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, 1995 Commission File Number 0-16867
UNITED TRUST, INC.
(Exact name of registrant as specified in its charter)
Illinois 37-1172848
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5250 South Sixth Street Road, P.O. Box 5147, Springfield, IL 62705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (217) 786-4300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock
Registrant 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, and has
been subject to such filing requirements for the past 90 days.
At March 1, 1996, the Registrant had outstanding 18,675,935 shares of Common
Stock, stated value $.02 per share.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Page 1 of 78
PART 1
ITEM 1. BUSINESS
United Trust, Inc. (the "Registrant") was incorporated in 1984, under the laws
of the State of Illinois to serve as an insurance holding company. At
December 31, 1995, significant majority-owned subsidiaries and affiliates of
the Registrant were as depicted on the following organizational chart:
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1995
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns 53%
of United Trust Group ("UTG") and 30% of United Income, Inc. ("UII"). UII
owns 47% of UTG. UTG owns 72% of First Commonwealth Corporation ("FCC"). FCC
owns 100% of Universal Guaranty Life Insurance Company ("UG"). UG owns 100%
of United Security Assurance Company ("USA"). USA owns 84% of Appalachian
Life Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln
Insurance Company ("ABE").
2
(a) GENERAL
The Registrant and its subsidiaries (the "Company") operate principally in the
individual life insurance business. The primary business of the Company has
been the servicing of existing insurance business in force, the solicitation
of new insurance business, and the acquisition of other companies in similar
lines of business.
Between March 28, 1985, and May 20, 1987, UTI was engaged in an intrastate
public offering of its securities, raising a total of $12,585,086 net of
offering costs. United Trust Assurance Company ("UTAC"), was initially
capitalized with a $5,000,000 contribution from UTI in 1986 and began selling
life insurance products in 1987.
Beginning in 1988, an affiliated company, UII, conducted a stock offering in
the State of Ohio. The investors purchased units consisting of one $2 par
value, 9% noncumulative, redeemable preferred share and one common share.
Each unit sold for $10. The preferred stock has been converted into two
shares of common stock.
Between March 1988 and August 1990, UII raised a total of approximately
$15,000,000 in an intrastate public offering in Ohio. USA was initially
capitalized with a $5,000,000 contribution from UII in 1990 in Ohio. USA
began selling life insurance products in August 1990.
Since the inception of the offering, the Company's ownership interest has
dropped from 49% to 30%. The Company accounts for its investment in UII using
the equity method. Because the offering price per share exceeded the
Company's carrying amount per share, the Company's equity in UII has increased
$4,359,749.
(b) FORMATION OF UNITED TRUST GROUP, INC.
On February 20, 1992, UTI and its affiliate, UII, formed a joint venture, UTG.
On June 16, 1992, UTI contributed $2.7 million in cash, an $840,000 promissory
note and 100% of the common stock of its wholly owned subsidiary, UTAC. UII
contributed $7.6 million in cash and 100% of its life insurance subsidiary,
USA to UTG. After the contributions of cash, subsidiaries, and the note, UII
owns 47% and UTI owns 53% of UTG.
(c) ACQUISITION OF CIC
Pursuant to the terms of a stock purchase agreement, on June 16, 1992, UTG
acquired 6,771 shares of the 8,776 no par value, issued and outstanding common
stock of CIC. Additionally, options for 1,300 shares were acquired and
simultaneously exercised. Further, UTG acquired 729 shares of CIC stock from
Mr. James Melville, a former officer of CIC. The adjusted purchase price for
all shares purchased including the options was $15,567,179. CIC then issued
315 shares of CIC common stock to UGIC and 2,730 shares of CIC common stock to
FCC in satisfaction of debt. As a result UTG owned 67% of CIC.
Also, June 16, 1992, UTG sold, at book value, its insurance subsidiaries, UTAC
and USA along with $6,000,000 of FCC's senior debt to FCC, an indirectly
controlled subsidiary of CIC, in exchange for $3,300,000 in cash, ten year
promissory notes totalling $5,669,988, twenty year promissory notes totalling
$3,529,865 and 11,134,000 shares of FCC unissued common stock, approximately
46% of the outstanding common stock of FCC.
3
(d) RESTRUCTURING OF AFFILIATES
The Company has taken several steps to streamline and simplify the corporate
structure following the acquisitions.
On December 28, 1992, UG was the surviving company to a merger with Roosevelt
National Life Insurance Company ("RNLIC"), United Trust Assurance Company
("UTAC") and Cimarron Life Insurance Company ("CIM"). On June 30, 1993,
Alliance Life Insurance Company ("ALLI"), a subsidiary of UG, was merged into
UG.
On March 30, 1994, Farmers and Ranchers Life Insurance Company ("F&R") was
sold to an unrelated third party. F&R was a small life insurance company
which did not significantly contribute to the operations of the group. F&R
primarily represented a marketing opportunity. The Company determined it
would not be able to allocate the time and resources necessary to properly
develop the opportunity, due to continued focus and emphasis on certain other
agency forces of the Company.
The transactions described below, which transpired during 1994, were necessary
to position Universal Guaranty Investment Company ("UGIC"), Investors Trust,
Inc. ("ITI") and Commonwealth Industries Corporation ("CIC") for liquidation
and dissolution.
Pursuant to an Agreement of Merger dated July 7, 1994 between Investors Trust
Assurance Company, an Illinois life insurance company ("ITAC"), and ALIC, on
July 31, 1994, ITAC merged with and into ALIC and ALIC was the surviving
company. On the effective date of the merger, ALIC succeeded to all the
rights and property of ITAC and assumed all of the liabilities and obligations
and became subject to all of the debts of ITAC in the same manner as if ALIC
had itself incurred them. The merger was approved by the Illinois Director of
Insurance.
Prior to the merger of ITAC with and into ALIC, ITAC was a wholly owned
subsidiary of ITI. ITAC owned 1,549,549 (approximately 66%) of the issued and
outstanding common stock of UGIC. Prior to July 31, 1994, ITI was the
indirect beneficial owner of the shares of UGIC common stock directly owned by
ITAC. On July 31, immediately prior to the effectiveness of the merger of
ITAC with and into ALIC, ITI purchased 758,946 shares of the UGIC common stock
owned by ITAC. The total purchase price was $2,276,793. On July 31, 1994,
ITAC also transferred to ITI at no cost 790,603 shares of the common stock of
the Company. On such date, ITI became the direct beneficial owner of all
1,549,549 shares of the common stock of UGIC. In order to purchase the
758,946 shares of UGIC common stock, ITI received a loan from UTI and UII in
the aggregate principal amount of $2,164,293. ITI transferred 721,431 shares
of the common stock of UGIC that it purchased from ITAC to UTI and UII in
payment of the loan. These shares were then contributed by UTI and UII to
their subsidiary, UTG.
The balance sheet of Commonwealth Industries Corporation for the period ended
July 31, 1994, included liabilities in the aggregate amount of $402,861
comprised of a future liability under a consulting agreement, escheat funds
and an account payable. On July 31, 1994, these liabilities were assumed by
UTG in exchange for 1,558,318 shares of the common stock of ITI.
The balance sheet of UGIC for the period ended July 31, 1994, included
liabilities in the aggregate amount of $461,102. On July 31, 1994, these
liabilities were assumed by UTG in exchange for 106,392 shares of the common
stock of FCC and 315 shares of the common stock of CIC. The FCC shares
transferred reduced UGIC's percentage ownership of FCC from 50.396% to
49.959%.
Prior to these transactions, UGIC, ITI and CIC each had liabilities in excess
of assets excluding the stock holdings of their respective subsidiary. The
1994 transactions enabled the companies to extinguish their liabilities.
4
On August 15, 1995, the shareholders of CIC, ITI, and UGIC voted to
voluntarily liquidate each of the companies and distribute the assets to the
shareholders (consisting solely of common stock of their respective
subsidiary). As a result of the liquidations, the shareholders of each
company became shareholders of FCC, following the liquidations, UTG holds 72%
of the common stock of FCC.
PRODUCTS
The Company's portfolio consists of three universal life insurance products.
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. The product currently credits 6% 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 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 first couple of 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 product, referred to as the "Eagle USL 400" has a minimum face
amount of $50,000 with a 3% load on all premiums and a policy fee of $4.75 per
month. This product is sold at issue ages of 0-18. The Eagle USL 400
currently credits 6% interest and 4% guaranteed interest rate. Partial
withdrawals are allowed after the first policy duration. Partial withdrawals
are allowed once a year subject to a $25 fee. Partial withdrawals are subject
to a minimum of $500 cash surrender value remaining. Policy loans are charged
8% interest in arrears with the loaned value receiving the 4% guaranteed rate.
Surrender charges are based on a percentage of target premium starting at 150%
for years 1-5 and decreasing 10% each year thereafter until year 15 when it
becomes zero.
The third universal life product was designed in 1990 and introduced for sale
in the fourth quarter of that year. This 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 6% interest and
4.5% guaranteed interest rate. Partial withdrawals are allowed after the
first duration. Partial withdrawals are allowed once a year subject a $25
fee. A partial withdrawal is subject to a minimum of $500 cash surrender
value remaining. 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 calculated from the policy issue date and is
contractually guaranteed.
The Company markets other products, none of which is significant to the
operations of the Company. In late 1994, the Company discontinued marketing
interest sensitive whole life insurance and traditional participating whole
life insurance products. The Company has a variety of policies in force
different from those which are currently being marketed. Approximately 34% of
the insurance in force is participating business. The Company's average
persistency rate for all policies in force for 1995 and 1994 has been
approximately 87.5% and
5
86.3%, respectively. The Company does not anticipate any material fluctuations
in these rates in the future that may result from competition.
The Company's experience for earned interest, persistency and mortality vary
from the assumptions applied to pricing and determining premiums.
Accordingly, differences between the Company's 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's primary product. The Company
monitors investment yields, and when necessary takes action to adjust credited
interest rates on its insurance products to preserve targeted interest
spreads. Credited rates are reviewed and established by the Board of
Directors.
The premium rates are competitive with other insurers doing business in the
states in which the Company is marketing its products.
MARKETING
The Company markets its products through separate and distinct agency forces.
The Company has approximately 100 independent agents who actively write new
business. No individual sales agent accounted for over 10% of the Company's
premium volume in 1995. The Company's sales agents do not have the power to
bind the Company.
The change in marketing strategy from traditional life insurance products to
universal life insurance products had a significant impact on new business
production. As a result of the change in marketing strategy the agency force
went through a restructure and retraining process. Marketing is based on a
referral network of community leaders and shareholders of UII and UTI.
Recruiting of agents is also based on the same referral network.
New sales are marketed by UG and USA through their agency forces using
contemporary sales approaches with personal computer illustrations. Current
marketing efforts are primarily focused on the Midwest region.
Recruiting of agents is based on obtaining people with little or no experience
in the life insurance business. These recruits go through an extensive
internal training program.
USA is licensed in Illinois, Indiana and Ohio. During 1995, Ohio accounted
for 99% of USA's direct premiums collected.
ALIC is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1995, Illinois and Indiana accounted for 47% and 33%,
respectively of ALIC's direct premiums collected.
APPL is licensed in Alabama, Arizona, Colorado, Georgia, Illinois, Indiana,
Kansas, Kentucky, Louisiana, Missouri, Montana, Nebraska, Ohio, Oklahoma,
Tennessee, Utah, Virginia, West Virginia and Wyoming. During 1995, West
Virginia accounted for 95% 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, Michigan, 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 1995,
Illinois and Ohio accounted for 32% and 16%, respectively, of UG's direct
premiums collected. No other states account for more than 6% of UG's direct
premiums collected.
6
UNDERWRITING
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 medical examinations,
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 rejects the
application.
RESERVES AND REINSURANCE
The Company establishes reserves for future policy benefits, unearned
premiums, reported claims and claims incurred but not reported. Such reserves
are based on regulatory accounting requirements and generally accepted
accounting principles.
The Company reinsures its insurance products with other insurance companies
under agreements of reinsurance. Reinsurance agreements are intended to limit
the Company's maximum loss and provide other financial benefits. The ceding
of reinsurance does not discharge the Company's primary liability to the
insured, however it is the practice of insurers to reduce their financial
statement liabilities to the extent that they have been reinsured with other
insurance companies.
