerages. This new legislation opens markets for financial institutions to compete against one another and to acquire one another across previously established barriers. This creates a whole new arena in which the Company must compete. Exactly what this change will mean to the financial industries is yet to be seen, but the Company will continue to watch these changes and look for new opportunities within them.
The State of Florida began an investigation of industrial life insurance policies in the fall of 1999 regarding policies with race-based premiums. This investigation has quickly spread to other states and to other types of small face amount policies and was expanded to consider the fairness of premiums for all small policies including policies which did not have race-based premiums. The NAIC historically has defined a “small face amount policy” as one with a face amount of $15,000 or less. Under current reviews, some states have increased this amount to policies of $25,000 or less. These states are attempting to force insurers to refund “excess premiums” to insureds or beneficiaries of insureds based on the recent American General settlement. This issue has become very complex and may become a political “hot potato”. The Company’s insurance subsidiaries have no race-based premium products, but do have policies with face amounts under the above-scrutinized limitations. The outcome of this issue could be dramatic on the insurance industry as a whole as well as the Company itself. The Company will continue to monitor developments regarding this matter to determine to what extent, if any, the Company may be exposed.
Congress recently passed the Gramm-Leach-Bliley Financial Services Modernization Act, which requires financial institutions, including all insurers, to take certain steps to enhance privacy protections of nonpublic personal information for consumers. The new law is one of the most sweeping systems of privacy protection and regulation ever imposed in our nation’s history. It requires financial companies to tell consumers how their financial information is protected, and what a company’s financial information sharing practices are, both within a corporate family and with unrelated third parties. Companies must inform their customers of their privacy policies and practices at the start of their business relationship, and then at least once a year for the duration of the relationship. Companies also must disclose the types of information that are shared. The privacy protections under the act become effective November 13, 2000. Financial institutions will have until July 1, 2001, to establish and implement privacy policies. The Company has been monitoring developments regarding this new act and analyzing options and requirements to determine the best method to comply with these new requirements.
The NAIC adopted the Life Illustration Model Regulation. Many states have adopted the regulation effective January 1, 1997. This regulation requires products, which contain non-guaranteed elements, such as universal life and interest sensitive life, to comply with certain actuarially established tests. These tests are intended to target future performance and profitability of a product under various scenarios. The regulation does not prevent a company from selling a product that does not meet the various tests. The only implication is the way in which the product is marketed to the consumer. A product that does not pass the tests uses guaranteed assumptions rather than current assumptions in presenting future product performance to the consumer. The Company conducts an ongoing thorough review of its sales and marketing process and continues to emphasize its compliance efforts.
A task force of the NAIC undertook a project to codify a comprehensive set of statutory insurance accounting rules and regulations. Project results were recently approved by the NAIC with an implementation date of January 1, 2001. Individual states in which the Company does business must implement these new rules for them to become effective. Specific recommendations have been set forth in papers issued by the NAIC. The NAIC continues to modify and amend these papers. The Company has monitored the process and has determined codification will not have a material financial impact on the Company’s financial position or results of operations. The Company will continue to monitor this issue as changes and new proposals are made.
ACCOUNTING AND LEGAL DEVELOPMENTS
The FASB has issued SFAS 138 entitled, Accounting for Derivative Instruments and Hedging Activities,as an amendment to SFAS 133 of the same title, SFAS 139 entitled,Rescission of FASB Statement No. 53 (Financial Reporting by Producers and Distributors of Motion Picture Films) and amendments to FASB Statements No. 63, 89, and 121, and SFAS 140 entitled,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,which is a replacement of SFAS 125 of the same title. The adoption of Statements of Financial Accounting Standards No. 138, 139 and 140, did not affect the Company’s financial position or results of operations, since the Company has no derivative or hedging type investments, and has not had any transactions relating to the above mentioned pronouncements.
The Company is not aware of any litigation that will have a material adverse effect on the financial position of the Company. In addition, the Company does not believe that the regulatory initiatives currently under consideration by various regulatory agencies will have a material adverse impact on the Company. The Company is not aware of any material pending or threatened regulatory action with respect to the Company or any of its subsidiaries. The Company does not believe that any insurance guaranty fund assessments will be materially different from amounts already provided for in the financial statements.
SUBSEQUENT EVENT
Pursuant to the terms of a common stock purchase agreement dated February 13, 2001, First Southern Bancorp, Inc. agreed to purchase 563,215 shares of United Trust Group, Inc. common stock from Larry E. Ryherd and family at a price of $8.00 per share. The purchase price will be payable in the form of $978,226 in cash and a five-year promissory note.
In addition, First Southern Bancorp, Inc. agreed to purchase 22,500 shares of United Trust Group, Inc. common stock and 544 shares of First Commonwealth Corporation common stock pursuant to the terms of a common stock purchase agreement dated February 13, 2001 with James E. Melville and his family. Pursuant to the terms of the agreement, the United Trust Group, Inc. shares will be acquired for $8.00 per share and First Commonwealth Corporation shares will be acquired for $200.00 per share. The purchase will be in the form of a five-year promissory note. Mr. Melville has agreed to resign as a director of United Trust Group, Inc. and its subsidiaries at the closing pursuant to an agreement and release First Southern Bancorp, Inc., United Trust Group, Inc., First Commonwealth Corporation and Mr. Melville executed concurrently with the common stock purchase agreement.
At the March 28, 2001 Board of Directors meeting of United Trust Group, Inc., the Board approved the assignment of First Southern Bancorp, Inc.'s position in the above agreements to UTG. Upon closing of the transactions, UTG will pay $978,226 in cash and issue notes payable totaling $3,816,294 to the sellers. The notes will bear interest at the fixed rate of 7% with principal payments due annually of $763,259 starting one year from the date of closing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Listed below are the financial statements included in this Part of the Annual Report on SEC Form 10-K:
Page No.
--------
UNITED TRUST GROUP, INC. AND CONSOLIDATED SUBSIDIARIES
Independent Auditors' Report for the
Years ended December 31, 2000, 1999, 1998.......................................34
Consolidated Balance Sheets.....................................................35
Consolidated Statements of Operations...........................................36
Consolidated Statements of Shareholders' Equity.................................37
Consolidated Statements of Cash Flows...........................................38
Notes to Consolidated Financial Statements.................................. 39-65
Independent Auditors’ Report
Board of Directors and Shareholders
UNITED TRUST GROUP, INC.
We have audited the accompanying consolidated balance sheets of UNITED TRUST GROUP, INC. (an Illinois corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UNITED TRUST GROUP, INC. and subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000, in conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 2000, and Schedules II, IV and V as of December 31, 2000 and 1999, of UNITED TRUST GROUP, INC. and subsidiaries and Schedules II, IV and V for each of the three years in the period then ended. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 9, 2001
UNITED TRUST GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 and 1999
ASSETS
2000 1999
------------ ------------
Investments:
Fixed maturities held to maturity, at amortized cost
(market $122,623,563 and $142,675,019) $ 121,922,963 $ 144,751,111
Investments held for sale:
Fixed maturities, at market (cost $42,914,186 and $31,415,026) 43,128,280 30,191,357
Equity securities, at market (cost $5,413,507 and $2,886,315) 5,129,571 2,165,556
Mortgage loans on real estate at amortized cost 32,896,671 15,483,772
Investment real estate, at cost, net of accumulated depreciation 13,096,245 15,552,165
Real estate acquired in satisfaction of debt 0 1,550,000
Policy loans 14,090,900 14,151,113
Other long-term investments 200,000 906,278
Short-term investments 1,686,397 2,230,267
------------ ------------
232,151,027 226,981,619
Cash and cash equivalents 15,065,076 21,027,804
Accrued investment income 3,482,036 3,459,761
Reinsurance receivables:
Future policy benefits 35,083,244 36,117,010
Policy claims and other benefits 3,911,258 3,806,382
Cost of insurance acquired 35,239,256 36,832,068
Deferred policy acquisition costs 3,948,496 5,127,536
Cost in excess of net assets purchased,
net of accumulated amortization 1,118,525 1,442,339
Property and equipment, net of accumulated depreciation 2,762,619 3,034,702
Income taxes receivable, current 178,335 434,427
Other assets 680,239 896,880
------------ ------------
Total assets $ 333,620,111 $ 339,160,528
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 240,238,991 $ 244,934,013
Policy claims and benefits payable 2,639,248 2,773,309
Other policyholder funds 1,445,857 1,627,341
Dividend and endowment accumulations 13,515,427 14,431,574
Deferred income taxes 12,056,497 11,913,154
Notes payable 1,817,169 5,917,969
Other liabilities 6,292,841 5,169,128
------------ ------------
Total liabilities 278,006,030 286,766,488
------------ ------------
Minority interests in consolidated subsidiaries 8,899,648 9,017,368
------------ ------------
Shareholders' equity:
Common stock - no par value, stated value $.02 per share.
Authorized 7,000,000 shares - 4,175,066 and 3,970,266 shares issued
and outstanding after deducting treasury shares of 47,507 and 47,507 83,501 79,405
Additional paid-in capital 47,730,980 45,175,076
Accumulated deficit (1,435,335) (738,909)
Accumulated other comprehensive income (deficit) 335,287 (1,138,900)
------------ ------------
Total shareholders' equity 46,714,433 43,376,672
------------ ------------
Total liabilities and shareholders' equity $ 333,620,111 $ 339,160,528
============ ============
See accompanying notes.
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 2000
2000 1999 1998
------------- ------------- -------------
Revenues:
Premiums and policy fees $ 23,045,858 $ 25,559,708 $ 30,938,609
Reinsurance premiums and policy fees (3,556,172) (3,978,565) (4,542,532)
Net investment income 16,085,833 14,529,537 15,042,287
Realized investment losses, net (260,078) (530,894) (1,119,156)
Other income 431,682 477,325 566,192
------------- ------------- -------------
35,747,123 36,057,111 40,885,400
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 23,440,711 22,338,042 23,078,145
Reinsurance benefits and claims (3,376,091) (3,610,459) (2,499,394)
Annuity 1,210,783 1,390,592 1,462,385
Dividends to policyholders 1,003,954 1,170,710 3,431,238
Commissions and amortization of deferred
policy acquisition costs 2,089,313 2,893,898 6,450,529
Amortization of cost of insurance acquired 1,592,812 1,847,754 2,214,928
Operating expenses 10,115,786 7,533,374 10,665,976
Interest expense 376,924 637,647 2,198,773
------------- ------------- -------------
36,454,192 34,201,558 47,002,580
------------- ------------- -------------
Income (loss) before income taxes, minority
interest and equity in income (loss) of investees (707,069) 1,855,553 (6,117,180)
Income tax credit (expense) (228,783) (690,454) 4,624,032
Minority interest in (income) loss
of consolidated subsidiaries 239,426 (142,745) 835,181
Equity in income (loss) of investees 0 53,555 (21,525)
------------- ------------- -------------
Net income (loss) $ (696,426)$ 1,075,909 $ (679,492)
============= ============= =============
Basic income (loss) per share from continuing
operations and net income (loss) $ (0.17)$ 0.38 $ (0.39)
============= ============= =============
Diluted income (loss) per share from continuing
operations and net income (loss) $ (0.17)$ 0.38 $ (0.39)
============= ============= =============
Basic weighted average shares outstanding 4,056,439 2,839,703 1,726,843
============= ============= =============
Diluted weighted average shares outstanding 4,056,439 2,839,934 1,726,843
============= ============= =============
See accompanying notes.
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 2000
2000 1999 1998
------------------------- ------------------------- -------------------------
Common stock
Balance, beginning of year $ 79,405 $ 49,809 $ 32,696
Issued during year 4,096 29,986 17,264
Treasury shares acquired 0 (390) (151)
----------- ----------- -----------
Balance, end of year $ 83,501 $ 79,405 $ 49,809
=========== =========== ===========
Additional paid-in capital
Balance, beginning of year $ 45,175,076 $ 27,403,172 $ 16,488,375
Issued during year 2,555,904 17,921,469 10,982,731
Treasury shares acquired 0 (149,565) (67,934)
----------- ----------- -----------
Balance, end of year $ 47,730,980 $ 45,175,076 $ 27,403,172
=========== =========== ===========
Accumulated deficit
Balance, beginning of year $ (738,909) $ (1,814,818) $ (1,135,326)
Net income (loss) (696,426) $ (696,426) 1,075,909 $ 1,075,909 (679,492) $ (679,492)
----------- ----------- -----------
Balance, end of year $ (1,435,335) $ (738,909) $ (1,814,818)
=========== =========== ===========
Accumulated other comprehensive
income (deficit)
Balance, beginning of year $ (1,138,900) $ (276,852) $ (29,127)
Other comprehensive income (deficit)
Unrealized holding gain (loss)
on securities 1,874,584 1,874,584 (1,166,008) (1,166,008) (440,592) (440,592)
Minority interest in unrealized
holding (gain) loss on securities (400,397) (400,397) 303,960 303,960 192,867 192,867
----------- ----------- ----------- ----------- ----------- ------------
Comprehensive income (deficit) $ 777,761 $ 213,861 $ (927,217)
=========== =========== ============
Balance, end of year $ 335,287 $ (1,138,900) $ (276,852)
=========== =========== ===========
Total shareholders' equity,
end of year $ 46,714,433 $ 43,376,672 $ 25,361,311
=========== =========== ===========
See accompanying notes.
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 2000
2000 1999 1998
---------- ----------- -----------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ (696,426) $ 1,075,909 $ (679,492)
Adjustments to reconcile net income (loss) to net
cash provided by(used in) operating activities net
of changes in assets and liabilities
resulting from the sales and purchases of
subsidiaries:
Amortization/accretion of fixed maturities 152,917 489,491 657,863
Realized investment losses, net 260,078 530,894 1,119,156
Amortization of deferred policy acquisition costs 1,452,040 1,917,012 5,168,172
Amortization of cost of insurance acquired 1,592,812 1,847,754 2,214,928
Amortization of costs in excess of net assets
purchased 90,000 90,000 90,000
Depreciation 505,221 507,771 494,364
Minority interest (239,426) 142,745 (835,181)
Charges for mortality and administration
of universal life and annuity products (10,151,024) (10,696,014) (10,771,795)
Interest credited to account balances 6,109,491 6,300,667 7,014,683
Equity in (income) loss of investees 0 (53,555) 21,525
Policy acquisition costs deferred (273,000) (720,000) (892,000)
Change in accrued investment income (22,275) 123,747 123,179
Change in reinsurance receivables 928,890 606,509 813,283
Change in policy liabilities and accruals (3,647,101) (2,218,519) 75,087
Change in income taxes payable 399,435 127,588 (4,635,447)
Change in indebtedness (to) from affiliates, net 0 (1,287) 3,769
Change in other assets and liabilities, net 1,382,877 (698,651) 2,184,079
---------- ----------- -----------
Net cash provided by (used in) operating activities (2,155,491) (627,939) 2,166,173
---------- ----------- -----------
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 5,607,700 1,430,000 164,520
Fixed maturities sold 0 0 0
Fixed maturities matured 27,103,149 31,032,290 54,642,223
Equity securities 189,270 0 450,000
Mortgage loans 4,279,622 4,765,678 1,785,859
Real estate 4,743,146 2,705,093 1,716,124
Policy loans 2,918,627 3,169,753 3,661,834
Other long-term investments 906,278 0 0
Short-term 1,042,826 1,336,251 1,593,749
---------- ----------- -----------
Total proceeds from investments sold and matured 46,790,618 44,439,065 64,014,309
Cost of investments acquired:
Fixed maturities held for sale (19,996,972) (31,366,755) 0
Fixed maturities (1,486,255) (2,020,803) (48,745,594)
Equity securities (2,673,199) (161,255) (79,053)
Mortgage loans (21,862,521) (9,257,836) (3,667,061)
Real estate (1,046,912) (635,303) (1,346,299)
Policy loans (2,858,415) (3,186,825) (3,588,686)
Other long-term investments (200,000) 0 (66,212)
Short-term (498,956) (2,503,722) (851,198)
---------- ----------- -----------
Total cost of investments acquired (50,623,230) (49,132,499) (58,344,103)
Purchase of property and equipment (108,346) (234,791) (114,449)
---------- ----------- -----------
Net cash provided by (used in) investing activities (3,940,958) (4,928,225) 5,555,757
---------- ----------- -----------
Cash flows from financing activities:
Policyholder contract deposits 12,724,345 14,176,188 15,480,745
Policyholder contract withdrawals (10,962,425) (11,222,814) (12,402,530)
Cash received in merger 0 607,508 0
Net cash transferred from coinsurance assumed 0 0 420,790
Proceeds from notes payable 0 0 500,000
Payments of principal on notes payable (1,540,800) (3,149,369) (12,420,373)
Purchase of stock of affiliates (87,399) (56,053) (1,500)
Purchase of treasury shares 0 (149,955) (26,527)
Proceeds from issuance of common stock 0 0 10,999,995
---------- ----------- -----------
Net cash provided by financing activities 133,721 205,505 2,550,600
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (5,962,728) (5,350,659) 10,272,530
Cash and cash equivalents at beginning of year 21,027,804 26,378,463 16,105,933
---------- ----------- -----------
Cash and cash equivalents at end of year $ 15,065,076 $ 21,027,804 $ 26,378,463
========== =========== ===========
See accompanying notes.
UNITED TRUST GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 2000, the parent, significant majority-owned subsidiaries and affiliates of UNITED TRUST GROUP, INC., were as depicted on the following organizational chart.
|
The Company’s significant accounting policies, consistently applied in the preparation of the accompanying consolidated financial statements, are summarized as follows.
B. NATURE OF OPERATIONS - United Trust Group, Inc., is an insurance holding company, which sells individual life insurance products through its subsidiaries. The Company’s principal market is the Midwestern United States. The Company’s dominant business is individual life insurance which includes the servicing of existing insurance business in force, the solicitation of new individual life insurance and the acquisition of other companies in the insurance business.
C. BUSINESS SEGMENTS - The Company has only one significant business segment - insurance.
D. BASIS OF PRESENTATION - The financial statements of United Trust Group, Inc., life insurance subsidiaries have been prepared in accordance with generally accepted accounting principles which differ from statutory accounting practices permitted by insurance regulatory authorities.
E. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Registrant and its majority-owned subsidiaries. Investments in 20% to 50% owned affiliates in which management has the ability to exercise significant influence are included based on the equity method of accounting and the Company’s share of such affiliates’ operating results is reflected in Equity in loss of investees. Other investments in affiliates are carried at cost. All significant intercompany accounts and transactions have been eliminated.
F. INVESTMENTS - Investments are shown on the following bases:
Fixed maturities -- at cost, adjusted for amortization of premium or discount and other-than-temporary market value declines. The amortized cost of such investments differs from their market values; however, the Company has the ability and intent to hold these investments to maturity, at which time the full face value is expected to be realized.
Investments held for sale -- at current market value, unrealized appreciation or depreciation is charged directly to shareholders’ equity.
Mortgage loans on real estate -- at unpaid balances, adjusted for amortization of premium or discount, less allowance for possible losses.
Real estate – investment real estate at cost less allowance for depreciation and, as appropriate, provisions for possible losses. Foreclosed real estate is adjusted for any impairment at the foreclosure date. Accumulated depreciation on investment real estate was $307,294 and $813,582 as of December 31, 2000 and 1999, respectively.
Policy loans -- at unpaid balances including accumulated interest but not in excess of the cash surrender value.
Short-term investments -- at cost, which approximates current market value.
Other long-term investments -- at cost.
Realized gains and losses on sales of investments are recognized in net income on the specific identification basis.
Unrealized gains and losses on investments carried at market value are recognized in other comprehensive income on the specific identification basis.
G. CASH EQUIVALENTS - The Company considers certificates of deposit and other short-term instruments with an original purchased maturity of three months or less cash equivalents.
H. REINSURANCE - In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts. The Company retains a maximum of $125,000 of coverage per individual life.
Amounts paid, or deemed to have been paid, for reinsurance contracts are recorded as reinsurance receivables. Reinsurance receivables are recognized in a manner consistent with the liabilities relating to the underlying reinsured contracts. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies.
I. FUTURE POLICY BENEFITS AND EXPENSES - 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 subsidiaries’ 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 9.25% 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. Current mortality rate assumptions are based on 1975-80 select and 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. Interest crediting rates for universal life and interest sensitive products range from 4.5% to 5.5% for the years ended December 31, 2000, 1999 and 1998, respectively.
J. POLICY AND CONTRACT CLAIMS - Policy and contract claims include provisions for reported claims in process of settlement, valued in accordance with the terms of the policies and contracts, as well as provisions for claims incurred and unreported based on prior experience of the Company. Incurred but not reported claims were $900,114 and $831,373 as of December 31, 2000 and 1999, respectively.
K. COST OF INSURANCE ACQUIRED - When an insurance company is acquired, the Company assigns a portion of its cost to the right to receive future cash flows from insurance contracts existing at the date of the acquisition. The cost of policies purchased represents the actuarially determined present value of the projected future cash flows from the acquired policies. The Company utilized 9% discount rate on approximately 25% of the business and 15% discount rate on approximately 75% of the business. 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 utilized in the amortization calculation are 9% on approximately 25% of the balance and 15% on the remaining balance. The interest rates vary due to differences in the blocks of business. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.
2000 1999 1998
------------- ------------- -------------
Cost of insurance acquired,
Beginning of year $ 36,832,068 $ 38,679,822 $ 40,894,750
Interest accretion 5,032,790 5,319,462 5,624,883
Amortization (6,625,602) (7,167,216) (7,839,811)
------------- ------------- -------------
Net amortization (1,592,812) (1,847,754) (2,214,928)
------------- ------------- -------------
Cost of insurance acquired,
End of year $ 35,239,256 $ 36,832,068 $ 38,679,822
============= ============= =============
Estimated net amortization expense of cost of insurance acquired for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
--------- ------------ ------------
2001 $ 4,775,000 $ 6,351,000 $ 1,576,000
2002 4,571,000 6,086,000 1,515,000
2003 4,371,000 6,066,000 1,695,000
2004 4,140,000 6,034,000 1,894,000
2005 3,875,000 6,084,000 2,209,000
L. DEFERRED POLICY ACQUISITION COSTS - Commissions and other costs (salaries of certain employees involved in the underwriting and policy issue functions, and medical and inspection fees) of acquiring life insurance products that vary with and are primarily related to the production of new business have been deferred. Traditional life insurance acquisition costs are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves.
For universal life insurance and interest sensitive life insurance products, acquisition costs are being amortized generally in proportion to the present value of expected gross profits from surrender charges and investment, mortality, and expense margins. Under SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments,” the Company makes certain assumptions regarding the mortality, persistency, expenses, and interest rates it expects to experience in future periods. These assumptions are to be best estimates and are to be periodically updated whenever actual experience and/or expectations for the future change from initial assumptions. The amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised.
The following table summarizes deferred policy acquisition costs and related data for the years shown.
2000 1999 1998
------------- ------------- -------------
Deferred, beginning of year $ 5,127,536 $ 6,324,548 $ 10,600,720
Acquisition costs deferred:
Commissions 184,000 566,000 690,000
Other expenses 89,000 154,000 202,000
------------- ------------- -------------
Total 273,000 720,000 892,000
Interest accretion 100,000 142,000 397,000
Amortization charged to income (1,552,040) (2,059,012) (2,582,172)
------------- ------------- -------------
Net amortization (1,452,040) (1,917,012) (2,185,172)
Amortization due to impairment 0 0 (2,983,000)
------------- ------------- -------------
Change for the year (1,179,040) (1,197,012) (4,276,172)
Deferred, end of year $ 3,948,496 $ 5,127,536 $ 6,324,548
============= ============= =============
The following table reflects the components of the income statement for the line item commissions and amortization of deferred policy acquisition costs:
2000 1999 1998
---------- ----------- ------------
Net amortization of deferred
policy acquisition costs $ 1,452,040 $ 1,917,012 $ 5,168,172
Commissions 637,273 976,886 1,282,357
---------- ----------- ------------
Total $ 2,089,313 $ 2,893,898 $ 6,450,529
========== =========== ============
Estimated net amortization expense of deferred policy acquisition costs for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
----------- ------------- -------------
2001 $ 66,000 $ 1,300,000 $ 1,234,000
2002 59,000 1,142,000 1,083,000
2003 52,000 1,008,000 956,000
2004 46,000 889,000 843,000
2005 41,000 782,000 741,000
M. COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of net assets purchased is the excess of the amount paid to acquire a company over the fair value of its net assets. Costs in excess of net assets purchased are amortized on the straight-line basis over a 40-year period. Management continually reviews the value of goodwill based on estimates of future earnings. As part of this review, management determines whether goodwill is fully recoverable from projected undiscounted net cash flows from earnings of the subsidiaries over the remaining amortization period. If management were to determine that changes in such projected cash flows no longer supported the recoverability of goodwill over the remaining amortization period, the carrying value of goodwill would be reduced with a corresponding charge to expense (no such changes have occurred). Accumulated amortization of cost in excess of net assets purchased was $1,690,146 and $1,600,146 as of December 31, 2000 and 1999, respectively.
N. PROPERTY AND EQUIPMENT – Company-occupied property, data processing equipment and furniture and office equipment are stated at cost less accumulated depreciation of $2,691,529 and $2,319,216 at December 31, 2000 and 1999, respectively. Depreciation is computed on a straight-line basis for financial reporting purposes using estimated useful lives of three to 30 years. Depreciation expense was $372,313 and $379,715, and $372,861 for the years ended December 31, 2000, 1999, and 1998, respectively.
O. INCOME TAXES - Income taxes are reported under Statement of Financial Accounting Standards Number 109. Deferred income taxes are recorded to reflect the tax consequences on future periods of differences between the tax bases of assets and liabilities and their financial reporting amounts at the end of each such period.
P. EARNINGS PER SHARE – Earnings per share (“EPS”) are reported under Statement of Financial Accounting Standards Number 128. The objective of both basic EPS and diluted EPS is to measure the performance of an entity over the reporting period. Basic EPS is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator also is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares.
Q. TREASURY SHARES – The Company holds 47,507 shares of common stock as treasury shares with a cost basis of $499,955 at both December 31, 2000 and 1999, respectively.
R. RECOGNITION OF REVENUES AND RELATED EXPENSES - Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits, consist principally of whole life insurance policies, and certain annuities with life contingencies are recognized as revenues when due. Limited payment life insurance policies defer gross premiums received in excess of net premiums, which is then recognized in income in a constant relationship with insurance in force. Accident and health insurance premiums are recognized as revenue pro rata over the terms of the policies. Benefits and related expenses associated with the premiums earned are charged to expense proportionately over the lives of the policies through a provision for future policy benefit liabilities and through deferral and amortization of deferred policy acquisition costs. For universal life and investment products, generally there is no requirement for payment of premium other than to maintain account values at a level sufficient to pay mortality and expense charges. Consequently, premiums for universal life policies and investment products are not reported as revenue, but as deposits. Policy fee revenue for universal life policies and investment products consists of charges for the cost of insurance and policy administration fees assessed during the period. Expenses include interest credited to policy account balances and benefit claims incurred in excess of policy account balances.
S. PARTICIPATING INSURANCE - Participating business represents 23% and 31% of the ordinary life insurance in force at December 31, 2000 and 1999, respectively. Premium income from participating business represents 27%, 29%, and 39% of total premiums for the years ended December 31, 2000, 1999 and 1998, respectively. The amount of dividends to be paid is determined annually by the respective insurance subsidiary’s Board of Directors. Earnings allocable to participating policyholders are based on legal requirements that vary by state.
T. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform to the 2000 presentation. Such reclassifications had no effect on previously reported net loss, total assets, or shareholders’ equity.
U. USE OF ESTIMATES - In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 2000, substantially all of consolidated shareholders’ equity represents net assets of UTG’s subsidiaries. The payment of cash dividends to shareholders by UTG is not legally restricted. However, the state insurance department regulates insurance company dividend payments where the company is domiciled. UG’s dividend limitations are described below.
Ohio domiciled insurance companies require five days prior notification to the insurance commissioner for the payment of an ordinary dividend. Ordinary dividends are defined as the greater of: a) prior year statutory earnings or b) 10% of statutory capital and surplus. For the year ended December 31, 2000, UG had a statutory gain from operations of $75,150. At December 31, 2000, UG’s statutory capital and surplus amounted to $14,288,015. Extraordinary dividends (amounts in excess of ordinary dividend limitations) require prior approval of the insurance commissioner and are not restricted to a specific calculation.
3. INCOME TAXES
Until 1984, the insurance companies were taxed under the provisions of the Life Insurance Company Income Tax Act of 1959 as amended by the Tax Equity and Fiscal Responsibility Act of 1982. These laws were superseded by the Deficit Reduction Act of 1984. All of these laws are based primarily upon statutory results with certain special deductions and other items available only to life insurance companies. Under the provision of the pre-1984 life insurance company income tax regulations, a portion of “gain from operations” of a life insurance company was not subject to current taxation but was accumulated, for tax purposes, in a special tax memorandum account designated as “policyholders’ surplus account”. Federal income taxes will become payable on this account at the then current tax rate when and if distributions to shareholders, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income maintained in the “shareholders surplus account”.
The following table summarizes the companies with this situation and the maximum amount of income that has not been taxed in each.
Shareholders' Untaxed
Company Surplus Balance
------------------- -------------- -----------
ABE $ 5,184,125 $ 1,149,693
APPL 6,603,229 1,525,367
UG 29,915,735 4,363,821
The payment of taxes on this income is not anticipated; and, accordingly, no deferred taxes have been established.
The life insurance company subsidiaries file a consolidated federal income tax return. The holding companies of the group file separate returns.
Life insurance company taxation is based primarily upon statutory results with certain special deductions and other items available only to life insurance companies. Income tax expense consists of the following components:
2000 1999 1998
------------- ------------- -------------
Current tax expense $ 85,440 $ 12,654 $ 111,470
Deferred tax expense (credit) 143,343 677,800 (4,735,502)
------------- ------------- -------------
$ 228,783 $ 690,454 $ (4,624,032)
============= ============= =============
The Companies have net operating loss carryforwards for federal income tax purposes expiring as follows:
UTG UG FCC
----------- ----------- ------------
2006 $ 103,654 $ 0 $ 0
2007 179,894 0 190,401
2008 0 0 4,595
2009 0 0 168,800
2010 0 0 19,112
2019 0 2,046,214 0
2020 0 0 631,324
----------- ----------- ------------
TOTAL $ 283,548 $ 2,046,214 $ 1,014,232
=========== =========== ============
The Company has established a deferred tax asset of $1,170,398 for its operating loss carryforwards and has established an allowance of $354,981. The Company has established a deferred tax asset of $24,445 for its total unrealized losses on investments of $69,842, and has established an allowance of $24,445. The total allowances established on deferred tax assets decreased $290,147 in 2000.
The following table shows the reconciliation of net income to taxable income of UTG:
2000 1999 1998
------------ ------------ -------------
Net income (loss) $ (696,426) $ 1,075,909 $ (679,492)
Federal income tax provision 60,550 192,247 (121,495)
(credit)
Loss (gain) of subsidiaries 762,656 (615,995) 421,738
Loss (gain) of investees 0 (53,555) 21,525
Write off of note discounts 0 0 586,462
------------ ------------ -------------
Taxable income $ 126,780 $ 598,606 $ 228,738
============ ============ =============
UTG has a net operating loss carryforward of $283,548 at December 31, 2000. UTG has averaged approximately $318,041 in taxable income over the past three years and must average taxable income of approximately $50,000 per year to fully realize its net operating loss carryforwards. UTG’s operating loss carryforwards do not begin to expire until the year 2006. UG must average approximately $110,000 of taxable income per year to fully realize its net operating loss carryforward for which no allowance is established. FCC must average approximately $80,000 of taxable income per year to fully realize its net operating loss carryforward for which no allowance is established. Management believes future earnings of UTG and UG will be sufficient to fully utilize these net operating loss carryforwards.