In selecting a reinsurance company, the Company examines many factors
including:
1) Whether the reinsurer is licensed in the states in which reinsurance
coverage is being sought;
2) the solvency and stability of the company. One source utilized is the
rating given the reinsurer by the A.M. Best Company, an insurance industry
rating company. Another source is the statutory annual statement of the
reinsurer;
3) the history and reputation of the Company;
4) competitive pricing of reinsurance coverage. The Company generally seeks
quotes from several reinsurers when considering a new treaty.
On existing reinsurance treaties, the Company monitors reinsurers through
sources such as, the ratings provided by the A.M. Best Company, reinsurer
financial statements and industry publications and literature.
In December 1991, UG entered into a 50% coinsurance arrangement with Republic
Vanguard Life Insurance Company to enable the Company to maintain increased
production levels while containing first year statutory costs. The ceding of
new business under this treaty was terminated December 31, 1993. Republic
Vanguard holds an "A" (Excellent) rating from A. M. Best, an industry rating
company. The coinsurance arrangement, which was effective January 1, 1991,
allowed UG to cede to Republic Vanguard a 50% quota share of all new universal
life policies issued after the effective date through date of termination. UG
receives a commission allowance of 11% of excess premium and renewal premium.
Monies pertaining to the coinsurance arrangement are settled monthly. The
agreement contains a provision whereby risks in excess of UG's retention
($125,000 maximum) are transferred to the reinsurer. Risks are transferred
under an automatic ceding arrangement up to $1,000,000 and a facultative
arrangement for amounts in excess of $1,000,000.
7
In December 1993, UG entered into reinsurance agreements with Business Men's
Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE RE"). BMA
and LIFE RE each hold an "A+" (Superior) rating from A.M. Best, an industry
rating company. The reinsurance arrangement was effective December 1, 1993,
and covered 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.
During 1993, USA entered into a coinsurance agreement with LIFE RE. The
coinsurance arrangement allows USA to cede to LIFE RE a 50% quota share of the
traditional participating policies issued by USA after the effective date of
July 1, 1992. USA entered into the arrangement to enable the Company to
maintain increased production levels while containing first year statutory
costs. USA receives commission allowances of 150% of first year premium, 27%
of second year premium, 32% of third year premium and 37% of fourth year and
beyond. Monies pertaining to the coinsurance arrangement are settled monthly.
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long-duration reinsurance contracts on premiums earned
in 1995, 1994 and 1993 was as follows:
Shown in thousands
1995 1994 1993
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 35,201 $ 38,063 $ 39,848
Assumed 0 0 0
Ceded (5,203) (5,659) (8,688)
Net premiums $ 29,998 $ 32,404 $ 31,160
As a result of amounts ceded to under reinsurance treaties, total life
insurance in force was reduced by approximately $1.088 billion and $1.217
billion at December 31, 1995, and 1994, respectively. Ceded reinsurance
premiums as a percentage of gross premium revenues were 15%, 15% and 22% in
1995, 1994 and 1993, respectively.
INVESTMENTS
Effective October 15, 1990, the Investment Committee of the Board of Directors
retained Alpha Advisors, Inc., of Chicago, Illinois, a registered investment
advisor, to assist the Company in managing its investment portfolio. The
Company may modify its present investment strategy at any time, provided its
strategy continues to be in compliance with the limitations of state insurance
department regulations.
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.
8
The following table reflects net investment income by type of investment.
December 31,
1995 1994 1993
Fixed maturities and fixed
maturities held for sale $ 13,190,121 $ 12,185,941 $ 10,814,222
Equity securities 52,445 3,999 253,706
Mortgage loans 1,257,189 1,423,474 1,745,563
Real estate 975,080 990,857 968,620
Policy loans 1,041,900 1,014,723 1,017,456
Short term investments 505,637 444,135 1,104,326
Other 158,290 221,125 255,093
Total consolidated
investment income 17,180,662 16,284,254 16,158,986
Investment expense (1,724,438) (1,915,808) (1,753,250)
Consolidated net
investment income $ 15,456,224 $ 14,368,446 $ 14,405,736
At December 31, 1995, the Company had a total of $7,998,000 of investments,
comprised of $7,189,000 in real estate including its home office property and
$809,000 in equity securities, which did not produce income during 1995.
The following table summarizes the Company's fixed maturities distribution at
December 31, 1995 and 1994 by ratings category as issued by Standard and
Poor's, a leading ratings analyst.
Fixed Maturities
Rating % of Portfolio
1995 1994
Investment grade
AAA 27% 23%
AA 14% 9%
A 48% 58%
BBB 11% 10%
Below investment grade 0% 0%
100% 100%
The following table summarizes the Company's fixed maturity holdings and fixed
maturities held for sale by major classifications.
Carrying Value
1995 1994
U.S. government and government agencies $ 29,492,006 $ 23,059,049
States, municipalities and
political subdivisions 7,608,494 8,075,703
Collateralized mortgage obligations 15,428,596 19,114,044
Public utilities 59,254,524 57,630,503
Corporate 82,516,775 79,161,167
$ 194,300,395 $ 187,040,466
9
The following table shows the composition and average maturity of the
Company's investment portfolio at December 31, 1995.
Carrying Average Average
Investments Value Maturity Yield
Fixed maturities and fixed
maturities held for sale . . . . $194,300,395 5 years 6.90%
Equity securities. . . . . . . . . 1,946,481 not applicable 3.67%
Mortgage loans . . . . . . . . . . 13,891,762 11 years 8.46%
Investment real estate . . . . . . 17,310,988 not applicable 5.63%
Policy loans . . . . . . . . . . . 16,941,359 not applicable 6.26%
Short term investments . . . . . . 425,000 190 days 5.01%
Total Investments. . . . . . . . . $244,815,985 7.04%
At December 31, 1995, fixed maturities and fixed maturities held for sale have
a market value of $202,179,000. Fixed maturities are carried at amortized
cost. It is management's intent to hold these securities until maturity.
Fixed maturities held for sale are carried at market.
The Company holds approximately $425,000 in short term investments. Other
investments include fixed maturities and mortgage loans of $10,788,000 and
$523,000, respectively, maturing in one year and $91,652,000 and $2,420,000,
respectively, maturing in two to five years, which in the opinion of
management is sufficient to meet the Company's cash requirements.
The Company holds approximately $13,892,000 in mortgage loans which represents
4% 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, personal financial information such as outstanding debt,
sources of income, and personal equity. A credit report is also obtained.
Loans issued are limited to no more than 80% of the appraised value of the
property, and the loan must have first position against the collateral.
The Company has $618,000 of mortgage loans, net of a $10,000 reserve
allowance, which are in default or in the process of foreclosure. These loans
represent approximately 4% of the total portfolio. The Company has three
loans that total approximately $102,000 which are 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 were loans
held in portfolios by acquired companies at the time of acquisition.
Management believes the internal controls surrounding, the mortgage loan
selection process have provided 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
10
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 days delinquent to cause an
automatic non-accrual status.
The 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.
In addition, the Company also monitors that the insurance on the property 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-payment 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
FHA/VA $ 785,973 6%
Commercial $ 3,329,884 24%
Residential $ 9,775,905 70%
The following table shows a geographic distribution of the mortgage loan
portfolio and real estate held.
Mortgage Real
Loans Estate
Colorado 2% 0%
Illinois 20% 55%
Kansas 12% 0%
Louisiana 13% 10%
Mississippi 0% 21%
Missouri 2% 1%
North Carolina 5% 5%
Oklahoma 6% 1%
Virginia 4% 3%
West Virginia 32% 3%
Other 4% 1%
Total 100% 100%
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The following table summarizes delinquent mortgage loan holdings.
Delinquent
31 Days or More 1995 1994 1993
Non-accrual status $ 0 $ 0 $ 0
Other 628,000 911,000 1,038,000
Reserve on delinquent loans (10,000) (26,000) (300,000)
Total Delinquent $ 618,000 $ 885,000 $ 738,000
Interest income foregone
(Delinquent loans) $ 15,800 $ 4,000 $ 33,700
In Process of
Restructuring $ 0 $ 0 $ 0
Restructuring on other
than market terms 0 0 0
Other potential problem loans 0 0 0
Total Problem Loans $ 0 $ 0 $ 0
Interest income foregone
(Restructured loans) $ 0 $ 0 $ 0
See Item 2, Properties, for description of real estate holdings.
COMPETITION
The insurance business is highly competitive 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 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.
GOVERNMENT REGULATION
In common with all domestic insurance companies, the Company is subject to
regulation and supervision in the jurisdictions in which it does business
under statutes which typically delegate regulatory, supervisory and
administrative powers to state insurance commissions. USA, UG, APPL and ALIC
are domiciled in the states of Ohio, Ohio, West Virginia and Illinois,
respectively. The method of regulation varies, but generally, regulation
relates to the licensing of insurers and their agents, nature of and
limitations on investments, approval
12
of policy forms, reserve requirements, standards of solvency, deposits of
securities for the benefit of policyholders, periodic examination of insurers,
and trade practices.
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
are 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 to Notes to Financial Statements), and payment of
dividends (see Note 2 to Notes to Financial Statements) in excess of specified
amounts by the insurance subsidiary within the holding company system are
required.
The National Association of Insurance Commissioners (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. The primary purpose of the NAIC 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 the individual state as presented, modified to meet the state's own needs
or requirements, or dismissed entirely.
Each year the NAIC prepares 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 1995, UG had two ratios outside the norm. The first ratio
compared investment in affiliates to total capital and surplus. At December
31, 1995, UG had an investment in affiliate (USA) slightly greater than
capital and surplus. It is believed that this ratio will be outside the
normal range in future periods, but is not considered by management to be an
issue as both companies are under common control.
The second ratio related to the decrease in premium. The ratio fell outside
the norm due to the significant reduction in first year business compared to
the prior year. Management does not believe that this ratio will be outside
the normal range in future periods.
The NAIC has adopted Risk Based Capital ("RBC") rules, which became effective
December 31, 1993, to evaluate the adequacy of statutory capital and surplus
in relation to a company's investment and insurance risks. The RBC formula
reflects the level of risk of invested assets and the types of insurance
products. The formula classifies company risks into four categories:
1) Asset risk - the risk of loss of principal due to default through
creditor bankruptcy or decline in market value for assets reported
at market.
2) Pricing inadequacy - the risk of adverse mortality, morbidity, and
expense experience in relation to pricing assumptions.
3) Asset and liability mismatch - the risk of having to reinvest
funds when market yields fall below levels guaranteed to contract
holders, and the risk of having to sell assets when market yields
are above the levels at which the assets were purchased.
13
4) General risk - the risk of fraud, mismanagement, and other
business risks.
The RBC formula will be used by the states as an early warning tool to
identify weakly capitalized companies for the purpose of initiating regulatory
action. Generally, the RBC requirements provide for four different levels of
regulatory attention depending upon the ratio of a company's total adjusted
capital (defined as the total of its statutory capital, surplus and asset
valuation reserve) to its RBC. The "Company Action Level" is triggered if a
company's total adjusted capital is less than 100% but greater than or equal
to 75% of its Company Action Level RBC. At The Company Action Level, the
company must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital position. The
"Regulatory Action Level" is triggered if a company's total adjusted capital
is less than 75% but greater than or equal to 50% of its Company Action Level
RBC. At the Regulatory Action Level, the regulatory authority will perform a
special examination if the company's total adjusted capital is less than 50%
but greater than or equal to 35% of its Company Action Level RBC, and the
regulatory authority may take any action it deems necessary, including placing
the company under regulatory control. The "Mandatory Control Level" is
triggered if a company's total adjusted capital is less than 35% of its
Company Action Level RBC, and the regulatory authority mandates that the
company be placed under its control. At December 31, 1995, each of the
Company's insurance subsidiaries has a Ratio in excess of 250% of the
authorized control level; accordingly the subsidiaries meet the RBC
requirements.
The NAIC has proposed a new Model Investment Law that may affect the statutory
carrying values of certain investments; however, the final outcome of that
proposal is not certain, nor is it possible to predict what impact the
proposal will have or whether the proposal will be adopted in the foreseeable
future.
The current statutory accounting treatment of DAC taxes results in an
understatement of companies' surplus. These taxes result from a law that
approximates acquisition expenses and then spreads the corresponding
deductions over a period of years. The result is a DAC tax which is collected
immediately and subsequently returned through deductions in later years.