The expense or (credit) for income differed from the amounts computed by applying the applicable United States statutory rate of 35% to the loss before income taxes as a result of the following differences:
2000 1999 1998
------------ ------------ -------------
Tax computed at statutory rate $ (247,474) $ 649,444 $ (2,141,013)
Changes in taxes due to:
Cost in excess of net assets purchased 31,500 31,500 31,500
Current year loss for which no benefit
realized 546,231 0 0
Benefit of prior losses (139,061) (6,309) (2,587,353)
Other 37,587 15,819 72,834
------------ ------------ -------------
Income tax expense (credit) $ 228,783 $ 690,454 $ (4,624,032)
============ ============ =============
The following table summarizes the major components that comprise the deferred tax liability as reflected in the balance sheets:
2000 1999
------------ -------------
Investments $ 1,402,431 $ 1,527,096
Cost of insurance acquired 13,427,963 14,029,379
Other assets (72,468) (72,468)
Deferred policy acquisition
costs 1,381,974 1,794,638
Agent balances (6,239) (20,381)
Management/consulting fees (810,717) (376,556)
Future policy benefits (2,485,664) (3,178,470)
Gain on sale of subsidiary 2,312,483 2,312,483
Net operating loss carryforward (815,417) (1,513,912)
Other liabilities (614,374) (723,940)
Federal tax DAC (1,663,475) (1,864,715)
------------ -------------
Deferred tax liability $ 12,056,497 $ 11,913,154
============ =============
4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A. NET INVESTMENT INCOME - The following table reflects net investment income by type of investment:
December 31,
------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Fixed maturities and fixed maturities
held for sale $ 11,775,706 $ 11,886,968 $ 11,981,660
Equity securities 116,327 91,429 92,196
Mortgage loans 1,777,374 1,079,332 859,543
Real estate 611,494 389,181 842,724
Policy loans 997,381 991,812 984,761
Other long-term investments 655,418 63,528 62,477
Short-term investments 158,378 147,726 29,907
Cash 936,433 850,836 1,235,888
------------- ------------- -------------
Total consolidated investment income 17,028,511 15,500,812 16,089,156
Investment expenses (942,678) (971,275) (1,046,869)
------------- ------------- -------------
Consolidated net investment income $ 16,085,833 $ 14,529,537 $ 15,042,287
============= ============= =============
At December 31, 2000, the Company had a total of $1,278,000 of investments, comprised of $1,078,000 in equity securities and $200,000 in other long-term investments, which did not produce income during 2000.
The following table summarizes the Company's fixed maturity holdings and investments held for sale by major classifications:
Carrying Value
----------------------------------
2000 1999
------------- ------------
Investments held for sale:
Fixed maturities
U.S. Government, government agencies and
authorities $ 35,444,312 $ 22,928,178
State, municipalities and political subdivisions 206,006 194,166
Collateralized mortgage obligations 5,962,594 5,578,853
Public utilities 0 0
All other corporate bonds 1,515,368 1,490,160
------------- ------------
$ 43,128,280 $ 30,191,357
============= ============
Equity securities
Banks, trust and insurance companies $ 3,142,320 $ 1,308,453
Industrial and miscellaneous 1,987,251 857,103
------------- ------------
$ 5,129,571 $ 2,165,556
============= ============
Fixed maturities held to maturity:
U.S. Government, government agencies and authorities $ 31,350,799 $ 30,556,303
State, municipalities and political subdivisions 15,318,605 17,440,381
Collateralized mortgage obligations 3,178,210 4,892,693
Public utilities 27,287,454 35,812,281
All other corporate bonds 44,787,895 56,049,453
------------- ------------
$ 121,922,963 $ 144,751,111
============= ============
By insurance statute, the majority of the Company’s investment portfolio is invested in investment grade securities to provide ample protection for policyholders. The Company does not invest in so-called “junk bonds” or derivative investments.
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 following table summarizes by category securities held that are below investment grade at amortized cost:
Below Investment
Grade Investments 2000 1999 1998
------------------------- ----------- ---------- ----------
Public Utilities $ 0 $ 251,878 $ 970,311
CMO 239,165 0 0
Corporate 23,000 276,649 47,281
----------- ---------- ----------
Total $ 262,165 $ 528,527 $1,017,592
=========== ========== ==========
B. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in securities including investments held for sale are as follows:
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
2000 Cost Gains Losses Value
- ------------------------------ ------------ ----------- ------------ ------------
Investments held for sale:
U.S. Government and govt.
agencies and authorities $ 35,281,562 $ 245,119 $ (82,369) $ 35,444,312
States, municipalities and
political subdivisions 190,593 15,413 0 206,006
Collateralized mortgage
obligations 5,919,553 58,179 (15,138) 5,962,594
Public utilities 0 0 0 0
All other corporate bonds 1,522,478 0 (7,110) 1,515,368
------------ ----------- ------------ ------------
42,914,186 318,711 (104,617) 43,128,280
Equity securities 5,413,507 637,191 (921,127) 5,129,571
------------ ----------- ------------ ------------
Total $ 48,327,693 $ 955,902 $ (1,025,744) $ 48,257,851
============ =========== ============ ============
Fixed maturities held to maturity:
U.S. Government and govt.
agencies and authorities $ 31,350,799 $ 148,229 $ (282,088) $ 31,216,940
States, municipalities and
political subdivisions 15,318,605 299,028 (45,335) 15,572,298
Collateralized mortgage
obligations 3,178,210 35,628 (3,323) 3,210,515
Public utilities 27,287,454 460,241 (220,316) 27,527,379
All other corporate bonds 44,787,895 505,860 (197,324) 45,096,431
------------ ----------- ------------ ------------
Total $ 121,922,963 $ 1,448,986 $ (748,386) $122,623,563
============ =========== ============ ============
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1999 Cost Gains Losses Value
- ------------------------------- ------------ ----------- ------------ ------------
Investments held for sale:
U.S. Government and govt.
Agencies and authorities $ 23,791,634 $ 0 $ (863,456) $ 22,928,178
States, municipalities and
Political subdivisions 189,212 4,954 0 194,166
Collateralized mortgage
Obligations 5,910,505 0 (331,652) 5,578,853
Public utilities 0 0 0 0
All other corporate bonds 1,523,675 0 (33,515) 1,490,160
------------ ----------- ------------ ------------
31,415,026 4,954 (1,228,623) 30,191,357
Equity securities 2,886,315 16,412 (737,171) 2,165,556
------------ ----------- ------------ ------------
Total $ 34,301,341 $ 21,366 $ (1,965,794) $ 32,356,913
============ =========== ============ ============
Fixed maturities held to maturity:
U.S. Government and govt.
Agencies and authorities $ 30,556,303 $ 105,814 $ (1,490,965) $ 29,171,152
States, municipalities and
Political subdivisions 17,440,381 85,098 (442,417) 17,083,062
Collateralized mortgage
Obligations 4,892,693 78,972 (47,329) 4,924,336
Public utilities 35,812,281 268,532 (251,317) 35,829,496
All other corporate bonds 56,049,453 228,223 (610,703) 55,666,973
------------ ----------- ------------ ------------
Total $ 144,751,111 $ 766,639 $ (2,842,731) $142,675,019
============ =========== ============ ============
| The amortized cost and estimated market value of debt securities at December 31, 2000, 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. |
Estimated
Fixed Maturities Held for Sale Amortized Market
December 31, 2000 Cost Value
------------------------------------- ------------ ------------
Due in one year or less $ 6,710,854 $ 6,729,550
Due after one year through five years 27,159,052 27,344,469
Due after five years through ten years 2,969,134 2,924,188
Due after ten years 155,593 167,479
Collateralized mortgage obligations 5,919,553 5,962,594
------------ ------------
Total $ 42,914,186 $ 43,128,280
============ ============
Estimated
Fixed Maturities Held to Maturity Amortized Market
December 31, 2000 Cost Value
------------------------------------- ------------ ------------
Due in one year or less $ 11,991,559 $ 11,996,447
Due after one year through five years 76,936,086 77,594,176
Due after five years through ten years 25,499,449 25,469,233
Due after ten years 4,317,659 4,353,192
Collateralized mortgage obligations 3,178,210 3,210,515
------------ ------------
Total $ 121,922,963 $ 122,623,563
============ ============
| An analysis of sales, maturities and principal repayments of the Company’s fixed maturities portfolio for the years ended December 31, 2000, 1999 and 1998 is as follows: |
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December 31, 2000 Cost Gains Losses Sale
- ------------------------------- ------------ ---------- ------------ ------------
Scheduled principal repayments,
calls and tenders:
Held for sale $ 5,611,476 $ 71 $ (3,847) $ 5,607,700
Held to maturity 27,047,819 59,463 (4,133) 27,103,149
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
------------ ---------- ------------ ------------
Total $ 32,659,295 $ 59,534 $ (7,980) $ 32,710,849
============ ========== ============ ============
Cost or Gross Gross Proceeds
Amortized Realized Realized from
Year ended December 31, 1999 Cost Gains Losses Sale
- ------------------------------- ------------ ---------- ------------ ------------
Scheduled principal
repayments,
calls and tenders:
Held for sale $ 1,430,000 $ 0 $ 0 $ 1,430,000
Held to maturity 31,037,532 16,480 (21,722) 31,032,290
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
------------ ---------- ------------ ------------
Total $ 32,467,532 $ 16,480 $ (21,722) $ 32,462,290
============ ========== ============ ============
Cost or Gross Gross Proceeds
Amortized Realized Realized From
Year ended December 31, 1998 Cost Gains Losses Sale
- ------------------------------- ------------ ---------- ------------ ------------
Scheduled principal
repayments,
calls and tenders:
Held for sale $ 164,161 $ 359 $ 0 $ 164,520
Held to maturity 54,824,249 126,285 (308,311) 54,642,223
Sales:
Held for sale 0 0 0 0
Held to maturity 0 0 0 0
------------ ---------- ------------ ------------
Total $ 54,988,410 $ 126,644 $ (308,311) $ 54,806,743
============ ========== ============ ============
C. INVESTMENTS ON DEPOSIT - At December 31, 2000, investments carried at approximately $13,041,000 were on deposit with various state insurance departments.
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value information at December 31, 2000 and 1999, as required by Statement of Financial Accounting Standards 107, Disclosure about Fair Value of Financial Instruments (“SFAS 107”). Such information, which pertains to the Company’s financial instruments, is based on the requirements set forth in that Statement and does not purport to represent the aggregate net fair value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument required to be valued by SFAS 107 for which it is practicable to estimate that value:
(a) Cash and Cash equivalents
The carrying amount in the financial statements approximates fair value because of the relatively short period of time between the origination of the instruments and their expected realization.
(b) Fixed maturities and investments held for sale
Quoted market prices, if available, are used to determine the fair value. If quoted market prices are not available, management estimates the fair value based on the quoted market price of a financial instrument with similar characteristics.
(c) Mortgage loans on real estate
The fair values of mortgage loans are estimated using discounted cash flow analyses and interest rates being offered for similar loans to borrowers with similar credit ratings.
(d) Investment real estate and real estate acquired in satisfaction of debt
An estimate of fair value is based on management’s review of the individual real estate holdings. Management utilizes sales of surrounding properties, current market conditions and geographic considerations. Management conservatively estimates the fair value of the portfolio is equal to the carrying value.
(e) Policy loans
It is not practicable to estimate the fair value of policy loans as they have no stated maturity and their rates are set at a fixed spread to related policy liability rates. Policy loans are carried at the aggregate unpaid principal balances in the consolidated balance sheets, and earn interest at rates ranging from 4% to 8%. Individual policy liabilities in all cases equal or exceed outstanding policy loan balances.
(f) Other long-term investments
The Company has invested $200,000 in a joint real estate venture.
(g) Short-term investments
For short-term instruments, the carrying amount is a reasonable estimate of fair value. Short-term instruments represent collateral loans and certificates of deposit with various banks that are protected under FDIC.
(h) Notes payable
For borrowings under the senior loan agreement, which is subject to floating rates of interest, carrying value is a reasonable estimate of fair value. For subordinated borrowings fair value was determined based on the borrowing rates currently available to the Company for loans with similar terms and average maturities.
The estimated fair values of the Company's financial instruments required to be valued by SFAS 107 are as follows as of December 31:
2000 1999
------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
- ------
------------ ------------ ------------ ------------
Fixed maturities $ 121,922,963 $ 122,623,563 $ 144,751,111 $ 142,675,019
Fixed maturities held for
sale 43,128,280 43,128,280 30,191,357 30,191,357
Equity securities 5,129,571 5,129,571 2,165,556 2,165,556
Mortgage loans on real
estate 32,896,671 32,841,254 15,483,772 14,633,879
Investment in real estate 13,096,245 13,096,245 15,552,165 15,552,165
Real estate acquired in
Satisfaction of debt 0 0 1,550,000 1,550,000
Policy loans 14,090,900 14,090,900 14,151,113 14,151,113
Other long-term investments 200,000 200,000 906,278 873,089
Short-term investments 1,686,397 1,686,397 2,230,267 2,230,267
Liabilities
- -----------
Notes payable 1,817,169 1,594,016 5,917,969 5,774,256
6. STATUTORY EQUITY AND INCOME FROM OPERATIONS
The Company’s insurance subsidiaries are domiciled in Ohio, Illinois and West Virginia and prepare their statutory-based financial statements in accordance with accounting practices prescribed or permitted by the respective insurance department. These principles differ significantly from generally accepted accounting principles. “Prescribed” statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (“NAIC”). “Permitted” statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, from company to company within a state, and may change in the future. The NAIC currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of “prescribed” statutory accounting practices. The new rules promulgated by the codifying of statutory accounting practices become effective January 1, 2001. Accordingly, these uniform rules will change prescribed statutory accounting practices and will result in changes to the accounting practices that insurance enterprises use to prepare their statutory financial statements. Implementation of the codification rules will not have a material financial impact on the financial condition of the Company’s life insurance subsidiaries. UG’s total statutory shareholders’ equity was $14,288,015 and $15,022,234 at December 31, 2000 and 1999, respectively. The Company’s life insurance subsidiaries reported combined statutory operating income before taxes (exclusive of intercompany dividends) of $2,901,000, $3,843,000 and $5,485,000 for 2000, 1999 and 1998, respectively.
7. REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
The Company assumes risks from, and reinsures certain parts of its risks with other insurers under yearly renewable term and coinsurance agreements that are accounted for by passing a portion of the risk to the reinsurer. Generally, the reinsurer receives a proportionate part of the premiums less commissions and is liable for a corresponding part of all benefit payments. While the amount retained on an individual life will vary based upon age and mortality prospects of the risk, the Company generally will not carry more than $125,000 individual life insurance on a single risk.
The Company has reinsured approximately $735 million, $831 million and $924 million in face amount of life insurance risks with other insurers for 2000, 1999 and 1998, respectively. Reinsurance receivables for future policy benefits were $35,083,244 and $36,117,010 at December 31, 2000 and 1999, respectively, for estimated recoveries under reinsurance treaties. Should any reinsurer be unable to meet its obligation at the time of a claim, obligation to pay such claim would remain with the Company.
Currently, the Company is utilizing reinsurance agreements with Business Mens’ Assurance Company, (“BMA”) and Life Reassurance Corporation, (“LIFE RE”) for new business. BMA and LIFE RE currenty hold an “A” (Excellent), and “A++” (Superior) rating, respectively, from A.M. Best, an industry rating company. The reinsurance agreements were effective December 1, 1993, and cover all new business of the Company. The agreements are a yearly renewable term (“YRT”) treaty where the Company cedes amounts above its retention limit of $100,000 with a minimum cession of $25,000.
One of the Company’s insurance subsidiaries, UG, entered a coinsurance agreement with First International Life Insurance Company (“FILIC”) as of September 30, 1996. Under the terms of the agreement, UG ceded to FILIC substantially all of its paid-up life insurance policies. Paid-up life insurance generally refers to non-premium paying life insurance policies. During 1997, FILIC changed its name to Park Avenue Life Insurance Company (“PALIC”).
PALIC and its ultimate parent The Guardian Life Insurance Company of America (“Guardian”), currently hold an “A” (Excellent), and “A+” (Superior) rating, respectively, from A.M. Best, an industry rating company. The agreement with PALIC accounts for approximately 65% of the reinsurance receivables, as of December 31, 2000.
On September 30, 1998, UG entered into a coinsurance agreement with The Independent Order of Vikings, an Illinois fraternal organization (“IOV”). Under the terms of the agreement, UG agreed to assume on a coinsurance basis, 25% of the reserves and liabilities arising from all inforce insurance contracts issued by the IOV to its members. At December 31, 2000, the IOV insurance inforce was approximately $1,712,000, with reserves being held on that amount of approximately $408,648.
On June 1, 2000, UG assumed an already existing coinsurance agreement, dated January 1, 1992, between Lancaster Life Reinsurance Company, an Arizona corporation (“LLRC”) and Investors Heritage Life Insurance Company, a corporation organized under the laws of the Commonwealth of Kentucky (“IHL”). Under the terms of the agreement, LLRC agreed to assume from IHL a 90% quota share of new issues of credit life and accident and health policies that have been written on or after January 1, 1992 through various branches of the First Southern National Bank. The maximum amount of credit life insurance that can be assumed on any one individual’s life is $15,000. UG assumed all the rights and obligations formerly held by LLRC as the reinsurer in the agreement. LLRC liquidated its charter immediately following the transfer. At December 31, 2000, IHL has insurance inforce of approximately $4,107,000.