EMPLOYEES
There are approximately 110 persons who are employed by the Company and its
affiliates.
ITEM 2. PROPERTIES
The following table shows the distribution of real estate by type.
Real Estate Amount % of Total
Home Office $ 3,054,115 18%
Commercial $ 2,680,318 15%
Residential development $ 6,244,142 36%
Foreclosed real estate $ 5,332,413 31%
Real estate holdings represent approximately 5% of the total assets of the
Company net of accumulated depreciation of $1,050,000 and $802,000 at year end
1995 and 1994 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 approximately $2,838,000. In addition, an
14
insurance subsidiary owns a home office building in Huntington, West Virginia.
The building has 15,000 square feet and is carried at $216,000. The
facilities occupied by the Company are adequate relative to the Company's
present operations.
Commercial property consists primarily of former home office buildings of
acquired companies no longer used in the operations of the Company. These
properties are leased to various unaffiliated companies and organizations.
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 is
on the development and sale of lots, with an occasional home construction to
help stimulate interest.
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.
Foreclosed property is carried at the unpaid loan principal balance plus
accrued interest on the loan and other costs associated with the foreclosure
process. The carrying value of foreclosed property does not exceed
management's estimate of net realizable value. Management's estimate of net
realizable value is based on significant internal real estate experience,
local market experience, independent appraisals and evaluation of existing
comparable property sales.
ITEM 3. LEGAL PROCEEDINGS
During the third quarter of 1994, UG became aware that certain new insurance
business was being solicited by certain agents and issued to individuals
considered to be not insurable by Company standards. These policies had a
face amount of $22,700,000 and represent 1/2 of 1% of the insurance in force.
Management's analysis indicates that the expected death claims on the business
in force to be adequately covered by the mortality assumptions inherent in the
calculation of statutory reserves. Nevertheless, management has determined it
is in the best interest of the Company to repurchase as many of the policies
as possible. As of December 31, 1995, there remained approximately $5,738,000
of the original face amount which have not been settled. The Company will
continue its efforts to repurchase as many of the policies as possible and
regularly apprise the Ohio Department of Insurance regarding the status of
this situation. Through December 31, 1995, the Company spent a total of
$2,886,000 for the repurchase of these policies and for the legal defense of
related litigation.
The Company is currently involved in the following litigation: Freeman v.
Universal Guaranty Life Insurance Company (U.S.D.C.,N.D.Ga, 1994, 1-94-CV-
2593-RCF); Armstrong v. Universal Guaranty Life Insurance Company and James
Melville (Circuit Court of Davidson County, Tenn., 1994, 94C3222); Armstrong
v. Universal Guaranty Life Insurance Company and James Melville (Circuit Court
of Davidson County, Tenn., 1994, 94C3720); Ridings v. Universal Guaranty Life
Insurance Company and James Melville (Circuit Court of Davidson County, Tenn.,
1994, 94C3221); Ronald L. Mekkes, Jr. v. Universal Guaranty Life Insurance
Company and James Melville, (Circuit Court of Kent County, Michigan, 1995, 95-
1073-NZ).
Four general agents of UG filed independent suits against UG in the latter
part of September or early October 1994. In February 1996, the Ronald L.
Mekkes, Jr. suit was dismissed with prejudice. Kathy Armstrong (3-94-1085),
another general agent, filed her suit on November 16, 1994. All of the suits
allege that the plaintiff was libeled by statements made in a
15
letter sent by UG. The letter was sent to persons who had been issued
life insurance policies by UG as the result of policy applications submitted
by the five agents. Mr. Melville is a defendant in some of the suits because
he signed the letter as president of UG.
In addition to the defamation count, Mr. Freeman alleges that UG breached a
contract by failing to pay his commissions for policies issued. Mr. Freeman
claims unpaid commissions of $104,000. In the libel claim, Mr. Freeman claims
compensatory damages of over $5,000,000, punitive damages of over $3,000,000,
costs, and litigation expenses. The other plaintiffs request the award of
unspecified compensatory damages and punitive (or special) damages as well as
costs and attorney's fees. UG has filed Answers to all of these suits
asserting various defenses and, where appropriate, counterclaims. UG believes
that it has no liability to any of the plaintiffs and intends to defend each
of the suits vigorously. The Freeman suit is scheduled for trial April 8,
1996.
Jeffrey Ploskonka, Keith Bohn and Paul Phinney v. Universal Guaranty Life
Insurance Company (Circuit Court of the Seventh Judicial Circuit Sangamon
County, Illinois Case No.: 95-L-0213)
On March 9, 1995 a lawsuit was filed against Universal Guaranty Life Insurance
Company on behalf of three insureds and a potential class of other insureds.
The Plaintiffs allege that UG violated the insurance contract in attempting to
cancel life insurance contracts. Additionally, the Plaintiffs assert
violations of Illinois law alleging vexations and unreasonable insurance
practices, breach of duty of good faith and fair dealing, and that Illinois
consumer fraud laws have been violated. The Plaintiffs seek unspecified
compensatory damages, injunctive relief, attorneys' fees, statutory damages in
an amount up to $25,000, punitive damages of $1,000,000, and other equitable
relief. UG filed an Answer to this lawsuit in May 1995, asserting various
defenses and reserving the right to assert counterclaims. UG has also filed
motions to dismiss certain allegations and claims made in the lawsuit. UG
believes it has no liability to any of the plaintiffs, or other potential
class members, and intends to defend the lawsuit vigorously. In June 1995,
the court conditionally certified a class of non-settling insureds.
The Company and its subsidiaries are named as defendants in a number of legal
actions arising primarily from claims made under insurance policies. Those
actions have been considered in establishing the Company's liabilities.
Management and its legal counsel are of the opinion that the settlement of
those actions will not have a material adverse effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS
None
16
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDERS
MATTERS
On June 18, 1990, UTI became a member of NASDAQ. Quotations began on that
date under the symbol UTIN. The following is a breakdown by quarter of the
closing bid and asked prices, without retail mark-up, mark-down or commission
and may not necessarily represent actual transactions.
Range of Stock Prices
BID ASK
PERIOD LOW HIGH LOW HIGH
1995
First quarter 1/2 5/8 3/4 3/4
Second quarter 1/2 1 3/4 1 1/8
Third quarter 1/2 5/8 11/16 7/8
Fourth quarter 3/8 9/16 5/8 3/4
1994
First quarter 1 1/8 1 1/2 1 1/2 1 3/4
Second quarter 5/8 1 1/4 7/8 1 1/2
Third quarter 1/2 3/4 3/4 1
Fourth quarter 3/8 5/8 3/4 1
Current Market Makers are:
Mesirow & Co., Inc. Howe, Barnes & Johnson, Inc.
350 N. Clark Street 135 South LaSalle, Suite 1500
Chicago, IL 60610-4796 Chicago, IL 60603
M. H. Meyerson and Company Carr Securities Corporation
30 Montgomery Street 17 Battery Place
Jersey City, NJ 07303 New York, NY 10004
Herzog, Heine, Geduld, Inc.
26 Broadway, 1st Floor
New York, NY 10004
As of December 31, 1995, no cash dividends had been declared on the common
stock of UTI.
See Note 2 in the accompanying consolidated financial statements for
information regarding dividend restrictions.
Number of Common Shareholders as of March 13, 1996 is 5,774.
17
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
1995 1994 1993 1992 1991
Premium income
net of reinsurance $ 29,998 $ 32,404 $ 31,160 $ 19,076 $ 9,575
Net investment income $ 15,456 $ 14,368 $ 14,406 $ 8,514 $ 1,609
Net income (loss) $ (3,001)* $ (1,624)* $ (862)* $ 5,661* $ (17)*
Net income (loss)
per share $ (0.16) $ (0.09) $ (0.05) $ 0.30 $ -
Total assets $356,393 $360,258 $375,755 $370,259 $ 41,243
Total long term debt $ 21,447 $ 22,053 $ 24,359 $ 27,494 $ 411
Dividends paid per share NONE NONE NONE NONE NONE
* Includes equity earnings of investees.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company and its consolidated subsidiaries have three principal needs for
cash - the insurance company's contractual obligations to policyholders, the
payment of operating expenses and servicing of its long-term debt. Cash and
cash equivalents as a percentage of total assets were 4% and 3% as of December
31, 1995, and 1994, respectively. Fixed maturities as a percentage of total
invested assets were 78% and 77% as of December 31, 1995 and 1994,
respectively. Fixed maturities increased 4% in 1995 compared to 1994.
Investing cash and cash equivalents in fixed maturities allowed the Company to
increase investment yield on these monies by extending time to maturity while
maintaining cash balances at an adequate level to meet the Company's short
term obligations.
The Company holds approximately $425,000 in short term investments. Other
investments mature at varying times including bonds and mortgage loans of
$10,788,000 and $523,000, respectively, maturing in one year and $89,405,000
and $2,420,000, respectively, maturing in two to five years, which in the
opinion of management is sufficient to meet the Company's cash requirements.
Consolidated operating activities of the Company produced negative cash flows
of ($6,204,000), ($3,786,000) and ($7,298,000) in 1995, 1994 and 1993,
respectively. The net cash provided by operating activities plus interest
credited to account balances and net policyholder contract deposits after the
payment of policyholder withdrawals, equalled $9,454,000 in 1995, $10,361,000
in 1994, and $10,029,000 in 1993. Management believes this measurement of
cash flows more accurately indicates the performance of the Company's
insurance operations, since reporting regulations require cash inflows and
outflows from universal life insurance products to be shown as financing
activities.
Cash used in investing activities was ($8,030,000), ($28,595,000) and
($22,041,000), for 1995, 1994 and 1993, respectively. The most significant
aspect of investing activities is the fixed maturity transactions. Fixed
maturities account for 76%, 78% and 88% of the total cost of investments
acquired in 1995, 1994 and 1993, respectively. The Company has not directed
its investable funds to so-called "junk bonds" or derivative investments. The
cash used by investing activities in the last three years was provided by
investing excess cash and cash equivalents and financing activities.
Net cash provided by financing activities was $15,064,000, $11,775,000 and
$14,082,000 for 1995, 1994 and 1993, respectively. Policyholder contract
deposits increased 8% in 1995 compared to 1994, and decreased 4% in 1994 when
compared to 1993. The increase between 1995 and 1994 is due to the change in
marketing focus of the Company. All of the Company's agency forces are
marketing universal life insurance products. The change between 1994 and 1993
is a normal fluctuation in marketing of the Company's universal life products.
Policyholder contract withdrawals has increased 7% in 1995 compared to 1994,
and increased 10% in 1994 compared to 1993. The increase in 1995 and 1994 is
not attributable to any one significant event. Factors that may be causing
the increase are the fluctuation of interest rates, competition and other
economic factors. The Company's current marketing strategy and product
portfolio is directly structured to conserve the existing customer base and at
the same time increase the customer base through new policy production.
19
Interest credited to account balances increased 12% in 1995 compared to 1994,
and decreased 14% when comparing 1994 to 1993. The increase in 1995 is due to
the increase in policyholder contract deposits. The decrease in 1994 is due
to a reduction in interest rates credited on the Company's insurance products
in January 1994. It takes approximately one year to fully realize a change in
credited rates since a change becomes effective on each policy's next
anniversary. Insurance products that the Company is issuing are crediting 6%
interest and the Company does not have any immediate plans to change product
interest rates.
The payment of cash dividends to shareholders is not legally restricted. At
December 31, 1995, substantially all of the consolidated shareholders equity
represents net assets of its subsidiaries. UTI does not have significant day
to day operations of its own. Cash requirements of UTI primarily relate to
the payment of expenses related to maintaining the Company as a corporation in
good standing with the various regulatory bodies which govern corporations in
the jurisdictions where the Company does business. UTI is able to meet its
cash needs through its management agreement with UII and its income received
on invested assets and cash balances. Insurance company dividend payments are
regulated by the state insurance department 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,
1995, UG had a statutory gain from operations of $3,197,000. At December 31,
1995, UG's statutory capital and surplus amounted to $7,274,000.
Extraordinary dividends (amounts in excess of ordinary dividend limitations)
require prior approval of the insurance commissioner and are not restricted to
a specific calculation.