The Company does not have any short-duration reinsurance contracts. The effect of the Company’s long-duration reinsurance contracts on premiums earned in 2000, 1999 and 1998 was as follows:
Shown in thousands
-----------------------------------------------
2000 1999 1998
Premiums Premiums Premiums
Earned Earned Earned
-------------- ------------- -------------
Direct $ 22,970 $ 25,539 $ 30,919
Assumed 76 20 20
Ceded (3,556) (3,978) (4,543)
-------------- ------------- -------------
Net premiums $ 19,490 $ 21,581 $ 26,396
============== ============= =============
8. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts which have been returned against life and health insurers in the jurisdictions in which the Company does business involving the insurers’ sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. Some of the lawsuits have resulted in the award of substantial judgments against the insurer, including material amounts of punitive damages. In some states, juries have substantial discretion in awarding punitive damages in these circumstances.
Under the insurance guaranty fund laws in most states, insurance companies doing business in a participating state can be assessed up to prescribed limits for policyholder losses incurred by insolvent or failed insurance companies. Although the Company cannot predict the amount of any future assessments, most insurance guaranty fund laws currently provide that an assessment may be excused or deferred if it would threaten an insurer’s financial strength. Mandatory assessments may be partially recovered through a reduction in future premium tax in some states. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements.
The State of Florida began an investigation of industrial life insurance policies in the fall of 1999 regarding policies with race-based premiums. This investigation has quickly spread to other states and to other types of small face amount policies and was expanded to consider the fairness of premiums for all small policies including policies which did not have race-based premiums. The NAIC historically has defined a “small face amount policy” as one with a face amount of $15,000 or less. Under current reviews, some states have increased this amount to policies of $25,000 or less. These states are attempting to force insurers to refund “excess premiums” to insureds or beneficiaries of insureds based on the recent American General settlement. This issue has become very complex and may become a political “hot potato”. The Company’s insurance subsidiaries have no race-based premium products, but do have policies with face amounts under the above-scrutinized limitations. The outcome of this issue could be dramatic on the insurance industry as a whole as well as the Company itself. The Company will continue to monitor developments regarding this matter to determine to what extent, if any, the Company may be exposed.
Congress recently passed the Gramm-Leach-Bliley Financial Services Modernization Act, which requires financial institutions, including all insurers, to take certain steps to enhance privacy protections of nonpublic personal information for consumers. The new law is one of the most sweeping systems of privacy protection and regulation ever imposed in our nation’s history. It requires financial companies to tell consumers how their financial information is protected, and what a company’s financial information sharing practices are, both within a corporate family and with unrelated third parties. Companies must inform their customers of their privacy policies and practices at the start of their business relationship, and then at least once a year for the duration of the relationship. Companies also must disclose the types of information that are shared. The privacy protections under the act become effective November 13, 2000. Financial institutions will have until July 1, 2001, to establish and implement privacy policies. The Company has been monitoring developments regarding this new act and analyzing options and requirements to determine the best method to comply with these new requirements.
David A. Morlan and Louis Black vs. Universal Guaranty Life Insurance Company and United Trust Insurance Company, (U.S. District Court, Southern District of Illinois, No. 99-274-PER)
On April 26, 1999, the above lawsuit was filed against Universal Guaranty Life Insurance Company on behalf of the two named individuals. The plaintiffs were former insurance salesmen of United Trust Assurance Company (merged into UG in 1992). The plaintiffs are alleging that their employment status was as an employee rather than an independent contractor and allege violation of various employment laws. The plaintiffs are seeking class action status and judgement for fair and reasonable employee benefits. Class status was certified on October 26, 2000.
Since the certification of the class action, Louis Black dropped out as a class representative. Due to David Morlan having filed bankruptcy prior to instituting the action, the Court has opined that he may not maintain the action. As a result three new class representatives have been proposed. Discovery was recently begun to determine the adequacy of the three newly proposed class representatives. Although the proposed trial month is May, 2001, it would appear same is premature since questions regarding the three newly proposed class representatives have not been resolved and notification to the class has not yet occurred. As a result, a request is pending to reestablish a trial date.
UG believes it has no liability to the plaintiffs or other potential class members, has taken a meritorious position, and intends to defend the lawsuit vigorously. During the fourth quarter of 2000, the Company established a liability of $500,000 to cover estimated legal costs associated with the defense of this matter.
9. RELATED PARTY TRANSACTIONS
Under the current structure, FCC pays a majority of the general operating expenses of the affiliated group. FCC then receives management, service fees and reimbursements from the various affiliates.
United Income, Inc. (“UII”) had a service agreement with United Security Assurance Company (“USA”). The agreement was originally established upon the formation of USA which was a 100% owned subsidiary of UII. Changes in the affiliate structure have resulted in USA no longer being a direct subsidiary of UII, though still a member of the same affiliated group. The original service agreement remained in place without modification. USA paid UII monthly fees equal to 22% of the amount of collected first year premiums, 20% in second year and 6% of the renewal premiums in years three and after. UII had a subcontract agreement with UTG to perform services and provide personnel and facilities. The services included in the agreement were claim processing, underwriting, processing and servicing of policies, accounting services, agency services, data processing and all other expenses necessary to carry on the business of a life insurance company. UII’s subcontract agreement with UTG states that UII pay UTG monthly fees equal to 60% of collected service fees from USA as stated above. The service fees received from UII were recorded in UTG’s financial statements as other income. With the merger of UII into UTG in July 1999, the sub-contract agreement ended and UTG assumed the direct contract with USA. This agreement was terminated upon the merger of USA into UG in December 1999.
USA paid $677,807 and $835,345 under their agreement with UII for 1999 and 1998, respectively. UII paid $223,753 and $501,207 under their agreement with UTG for 1999 and 1998, respectively. Additionally, UII paid FCC $30,000 and $0 in 1999 and 1998, respectively for reimbursement of costs attributed to UII. These reimbursements are reflected as a credit to general expenses.
UTG paid FCC $750,000, $600,000 and $0 in 2000, 1999 and 1998, respectively for reimbursement of costs attributed to UTG.
On January 1, 1993, FCC entered an agreement with UG pursuant to which FCC provides management services necessary for UG to carry on its business. UG paid $6,061,515, $6,251,340 and $8,018,141 to FCC in 2000, 1999 and 1998, respectively.
ABE pays fees to FCC pursuant to a cost sharing and management fee agreement. FCC provides management services for ABE to carry on its business. The agreement requires ABE to pay a percentage of the actual expenses incurred by FCC based on certain activity indicators of ABE business to the business of all the insurance company subsidiaries plus a management fee based on a percentage of the actual expenses allocated to ABE. ABE paid fees of $371,211, $392,005 and $399,325 in 2000, 1999 and 1998, respectively under this agreement.
APPL has a management fee agreement with FCC whereby FCC provides certain administrative duties, primarily data processing and investment advice. APPL paid fees of $444,000, $300,000 and $300,000 in 2000, 1999 and 1998, under this agreement.
Respective domiciliary insurance departments have approved the agreements of the insurance companies and it is Management’s opinion that where applicable, costs have been allocated fairly and such allocations are based upon generally accepted accounting principles.
Since the Company’s affiliation with FSF, UG has acquired mortgage loans through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. UG pays a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $34,721, $11,578 and $0 in servicing fees and $91,392, $0 and $0 in origination fees to FSNB during 2000, 1999 and 1998, respectively.
The Company reimbursed expenses incurred by Mr. Correll and Mr. Attkisson relating to travel and other costs incurred on behalf of or relating to the Company. The Company paid $96,599, $39,336 and $0 in 2000, 1999 and 1998,respectively to First Southern Bancorp, Inc. in reimbursement of such costs.
On December 31, 1999, UTG and Jesse T. Correll entered a transaction whereby Mr. Correll, in combination with other individuals, made an equity investment in UTG. Under the terms of the Stock Acquisition Agreement, the Correll group contributed their 100% ownership of North Plaza of Somerset, Inc. to UTG in exchange for 681,818 authorized but unissued shares of UTG common stock. The Board of Directors of UTG approved the transaction at their regular quarterly board meeting held on December 7, 1999. North Plaza of Somerset, Inc. owns for investment purposes, a shopping center in Somerset, Kentucky, approximately 12,000 acres of timberland in Kentucky, and a 50% partnership interest in an additional 11,000 acres of Kentucky timberland. North Plaza has no debt. The net assets have been valued at $7,500,000, which equates to $11.00 per share for the new shares issued.
Mr. Correll is Chairman of the Board of Directors of UTG and currently UTG's largest shareholder through his ownership control of FSF and its affiliates. Mr. Correll is the majority shareholder of FSF, which is an affiliate of First Southern Bancorp, Inc., a bank holding company that operates out of 14 locations in central Kentucky. Following the above transaction, as of December 31, 1999, Mr. Correll owned or controlled directly and indirectly approximately 46% of UTG. At December 31, 2000, Mr. Correll owned or controlled directly and indirectly approximately 51% of UTG.
Following necessary regulatory approval, on December 29, 1999, UG was the survivor to a merger with its 100% owned subsidiary, USA. The merger was completed as a part of management’s efforts to reduce costs and simplify the corporate structure.
On July 26, 1999, the shareholders of UTG and UII approved a merger transaction of the two companies. Prior to the merger, UTG owned 53% of UTGL99 (refers to the former United Trust Group, Inc., which was formed in February of 1992 and liquidated in July of 1999) an insurance holding company, and UII owned 47% of UTGL99. Additionally, UTG held an equity investment in UII. At the time the decision to merge was made, neither UTG nor UII had any other significant holdings or business dealings. The Board of Directors of each company thus concluded a merger of the two companies would be in the best interests of the shareholders by creating a larger more viable life insurance holding group with lower administrative costs, a simplified corporate structure, and more readily marketable securities. Following the merger approval, UTG issued 817,517 shares of its authorized but unissued common stock to former UII shareholders, net of any dissenter shareholders in the merger. Immediately following the merger, UTGL99, which was then 100% owned by UTG, was liquidated and UTG changed its name to United Trust Group, Inc. (“UTG”).
10. CAPITAL STOCK TRANSACTIONS
A. STOCK OPTION PLANS
UII had a stock option plan, which was assumed by UTG through the merger with UII, under which certain directors, officers and employees may be issued options to purchase up to 31,500 shares of common stock at $13.07 per share. Options become exercisable at 25% annually beginning one year after date of grant and expire generally in five years. At the September 21, 1999 board meeting, the Directors of UTG voted to discontinue this stock option plan, leaving options for 20,576 shares ungranted and therefore ultimately forfeited. At December 31, 2000, all previously granted options have expired, ending this stock option plan. No stock options were granted, exercised or exercisable through the years ended December 31, 2000, 1999, and 1998, respectively.
On January 15, 1991 UII adopted an additional nonqualified stock option plan, assumed by UTG through the UII merger, under which certain employees and sales personnel may be granted options. The plan provided for the granting of up to 42,000 options at an exercise price of $.47 per share. The options generally expire five years from the date of grant. A total of 11,620 option shares have been exercised through December 31, 1999. At the September 21, 1999 board meeting, the Directors of UTG voted to discontinue this stock option plan, leaving options for 30,149 shares ungranted and therefore ultimately forfeited. At March 31, 2000, all previously granted options have expired, ending this stock option plan. No stock options were granted, exercised or exercisable through the years ended December 31, 2000, 1999, and 1998, respectively.
B. DEFERRED COMPENSATION PLAN
UTG and FCC established a deferred compensation plan during 1993 pursuant to which an officer or agent of FCC or affiliates of UTG, could defer a portion of their income over the next two and one-half years in return for a deferred compensation payment payable at the end of seven years in the amount equal to the total income deferred plus interest at a rate of approximately 8.5% per annum and a stock option to purchase shares of common stock of UTG. At the beginning of the deferral period an officer or agent received an immediately exercisable option to purchase 2,300 shares of UTG common stock at $17.50 per share for each $25,000 ($10,000 per year for two and one-half years) of total income deferred. The option expired on December 31, 2000. A total of 105,000 options were granted in 1993 under this plan. At December 31, 2000, all previously granted options have expired, ending the stock options available through this plan. During 2000, the Company paid deferred compensation owed totaling $1,166,400. At December 31, 2000 and December 31, 1999, the Company held a liability of $116,999 and $1,283,399, respectively, relating to this plan.
C. CONVERTIBLE NOTES
On July 31, 1997, UTG issued convertible notes for cash in the amount of $2,560,000 to seven individuals, all officers or employees of UTG. The notes bear interest at a rate of 1% over prime, with interest payments due quarterly and principal due upon maturity of July 31, 2004. The conversion price of the notes are graded from $12.50 per share for the first three years, increasing to $15.00 per share for the next two years and increasing to $20.00 per share for the last two years. On March 1, 1999, First Southern Bancorp, Inc., an affiliate of First Southern Funding, LLC, acquired all the outstanding UTG convertible notes from the original holders. Pursuant to an agreement, First Southern Bancorp, Inc. converted the notes to 204,800 shares of UTG common stock on July 31, 2000.
D. SHARES ACQUIRED BY FSF AND AFFILIATES WITH OPTIONS GRANTED
On November 20, 1998, First Southern Funding LLC, a Kentucky corporation, (“FSF”) and affiliates acquired 929,904 shares of common stock of UTG from UTG and certain UTG shareholders. As consideration for the shares, FSF paid UTG $10,999,995 and certain shareholders of UTG $999,990 in cash.
Included in the stock acquisition agreement is an earnings covenant whereby UTG warrants UTG and its subsidiaries and affiliates will have future earnings of at least $30,000,000 for a five-year period beginning January 1, 1998. Such earnings are computed based on statutory results excluding inter-company activities such as inter-company dividends plus realized and unrealized gains and losses on real estate, mortgage loans and unaffiliated common stocks. At the end of the covenant period, an adjustment is to be made equal to the difference between the then market value and statutory carrying value of real estate still owned that existed at the beginning of the covenant period. Should UTG not meet the covenant requirements, any shortfall will first be reduced by the actual average tax rate for UTG for the period, then will be further reduced by one-half of the percentage, if any, representing UTG’s ownership percentage of the insurance company subsidiaries. This result will then be reduced by $250,000. The remaining amount will be paid by UTG in the form of UTG common stock valued at $15.00 per share with a maximum number of shares to be issued of 500,000. However, there shall be no limit to the number of shares transferred to the extent that there are legal fees, settlements, damage payments or other losses as a result of certain legal action taken. The price and number of shares shall be adjusted for any applicable stock splits, stock dividends or other recapitalizations. At December 31, 2000, the Company had total earnings of $9,881,084 applicable to this covenant.
At the time of the stock acquisition above, UTG also granted, for nominal consideration, an irrevocable, exclusive option to FSF to purchase up to 1,450,000 shares of UTG common stock for a purchase price in cash equal to $15.00 per share, with such option to expire on July 1, 2001. UTG had a market price per share of $9.50 at the date of grant of the option. The option shares under this option are to be reduced by two shares for each share of UTG common stock that FSF or its affiliates purchases from UTG shareholders in private or public transactions after the execution of the option agreement. The option is additionally limited to a maximum when combined with shares owned by FSF of 51% of the issued and outstanding shares of UTG after giving effect to any shares subject to the option.
As of December 31, 2000, no options were exercised. At December 31, 2000, UTG common stock had a market value of $6.375 per share.
2000 1999 1998
------------------------- ------------------------- -------------------------
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ------------- ----------- ------------ ----------- -------------
Outstanding at beginning of
Period 166,104 $15.00 1,450,000 $15.00 0 $0.00
Granted 0 0.00 0 0.00 1,450,000 15.00
Exercised 0 0.00 0 0.00 0 0.00
Forfeited 146,996 15.00 1,283,896 15.00 0 0.00
---------- ------------- ----------- ------------ ----------- -------------
Outstanding at end of period 19,108 $15.00 166,104 $15.00 1,450,000 $15.00
========== ============= =========== ============ =========== =============
The following information applies to options outstanding at December 31, 2000:
Number outstanding 19,108
Exercise price $ 15.00
Remaining contractual life 1/2 year
E. EARNINGS PER SHARE CALCULATIONS
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations as presented on the income statement.