The Company's Senior Debt bears interest equal to 1% over the variable per
annum rate most recently announced by the First Bank of Missouri as its "Base
Rate". As of March 1, 1996, the "Base Rate" was 8.25%. The principal balance
of the Company's Senior Debt is payable in installments on June 1st of each
year. On December 2, 1994, the Company prepaid $2,000,000 of the $2,900,000
scheduled principal payment due June 1, 1995. On March 1, 1995, the Company
prepaid the remaining $900,000 of the June 1, 1995 scheduled principal
payment. On January 31, 1996, the Company prepaid $1,500,000 of the
$3,900,000 scheduled principal payment due June 1, 1996.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
(a) REVENUES
Total revenue increased 1% when comparing 1995 to 1994.
Premium income, net of reinsurance premium, decreased 7% when comparing 1995
to 1994. The decrease is primarily attributed to the reduction in new
business production and the change in products marketed. In 1995, the Company
has streamlined the product portfolio, as well as restructured the marketing
force. The decrease in first year premium production is directly related to
the Company's change in distribution systems. The Company has changed its
focus from primarily a broker agency distribution system to a captive agent
system.
20
Business written by the broker agency force in recent years did not meet
Company expectations. With the change in focus of distribution systems, most
of the broker agents were terminated. (The termination of the broker agency
force caused a non-recurring write-down of the value of agency force asset.
See discussion of amortization of agency force for further details.)
The change in marketing strategy from traditional life insurance products to
universal life insurance products had a significant impact on new business
production. As a result of the change in marketing strategy the agency force
went through a restructure and retraining process. Cash collected from the
universal life and interest sensitive products contribute only the risk charge
to premium income, however traditional insurance products contribute monies
received to premium income. One factor that has had a positive impact on
premium income is the improvement of persistency. Persistency is a measure of
insurance in force retained in relation to the previous year. Overall,
persistency improved to 87.5% in 1995 compared to 86.3% in 1994.
Other considerations, net of reinsurance, increased 13% compared to one year
ago. Other considerations consists of administrative charges on universal
life and interest sensitive life insurance products. The insurance in force
relating to these types of products continues to increase as marketing efforts
are focused on universal life insurance products.
Net investment income increased 8% when comparing 1995 to 1994. The change
reflected an increase in the amount of invested assets, which was partially
offset by a lower effective yield on investments made during 1995. The
overall investment yields for 1995, 1994 and 1993, are 7.04%, 7.13% and 7.22%,
respectively. The Company has been able to increase its investment portfolio
through financing cash flows, generated by cash received through sales of
universal life insurance products. Although the Company sold no fixed
maturities during the last few years, it did experience a significant turnover
in the portfolio. Many companies with bond issues outstanding took advantage
of lower interest rates and retired older debt which carried higher rates.
This was accomplished through early calls and accelerated pay-downs of fixed
maturity investments.
The Company's investments are generally managed to match related insurance and
policyholder liabilities. The Company, in conjunction with the decrease in
average yield of the Company's fixed maturity portfolio has decreased the
average crediting rate for the insurance and investment products. The
comparison of investment return with insurance or investment product crediting
rates establishes an interest spread. The minimum interest spread between
earned and credited rates is 1% on the "Century 2000" universal life insurance
product, the Company's primary product. The Company monitors investment
yields, and when necessary takes action to adjust credited interest rates on
its insurance products to preserve targeted spreads. Over 60% of the
insurance and investment product reserves are crediting 5% or less in interest
and 39% of the insurance and investment product reserves are crediting 5.25%
to 6% in interest. It is expected that the monitoring of the interest spreads
by management will provide the necessary margin to adequately provide for
associated costs on insurance policies the Company has in force and will write
in the future.
Realized investment losses were $124,000 and $1,437,000 in 1995 and 1994,
respectively. Fixed maturities and equity securities realized net investment
losses of $224,000 and real estate realized net investment gains of $100,000
in 1995. The realized loss in 1995 can not be attributed to any one specific
transaction. In 1994, the Company realized losses of $865,000 due to a
permanent impairment of property located in Louisiana. The permanent
impairment was based on recent appraisals and marketing analysis of
surrounding properties.
21
The Company realized a gain of $467,000 from the sale of an insignificant
subsidiary in 1994. In 1994, the Company realized a loss of $212,000
from the charge off of its investment in its equity subsidiary, United
Fidelity, Inc. The Company had other gains and losses during the period
that comprised the remaining amount reported but were routine or immaterial in
nature to disclose on an individual basis.
(b) EXPENSES
Total expenses increased 16% when comparing 1995 to 1994.
Life benefits, net of reinsurance benefits and claims, decreased 4% compared
to 1994. The decrease is related to the decrease in first year premium
production. Another factor that has caused life benefits to decrease is that
during 1994, the Company lowered its crediting rates on interest sensitive
products in response to financial market conditions. This action will
facilitate the appropriate spreads between investment returns and credited
interest rates. It takes approximately one year to fully realize a change in
credited rates since a change becomes effective on each policy's next
anniversary. Please refer to discussion of net investment income for analysis
of interest spreads.
The Company experienced an increase of 6% in mortality during 1995 compared to
1994. The increase in mortality is due primarily to settlement expenses
discussed in the following paragraph:
During the third quarter of 1994, UG became aware that certain new insurance
business was being solicited by certain agents and issued to individuals
considered to be not insurable by Company standards. These policies had a
face amount of $22,700,000 and represent 1/2 of 1% of the insurance in force.
Management's analysis indicates that the expected death claims on the business
in force to be adequately covered by the mortality assumptions inherent in the
calculation of statutory reserves. Nevertheless, management has determined it
is in the best interest of the Company to repurchase as many of the policies
as possible. As of December 31, 1995, there remained approximately $5,738,000
of the original face amount which have not been settled. The Company will
continue its efforts to repurchase as many of the policies as possible and
regularly apprise the Ohio Department of Insurance regarding the status of
this situation. Through December 31, 1995, the Company spent a total of
$2,886,000 for the repurchase of these policies and for the legal defense of
related litigation. In relation to the repurchase of insurance policies the
Company incurred life benefits of $720,000 and $1,250,000 in 1995 and 1994,
respectively. The Company incurred legal costs of $687,000 and $229,000 in
1995 and 1994, respectively.
Dividends to policyholders increased approximately 16% when comparing 1995 to
1994. USA continued to market participating policies through most of 1994.
Management expects dividends to policyholders will continue to increase in the
future. A significant portion of the insurance in force is participating
insurance. A significant portion of the participating business is relatively
newer business, and the dividend scale for participating policies increases in
the early durations. The dividend scale is subject to approval of the Board
of Directors and may be changed at their discretion. The Company has
discontinued its marketing of participating policies.
Commissions and amortization of deferred policy acquisition costs increased
21% in 1995 compared to 1994. The increase is directly attributed to the
amortization of a larger asset. The increase is also caused by the reduction
in first year premium production. To a lesser extent the increase in
amortization of deferred policy acquisition costs is directly related to the
change in products that is currently marketed. The Company revised its
portfolio of products as previously discussed in premium income. These new
products pay lower first year
22
commissions than the products sold in prior periods. The asset increased
due to first year premium production by the agency force. The Company did
benefit from improved persistency.
Amortization of cost of insurance acquired decreased 40% in 1995 compared to
1994. Cost of insurance acquired is amortized in relation to expected future
profits, including direct charge-offs for any excess of the unamortized asset
over the projected future profits. The Company did not have any charge-offs
during the periods covered by this report. The decrease in amortization
during the current period is a normal fluctuation due to the expected future
profits. Amortization of cost of insurance acquired is particularly sensitive
to changes in persistency of certain blocks of insurance in force. The
Company's average persistency rate for all policies in force for 1995 and 1994
has been approximately 87.5% and 86.3%, respectively.
During 1995, the Company reported a non-recurring write down of value of
agency force of $8,297,000. The write down is directly related to the
Company's change in distribution systems. The Company has changed its focus
from primarily a broker agency distribution system to a captive agent system.
Business produced by the broker agency force in recent years did not meet
Company expectations. With the change in focus of distribution systems, most
of the broker agents were terminated. The termination of most of the agents
involved in the broker agency force caused management to re-evaluate the value
of the agency force carried on the balance sheet. As of December 31, 1995,
the remaining value of the agency force on the balance sheet represents the
active agency forces that continue to originate premium production.
Operating expenses increased 18% in 1995 compared to 1994. The increase was
caused by several factors. The primary factor for the increase in operating
expenses is due to the decrease in production. The decrease in production was
discussed in the analysis of premium income. As such, the Company was
positioned to handle significantly more first year production than was
produced. First year operating expenses that were deferred and capitalized as
a deferred policy acquisition costs asset was $532,000 in 1995 compared to
$1,757,000 in 1994. The difference between the policy acquisition costs
deferred in 1995 compared to 1994, effected the increase in operating
expenses. The increase in operating expenses was offset, to a lesser extent,
from a 12% reduction in staff in 1995 compared to 1994. The reduction in
staff was achieved by attrition.
Another factor that caused the increase in operating expenses is directly
related to increased legal costs. During the third quarter of 1994, UG became
aware that certain new insurance business was being solicited by certain
agents and issued to individuals considered to be not insurable by Company
standards. These policies had a face amount of $22,700,000 and represent 1/2
of 1% of the insurance in force of the Company. As of December 31, 1995,
there remained approximately $5,738,000 of the original face amount which have
not been settled. The Company will continue its efforts to repurchase as many
of the policies as possible and regularly apprise the Ohio Department of
Insurance regarding the status of this situation. The Company incurred legal
costs of $687,000 and $229,000 in 1995 and 1994, respectively, for the legal
defense of related litigation.
Interest expense increased slightly in 1995 compared to 1994. The increase
was due to the increase in the interest rate on the Company's senior debt,
which is tied to the base rate of the First Bank of Missouri. The interest
rate on the senior debt increased to 10% on March 1, 1995 compared to 7% on
March 1, 1994. The Company was able to minimize the effect of the higher
interest rate in 1995 by early payments of principal. The Company paid
$600,000 in principal payments in early 1995. The interest rate on the senior
debt has decreased to 9.25% as of March 1, 1996.
23
(c) NET LOSS
The Company had a net loss of $3,001,000 in 1995 compared to a net loss of
$1,624,000 in 1994. The decline in 1995 is attributed to the non-recurring
write down of the value of agency force and the increase in operating
expenses. The write down of agency force, net of deferred income taxes and
minority interest, caused $2,608,000 of the $3,001,000 net loss in 1995. The
net loss was minimized by the improvement of net investment income and
realized investment losses when compared to the previous year.
1994 COMPARED TO 1993
(a) REVENUES
Total revenues increased 1% when comparing 1994 to 1993. The termination of
the Company's coinsurance agreement with Republic Vanguard contributed
significantly to the increase in revenues.
Premium income, net of reinsurance premium, increased 4% when comparing 1994
to 1993. The termination of the coinsurance agreement with Republic Vanguard
contributed significantly to the increase in premium, net of reinsurance
premium. UG terminated the coinsurance agreement with Republic Vanguard on
December 31, 1993. In UG, first year reinsurance premium was 21% of direct
first year premium in 1993 compared to 3% in 1994. Coinsurance agreements
provide a sharing or 50/50 relationship between the direct company and the
reinsurer of the premiums, benefits and the profitability of the underlying
product. Management believes that terminating the agreement was the best
alternative for long term benefit of the Company.
In 1994, the Company has been very active in streamlining the product
portfolio, as well as restructuring the marketing force. The Company is
currently marketing three universal life products. In late 1994, the Company
discontinued marketing the traditional and interest sensitive products. The
current universal life products feature lower first year costs compared to the
discontinued products. The marketing force is made up of three distinct
groups. Business produced by the broker agency force did not meet the Company
standards. Therefore, most of the agents associated with that group were
terminated. The other two agency forces continued to grow in 1994. First
year direct premium decreased 3% in 1994 compared to 1993. The small decrease
is perceived as a positive result when considering the changes to the
portfolio and marketing force.
Net investment income decreased slightly when comparing 1994 to 1993. The
Company's average yield on its investments declined slightly in 1994 compared
to 1993. The Company has been able to increase its investment portfolio
through financing cash flows and reducing its cash and short term positions.
Although the Company sold no fixed maturities during 1994 or 1993, it did
experience a significant turnover in the portfolio. Many companies with bond
issues outstanding took advantage of the lower interest rates in the market
during 1993 and early 1994 and retired older debt which carried higher rates.
This was accomplished through early calls and accelerated pay-downs of fixed
maturity investments. In late 1994 and early 1995, there has been a slight
upward movement in general interest rates.
The Company's investments are generally managed to match related insurance and
policyholder liabilities. The overall investment yields for 1994, 1993 and
1992, are 7.13%, 7.22% and 7.86%, respectively. The Company in conjunction
with the decrease in average yield of the Company's fixed maturity portfolio
has decreased the average crediting rate for the Company's insurance and
investment products. The comparison of investment return with insurance or
investment product crediting rates establishes an interest spread. Minimum
interest spreads between earned and credited rates are 1% to 1.5%. The
Company continually assesses
24
investment yields, and when necessary takes action to reduce credited interest
rates on its insurance products to preserve targeted spreads. Credited rates
are established by the Board of Directors. Over 60% of the insurance and
investment product reserves are crediting 5% or less in interest and 39% of
the insurance and investment product reserves are crediting 5.25% to 6% in
interest. It is expected that the monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on insurance policies that the Company has in force and will
write in the future.
Realized investment losses were $1,437,000 and $562,000 in 1994 and 1993,
respectively. The Company realized losses of $865,000 and $505,000 due to
permanent impairment of the value of property located in Louisiana, in 1994
and 1993, respectively. The Company is actively pursuing a buyer for the
property. The permanent impairment was due to recent appraisals and marketing
analysis of the surrounding properties. The Company realized a gain of
$467,000 due to the sale of an insignificant subsidiary in 1994. The Company
realized a loss of $212,000 from the charge off of its remaining investment in
its equity subsidiary, United Fidelity, Inc. The Company determined any
material recoverability of its investment to be unlikely due to continuing
losses and limited capital of United Fidelity, Inc. The Company realized a
loss of $394,000 due to calls and accelerated pay-downs of fixed maturities in
1994. The Company realized a loss of $119,000 due to the sale of common stock
which was acquired through the reorganization of a fixed maturity security of
Savin Corporation. The Company had other gains and losses during the period
that compromised the remaining amount reported but were routine or immaterial
in nature to disclose on an individual basis.
(b) EXPENSES
Total expenses increased 4% when comparing 1994 to 1993. Life and annuity
benefits, net of reinsurance, contributed significantly to the increase in
expenses. Operating expenses decreased during 1994 compared to 1993.
Life benefits and reinsurance benefits and claims increased 5% compared to
1993. Reinsurance benefits and claims changed significantly due to the
termination of the coinsurance treaty with Republic Vanguard. Coinsurance
agreements provide a sharing or 50/50 relationship between the direct company
and the reinsurer of the premiums, benefits and the profitability of the
underlying product. Management believes that terminating the agreement was
the best alternative for the long term benefit of the Company.
Mortality remained at the same level in 1994 compared to 1993. Changes in
mortality can have a significant impact on life benefits.
During the third quarter of 1994, the Company became aware that certain new
insurance business was being solicited by certain agents of UG and issued to
individuals considered to be not insurable by Company standards. These
policies had a face amount of $22,700,000 and represent less than 1/2 of 1% of
the insurance in force of the Company. Management's analysis of the business
in force indicates that the expected death claims on the business in force to
be adequately covered by the mortality assumptions inherent in the calculation
of statutory reserves. Nevertheless, management has determined it is in the
best interest of the Company to attempt to acquire as many of the policies as
possible.
During 1994, the Company authorized $1,250,000 for the acquisition of these
policies. At December 31, 1994, the Company had $227,961 remaining for the
purchase of these policies. The $1,250,000 has been charged to life benefits,
claims and settlement expenses.
25
During 1993 and early 1994, the Company lowered its crediting rates on
interest sensitive products in response to financial market conditions. This
action will facilitate the appropriate spreads between investment returns and
credited interest rates. The result is a reduction to the life benefits line
item as the increase in policy values through credited interest is lower. The
overall investment yields for 1994, 1993 and 1992, are 7.13%, 7.22% and 7.86%,
respectively. The Company in conjunction with the decrease in average yield
of the Company's fixed maturity portfolio has decreased the average crediting
rate for the Company's insurance and investment products. The comparison of
investment return with insurance or investment product crediting rates
establishes an interest spread. Minimum interest spreads between earned and
credited rates are 1% to 1.5%. The Company continually assesses investment
yields, and when necessary takes action to reduce credited interest rates on
its insurance products to preserve targeted spreads. Credited rates are
established by the Board of Directors. Over 60% of the insurance and
investment product reserves are crediting 5% or less in interest and 39% of
the insurance and investment product reserves are crediting 5.25% to 6% in
interest. It is expected that the monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on insurance policies that the Company has in force and will
write in the future. Management anticipates that the lowering of credited
interest rates will benefit future periods.
Dividends to policyholders increased approximately 23% when comparing 1994 to
1993. USA continued to market participating policies through most of 1994.
Management expects dividends to policyholders will continue to increase in the
future. A portion of the Company's insurance in force is participating
insurance. A significant portion of the participating business is relatively
newer business. The dividend scale for participating policies increases
significantly in the early years. The dividend scale is subject to approval
of the Board of Directors and may be changed at their discretion. The Company
no longer markets any participating policies.
Commissions and amortization of deferred policy acquisition costs increased
15% in 1994 compared to 1993. The increase is directly attributable to the
amortization of a larger asset. The asset is increasing due to continued
first year premium production by the agency force. The Company did benefit
from improved persistency. Persistency is the measurement of policies that
the Company was able to retain in a given period of time. The Company's
average persistency rate for all policies in force for 1994 and 1993 has been
approximately 86% and 85%, respectively. The overall improvement appears
small but has a significant impact on the amortization of deferred policy
acquisition costs. There was significant improvement in persistency on
certain blocks of insurance that are sensitive to fluctuations in persistency
and directly affect the amortization of deferred policy acquisition costs.
The Company revised its portfolio of products as previously discussed in
premium income. These new products pay lower commissions than the previous
products sold in prior periods.
Amortization of cost of insurance acquired increased 36% in 1994 compared to
1993. Cost of insurance acquired is amortized in relation to expected future
profits, including direct charge-offs for any excess of the unamortized asset
over the projected future profits. The Company did not have any charge-offs
during the periods covered by this report. The increase in amortization
during the current period is a normal fluctuation due to the expected future
profits.
Operating expenses decreased 13% in 1994 compared to 1993. The decrease is
not attributable to one particular event but to the overall savings produced
from the recent streamlining efforts. A reduction of operating expenses is
being realized from operating fewer insurance subsidiaries. In 1992, the
Company was operating eleven insurance companies, but through mergers and the
sale of one insignificant subsidiary, the Company is now operating four
26
insurance companies. The Company also completed conversion of an insurance
subsidiary's computer system to its Life 70 system. The Company had a 11%
reduction in staff in 1994 compared to 1993. This was achieved mostly by
attrition. The Company feels that this reduction was necessary and could be
achieved through continued improvement in efficiency and automation.
Interest expense decreased slightly in 1994 compared to 1993. The decrease
was due to the reduction in the Company's senior debt. The Company
experienced an increase in the interest rate on the Company's senior debt,
which is tied to the prime rate of the lead bank. The Company was able to
minimize the effect of the increase in interest rate by early payments of
principal. The Company paid $2,000,000 in principal payments in 1994. The
Company believes that interest rates will not change dramatically in 1995, and
therefore will not significantly impact interest expense.
(c) NET LOSS
The Company had a net loss of $1,624,000 in 1994 compared to a net loss of
$862,000 in 1993. The decline in 1994 was the result of the establishment of
a reserve of $1,250,000 for the acquisition of certain policies, continued
losses experienced by the Company's 36% owned affiliate, United Fidelity,
Inc., and realized investment losses. See the discussion of the Company's
life benefits for further discussion regarding the acquisition of certain
policies. At December 31, 1994, UFI has a carrying value of zero on the
Company's financial statements. See Note 9A of the notes to the financial
statements for further discussion of United Fidelity, Inc. See the discussion
of the Company's revenues for further discussion of the Company's realized
investment losses. The Company was able to benefit from an increase in the
credit provided by deferred income taxes. Deferred income taxes are affected
by changes in timing differences between the financial statements and
reportable for federal income tax purposes. Also, a reduction in operating
expenses contributed to reducing the loss in 1994. Management anticipates
that the lowering of credited interest rates on the Company's insurance and
investment products will benefit future periods.
FINANCIAL CONDITION
(a) ASSETS
The Company's financial position at December 31, 1995, reflected a decrease in
assets and an increase in liabilities compared to the preceding year end. As
of December 31, 1995 and 1994, cash and invested assets represented
approximately 72% and 69% of consolidated assets, respectively. Cash and cash
equivalents increased 7% when comparing 1995 to 1994. As of December 31, 1995
and 1994, fixed maturities represented 74% of total invested assets and cash.
27
By insurance statute, the majority of the Company's investment portfolio is
required to be invested in investment grade securities to provide ample
protection to policyholders. The liabilities are predominantly long term in
nature and therefore, the Company invests in long term fixed maturity
investments which 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, 1995, 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.
The Company's fixed maturity securities include mortgage-backed bonds of
$21,415,000 and $22,444,000 at December 31, 1995 and 1994, respectively. The
mortgage-backed bonds are subject to risks associated with variable
prepayments of the underlying mortgage loans. Prepayments cause those
securities to have different actual maturities than that expected at the time
of purchase. Prepayment of mortgage backed securities with an amortized cost
greater than par will incur a reduction in yield or loss. Those securities
that have an amortized cost less than par will generate an increase in yield
or gain. The degree to which a security is susceptible to either gains or
losses is influenced by the difference between its amortized cost and par, the
relative interest rate sensitivity of the underlying mortgages backing the
assets and the repayment priority of the securities in the overall
securitization structure.
The Company limits its credit risk by purchasing securities backed by stable
collateral and by concentrating on securities with enhanced priority in their
trust structure. Such securities with reduced risk typically have a lower
yield (but higher liquidity) than higher-risk mortgage-backed bonds (i.e.,
mortgage-backed bonds structured to share in residual cash flows or which
cover only interest payments). At December 31, 1995, the Company does not
have a significant amount of higher-risk mortgage-backed bonds. There are
negligible default risks in the Company's mortgage-backed bond portfolio as a
whole. The vast majority of the assets are either guaranteed by U.S.
government-sponsored entities or are supported in the securitization structure
by junior securities enabling the assets to achieve high investment grade
status.
The Company experienced moderate turnover in its fixed maturities portfolio
during 1995. As previously discussed, this was the result of companies taking
advantage of lower interest rates. This was accomplished through early calls
and accelerated pay downs. During the year, the Company reinvested its funds
and invested new monies from operations and from cash and short term
investments primarily in investment grade corporate bonds.
Mortgage loans decreased 12% in 1995 as compared to 1994. The Company is not
actively seeking new mortgage loans, and the decrease is due to early pay-offs
from mortgagee's seeking refinancing at lower interest rates. All mortgage
loans held by the Company are first position loans. The Company has $618,000
in mortgage loans, net of a $10,000 reserve allowance, which are in default or
in the process of foreclosure, this represents approximately 4% of the total
portfolio.
Investment real estate and real estate acquired in satisfaction of debt
decreased slightly in 1995 compared to 1994. The decrease is primarily the
net result of improvements made and sales of homes and lots from the
residential developments. Total real estate is separated into four
categories: Home Office 18%, Commercial 15%, Residential Development 36% and
Foreclosed Properties 31%.
28
Policy loans increased 4% in 1995 compared to 1994. There is no single event
that caused policy loans to increase. 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.
Value of agency force acquired decreased significantly when compared to 1994.
The decrease is primarily due to the non-recurring write down of a portion of
the asset. The write down of agency force accounted for $8,297,000 of the
decrease. The write down is directly related to the Company's change in
distribution systems. The Company has changed its focus from primarily a
broker agency distribution system to a captive agent system. Business written
by the broker agency force in recent years did not meet Company standards.