For the year ended December 31, 2000
-------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- --------------- -------------
Basic EPS
Income available to common shareholders $ (696,426) 4,056,439 $ (0.17)
=============
Effect of Dilutive Securities
Convertible notes 0 0
Options 0 0
------------- ---------------
Diluted EPS
Income available to common shareholders
and assumed conversions $ (696,426) 4,056,439 $ (0.17)
============= =============== =============
For the year ended December 31, 1999
-------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- --------------- -------------
Basic EPS
Income available to common shareholders $ 1,075,909 2,839,703 $ 0.38
=============
Effect of Dilutive Securities
Convertible notes 0 0
Options 0 231
------------- ---------------
Diluted EPS
Income available to common shareholders $
and assumed conversions 1,075,909 2,839,934 $ 0.38
============= =============== =============
For the year ended December 31, 1998
-------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- --------------- -------------
Basic EPS
Income available to common shareholders $ (679,492) 1,726,843 $ (0.39)
=============
Effect of Dilutive Securities
Convertible notes 0 0
Options 0 0
------------- ---------------
Diluted EPS
Income available to common shareholders
and assumed conversions $ (679,492) 1,726,843 $ (0.39)
============= =============== =============
In accordance with Statement of Financial Accounting Standards No. 128, the computation of diluted earnings per share is the same as basic earnings per share for the years ending December 31, 2000 and 1998, since the Company had a loss from continuing operations in each of these periods presented, and any assumed conversion, exercise, or contingent issuance of securities would have an antidilutive effect on earnings per share. There were no outstanding dilutive instruments during the aforementioned periods.
UTG had stock options outstanding at year end 1999 and 1998 for 451 shares of common stock at $13.07 per share, 105,000 shares of common stock at $17.50 per share that were not included in the computation of diluted EPS because the exercise price was greater than the average market price of the common shares for each respective year presented. UTG had stock options for 231 shares of common stock at $.047 per share, which were included in the calculation of diluted earnings per share for UTG for the year ended December 31, 1999, since they were assumed by UTG in the 1999 merger of UII into UTG. The stock options outstanding for 451 shares, 105,000 shares, and 231 shares all expired during the current year, ending these stock option plans.
On July 31, 1997, UTG issued convertible notes for cash in the amount of $2,560,000 to seven individuals, all officers or employees of UTG. During the first three years the notes could be converted into 204,800 shares of common stock at $12.50 per share. The potential conversion of the notes was not included in the computation of diluted EPS for the years ended December 31, 1998 and 1997, respectively, because the exercise price was greater than the average market price of the common shares. In 1999, First Southern Bancorp, Inc., an affiliate of First Southern Funding, LLC, acquired all the outstanding UTG convertible notes from the original holders. Pursuant to an agreement, First Southern Bancorp, Inc. converted the notes to 204,800 shares of UTG common stock on July 31, 2000.
UTG had granted stock options to FSF of 1,450,000 which were outstanding as of year end 1998. The option shares under this option are to be reduced by two shares for each share of UTG common stock that FSF or its affiliates purchases from UTG shareholders in private or public transactions after the execution of the option agreement. The option is additionally limited to a maximum when combined with shares owned by FSF of 51% of the issued and outstanding shares of UTG after giving effect to any shares subject to the option. Due to purchases made by FSF during 2000 and the 51% limitation, the number of stock options has been reduced to 19,108 at $15.00 per share. These options were not included in the computation of diluted EPS because the exercise price was greater than the average market price of the common shares for each respective year.
11. NOTES PAYABLE
At December 31, 2000 and 1999, the Company had $1,817,169 and $5,917,969 in long-term debt outstanding, respectively. The debt is comprised of the following components:
2000 1999
----------- -----------
Senior debt $ 0 $ 25,000
Subordinated 10 yr. Notes 0 840,000
Subordinated 20 yr. Notes 1,817,169 1,817,169
Convertible notes 0 2,560,000
Convertible debentures 0 675,800
----------- -----------
$ 1,817,169 $ 5,917,969
=========== ===========
A. SENIOR DEBT
The senior debt was through National City Bank (formerly First of America Bank - Illinois NA) and was subject to a credit agreement. The debt was bearing interest at a rate equal to the “base rate” plus nine-sixteenths of one percent. The Base rate is defined as the floating daily, variable rate of interest determined and announced by National City Bank from time to time as its “base lending rate.” The base rate at the beginning of fiscal year 2000 was 8.50% with interest to be paid quarterly. During second quarter of 2000, the remaining principal of $25,000 was retired.
B. SUBORDINATED DEBT
The subordinated debt was incurred June 16, 1992 as a part of the acquisition of the now dissolved Commonwealth Industries Corporation, (CIC). The 10-year notes bear interest at the rate of 7 1/2% per annum, payable semi-annually beginning December 16, 1992. In the second quarter of 2000, the remaining principal balance of $840,000 was retired.
The original 20-year notes bear interest at the rate of 8 1/2% per annum on $1,817,169 payable semi-annually with a lump sum principal payment due June 16, 2012. During 2000, no retirements were made on the 20-year notes.
C. CONVERTIBLE DEBENTURES
The convertible debentures were assumed from the July 1999, merger of UII into UTG. In early 1994, UII received $902,300 from the sale of Debentures. The Debentures were issued pursuant to an indenture between UII and National City Bank (formerly First of America Bank - Southeast Michigan, N.A.), as trustee. The Debentures were general unsecured obligations of UII, subordinate in right of payment to any existing or future senior debt of UII. The Debentures were bearing interest quarterly at a variable rate equal to one percentage point above the prime rate published in the Wall Street Journal from time to time. During second quarter of 2000, the Company retired all of the remaining outstanding debenture debt of $675,800.
D. CONVERTIBLE NOTES
On July 31, 1997, UTG issued convertible notes for cash in the amount of $2,560,000 to seven individuals, all officers or employees of UTG. The notes were bearing interest at a rate of 1% over prime, with interest payments due quarterly. The conversion price of the notes were graded from $12.50 per share for the first three years, increasing to $15.00 per share for the next two years and increasing to $20.00 per share for the last two years. On March 1, 1999, First Southern Bancorp, Inc., an affiliate of First Southern Funding, LLC, acquired all the outstanding UTI convertible notes from the original holders. In July of 2000, First Southern Bancorp, Inc. converted the notes in the amount of $2,560,000 to 204,800 shares of UTG common stock.
There are no scheduled principal reductions on the Company’s debt for the next five years.
12. OTHER CASH FLOW DISCLOSURES
On a cash basis, the Company paid $373,988, $643,429, and $1,851,386 in interest expense for the years 2000, 1999 and 1998, respectively. The Company paid $(173,500), $557,812 and $15,805 in federal income tax for 2000, 1999 and 1998, respectively.
On July 31, 2000, First Southern Bancorp, Inc., pursuant to the terms of a previous agreement, converted the $2,560,000 of convertible debt it held of United Trust Group, Inc. into 204,800 shares of common stock of UTG.
On December 31, 1999, UTG issued 681,818 shares of authorized but unissued common stock to acquire 100% ownership of North Plaza of Somerset, Inc. (“North Plaza”). North Plaza owns for investment purposes, a shopping center in Somerset, Kentucky, approximately 12,000 acres of timberland in Kentucky, and a 50% partnership interest in an additional 11,000 acres of Kentucky timberland. North Plaza has no debt. The net assets have been valued at $7,500,000, which equates to $11.00 per share for the new shares issued.
On July 26, 1999, UII was merged into UTG. UTG issued 817,517 shares of its authorized but unissued common stock to former UII shareholders in the merger. The shares issued were valued at $10,451,455. At the date of the merger, UII had cash balances of $607,508 that were transferred to UTG.
As partial proceeds for the acquisition of common stock of UTG during 1998, UTG issued a promissory note of $53,053 due seven years from issue.
13. CONCENTRATION OF CREDIT RISK
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 First Southern Funding, LLC, the largest shareholder of UTG. In aggregate at December 31, 2000 these accounts hold approximately $3,295,000 for which there are no pledges or guarantees outside FDIC insurance limits. 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.
14. NEW ACCOUNTING STANDARDS
The FASB has issued SFAS 138 entitled, Accounting for Derivative Instruments and Hedging Activities,as an amendment to SFAS 133 of the same title, SFAS 139 entitled,Rescission of FASB Statement No. 53 (Financial Reporting by Producers and Distributors of Motion Picture Films) and amendments to FASB Statements No. 63, 89, and 121, and SFAS 140 entitled,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,which is a replacement of SFAS 125 of the same title. The adoption of Statements of Financial Accounting Standards No. 138, 139 and 140, did not affect the Company’s financial position or results of operations, since the Company has no derivative or hedging type investments, and has not had any transactions relating to the above mentioned pronouncements.
15. WRITE-DOWN OF INVESTMENT REAL ESTATE
In the third quarter of 2000, the Company sold remaining real estate properties identified for disposal in prior years at a net realized gain of $728,000. In the fourth quarter 2000, remaining real estate consisted of the North Plaza holdings and development real estate located in Springfield, IL. In December 2000, management studied its development properties, analyzing such issues as remaining time to fully develop without over saturation, historic sales trends, management time and resources to continue development and other alternatives such as modifying current plans or discontinuing entirely. Management determined it would be in the long term best interests of the Company to discontinue development and attempt to liquidate the remaining properties. As such, a realized loss of $913,000 was recorded in December 2000 to reduce the book value of these properties to the amount management determined it would accept net of selling costs to facilitate liquidation.
16. MERGER OF UNITED TRUST GROUP, INC. AND UNITED INCOME, INC.
On March 25, 1997, the Board of Directors of UTG and UII voted to recommend to the shareholders a merger of the two companies. Under the Plan of Merger, UTG would be the surviving entity with UTG issuing one share of its stock for each share held by UII shareholders.
UTG owned 53% of United Trust Group, Inc., (“UTGL99”) an insurance holding company, and UII owned 47% of UTGL99. At the time the decision to merge was made, neither UTG nor UII had any other significant holdings or business dealings. The Board of Directors of each company thus concluded a merger of the two companies would be in the best interests of the shareholders. The merger will result in certain cost savings, primarily related to costs associated with maintaining a corporation in good standing in the states in which it transacts business.
A vote of the shareholders of UTG and UII regarding the proposed merger occurred on July 26, 1999, with shareholders of both companies approving the transaction. UTG issued 817,517 shares of its authorized but unissued common stock to former UII shareholders, exclusive of any dissenter shareholders, in the merger. Immediately following the merger, UTGL99, which was then 100% owned by UTG, was liquidated and UTG changed its name to United Trust Group, Inc.
The merger of UII was accounted for as a purchase of UII and was valued at $12.74 per share. This value was determined using the average price of UTG shares issued on November 20, 1998 in a separate transaction with First Southern Funding LLC, an outside third party.
The purchase price is comprised of the following components:
Investments $ 62,279,460
Cash and cash equivalents 4,830,171
Accrued investment income 1,029,741
Reinsurance receivables 11,291,237
Cost of insurance acquired 13,265,699
Costs in excess of net assets purchased 868,750
Property and equipment 868,652
Other assets 672,427
---------------
Total assets 95,106,137
Policy liabilities and accruals (74,427,627)
Income taxes payable - current and deferred (2,140,155)
Notes payable (3,865,344)
Other liabilities (1,521,989)
Minority interests (2,699,567)
---------------
Net purchase price $ 10,451,455
===============
The following table summarizes certain unaudited operating results of UTG as though the merger transaction had taken place on December 31, 1999 and 1998, respectively.
December 31, December 31,
1999 1998
---------------- ----------------
Total revenues $ 35,834,693 $ 40,250,810
Total benefits and other expenses $ 33,841,679 $ 46,206,060
Operating income $ 1,993,014 $ (5,955,250)
Net Income $ 1,202,759 $ (829,784)
Basic earnings per share $ 0.36 $ (0.33)
Diluted earnings per share $ 0.36 $ (0.33)
17. SUBSEQUENT EVENT
Pursuant to the terms of a common stock purchase agreement dated February 13, 2001, First Southern Bancorp, Inc. agreed to purchase 563,215 shares of United Trust Group, Inc. common stock from Larry E. Ryherd and family at a price of $8.00 per share. The purchase price will be payable in the form of $978,226 in cash and a five-year promissory note.
In addition, First Southern Bancorp, Inc. agreed to purchase 22,500 shares of United Trust Group, Inc. common stock and 544 shares of First Commonwealth Corporation common stock pursuant to the terms of a common stock purchase agreement dated February 13, 2001 with James E. Melville and his family. Pursuant to the terms of the agreement, the United Trust Group, Inc. shares will be acquired for $8.00 per share and First Commonwealth Corporation shares will be acquired for $200.00 per share. The purchase will be in the form of a five-year promissory note. Mr. Melville has agreed to resign as a director of United Trust Group, Inc. and its subsidiaries at the closing pursuant to an agreement and release First Southern Bancorp, Inc., United Trust Group, Inc., First Commonwealth Corporation and Mr. Melville executed concurrently with the common stock purchase agreement.
At the March 28, 2001 Board of Directors meeting of United Trust Group, Inc., the Board approved the assignment of First Southern Bancorp, Inc.'s position in the above agreements to UTG. Upon closing of the transactions, UTG will pay $978,226 in cash and issue notes payable totaling $3,816,294 to the sellers. The notes will bear interest at the fixed rate of 7% with principal payments due annually of $763,259 starting one year from the date of closing.
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2000
---------------- ----------------- ----------------- -----------------
1st 2nd 3rd 4th
------------ ------------ ------------ ------------
Premiums and policy fees,
net $ 5,337,148 $ 5,201,585 $ 4,470,307 $ 4,480,646
Net investment income 4,252,494 4,009,489 3,927,944 3,895,906
Total revenues 9,933,932 9,348,373 8,471,566 7,993,252
Policy benefits including
Dividends 6,119,515 5,502,941 5,128,773 5,528,128
Commissions and
amortization of DAC and 1,097,759 804,071 775,825 1,004,470
COI
Operating expenses 2,827,918 1,732,641 2,095,530 3,459,697
Operating income (loss) (244,223) 1,166,057 408,328 (2,037,231)
Net income (loss) (47,394) 686,907 163,169 (1,499,108)
Basic earnings (loss) per
share (0.01) 0.17 0.04 (0.39)
Diluted earnings (loss) per
Share (0.01) 0.17 0.04 (0.39)
1999
---------------- ----------------- ----------------- -----------------
1st 2nd 3rd 4th
------------ ------------ ------------ ------------
Premiums and policy fees,
net $ 6,007,511 $ 5,705,270 $ 5,337,120 $ 4,531,242
Net investment income 3,640,387 3,603,212 3,628,538 3,657,400
Total revenues 9,835,111 9,136,482 8,964,360 8,121,158
Policy benefits including
Dividends 6,115,079 5,569,046 4,864,370 4,740,390
Commissions and
amortization of DAC and 1,366,288 1,131,407 1,070,869 1,173,088
COI
Operating expenses 2,080,905 1,882,088 1,678,571 1,891,810
Operating income (loss) 74,962 392,486 1,198,404 189,701
Net income (loss) 132,461 123,481 883,271 (63,304)
Basic earnings (loss) per
share 0.05 0.05 0.29 (0.01)
Diluted earnings (loss) per
Share 0.07 0.07 0.29 (0.00)
1998
---------------- ----------------- ----------------- -----------------
1st 2nd 3rd 4th
------------ ------------ ------------ ------------
Premiums and policy fees,
net $ 7,231,481 $ 7,111,079 $ 6,243,869 $ 5,809,648
Net investment income 3,727,002 3,786,410 3,791,774 3,737,101
Total revenues 11,226,760 10,557,065 9,767,526 9,334,049
Policy benefits including
Dividends 6,827,040 6,287,460 6,217,272 6,140,602
Commissions and
amortization of DAC and COI 1,654,560 1,386,119 1,322,442 4,302,336
Operating expenses 2,237,840 2,237,899 1,953,061 4,237,176
Operating income (loss) 19,707 163,392 (204,429) (6,095,850)
Net income (loss) 114,441 228,704 458,002 (1,480,639)
Basic earnings (loss) per
share 0.07 0.14 0.28 (0.88)
Diluted earnings (loss) per
Share 0.08 0.15 0.27 (0.88)
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF UTG
THE BOARD OF DIRECTORS
In accordance with the laws of Illinois and the Certificate of Incorporation and Bylaws of UTG, as amended, UTG is managed by its executive officers under the direction of the Board of Directors. The Board elects executive officers, evaluates their performance, works with management in establishing business objectives and considers other fundamental corporate matters, such as the issuance of stock or other securities, the purchase or sale of a business and other significant corporate business transactions. In the fiscal year ended December 31, 2000, the Board met 5 times. All directors attended at least 75% of all meetings of the board.