With the change in focus of distribution systems, most of the broker agents
were terminated. The termination of most of the agents involved in the broker
agency force caused management to re-evaluate the value of the agency force
carried on the balance sheet. As of December 31, 1995, the remaining value of
the agency force on the balance sheet represents the active agency forces that
continue to originate premium production.
Cost of insurance acquired and cost in excess of net assets purchased
decreased 7% in 1995 compared to 1994. The decrease is directly attributed to
normal amortization during the period. The Company did not recognize any
impairments during the period.
Deferred policy acquisition costs increased 8% in 1995 compared to 1994. The
Company had $2,370,000 in policy acquisition costs deferred, $338,000 in
interest accretion and $1,905,000 in amortization. The Company anticipates
similar increases in the future due to continued marketing efforts by the
Company's agency force. The Company did not recognize any impairments during
the period.
(b) LIABILITIES
Total liabilities increased approximately 1% in 1995 compared to 1994. Future
policy benefits increased 3% in 1995 and represented 80% of total liabilities
at December 31, 1995. Management expects future policy benefits to increase
in the future due to the aging of the volume of insurance in force and
continued production by the Company's sales force.
Policy claims and benefits payable decreased 3% in 1995 compared to 1994.
There is no single event that caused this item to decrease. Policy claims
vary from year to year and therefore, fluctuations in this liability are to be
expected and are not considered unusual by management.
Other policyholder funds decreased 4% in 1995 compared to 1994. The decrease
can be attributed to a decrease in premium deposit funds. Premium deposit
funds are funds deposited by the policyholder with the insurance company to
accumulate interest and pay future policy premiums. The change in marketing
from traditional insurance products to universal life insurance products is
the primary reason for the decrease. Universal life insurance products do not
have premium deposit funds. All premiums received from the policyholder are
credited to the life insurance policy and are reflected in future policy
benefits.
Dividend and endowment accumulations increased 14% in 1995 compared to 1994.
The increase is attributed to the significant amount of participating business
the Company has in force. There are generally four options a policyholder can
select to pay policy dividends. Over 47% of all dividends paid were put on
deposit to accumulate with interest. Accordingly, management expects this
liability to increase in the future.
29
Income taxes payable and deferred income taxes payable decreased significantly
in 1995 compared to 1994. The primary reason for the decrease in deferred
income taxes is due to the impairment of the agency force acquired asset. The
impairment decreased deferred income taxes by $2,904,000. The change in
deferred income taxes payable is attributable to temporary differences between
Generally Accepted Accounting Principles ("GAAP") and tax basis. Federal
income taxes are fully disclosed in Note 3 of the Notes to the Financial
Statements.
Notes payable decreased $600,000 in 1995 compared to 1994. On January 31,
1996, the Company prepaid $1,500,000 of the $3,900,000 principal payment due
on June 1, 1996. 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 decreased 13% in 1995 compared to 1994. The
decrease in shareholders' equity is primarily due to the net loss of
$3,001,000 in 1995. The Company experienced $142,000 in unrealized
appreciation of equity securities and investments held for sale in 1995.
REGULATORY ENVIRONMENT
The Company is highly regulated by state insurance authorities in the states
its affiliates are domiciled. Such regulations, among other things, limit the
amount of dividends, tax sharing payments, other payments that can be made by
affiliates without prior regulatory approval and impose restrictions on the
amount and type of investments the Company may own. The Company also is
regulated in various states as an insurance holding company system. Because
the Company is an insurance holding company, an investment in the Company
which could result in a change in control must be passed on by certain state
departments of insurance.
There is currently increased scrutiny placed upon the insurance regulatory
framework. As a result, certain state legislatures have considered or enacted
laws that alter, and in many cases increase, state authority to regulate
insurance companies and insurance holding company systems. In light of recent
legislative developments, the National Association of Insurance Commissioners
("NAIC") and state insurance regulators have begun examining existing laws and
regulations, specifically focusing on insurance company investments, solvency
issues, risk-adjusted capital guidelines, interpretations of existing laws,
the development of new laws, the implementation of nonstatutory guidelines,
and the circumstances under which dividends may be paid. The Company cannot
predict with certainty the effect that any NAIC recommendations, proposed or
future legislation, may have on the financial condition or operations.
The Company receives funds from its insurance subsidiaries in the form of
management and cost sharing arrangements (See Note 9) and through dividends.
Annual dividends in excess of maximum amounts prescribed by state statutes
("extraordinary dividends") may not be paid without the approval of the
insurance commissioner in which an insurance subsidiary is domiciled. The
National Association of Insurance Commissioners ("NAIC") has proposed, and
certain states have adopted, legislation that lowers the threshold amount for
determining what constitutes an extraordinary dividend. Such legislative
changes could make it more difficult for insurance subsidiaries to pay
dividends to their parents.
30
The NAIC has adopted Risk-Based Capital ("RBC") requirements for life/health
insurance companies to evaluate 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 will be 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 company's
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, 1995, each of the Company's insurance subsidiaries has a Ratio
that is in excess of 250% of the authorized control level; accordingly the
Company's subsidiaries meet the RBC requirements.
The NAIC has proposed a new Model Investment Law that may affect the statutory
carrying values of certain investments; however, the final outcome of that
proposal is not certain, nor is it possible to predict what impact the
proposal will have on the Company or whether the proposal will be adopted in
the foreseeable future.
FUTURE OUTLOOK
Factors expected to influence life insurance industry growth include: 1)
competitive pressure among the large number of existing firms; 2) competition
from financial service companies, as they seek to expand into insurance
marketing; 3) customers' changing needs for new types of insurance products;
4) customers' lack of confidence in the entire industry as a result of the
recent highly visible failures; and 5) uncertainty concerning the future
regulation of the industry. Growth in demand for insurance products will
depend upon demographic variables such as income growth, wealth accumulation,
population and work force changes.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 114 entitled "Accounting by Creditors for
Impairment of a Loan" and Statement of Financial Accounting Standards No. 118,
an amendment of Statement No. 114. The Statement amends FASB Statement No. 5
"Accounting for Contingencies" and FASB Statement No. 15 "Accounting by
Debtors and Creditors for Troubled Debt Restructuring". This Statement, which
became effective for financial statements for fiscal years beginning after
December 15, 1994, applies to all troubled debt restructuring involving a
modification of terms.
A loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. As used in this Statement and
in Statement 5, as amended, all amounts due according to the contractual terms
means that both the contractual interest payments and the contractual
principal payments of a loan will be collected as scheduled in the loan
agreement. This Statement does not specify how a creditor should determine
that it is probable that it will be unable to collect all amounts due
according to the contractual terms of a loan. A creditor should apply its
normal loan review procedures in making that judgment. An insignificant delay
or insignificant shortfall in amount of payments does not require application
of this Statement. A loan is not impaired during a period of delay in payment
if the creditor expects to collect all amounts due including interest accrued
at the contractual interest rate for the period of delay. Thus, a demand loan
or other loan with no stated maturity is not impaired if the creditor expects
to collect all amounts due including interest accrued at the contractual
interest rate during the period the loan is outstanding.
This statement was adopted for the 1995 financial statements. The adoption
did not have any impact on the Company's financial statements.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 121 entitled "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This
Statement, becomes effective for financial statements for fiscal years
beginning after December 31, 1995, with early adoption encouraged.
An entity shall review long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If certain events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, the entity shall estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. Future cash
flows are the future cash inflows expected to be generated by an asset less
the future cash outflows expected to be necessary to obtain those inflows. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the entity shall
recognize an impairment loss in accordance with this Statement. Otherwise, an
impairment loss shall not be recognized; however, a review of depreciation
policies may be appropriate.
This statement was adopted for the 1995 financial statements. The adoption
did not have any impact on the Company's financial statements.
32
Listed below are the financial statements included in this Part of the Annual
Report on SEC Form 10-K:
Page No.
UNITED TRUST, INC. AND CONSOLIDATED SUBSIDIARIES
Independent Auditor's Report for the
Years ended December 31, 1995, 1994, 1993. . . . . . . . . . 34
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . 35
Consolidated Statements of Operations. . . . . . . . . . . . 36
Consolidated Statements of Shareholders' Equity. . . . . . . 37
Consolidated Statements of Cash Flows. . . . . . . . . . . . 38
Notes to Financial Statements. . . . . . . . . . . . . . . . 39-62
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
33
Independent Auditors' Report
Board of Directors and Shareholders
United Trust, Inc.
We have audited the accompanying consolidated balance sheets of United
Trust, Inc. (an Illinois corporation) and subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1995. 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, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1995, and Schedules
II, IV and V as of December 31, 1995 and 1994, of United Trust, 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 26, 1996
34
UNITED TRUST, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and 1994
ASSETS
1995 1994
Investments:
Fixed maturities at amortized cost
(market $197,006,257 and $171,935,030) $191,074,220 $183,702,794
Investments held for sale:
Fixed maturities, at market
(cost $3,224,039 and $3,450,273) 3,226,175 3,337,672
Equity securities, at market
(cost $2,086,159 and $1,235,840) 1,946,481 911,012
Mortgage loans on real estate
at amortized cost 13,891,762 15,822,056
Investment real estate, at cost,
net of accumulated depreciation 11,978,575 11,737,847
Real estate acquired in satisfaction
of debt, at cost, net of
accumulated depreciation 5,332,413 5,620,101
Policy loans 16,941,359 16,338,632
Short term investments 425,000 350,000
244,815,985 237,820,114
Cash and cash equivalents 12,528,025 11,697,067
Investment in affiliates 5,169,596 5,161,034
Indebtedness of affiliates, net 87,869 67,865
Accrued investment income 3,671,842 3,500,585
Reinsurance receivables:
Future policy benefits 13,540,413 12,818,658
Unpaid policy claims and benefits 733,524 975,613
Paid policy claims and benefits 127,964 125,355
Other accounts and notes receivable 1,246,367 1,582,625
Cost of insurance acquired 49,331,201 53,324,051
Deferred policy acquisition costs 11,436,728 10,634,476
Value of agency force acquired 6,485,733 15,489,946
Cost in excess of net assets purchased,
net of accumulated amortization 5,661,462 5,991,914
Other assets 1,555,986 1,068,820
TOTAL ASSETS $ 356,392,695 $ 360,258,123
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 243,044,963 $ 234,875,800
Policy claims and benefits payable 3,110,378 3,207,014
Other policyholder funds 3,004,655 3,124,851
Dividend and endowment accumulations 12,636,949 11,106,903
Income taxes payable:
Current 215,944 237,846
Deferred 17,762,408 22,336,077
Notes payable 21,447,428 22,053,289
Other liabilities 5,009,637 5,343,153
TOTAL LIABILITIES 306,232,362 302,284,933
Minority interests in
consolidated subsidiaries 31,138,077 36,104,095
SHAREHOLDERS' EQUITY
Common stock - no par value, stated
value $.02 per share. Authorized
35,000,000 shares - 18,675,935 and
18,655,935 shares issued after
deducting treasury shares of
423,840 and 423,840 (Note 1) 373,519 373,119
Additional paid-in capital 18,288,411 18,276,311
Unrealized depreciation of investments
held for sale (1,499) (143,405)
Retained earnings 361,825 3,363,070
TOTAL SHAREHOLDERS' EQUITY 19,022,256 21,869,095
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 356,392,695 $ 360,258,123
See accompanying notes.
36
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1995
1995 1994 1993
Revenues:
Premium income $ 35,200,815 $ 38,063,186 $ 39,848,224
Reinsurance premium (5,202,690) (5,658,697) (8,687,593)
Other considerations 3,280,823 2,969,131 2,898,103
Other considerations paid
to reinsurers (180,412) (229,093) (528,495)
Net investment income 15,456,224 14,368,446 14,405,736
Realized investment gains
and (losses) (124,235) (1,436,521) (561,697)
Other income 1,438,559 1,130,176 1,167,007
49,869,084 49,206,628 48,541,285
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 26,680,217 27,479,315 29,485,489
Reinsurance benefits
and claims (2,850,228) (2,766,776) (5,891,743)
Annuity 1,797,475 1,314,384 1,824,249
Dividends to policyholders 4,228,300 3,634,311 2,945,983
Commissions and amortization
ofdeferred policy
acquisition costs 4,907,653 4,060,425 3,517,801
Amortization of cost of
insurance acquired 3,992,850 6,685,677 4,926,703
Amortization of agency force 707,239 574,403 636,803
Non-recurring write down of
value of agency force 8,296,974 0 0
Operating expenses 11,517,648 9,787,962 11,238,826
Interest expense 1,966,776 1,936,324 1,972,060
61,244,904 52,706,025 50,656,171
Loss before income taxes
and minority interest (11,375,820) (3,499,397) (2,114,886)
Credit for income taxes 4,571,028 1,965,084 161,906
Minority interest in loss
of consolidated subsidiaries 4,439,496 1,035,831 1,587,438
Equity in loss of investees (635,949) (1,125,118) (495,990)
Net loss $(3,001,245) $(1,623,600) $ (861,532)
Net loss per
common share $ (0.16) $ (0.09) $ (0.05)
Average common
shares outstanding 18,668,510 18,664,830 18,676,521
See accompanying notes
36
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1995
1995 1994 1993
Common stock
Balance, beginning of year $ 373,119 $ 373,297 $ 374,808
Issued during year 400 0 55
Purchase treasury stock 0 (178) (1,566)
Balance, end of year $ 373,519 $ 373,119 $ 373,297
Additional paid-in capital
Balance, beginning of year $ 18,276,311 $ 18,066,119 $ 17,450,643
Issued during year 12,100 0 3,360
Public offering of
United Fidelity, Inc. 0 277,559 723,618
Purchase treasury stock 0 (67,367) (111,502)
Balance, end of year $ 18,288,411 $ 18,276,311 $ 18,066,119
Unrealized appreciation (depreciation)
of investments held for sale
Balance, beginning of year $ (143,405) $ (23,624) $ (266,417)
Change during year 141,906 (119,781) 242,793
Balance, end of year $ (1,499) $ (143,405) $ (23,624)
Retained earnings
Balance, beginning of year $ 3,363,070 $ 4,986,670 $ 5,848,202
Net loss (3,001,245) (1,623,600) (861,532)
Balance, end of year $ 361,825 $ 3,363,070 $ 4,986,670
Total shareholders' equity,
end of year $ 19,022,256 $ 21,869,095 $ 23,402,462
See accompanying notes.
37
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1995
1995 1994 1993
Increase (decrease) in cash
and cash equivalents
Cash flows from operating activities:
Net loss $ (3,001,245) $ (1,623,600) $ (861,532)
Adjustments to reconcile net
loss to net cash used in operating
activities net of changes in
assets and liabilities resulting
from the sales and purchases of subsidiaries:
Charges for mortality and administration
of universal life
and annuity products (9,757,354) (9,178,363) (9,161,188)
Change in policy liabilities
and accruals 3,581,928 4,487,982 790,475
Change in reinsurance
receivables (482,275) (1,009,745) (1,058,853)
Change in indebtedness
of affiliates, net (20,004) 375,848 (5,833)
Minority interest (4,439,496) (1,035,831) (1,587,438)
Equity in loss of investees 635,949 1,125,118 495,990
Change in accrued
investment income (171,257) (543,476) 487,824
Depreciation 557,776 705,944 731,354
Change in income taxes
payable (4,595,571) (2,120,009) (490,193)
Realized investment
(gains) losses 124,235 1,436,521 561,697
Policy acquisition costs
deferred (2,370,000) (4,939,000) (6,231,000)
Amortization of deferred
policy acquisition costs 1,567,748 1,137,923 1,882,753
Amortization of cost of
insurance acquired 3,992,850 6,685,677 4,926,703
Amortization of value
of agency force 707,239 574,403 636,803
Non-recurring write down of
of value of agency force 8,296,974 0 0
Amortization of costs
in excess of net assets
purchased 423,192 297,676 284,999
Premiums, operating receivables,
commissions, operating
expenses, and other assets
and liabilities (1,254,235) (163,559) 1,299,256
Net cash used in
operating activities (6,203,546) (3,786,491) (7,298,183)
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held
for sale matured 619,612 250,000 0
Fixed maturities sold 0 0 0
Fixed maturities matured 16,265,140 23,894,954 47,527,821
Equity securities 104,260 49,557 7,340,431
Mortgage loans 2,252,423 4,029,630 9,057,680
Real estate 1,768,254 2,640,025 4,215,402
Collateral loans 0 0 600,341
Policy loans 4,110,744 4,064,602 4,198,755
Short term 25,000 1,103,856 3,573,431
Total proceeds from investments
sold and matured 25,145,433 36,032,624 76,513,861
Cost of investments acquired:
Fixed maturities held
for sale 0 (839,375) 0
Fixed maturities (25,112,358) (51,929,105) (86,444,942)
Equity securities (1,000,000) (249,925) (565,488)
Mortgage loans (322,129) (5,611,967) (3,278,798)
Real estate (1,927,413) (3,321,599) (2,322,862)
Policy loans (4,713,471) (3,886,821) (3,875,383
Short term (100,000) (650,000) (2,067,712)
Total cost of investments
acquired (33,175,371) (66,488,792) (98,555,185)
Cash of subsidiary at
date of sale 0 (3,134,343) 0
Cash received in sale
of subsidiary 0 4,995,804 0
Net cash used in
investing activities (8,029,938) (28,594,707) (22,041,324)
Cash flows from financing activities:
Policyholder contract deposits 25,021,983 23,110,031 23,958,756
Policyholder contract
withdrawals (16,008,462) (14,893,221) (13,519,830)
Interest credited to account
balances 6,644,282 5,931,019 6,888,067
Payments of principal on
notes payable (605,861) (2,305,687) (3,134,946)
Purchase of treasury stock 0 (67,545) (113,068)
Proceeds from issuance of
common stock 12,500 0 3,415
Net cash provided by
financing activities 15,064,442 11,774,597 14,082,394
Net increase (decrease) in
cash and cash equivalents 830,958 (20,606,601) (15,257,113)
Cash and cash equivalents
at beginning of year 11,697,067 32,303,668 47,560,781
Cash and cash equivalents
at end of year $ 12,528,025 $ 11,697,067 $ 32,303,668
See accompanying notes.
38
UNITED TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1995, the parent, significant majority-
owned subsidiaries and affiliates of United Trust, Inc. were as depicted
on the following organizational chart.
ORGANIZATIONAL CHART
AS OF DECEMBER 31, 1995
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns 53%
of United Trust Group ("UTG") and 30% of United Income, Inc. ("UII"). UII
owns 47% of UTG. UTG owns 72% of First Commonwealth Corporation ("FCC"). FCC
owns 100% of Universal Guaranty Life Insurance Company ("UG"). UG owns 100%
of United Security Assurance Company ("USA"). USA owns 84% of Appalachian
Life Insurance Company ("APPL") and APPL owns 100% of Abraham Lincoln
Insurance Company ("ABE").
39
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying financial statements
follows.
B. NATURE OF OPERATIONS - United Trust, Inc., is an insurance holding
company that, through its insurance subsidiaries sells individual life
insurance products. The Company's principal market is the midwestern
United States. The primary focus of the Company has been the servicing
of existing insurance business in force, the solicitation of new life
insurance products and the acquisition of other companies in similar
lines of business.
C. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company 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 investee, net.
Other investments in affiliates are carried at cost. All significant
intercompany accounts and transactions have been eliminated.
D. BASIS OF PRESENTATION - The financial statements of United Trust, Inc.'s
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. 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.
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 -- at cost, less allowances for depreciation and any
impairment which would result in a carrying value below net realizable
value. Foreclosed real estate is adjusted for any impairment at the
foreclosure date.
Policy loans -- at unpaid balances including accumulated interest but
not in excess of the cash surrender value.
Short-term investments -- at cost, which approximates market value.
Realized gains and losses on sales of investments are recognized in net
income on the specific identification basis.
40
G. 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, limited-payment life insurance policies, and certain
annuities with life contingencies are recognized as revenues when due.
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, policy administration,
and surrenders assessed during the period. Expenses include interest
credited to policy account balances and benefit claims incurred in
excess of policy account balances.
H. DEFERRED POLICY ACQUISITION COSTS - Commissions and other costs of
acquiring life insurance products have been deferred. Traditional life
insurance and accident and health 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. This amortization is
adjusted retrospectively when estimates of current or future gross
profits to be realized from a group of products are revised.
41
The following table summarizes deferred policy acquisition costs and related
data for the years shown.
1995 1994 1993
Deferred, beginning of year $10,634,000 $ 7,160,000 $ 2,812,000
Acquisition costs deferred:
Commissions, net of reinsurance
of $0, $1,837,000
and $2,871,000 1,838,000 3,182,000 4,399,000
Marketing, salaries and
other expenses 532,000 1,757,000 1,832,000
Total 2,370,000 4,939,000 6,231,000
Interest accretion 338,000 181,000 92,000
Amortization charged to income (1,905,000) (1,319,000) (1,975,000)
Net amortization (1,567,000) (1,138,000) (1,883,000)
Deferred acquisition costs
disposed of at sale
of subsidiary 0 (327,000) 0
Change for the year 803,000 3,474,000 4,348,000
Deferred, end of year $11,437,000 $10,634,000 $ 7,160,000
The following table reflects the components of the income statement for the
line item Commissions and amortization of deferred policy acquisition costs:
1995 1994 1993
Net amortization of deferred
policy acquisition costs $ 1,567,000 $ 1,138,000 $ 1,883,000
Commissions 3,341,000 2,922,000 1,635,000
Total $ 4,908,000 $ 4,060,000 $ 3,518,000
42
I. COST OF INSURANCE ACQUIRED - Policy acquisition costs established at the
time a company is acquired are 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
23% of the balance and 15% on the remaining balance. The interest rates
vary due to different blocks of business.
1995 1994 1993
Cost of insurance acquired,
beginning of year $53,324,000 $62,007,000 $66,933,000
Additions from acquisitions 0 0 0
Interest accretion 6,028,000 6,545,000 7,158,000
Amortization (10,021,000) (13,231,000) (12,084,000)
Net amortization (3,993,000) (6,686,000) (4,926,000)
Balance attributable to
subsidiary at date of sale 0 (1,379,000) 0
Balance attributable to down-
stream merger of subsidiary 0 (618,000) 0
Write-offs due to impairment 0 0 0
Cost of insurance acquired,
end of year $49,331,000 $53,324,000 $62,007,000
Estimated net amortization expense of cost of insurance acquired for the
next five years is as follows:
Interest Net
Accretion Amortization Amortization
1996 5,700,000 10,100,000 4,400,000
1997 5,300,000 9,100,000 3,800,000
1998 5,000,000 8,100,000 3,100,000
1999 4,700,000 7,200,000 2,500,000
2000 4,500,000 6,700,000 2,200,000
J. COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess of net assets
purchased are amortized over periods not exceeding forty years using the
straight-line method. Management reviews the valuation and amortization
of goodwill on an annual basis. As part of this review, the Company
estimates the value of and the estimated undiscounted future cash flows
expected to be generated by the related subsidiaries to determine that
no impairment has occurred.
K. 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. Reserve interest assumptions are
graded and range from 6% to 2%. Such liabilities, for certain plans,
are graded
43
to equal statutory values or cash values prior to maturity.
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.
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 5.0% to 6.0% in 1995, 5.0% to 6.0% in 1994 and 5.0% to 7.5% in
1993.
L. 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.
M. PARTICIPATING INSURANCE - Participating business represents 34% and 31%
of the ordinary life insurance in force at December 31, 1995 and 1994,
respectively. Premium income from participating business represents
55%, 53%, and 51% of total premiums for the years ended December 31,
1995, 1994 and 1993, respectively. The amount of dividends to be paid
is determined annually by the Board of Directors. Earnings allocable to
participating policyholders are based on legal requirements which vary
by state.
N. 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.
O. BUSINESS SEGMENTS - The Company operates principally in the individual
life insurance business.
P. EARNINGS PER SHARE - Earnings per share are based on the weighted
average number of common shares outstanding during the respective
period.
Q. 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.
R. RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the 1995 presentation.
S. 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 premiums, commissions,
expense reimbursements, and reserves on reinsured business are accounted
for on a basis consistent with
44
those used in accounting for the original policies issued and the terms
of the reinsurance contracts. Expense reimbursements received in
connection with reinsurance ceded have been accounted for as a reduction
of the related policy acquisition costs or, to the extent such
reimbursements exceed the related acquisition costs, as revenue.