The Board of Directors has an Audit Committee consisting of Messrs. Albin, Collins, and Teater. The Audit Committee performs such duties as outlined in the Company's Audit Committee Charter. The Audit Committee reviews and acts or reports to the Board with respect to various auditing and accounting matters, the scope of the audit procedures and the results thereof, internal accounting and control systems of UTG, the nature of services performed for UTG and the fees to be paid to the independent auditors, the performance of UTG's independent and internal auditors and the accounting practices of UTG. The Audit Committee also recommends to the full Board of Directors the auditors to be appointed by the Board. The Audit Committee met twice in 2000.
The compensation of UTG's executive officers is determined by the full Board of Directors (see report on Executive Compensation).
Under UTG's Certificate of Incorporation, the Board of Directors may be comprised of between five and twenty-one directors. At December 31, 2000 The Board consisted of eleven directors. Shareholders elect Directors to serve for a period of one year at UTG's Annual Shareholders' meeting.
The following information with respect to business experience of the Board of Directors has been furnished by the respective directors or obtained from the records of UTG.
AUDIT COMMITTEE REPORT TO SHAREHOLDERS
In connection with the December 31, 2000 financial statements, the audit committee: (1) reviewed and discussed the audited financial statements with management; (2) discussed with the auditors the matters required by Statement on Auditing Standards No. 61; and (3) received and discussed with the auditors the matters required by Independence Standards Board Statement No.1. Based upon these reviews and discussions, the audit committee recommended to the Board of Directors that the audited financial statements be included in the Annual Report on Form 10-K filed with the SEC.
John S. Albin - Committee Chairman
John W. Collins
Robert W. Teater
DIRECTORS
- ---------
Name, Age Position with the Company, Business Experience and Other Directorships
John S. Albin, 72 Director of UTG since 1984 and FCC since 1992; farmer in Douglas and Edgar counties,
Illinois, since 1951; Chairman of the Board of Longview State Bank since 1978;
President of the Longview Capitol Corporation, a bank holding company, since 1978;
Chairman of First National Bank of Ogden, Illinois, since 1987; Chairman of the State
Bank of Chrisman since 1988; Director and Secretary of Illini Community Development
Corporation since 1990; Commissioner of Illinois Student Assistant Commission since 1996.
Randall L. Attkisson 55 Director of UTG and FCC since 1999; Chief Financial Officer, Treasurer, Director of
First Southern Bancorp, Inc. since 1986; Treasurer, Director of First Southern Funding,
Inc. since 1992; Director of The River Foundation, Inc. since 1990; Treasurer, Director
of Somerset Holdings, Inc. since 1987; President of Randall L. Attkisson & Associates
from 1982 to 1986; Commissioner of Kentucky Department of Banking & Securities from
1980 to 1982; Self-employed Banking Consultant in Miami, FL from 1978 to 1980.
John W. Collins 74 Director of UTG since 2000; Director of FCC and certain affiliate companies since
1982. Consultant and past President of Collins-Winston Group since 1976.
Robert E. Cook 75(1) Director of UTG since 1984 and certain affiliate companies since 1991; Director
of FCC since 2000; President of Cook-Witter, Inc., a governmental consulting and
lobbying firm with offices in Springfield, Illinois, from 1985 until 1990.
Jesse T. Correll 44 Chairman and CEO of UTG since 2000; Director of UTG and FCC since 1999; Chairman,
President, Director of First Southern Bancorp, Inc. since 1983; President, Director of
First Southern Funding, Inc. since 1992; President, Director of Somerset Holdings, Inc.
and Lancaster Life Reinsurance Company and First Southern Insurance Agency since 1987;
President, Director of The River Foundation since 1990; President, Director of Dyscim
Holdings Company, Inc. since 1990; Director or Adamas Diamond Corporation since 1980;
Secretary, Director Lovemore Holding Company since 1987; President, Director of North
Plaza of Somerset since 1990; Director of St. Joseph Hospital, Lexington, KY since
1997; Managing Partner of World Wide Minerals from 1978 to 1983.
Ward F. Correll 72 Director of UTG since 2000 and FCC since 1999; President, Director of Tradeway, Inc.
of Somerset, KY since 1973; President, Director of Cumberland Lake Shell, Inc. of
Somerset, KY since 1971; President, Director of Tradewind Shopping Center, Inc. of
Somerset, KY since 1966; Director of First Southern Bancorp, Inc. of Stanford, KY since
1988; Director of First Southern Funding, Inc. of Stanford, KY since 1991; Director of
The River Foundation of Stanford, KY since 1990; and Director of Somerset Holdings,
Inc., Lancaster Life and First Southern Insurance Agency of Stanford, KY since 1987.
James E.Melville 55(2)President and Chief Operating Officer since July 1997; Chief Financial Officer
of UTG 1993-1997, Senior Executive Vice President of UTG 1992-1997; President of
certain Affiliate Companies from May 1989 until September 1991; Chief Operating Officer
of FCC from 1989 until September 1991; Chief Operating Officer of certain Affiliate
Companies from 1984 until September 1991; Senior Executive Vice President of certain
affiliate companies from 1984 until 1989; Consultant to UTG from March 1992 through
September 1992; President and Chief Operating Officer of certain affiliate life
insurance companies and Senior Executive Vice President of non-insurance affiliate
companies since 1992.
Luther C. Miller 70 Director of UTG since 2000 and FCC since 1984; Executive Vice President and
Secretary of FCC from 1984 until 1992; officer and director of certain affiliate
companies until 1992.
Millard V. Oakley 70 Director of UTG and FCC since 1999; Presently serves on Board of Directors and
Executive Committee of Thomas Nelson, a publicly held publishing company based in
Nashville, TN; Director of First National Bank of the Cumberlands,
Livingston-Cooksville, TN; Lawyer with limited law practice since 1980; State Insurance
Commissioner for State of Tennessee from 1975 to 1979; Served as General Counsel,
United States House of Representatives, Washington, D.C., Congressional Committee on
Small Business from 1971-1973; Served four elective terms as County Attorney for
Overton County, Tennessee; Elected delegate to National Democratic Convention in 1964;
Served four elective terms in the Tennessee General Assembly from 1956 to 1964; Lawyer
in Livingston, TN from 1953 to 1971; Elected to the Tennessee Constitutional Convention
in 1952.
Robert V. O'Keefe 79 Director of UTG since 2000 and FCC since 1993; Director and Treasurer of UTG from 1988
to 1992; Director of Cilcorp, Inc. from 1982 to 1994; Director of Cilcorp Ventures,
Inc. from 1985 to 1994; Director of Environmental Science and Engineering Co. from 1990
to 1994.
Robert W. Teater 74 Director of UTG since 1987 and FCC since 1992; member of Columbus School Board
1991-2001; Former Director, Ohio Department of Natural Resources; Founder,
Teater-Gebhardt and Associates, Inc., a comprehensive consulting firm in natural
resources development; Combat veteran and retired Major General, Ohio Army National
Guard.
(1) On January 8, 2001, Mr. Robert E. Cook resigned his position as a Director for both UTG and FCC.
(2) On February 13, 2001, Mr. James E. Melville resigned his position as a Director for both UTG and FCC.
EXECUTIVE OFFICERS OF UTG
More detailed information on the following officers of UTG appears under "Election of Directors":
Jesse T. Correll Chairman of the Board and Chief Executive Officer
James E. Melville (3) President and Chief Operating Officer
Other officers of UTG are set forth below:
Name, Age Position with UTG, Business Experience and Other Directorships
Theodore C. Miller 38 Corporate Secretary since December 2000, Senior Vice President and Chief Financial
Officer since July 1997; Vice President and Treasurer since October 1992; Vice
President and Controller of certain Affiliate Companies from 1984 to 1992.
Brad M. Wilson 49 Chief Administrative officer since December 2000, Senior Vice President and Chief
Information Officer since 1992.
(3)A special joint meeting of the Boards of Directors of United Trust Group, Inc. and its subsidiaries was held January 8, 2001, at which the termination of the employment agreement between First Commonwealth Corporation and James E. Melville, dated July 31, 1997, and the termination of James E. Melville as an officer or agent of United Trust Group, Inc. and all of its subsidiaries including the office of President with First Commonwealth Corporation were approved by the Boards of Directors of each of the companies. At this same meeting, the Boards of Directors of each company approved the appointment of Randall L. Attkisson to fill all positions previously held by Mr. Melville.
Mr. Attkisson is a member of the Board of Directors and Chief Financial Officer of First Southern Funding, LLC and First Southern Bancorp, Inc., an affiliate of First Southern Funding, LLC. First Southern Bancorp, Inc. owns First Southern National Bank, which operates out of 14 locations in central Kentucky. First Southern Funding, LLC and its affiliates are United Trust Group, Inc.'s largest shareholder.
ITEM 11. EXECUTIVE COMPENSATION UTG
Executive Compensation Table
The following table sets forth certain information regarding compensation paid to or earned by UTG’s Chief Executive Officer and each of the Executive Officers of UTG whose salary plus bonus exceeded $100,000 during each of UTG’s last three fiscal years:Compensation for services provided by the named executive officers to UTG and its affiliates is paid by FCC (See Employment Contracts for Mssrs. Melville and Ryherd)
SUMMARY COMPENSATION TABLE
Annual Compensation
Other Annual
Name and Compensation (1)
Principal Position Salary ($) Bonus ($) ($)
Jesse T. Correll (2) 2000 - - -
Chairman of the Board
Chief Executive Officer
Brad M. Wilson 2000 157,500 3,227 3,150
Senior Vice President 1999 147,700 3,000 6,815
Chief Information Officer 1998 139,000 2,900 6,506
James E. Melville (4) 2000 238,200 - -
President, Chief 1999 238,200 - 33,084
Operating Officer 1998 238,200 - 31,956
Larry E. Ryherd (3) 2000 400,000 - -
Former Chairman of the Board 1999 400,000 - 21,230
Chief Executive Officer 1998 400,000 - 20,373
(1) Other annual compensation consists of interest earned on deferred compensation amounts pursuant to their employment agreements and UTG’s matching contribution to the First Commonwealth Corporation Employee Savings Trust 401(k) Plan.
(2) On March 27, 2000, Mr. Jesse T. Correll assumed the position as Chairman of the Board and Chief Executive Officer of UTG and each of its affiliates. Mr. Correll did not receive a salary, bonus or other compensation for his duties with UTG and each of its affiliates in the year 2000.
(3) On March 27, 2000, Mr. Larry E. Ryherd resigned as Chairman of the Board and Chief Executive Officer of UTG and each of its affiliates.
(4) On January 8, 2001, Mr. James E. Melville was terminated as President and Chief Operating Officer of UTG and each of its affiliates.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
The following table summarizes for fiscal year ending, December 31, 2000, the number of shares subject to unexercised options and the value of unexercised options of the Common Stock of UTG held by the named executive officers. The values shown were determined by multiplying the applicable number of unexercised share options by the difference between the per share market price on December 31, 2000 and the applicable per share exercise price. There were no options granted to the named executive officers for the past three fiscal years.
Number of
Shares Value Number of Securities Value of Unexercised In
Acquired on Realized Underlying Unexercised the Money Options/SARs at
Exercise (#) ($) Options/SARs at FY-End (#) FY-End ($)
Name Exercisable Unexercisable Exercisable Unexercisable
Jesse T. Correll - - 19,108 - - -
James E. Melville - - - - - -
Theodore C. Miller - - - - - -
Brad M. Wilson - - - - - -
Compensation of Directors
UTG’s standard arrangement for the compensation of directors provides that each director shall receive an annual retainer of $2,400, plus $300 for each meeting attended and reimbursement for reasonable travel expenses. UTG’s director compensation policy also provides that directors who are employees of UTG or directors or officers of First Southern Funding, LLC and Affiliates do not receive any compensation for their services as directors except for reimbursement for reasonable travel expenses for attending each meeting.
Employment Contracts
FCC entered into an employment agreement dated July 31, 1997 with Larry E. Ryherd. Formerly, Mr. Ryherd had served as Chairman of the Board and Chief Executive Officer of UTG and its affiliates, until his resignation on March 27, 2000. Pursuant to the agreement, Mr. Ryherd agreed to serve as Chairman of the Board and Chief Executive Officer of UTG and in addition, to serve in other positions of the affiliated companies if appointed or elected. The agreement provides for an annual salary of $400,000 as determined by the Board of Directors. The term of the agreement is for a period of five years. Mr. Ryherd has deferred portions of his income under a plan entitling him to a deferred compensation payment, which was paid to him on January 2, 2000, in the amount of $240,000, which included interest at the rate of approximately 8.5% annually. Additionally, Mr. Ryherd was granted an option to purchase up to 13,800 of the Common Stock of UTG at $17.50 per share. The option was immediately exercisable and transferable. At December 31, 2000, all previously granted options have expired. In accordance with the employment agreement, Mr. Ryherd continues to receive his annual Salary of $400,000 until the agreement expiration date of July 31, 2002. The entire $933,333 payable to Mr. Ryherd, from the date of his resignation until the end of his employment agreement was accrued, and thus expensed, by FCC in the first quarter of 2000.
FCC entered into an employment agreement dated July 31, 1997 with James E. Melville pursuant to which Mr. Melville is employed as President and Chief Operating Officer and in addition, to serve in other positions of the affiliated companies if appointed or elected at an annual salary of $238,200. The term of the agreement expires July 31, 2002. Mr. Melville has deferred portions of his income under a plan entitling him to a deferred compensation payment which was paid to him on January 2, 2000 of $400,000 which includes interest at the rate of approximately 8.5% annually. Additionally, Mr. Melville was granted an option to purchase up to 30,000 shares of the Common Stock of UTG at $17.50 per share. The option is immediately exercisable and transferable. At December 31, 2000, all previously granted options have expired. In accordance with the employment agreement, Mr. Melville continues to receive his annual Salary of $238,200 until the agreement expiration date of July 31, 2002. An accrual of $562,000 was established through a charge to general expenses at year-end 2000 for the remaining payments required pursuant to the terms of Mr. Melville's employment contract and other settlement costs.
There are no other employment agreements in effect with any executive officers or employees of the Company.
REPORT ON EXECUTIVE COMPENSATION
Introduction
The compensation of UTG’s executive officers is determined by the full Board of Directors. The Board of Directors strongly believes that UTG’s executive officers directly impact the short-term and long-term performance of UTG. With this belief and the corresponding objective of making decisions that are in the best interest of UTG’s shareholders, the Board of Directors places significant emphasis on the design and administration of UTG’s executive compensation plans.
Executive Compensation Plan Elements
Base Salary. The Board of Directors establishes base salaries each year at a level intended to be within the competitive market range of comparable companies. In addition to the competitive market range, many factors are considered in determining base salaries, including the responsibilities assumed by the executive, the scope of the executive’s position, experience, length of service, individual performance and internal equity considerations. During the last three fiscal years, there were no material changes in the base salaries of the named executive officers, except for the compensation received by the newly appointed Chairman of the Board of Directors and Chief Executive Officer.
Stock Options. Stock options are granted at the discretion of the Board of Directors. There were no options granted to the named executive officers during the last three fiscal years.
Deferred Compensation. There are currently no deferred compensation arrangements with any executive officers or employees of the Company.
Chief Executive Officer
Larry E. Ryherd was the Chairman of the Board and Chief Executive Officer from 1984 until his resignation on March 27, 2000 (seeEmployment Contracts).
On March 27, 2000, Mr. Jesse T. Correll assumed the position of Chairman of the Board and Chief Executive Officer of UTG and each of its affiliates. Under Mr. Correll’s leadership, he has declined to receive a salary, bonus or other forms of compensation for his duties with UTG and each of its affiliates in the year 2000. As a reflection of Mr. Correll’s leadership, the Compensation of current and future executive officers of the Company will be determined by the Board of Directors using a “performance based” philosophy. The Board of Directors will consider UTG’s financial results and future salary decisions will be proportionately based on the profitability of the Company.
Conclusion
The Board of Directors believes this Executive Compensation Plan provides a competitive and motivational compensation package to the executive officer team necessary to produce the results UTG strives to achieve. The Board of Directors also believes theExecutive Compensation Plan addresses both the interests of the shareholders and the executive team.
BOARD OF DIRECTORS
John S. Albin James E. Melville
Randall L. Attkisson Luther C. Miller
John W. Collins Millard V. Oakley
Robert E. Cook Robert V. O'Keefe
Jesse T. Correll Robert W. Teater
Ward F. Correll
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on UTG’s Common Stock during the five fiscal years ended December 31, 2000 with the cumulative total return on the NASDAQ Composite Index Performance and the NASDAQ Insurance Stock Index (1). The graph assumes that $100 was invested on December 31, 1995 in each of the Company’s common stock, the NASDAQ Composite Index, and the NASDAQ Insurance Stock Index, and that any dividends were reinvested.
 |
(1) UTG selected the NASDAQ Composite Index Performance as an appropriate comparison as UTG’s Common Stock is traded on the NASDAQ Small Cap exchange under the sign “UTGI”. Furthermore, UTG selected the NASDAQ Insurance Stock Index as the second comparison because there is no similar single “peer company” in the NASDAQ system with which to compare stock performance and the closest additional line-of-business index which could be found was the NASDAQ Insurance Stock Index. Trading activity in UTG’s Common Stock is limited, which may be due in part as a result of UTG’s low profile, and its reported operating losses. The Return Chart is not intended to forecast or be indicative of possible future performance of UTG’s stock.
The foregoing graph shall not be deemed to be incorporated by reference into any filing of UTG under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that UTG specifically incorporates such information by reference.
Compensation Committee Interlocks and Insider Participation
The following persons served as directors of UTG during 2000 and were officers or employees of UTG or its affiliates during 2000: Jesse T. Correll and James E. Melville. Accordingly, these individuals have participated in decisions related to compensation of executive officers of UTG and its subsidiaries.
During 2000, Jesse T. Correll and James E. Melville, executive officers of UTG, were also members of the Board of Directors of FCC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF UTG
PRINCIPAL HOLDERS OF SECURITIES
The following tabulation sets forth the name and address of the entity known to be the beneficial owners of more than 5% of UTG’s Common Stock and shows: (i) the total number of shares of Common Stock beneficially owned by such person as of December 31, 2000 and the nature of such ownership; and (ii) the percent of the issued and outstanding shares of Common Stock so owned as of the same date.
Title Number of Shares Percent
Of Name and Address and Nature of of
Class of Beneficial Owner Beneficial Ownership Class (1)
----- ------------------- -------------------- ---------
Common First Southern Funding, LLC 2,119,921 (2) 50.8%
Stock no 99 Lancaster Street
Par value P.O. Box 328
Stanford, KY 40484
Larry E. Ryherd 535,252(3) (4) 12.8%
12 Red Bud Lane
Springfield, IL 62707
(1) The percentage of outstanding shares is based on 4,175,066 shares of Common Stock outstanding.
(2) First Southern Funding LLC (“FSF”) owns 1,130,747 shares of Common Stock directly. The aforementioned amount does not include additional shares of Common Stock that may be acquired under a stock option agreement. Beneficial ownership of up to 51% of the outstanding Common Stock can be acquired under the Option Agreement. As of December 31, 2000, FSF could acquire a total of 19,108 additional shares of Common Stock under the Option Agreement. Includes: (i) 353,044 shares of Common Stock owned by First Southern Bancorp, Inc. (“FSBI”). (ii) 112,704 shares of Common Stock owned by Mr. Jesse T. Correll directly. 150,545 shares of Common Stock held by Dyscim Holding Co., Inc., a Kentucky corporation all of the outstanding shares of which are owned by Mr. Correll. 72,750 shares of Common Stock held by WCorrell Limited Partnership in which Mr. Correll serves as managing general partner and, as such, has sole voting and dispositive power over the shares of Common Stock held by it; (iii) 183,033 shares of Common Stock owned by First Southern Capital Corp., LLC; (iv) 98,523 shares of Common Stock held by Cumberland Lake Shell, Inc., all of the outstanding voting shares of which are owned jointly by Ward F. Correll and his wife. As a result Ward F. Correll may be deemed to share the voting and dispositive power over these shares; (v) 18,575 shares of Common Stock owned by First Southern Investments, LLC.
(3) Larry E. Ryherd owns 181,091 shares of UTG’s Common Stock in his own name. Includes: (i) 150,050 shares of UTG’s Common Stock in the name of Dorothy LouVae Ryherd, his wife; (ii) 150,000 shares of UTG’s Common Stock which are held beneficially in trust for the three children of Larry E. Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek Scott Ryherd and Jarad John Ryherd; (iii) 4,701 shares of UTG’s Common Stock, 2,700 shares of which are in the name of Shari Lynette Serr, 1,900 shares of which are in the name of Jarad John Ryherd; and 101 shares of which are in the name of Derek Scott Ryherd (iv) 2,000 shares held by Dorothy LouVae Ryherd, his wife as custodian for granddaughter, 160 shares held by Larry E. Ryherd as custodian for granddaughter; (v) 47,250 shares beneficially in trust for the three children of Larry E. Ryherd and Dorothy LouVae Ryherd, namely Shari Lynette Serr, Derek Scott Ryherd and Jarad John Ryherd.
(4) Pursuant to the terms of a common stock purchase agreement dated February 13, 2001, First Southern Bancorp, Inc. agreed to purchase 563,215 shares of United Trust Group, Inc. common stock from Larry E. Ryherd and family at a price of $8.00 per share. The purchase price will be payable in the form of $881,874 in cash and a five-year promissory note. Of the 563,215 shares purchased 27,963 are being purchased from members of Mr. Ryherd’s family who are not considered as beneficial owners.
SECURITY OWNERSHIP OF MANAGEMENT OF UTG
The following tabulation shows with respect to each of the directors and nominees of UTG, with respect to UTG’s chief executive officer and each of UTG’s executive officers whose salary plus bonus exceeded $100,000 for fiscal 2000, and with respect to all executive officers and directors of UTG as a group: (i) the total number of shares of all classes of stock of UTG or any of its parents or subsidiaries, beneficially owned as of December 31, 2000 and the nature of such ownership; and (ii) the percent of the issued and outstanding shares of stock so owned, and granted stock options available as of the same date.
Title Directors, Named Executive Number of Shares Percent
of Officers, & All Directors & and Nature of of
Class Executive Officers as a Group Ownership Class (1)
- ----- ----------------------------- --------- ---------
FCC's John S. Albin 0 *
Common Randall L. Attkisson 0 (5) *
Stock, $1.00 John W. Collins 0 *
par value Robert E. Cook 0 *
Jesse T. Correll 1,217 (2) 2.2%
Ward F. Correll 0 *
James E. Melville 544 (3) (10) 1.0%
Luther C. Miller 0 *
Theodore C. Miller 15 *
Millard V. Oakley 0 *
Robert V. O'Keefe 0 *
Robert W. Teater 0 *
Brad M. Wilson 0 *
All directors and executive officers 1,776 3.3%
as a group (thirteen in number)
UTG's John S. Albin 10,503 (4) *
Common Randall L. Attkisson 0 (5) *
Stock, no John W. Collins 0 *
par value Robert E. Cook 10,891 *
Jesse T. Correll 2,021,398 (2) 48.4%
Ward F. Correll 98,523 (6) 2.4%
James E. Melville 22,500 (7) (10) *
Luther C. Miller 0 *
Theodore C. Miller 0 *
Millard V. Oakley 16,471 *
Robert V. O'Keefe 300 (8) *
Robert W. Teater 7,380 (9) *
Brad M. Wilson 0 *
All directors and executive officers
as a group (thirteen in number) 2,187,966 52.4%
(1) The percentage of outstanding shares for FCC is based on 54,393 shares of Common Stock outstanding. The percentage of outstanding shares for UTG is based on 4,175,066 shares of Common Stock outstanding.
(2) Jesse T. Correll owns 112,704 shares of UTG stock individually. In addition, Mr. Correll is a director and officer of First Southern Funding, LLC & Affiliates, which owns 1,908,694 shares of UTG and 1,217 shares of FCC's common stock. (See Principal Holders of Securities).
(3) James E. Melville owns 168 shares individually and 376 shares owned jointly with his spouse.
(4) Includes 392 shares owned directly by Mr. Albin's spouse.
(5) Randall L. Attkisson is an associate and business partner of Mr. Jesse T. Correll and holds minority ownership positions in certain of the companies listed as owning UTG and FCC Common Stock including First Southern Funding LLC and First Southern Bancorp, Inc. Ownership of these shares is reflected in the ownership of Jesse T. Correll.
(6) Cumberland Lake Shell, Inc. owns 98,523 shares of UTG Common Stock, all of the outstanding voting shares of which are owned by Ward F. Correll and his wife. As a result Ward F. Correll may be deemed to share the voting and dispositive power over these shares. Ward F. Correll is the father of Jesse T. Correll. There are 72,750 shares of UTG Common Stock owned by WCorrell Limited Partnership in which Jesse T. Correll serves as managing general partner and, as such, has sole voting and dispositive power over the shares of Common Stock held by it. The aforementioned 72,750 shares are deemed to be beneficially owned by and listed under Jesse T. Correll in this section.
(7) James E. Melville owns 2,500 shares individually and 14,000 shares jointly with his spouse. Includes: (i) 3,000 shares of UTG’s Common Stock which are held beneficially in trust for his daughter, namely Bonnie J. Melville; (ii) 3,000 shares of UTG’s Common Stock, 750 shares of which are in the name of Matthew C. Hartman, his nephew; 750 shares of which are in the name of Zachary T. Hartman, his nephew; 750 shares of which are in the name of Elizabeth A. Hartman, his niece; and 750 shares of which are in the name of Margaret M. Hartman, his niece.
(8) Includes 300 shares owned directly by Mr. O'Keefe's spouse.
(9) Includes 210 shares owned directly by Mr. Teater's spouse.
(10) First Southern Bancorp, Inc. agreed to purchase 22,500 shares of United Trust Group, Inc. common stock and 544 shares of First Commonwealth Corporation common stock pursuant to the terms of a common stock purchase agreement dated February 13, 2001 with James E. Melville and his family. Pursuant to the terms of the agreement, the United Trust Group, Inc. shares will be acquired for $8.00 per share and the First Commonwealth Corporation shares will be acquired for $200.00 per share. The purchase will be in the form of a five-year promissory note. Mr. Melville agreed to resign as a director of United Trust Group, Inc. and its subsidiaries (including First Commonwealth Corporation) pursuant to an agreement and release First Southern Bancorp, Inc., United Trust Group, Inc., First Commonwealth Corporation and Mr. Melville executed concurrently with the common stock purchase agreement.
At the March 28, 2001 Board of Directors meeting of United Trust Group, Inc., the Board approved the assignment of First Southern Bancorp, Inc.'s position in the agreements with Mr Melville (See (10) above) and with Mr. Ryherd (See (4) underPRINCIPAL HOLDERS OF SECURITIES) to UTG. Upon closing of the transactions, UTG will pay $978,226 in cash and issue notes payable totaling $3,816,294 to the sellers. The notes will bear interest at the fixed rate of 7% with principal payments due annually of $763,259 starting one year from the date of closing.
* Less than 1%.
Except as indicated above, the foregoing persons hold sole voting and investment power.
Directors and officers of UTG file periodic reports regarding ownership of Company securities with the Securities and Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934 as amended, and the rules promulgated thereunder.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the current structure, FCC pays a majority of the general operating expenses of the affiliated group. FCC then receives management, service fees and reimbursements from the various affiliates.
United Income, Inc. (“UII”) had a service agreement with United Security Assurance Company (“USA”). The agreement was originally established upon the formation of USA which was a 100% owned subsidiary of UII. Changes in the affiliate structure have resulted in USA no longer being a direct subsidiary of UII, though still a member of the same affiliated group. The original service agreement remained in place without modification. USA paid UII monthly fees equal to 22% of the amount of collected first year premiums, 20% in second year and 6% of the renewal premiums in years three and after. UII had a subcontract agreement with UTG to perform services and provide personnel and facilities. The services included in the agreement were claim processing, underwriting, processing and servicing of policies, accounting services, agency services, data processing and all other expenses necessary to carry on the business of a life insurance company. UII’s subcontract agreement with UTG states that UII pay UTG monthly fees equal to 60% of collected service fees from USA as stated above. The service fees received from UII were recorded in UTG’s financial statements as other income. With the merger of UII into UTG in July 1999, the sub-contract agreement ended and UTG assumed the direct contract with USA. This agreement was terminated upon the merger of USA into UG in December 1999.
USA paid $677,807 and $835,345 under their agreement with UII for 1999 and 1998, respectively. UII paid $223,753 and $501,207 under their agreement with UTG for 1999 and 1998, respectively. Additionally, UII paid FCC $30,000 and $0 in 1999 and 1998, respectively for reimbursement of costs attributed to UII. These reimbursements are reflected as a credit to general expenses.
UTG paid FCC $750,000, $600,000 and $0 in 2000, 1999 and 1998, respectively for reimbursement of costs attributed to UTG.
On January 1, 1993, FCC entered an agreement with UG pursuant to which FCC provides management services necessary for UG to carry on its business. UG paid $6,061,515, $6,251,340 and $8,018,141 to FCC in 2000, 1999 and 1998, respectively.
ABE pays fees to FCC pursuant to a cost sharing and management fee agreement. FCC provides management services for ABE to carry on its business. The agreement requires ABE to pay a percentage of the actual expenses incurred by FCC based on certain activity indicators of ABE business to the business of all the insurance company subsidiaries plus a management fee based on a percentage of the actual expenses allocated to ABE. ABE paid fees of $371,211, $392,005 and $399,325 in 2000, 1999 and 1998, respectively under this agreement.
APPL has a management fee agreement with FCC whereby FCC provides certain administrative duties, primarily data processing and investment advice. APPL paid fees of $444,000, $300,000 and $300,000 in 2000, 1999 and 1998, under this agreement.
Respective domiciliary insurance departments have approved the agreements of the insurance companies and it is Management’s opinion that where applicable, costs have been allocated fairly and such allocations are based upon generally accepted accounting principles.
Since the Company’s affiliation with FSF, UG has acquired mortgage loans through participation agreements with FSNB. FSNB services the loans covered by these participation agreements. UG pays a .25% servicing fee on these loans and a one-time fee at loan origination of .50% of the original loan amount to cover costs incurred by FSNB relating to the processing and establishment of the loan. UG paid $34,721, $11,578 and $0 in servicing fees and $91,392, $0 and $0 in origination fees to FSNB during 2000, 1999 and 1998, respectively.
The Company reimbursed expenses incurred by Mr. Correll and Mr. Attkisson relating to travel and other costs incurred on behalf of or relating to the Company. The Company paid $96,599, $39,336 and $0 in 2000, 1999 and 1998,respectively to First Southern Bancorp, Inc. in reimbursement of such costs.
On December 31, 1999, UTG and Jesse T. Correll entered a transaction whereby Mr. Correll, in combination with other individuals, made an equity investment in UTG. Under the terms of the Stock Acquisition Agreement, the Correll group contributed their 100% ownership of North Plaza of Somerset, Inc. to UTG in exchange for 681,818 authorized but unissued shares of UTG common stock. The Board of Directors of UTG approved the transaction at their regular quarterly board meeting held on December 7, 1999. North Plaza of Somerset, Inc. owns for investment purposes, a shopping center in Somerset, Kentucky, approximately 12,000 acres of timberland in Kentucky, and a 50% partnership interest in an additional 11,000 acres of Kentucky timberland. North Plaza has no debt. The net assets have been valued at $7,500,000, which equates to $11.00 per share for the new shares issued.
Mr. Correll is a member of the Board of Directors of UTG and currently UTG's largest shareholder through his ownership control of FSF and its affiliates. Mr. Correll is the majority shareholder of FSF, which is an affiliate of First Southern Bancorp, Inc., a bank holding company that operates out of 14 locations in central Kentucky. Following the above transaction, as of December 31, 1999, Mr. Correll owns or controls directly and indirectly approximately 46% of UTG. At December 31, 2000, Mr. Correll owned or controlled directly and indirectly approximately 51% of UTG.
Following necessary regulatory approval, on December 29, 1999, UG was the survivor to a merger with its 100% owned subsidiary, USA. The merger was completed as a part of management’s efforts to reduce costs and simplify the corporate structure.
On July 26, 1999, the shareholders of UTG and UII approved a merger transaction of the two companies. Prior to the merger, UTG owned 53% of UTGL99 (refers to the former United Trust Group, Inc., which was formed in February of 1992 and liquidated in July of 1999) an insurance holding company, and UII owned 47% of UTGL99. Additionally, UTG held an equity investment in UII. At the time the decision to merge was made, neither UTG nor UII had any other significant holdings or business dealings. The Board of Directors of each company thus concluded a merger of the two companies would be in the best interests of the shareholders by creating a larger more viable life insurance holding group with lower administrative costs, a simplified corporate structure, and more readily marketable securities. Following the merger approval, UTG issued 817,517 shares of its authorized but unissued common stock to former UII shareholders, net of any dissenter shareholders in the merger. Immediately following the merger, UTGL99, which was then 100% owned by UTG, was liquidated and UTG changed its name to United Trust Group, Inc. (“UTG”).
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
Kerber, Eck and Braeckel LLP (“KEB”) served as UTG’s independent certified public accounting firm for the fiscal year ended December 31, 2000 and for fiscal year ended December 31, 1999. In serving its primary function as outside auditor for UTG, KEB performed the following audit services: examination of annual consolidated financial statements; assistance and consultation on reports filed with the Securities and Exchange Commission and; assistance and consultation on separate financial reports filed with the State insurance regulatory authorities pursuant to certain statutory requirements. Audit Fees billed for these audit services in the year 2000 totaled $187,000, and audit fees billed for quarterly reviews of the Company’s financial statements totaled $16,496. No other services were performed by, and therefore no other fees were billed by, KEB for services in the current year.
UTG does not expect that a representative of KEB will be present at the Annual Meeting of Shareholders of UTG. No accountants have been selected for fiscal year 2001 because UTG generally chooses accountants shortly before the commencement of the annual audit work.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
(1) Financial Statements:
See Item 8, Index to Financial Statements
(2) Financial Statement Schedules
Schedule I - Summary of Investments - other than invested in related parties.
Schedule II - Condensed financial information of registrant
Schedule IV - Reinsurance
Schedule V - Valuation and qualifying accounts
NOTE: Schedules other than those listed above are omitted because they are not required or the
information is disclosed in the financial statements or footnotes.
(b) Reports on Form 8-K filed during fourth quarter.
None
(c) Exhibits:
Index to Exhibits (See Pages 79 and 80).
INDEX TO EXHIBITS
Exhibit
Number
- --------
3(a) (1) Amended Articles of Incorporation for the Company dated November 20, 1987.
3(b) (1) Amended Articles of Incorporation for the Company dated December 6, 1991.
3(c) (1) Amended Articles of Incorporation for the Company dated March 30, 1993.
3(d) (1) Code of By-Laws for the Company.
10(a) (2) Coinsurance Agreement dated September 30, 1996 between Universal Guaranty Life Insurance
Company and First International Life Insurance Company, including assumption reinsurance
agreement exhibit and amendments.
10(b) (1) Subcontract Agreement dated September 1, 1990 between United Trust, Inc. and United Income, Inc.
10(c) (1) Service Agreement dated November 8, 1989 between United Security Assurance Company and United
Income, Inc.
10(d) (1) Management and Consultant Agreement dated as of January 1, 1993 between First Commonwealth
Corporation and Universal Guaranty Life Insurance Company.
10(e) (1) Management Agreement dated December 20, 1981 between Commonwealth Industries Corporation, and
Abraham Lincoln Insurance Company.
10(f) (1) Reinsurance Agreement dated January 1, 1991 between Universal Guaranty Life Insurance Company
and Republic Vanguard Life Insurance Company.
10(g) (1) Reinsurance Agreement dated July 1, 1992 between United Security Assurance Company and Life
Reassurance Corporation of America.
10(h) (3) Employment Agreement dated as of July 31, 1997 between Larry E. Ryherd and First Commonwealth
Corporation
10(i) (3) Employment Agreement dated as of July 31, 1997 between James E. Melville and First Commonwealth
Corporation
10(j) (1) Agreement dated June 16, 1992 between John K. Cantrell and First Commonwealth Corporation.
10(k) (1) Stock Purchase Agreement dated February 20, 1992 between United Trust Group, Inc. and Sellers.
10(l) (1) Amendment No. One dated April 20, 1992 to the Stock Purchase Agreement between the Sellers and
United Trust Group, Inc.
INDEX TO EXHIBITS
Exhibit
Number
- --------
10(m) (1) Security Agreement dated June 16, 1992 between United Trust Group, Inc. and the Sellers.
10(n) (1) Stock Purchase Agreement dated June 16, 1992 between United Trust Group, Inc. and First
Commonwealth Corporation
99(a) Audit Committee Charter
Footnote:
(1) Incorporated by reference from the Company's Annual Report on Form 10-K, File No. 0-5392, as of
December 31, 1993.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K, File No. 0-5392, as of
December 31, 1996.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K, File No. 0-5392, as of
December 31, 1997.
UNITED TRUST GROUP, INC.
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 2000
Schedule I
Column A Column B Column C Column D
- ------------------------------------------------------------- ------------- -------------
Amount at
Which Shown
in Balance
Cost Value Sheet
------------- ------------- -------------
Fixed maturities:
Bonds:
United States Government and
government agencies and authorities $ 31,350,799 $ 31,216,940 $ 31,350,799
State, municipalities, and political
subdivisions 15,318,605 15,572,298 15,318,605
Collateralized mortgage obligations 3,178,210 3,210,515 3,178,210
Public utilities 27,287,454 27,527,379 27,287,454
All other corporate bonds 44,787,895 45,096,431 44,787,895
------------- ------------- -------------
Total fixed maturities 121,922,963 $ 122,623,563 121,922,963
=============
Investments held for sale:
Fixed maturities:
United States Government and
government agencies and authorities 35,281,562 $ 35,444,312 35,444,312
State, municipalities, and political
subdivisions 190,593 206,006 206,006
Collateralized mortgage obligations 5,919,553 5,962,594 5,962,594
Public utilities 0 0 0
All other corporate bonds 1,522,478 1,515,368 1,515,368
------------- ------------- -------------
42,914,186 $ 43,128,280 43,128,280
=============
Equity securities:
Banks, trusts and insurance companies 3,247,525 $ 3,139,020 3,139,020
All other corporate securities 2,165,982 1,990,551 1,990,551
------------- ------------- -------------
5,413,507 $ 5,129,571 5,129,571
=============
Mortgage loans on real estate 32,896,671 32,896,671
Investment real estate 13,096,245 13,096,245
Real estate acquired in satisfaction of debt 0 0
Policy loans 14,090,900 14,090,900
Other long-term investments 200,000 200,000
Short-term investments 1,686,397 1,686,397
------------- -------------
Total investments $ 232,220,869 $ 232,151,027
============= =============
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT Schedule II
NOTES TO CONDENSED FINANCIAL INFORMATION
(a) The condensed financial information should be read in conjunction with the consolidated financial statements and notes of United Trust Group, Inc. and Consolidated Subsidiaries.
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY BALANCE SHEETS
As of December 31, 2000 and 1999
Schedule II
2000 1999
------------- -------------
ASSETS
Investment in affiliates $ 36,443,353 $ 35,771,144
Cash and cash equivalents 1,851,441 1,176,540
Notes receivable from affiliate 12,839,193 14,839,193
FIT recoverable 7,583 11,028
Accrued interest income 20,837 41,462
Other assets 0 5,101
------------- -------------
Total assets $ 51,162,407 $ 51,844,468
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 1,817,169 $ 5,892,969
Payable to affiliates, net 156,000 147,310
Deferred income taxes 2,140,774 2,080,486
Other liabilities 334,031 347,031
------------- -------------
Total liabilities 4,447,974 8,467,796
------------- -------------
Shareholders' equity:
Common stock, net of treasury shares 83,501 79,405
Additional paid-in capital, net of treasury 47,730,980 45,175,076
Accumulated other comprehensive
income (deficit) of affiliates 335,287 (1,138,900)
Accumulated deficit (1,435,335) (738,909)
------------- -------------
Total shareholders' equity 46,714,433 43,376,672
------------- -------------
Total liabilities and shareholders' equity $ 51,162,407 $ 51,844,468
============= =============
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 2000
Schedule II
2000 1999 1998
------------- ------------- -------------
Revenues:
Management fees from affiliates $ 0 $ 528,638 $ 501,207
Other income from affiliates 4,381 43,148 47,048
Interest income from affiliates 1,242,990 1,099,013 236,058
Interest income 84,519 37,402 25,283
------------- ------------- -------------
1,331,890 1,708,201 809,596
Expenses:
Management fee to affiliate 750,000 600,000 0
Interest expense 376,095 387,966 787,432
Interest expense to affiliates 0 31,325 63,000
Operating expenses 79,015 90,304 316,888
------------- ------------- -------------
1,205,110 1,109,595 1,167,320
------------- ------------- -------------
Operating income (loss) 126,780 598,606 (357,724)
Income tax credit (expense) (60,550) (192,247) 121,495
Equity in income (loss) of investees 0 53,555 (21,525)
Equity in income (loss) of subsidiaries (762,656) 615,995 (421,738)
------------- ------------- -------------
Net income (loss) $ (696,426)$ 1,075,909 $ (679,492)
============= ============= =============
Basic income (loss) per share from continuing
operations and net income (loss) $ (0.17)$ 0.38 $ (0.39)
============= ============= =============
Diluted income (loss) per share from continuing
operations and net income (loss) $ (0.17)$ 0.38 $ (0.39)
============= ============= =============
Basic weighted average shares outstanding 4,056,439 2,839,703 1,726,843
============= ============= =============
Diluted weighted average shares outstanding 4,056,439 2,839,934 1,726,843
============= ============= =============
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 2000
Schedule II
2000 1999 1998
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ (696,426) $ 1,075,909 $ (679,492)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Equity in (income) loss of subsidiaries 762,656 (615,995) 421,738
Equity in (income) loss of investees 0 (53,555) 21,525
Change in accrued interest income 20,625 12,886 1,888
Depreciation 5,102 7,266 7,683
Amortization of notes payable discount 0 0 586,462
Change in deferred income taxes 60,288 185,406 (121,495)
Change in indebtedness (to) from affiliates, net 8,690 166,422 1,433
Change in other assets and liabilities 32,966 (25,070) 4,147
------------- ------------- -------------
Net cash provided by operating activities 193,901 753,269 243,889
------------- ------------- -------------
Cash flows from investing activities:
Purchase of stock of affiliates (3,200) (50,325) 0
Sale of stock of affiliates 0 71,195 0
Issuance of notes receivable to affiliates 0 (610,000) (9,120,813)
Payments received on notes receivable from affiliates 2,000,000 400,000 0
Payments received on mortgage loans 0 50,000 0
------------- ------------- -------------
Net cash provided by (used in) investing activities 1,996,800 (139,130) (9,120,813)
------------- ------------- -------------
Cash flows from financing activities:
Purchase of treasury stock 0 (149,955) (26,527)
Payments on notes payable (1,515,800) (433,974) (1,927,952)
Cash received in merger 0 607,508 0
Cash received in liquidation of subsidiary 0 27,936 0
Proceeds from issuance of common stock 0 0 10,999,995
------------- ------------- -------------
Net cash provided by (used in) financing activities (1,515,800) 51,515 9,045,516
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 674,901 665,654 168,592
Cash and cash equivalents at beginning of year 1,176,540 510,886 342,294
------------- ------------- -------------
Cash and cash equivalents at end of year $ 1,851,441 $ 1,176,540 $ 510,886
============= ============= =============
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 2000 and the year ended December 31, 2000
Schedule IV
- ------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
--------- ------------ ------------ ------------- ------------ ----------
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies Net amount net
- --------------------------------------------------------------------------------------------------
Life insurance
in force $ 2,878,693,447 $ 734,621,000 $ 1,020,170,553 $ 3,164,243,000 32.2%
============= =========== ============= =============
Premiums and policy fees:
Life insurance $ 22,789,885 $ 3,518,015 $ 76,069 $ 19,347,939 0.4%
Accident and health
insurance 179,904 38,157 0 141,747 0.0%
------------ ------------ ------------- ------------
$ 22,969,789 $ 3,556,172 $ 76,069 $ 19,489,686 0.4%
============= =========== ============= =============
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1999 and the year ended December 31, 1999
Schedule IV
- ---------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
---------- ------------ ------------ ------------- ------------ ----------
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies Net amount net
- ---------------------------------------------------------------------------------------------------
Life insurance
in force $ 3,142,274,477 $ 831,024,000 $ 1,008,903,523 $ 3,320,154,000 30.4%
============= ============ ============= =============
Premiums and policy fees:
Life insurance $ 25,345,843 $ 3,929,888 $ 20,324 $ 21,436,279 0.1%
Accident and health
insurance 193,541 48,677 0 144,864 0.0%
------------ ------------ ------------- ------------
$ 25,539,384 $ 3,978,565 $ 20,324 $ 21,581,143 0.1%
============ ============ ============= =============
UNITED TRUST GROUP, INC.
REINSURANCE
As of December 31, 1998 and the year ended December 31, 1998
Schedule IV
- ----------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
---------- ------------ ------------ ------------- ------------ ----------
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
- -------------------------------------------------------------------------------------------------
Life insurance
in force $ 3,424,677,000 $ 924,404,000 $ 1,036,005,000 $ 3,536,278,000 29.3%
============= ============= ============= =============
Premiums and policy fees:
Life insurance $ 30,685,493 $ 4,492,304 $ 20,091 $ 26,213,280 0.1%
Accident and health
insurance 233,025 50,228 0 182,797 0.0%
------------- ------------- ------------- -------------
$ 30,918,518 $ 4,542,532 $ 20,091 $ 26,396,077 0.1%
============= ============= ============= =============
* All assumed business represents the Company’s participation in the Servicemen’s Group Life Insurance Program (SGLI).
UNITED TRUST GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
As of and for the years ended December 31, 2000, 1999, and 1998
Schedule V
Balance at Additions
Beginning Charges Balances at
Description Of Period and Expenses Deductions End of Period
- -----------------------------------------------------------------------------------------------------
December 31, 2000
Allowance for doubtful accounts -
mortgage loans $ 70,000 $ 170,000 $ 0 $ 240,000 $
December 31, 1999
Allowance for doubtful accounts -
mortgage loans $ 70,000 $ 0 $ 0 $ 70,000 $
December 31, 1998
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 70,000 $ 10,000 $ 70,000 $
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
UNITED TRUST GROUP, INC.
------------------------
(Registrant)
/s/ John S. Albin March 28, 2001
- ------------------------------------------------------
John S. Albin, Director
/s/ Randall L. Attkisson March 28, 2001
- --------------------------------------------------
Randall L. Attkisson, President, Chief
Operating Officer and Director
/s/ John W. Collins March 28, 2001
- ----------------------------------------------------
John W. Collins, Director
/s/ Jesse T. Correll March 28, 2001
- ----------------------------------------------------
Jesse T. Correll, Chairman of the Board,
Chief Executive Officer and Director
Ward F. Correll March 28, 2001
- ----------------------------------------------------
Ward F. Correll, Director
/s/ Luther C. Miller March 28, 2001
- ------------------------------------------------
Luther C. Miller, Director
/s/ Millard V. Oakley March 28, 2001
- ----------------------------------------------
Millard V. Oakley, Director
/s/ Robert V. O'Keefe March 28, 2001
- ---------------------------------------------
Robert V. O'Keefe, Director
/s/ Robert W. Teater March 28, 2001
- ---------------------------------------------
Robert W. Teater, Director
/s/ Theodore C. Miller March 28, 2001
- ----------------------------------------------------
Theodore C. Miller, Corporate Secretary
and Chief Financial Officer
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
UNITED TRUST GROUP, INC.
------------------------
(Registrant)
March 28, 2001
- ----------------------------------------------------------
John S. Albin, Director
March 28, 2001
- ----------------------------------------------------------
Randall L. Attkisson, President, Chief
Operating Officer and Director
March 28, 2001
- ----------------------------------------------------------
John W. Collins, Director
March 28, 2001
- ----------------------------------------------------------
Jesse T. Correll, Chairman of the Board,
Chief Executive Officer and Director
March 28, 2001
- ----------------------------------------------------------
Ward F. Correll, Director
March 28, 2001
- ----------------------------------------------------------
Millard V. Oakley, Director
March 28, 2001
- ----------------------------------------------------------
Robert V. O'Keefe, Director
March 28, 2001
- ----------------------------------------------------------
Robert W. Teater, Director
March 28, 2001
- ---------------------------------------------------------
Theodore C. Miller, Corporate Secretary
and Chief Financial Officer