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; consequently, allowances are
established for amounts deemed uncollectible. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1995, substantially all of consolidated shareholders' equity
represents net assets of UTI's subsidiaries. The payment of cash dividends to
shareholders by UTI or UTG is not legally restricted. 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,
1995, UG had a statutory gain from operations of $3,197,000. At December 31,
1995, UG's statutory capital and surplus amounted to $7,274,000.
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. FEDERAL 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. If any of the life companies pay shareholder dividends
in excess of "shareholders' surplus" they will be required to pay taxes on
income not taxed under the pre-1984 acts.
The following table summarizes the companies with this situation and the
maximum amount of income which has not been taxed in each.
Shareholders' Untaxed
Company Surplus Balance
ABE $ 5,327,000 $ 1,150,000
APPL 4,128,000 1,525,000
UG 22,195,000 4,364,000
USA 1,101,000 0
45
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:
1995 1994 1993
Current tax expense (credit) $ 3,000 $ 51,000 $ (205,000)
Deferred tax expense (credit) (4,574,000) (2,016,000) 43,000
$(4,571,000) $(1,965,000) $ (162,000)
The Companies have net operating loss carryforwards for federal income tax
purposes expiring as follows:
UTI UG FCC
2001 $ 0 $ 117,000 $ 0
2003 415,000 57,000 0
2004 826,000 0 0
2005 293,000 0 0
2006 213,000 4,388,000 0
2007 111,000 783,000 46,000
2008 0 940,000 0
2010 0 2,540,000 0
TOTAL $1,858,000 $8,825,000 $ 46,000
The Company has established a deferred tax asset of $3,755,000 for its
operating loss carryforwards and has established an allowance of $3,105,000.
The following table shows the reconciliation of net income to taxable income
of UTI:
1995 1994 1993
Net income (loss) $(3,001,000) $(1,624,000) $ (862,000)
Federal income tax
provision (credit) 154,000 40,000 (35,000)
Loss (earnings) of subsidiaries 2,613,000 341,000 544,000
Loss (earnings) of investees 636,000 1,125,000 496,000
Write off of investment in affil. 10,000 212,000 0
Depreciation 3,000 4,000 0
Other 22,000 20,000 17,000
Taxable income (loss) $ 437,000 $ 118,000 $ 160,000
46
UTI has a net operating loss carryforward of $1,858,000 at December 31, 1995.
UTI has historically reported net losses for tax purposes, however general
expenses of the combined companies were reduced dramatically from levels
experienced by the companies as separate entities. A significant portion of
the expense savings were realized by UTI. UTI must average taxable income of
$155,000 per year to fully realize its net operating loss carryforwards.
UTI's operating loss carryforwards do not begin to expire until 2003. Due to
continuing efforts to reduce expenses, 1996 and future years will result in
additional expense savings, thus enabling UTI to achieve taxable income levels
which will fully utilize its net operating loss carryforwards.
The provision or (credit) for income taxes shown in the statements of
operations does not bear the normal relationship to pre-tax income as a result
of certain permanent differences. The sources and effects of such differences
are summarized in the following table:
1995 1994 1993
Tax computed at standard
corporate rate $(3,982,000) $(1,225,000) $ (740,000)
Changes in taxes due to:
Companies incurring losses
without tax benefit 0 0 478,000
Goodwill 61,000 104,000 100,000
Special insurance deductions 0 (24,000) 0
Benefit of prior losses (602,000) (649,000) 0
Other (48,000) (171,000) 0
Income tax expense (credit) $(4,571,000) $(1,965,000) $ (162,000)
The following table summarizes the major components which comprise the
deferred tax liability as reflected in the balance sheets:
1995 1994
Investments $ (48,918) $ (12,942)
Cost of insurance acquired 18,590,595 20,060,374
Value of agency force 2,270,007 5,421,481
Deferred policy acquisition costs 4,002,855 3,722,067
Agents balances (71,625) (77,310)
Furniture and equipment (82,257) (36,532)
Discount of notes 1,003,038 987,932
Management/consulting fees (841,991) (1,334,076)
Future policy benefits (5,039,938) (4,861,564)
Gain on sale of subsidiary 2,312,483 2,312,483
Net operating loss carryforward (650,358) (803,378)
Other liabilities (818,484) (456,301)
Federal tax DAC (2,862,999) (2,586,157)
Deferred tax liability $17,762,408 $22,336,077
4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A. NET INVESTMENT INCOME - The following table reflects net investment
income by type of investment:
1995 1994 1993
Fixed maturities and fixed
maturities held for sale $13,190,121 $12,185,941 $10,814,222
Equity securities 52,445 3,999 253,706
Mortgage loans 1,257,189 1,423,474 1,745,563
Real estate 975,080 990,857 968,620
Policy loans 1,041,900 1,014,723 1,017,456
Short term investments 505,637 444,135 1,104,326
Collateral loans 14,537 24,103 5,121
Other 143,753 197,022 249,972
Total investment income 17,180,662 16,284,254 16,158,986
Investment expense (1,724,438) (1,915,808) (1,753,250)
Net investment income $15,456,224 $14,368,446 $14,405,736
At December 31, 1995, the companies had a total of $7,998,000 of
investments, comprised of $7,189,000 in real estate including its home
office property and $809,000 in equity securities, which did not produce
income during 1995.
The following table summarizes the Company's fixed maturity holdings,
and investments held for sale by major classifications:
Carrying Value
1995 1994
Investments held for sale:
Fixed maturities $ 3,226,175 $ 3,337,672
Equity securities 1,946,481 911,012
Fixed maturities:
U.S. Government, government agencies
and authorities 27,488,188 20,650,905
State, municipalities and political
subdivisions 6,785,476 7,146,176
Collateralized mortgage obligations 15,395,913 19,114,044
Public utilities 59,136,696 57,630,503
All other corporate bonds 82,267,947 79,161,166
$196,246,876 $187,951,478
By insurance statute, the majority of the Company's investment portfolio
is required to be 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.
48
The following table summarizes by category securities held that are below
investment grade at amortized cost:
Below Investment
Grade Investments 1995 1994 1993
State, Municipalities and
Political Subdivisions $ 0 $ 32,370 $ 1,750
Public Utilities 116,879 168,869 168,379
Corporate 819,010 848,033 512,625
Total $ 935,889 $ 1,049,272 $ 682,754
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
1995 Cost Gains Losses Value
Investments Held for Sale:
U.S. Government and govt.
agencies and authorities $ 2,001,860 $ 2,579 $ 621 $ 2,003,818
States, municipalities and
political subdivisions 812,454 14,313 3,749 823,018
Collateralized mortgage
obligations 32,177 506 0 32,683
Public utilities 119,379 572 2,123 117,828
All other corporate bonds 258,169 337 9,678 248,828
3,224,039 18,307 16,171 3,226,175
Equity securities 2,086,159 80,721 220,399 1,946,481
Total $ 5,310,198 $ 99,028 $ 236,570 $ 5,172,656
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities $ 27,488,188 $ 841,786 $ 76,417 $28,253,557
States, municipalities and
political subdivisions 6,785,476 305,053 10,895 7,079,634
Collateralized mortgage
obligations 15,395,913 295,344 67,472 15,623,785
Public utilities 59,136,696 2,279,509 134,091 61,282,114
All other corporate bonds 82,267,947 2,974,553 475,333 84,767,167
Total $191,074,220 $6,696,245 $ 764,208 $197,006,257
49
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1994 Cost Gains Losses Value
Investments Held for Sale:
U.S. Government and govt.
agencies and authorities $ 1,993,503 $ 0 $ 132,003 $ 1,861,500
States, municipalities and
political subdivisions 914,902 23,496 8,871 929,527
Collateralized mortgage
obligations 541,868 4,777 0 546,645
Public utilities 0 0 0 0
All other corporate bonds 0 0 0 0
3,450,273 28,273 140,874 3,337,672
Equity securities 1,235,840 1,800 326,628 911,012
Total $ 4,686,113 $ 30,073 $ 467,502 $ 4,248,684
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities $ 20,650,905 $ 155,347 $ 697,859 $ 20,108,393
States, municipalities and
political subdivisions 7,146,176 75,052 355,904 6,865,324
Collateralized mortgage
obligations 19,114,044 55,736 991,431 18,178,349
Public utilities 57,630,503 27,200 4,836,324 52,821,379
All other corporate bonds 79,161,166 165,497 5,365,078 73,961,585
Total $183,702,794 $ 478,832 $ 12,246,596 $171,935,030
The amortized cost of debt securities at December 31, 1995, by
contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Fixed Maturities Held to Maturity Amortized
December 31, 1995 Cost
Due in one year or less $ 10,787,526
Due after one year through five years 89,404,633
Due after five years through ten years 80,456,206
Due after ten years 10,425,855
$191,074,220
Fixed Maturities Held for Sale Amortized
December 31, 1995 Cost
Due in one year or less $ 0
Due after one year through five years 2,249,473
Due after five years through ten years 682,573
Due after ten years 291,993
$ 3,224,039
50
Proceeds from sales, calls and maturities of investments in debt securities
during 1995 were $16,885,000. Gross gains of $126,000 and gross losses of
$246,000 were realized on those sales, calls and maturities.
Proceeds from sales, calls and maturities of investments in debt securities
during 1994 were $24,145,000. Gross gains of $84,000 and gross losses of
$554,000 were realized on those sales, calls and maturities.
Proceeds from sales, calls and maturities of investments in debt securities
during 1993 were $47,528,000. Gross gains of $567,000 and gross losses of
$440,000 were realized on those sales, calls and maturities.
C. INVESTMENTS ON DEPOSIT - At December 31, 1995, investments carried at
approximately $46,957,000 were on deposit with various state insurance
departments.
D. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES - The Company's
investment in United Income, Inc., a 30% owned affiliate, is carried at
an amount equal to the Company's share of the equity of United Income.
The Company's equity in United Income, Inc. has increased $4,359,749 as
a result of a public offering of stock by United Income, Inc. The
shares sold in the public offering decreased the Company's ownership
share from 49% to 30%. The Company's equity in United Income, Inc.
includes the original investment of $194,304 and the Company's share of
United Income, Inc.'s earnings and losses since inception.
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value information at
December 31, 1995 and 1994, 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
An estimate of fair value is based on management's review of the portfolio in
relation to market prices of similar loans with similar credit ratings,
interest rates, and maturity dates. Management conservatively estimates fair
value of the portfolio is equal to the carrying value.
51
(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) Short term investments
For short term instruments, the carrying amount is a reasonable estimate of
fair value. All short term instruments represent certificates of deposit
with various banks and all are protected under FDIC.
(g) Notes and accounts receivable and uncollected premiums
The Company holds a $840,000 note receivable for which the determination of
fair value is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. Accounts receivable and
uncollected premiums are primarily insurance contract related receivables
which are determined based upon the underlying insurance liabilities and added
reinsurance amounts, and thus are excluded for the purpose of fair value
disclosure by paragraph 8(c) of SFAS 107.
(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.
52
The estimated fair values of the Company's financial instruments required to
be valued by SFAS 107 are as follows as of December 31:
1995 1994
Estimated Estimated
Carrying Fair Carrying Fair
Assets Amount Value Amount Value
Fixed maturities $191,074,220 $197,006,257 $183,702,794 $171,935,030
Fixed maturities
held for sale 3,226,175 3,226,175 3,337,672 3,337,672
Equity securities 1,946,481 1,946,481 911,012 911,012
Mortgage loans on
real estate 13,891,762 13,891,762 15,822,056 15,822,056
Policy loans 16,941,359 16,941,359 16,338,632 16,338,632
Short term
investments 425,000 425,000 350,000 350,000
Investment real
estate 11,978,575 11,978,575 11,737,847 11,737,847
Real estate
acquired in
satisfaction
of debt 5,332,413 5,332,413 5,620,101 5,620,101
Notes receivable 840,066 775,399 840,066 768,094
Liabilities
Notes payable 21,447,428 20,747,991 22,053,289 21,295,161
6. STATUTORY EQUITY AND GAIN 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 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.
Accordingly, that project, which is expected to be completed in 1996, will
likely change prescribed statutory accounting practices and may result in
changes to the accounting practices that insurance enterprises use to prepare
their statutory financial statements. UG's total statutory shareholders'
equity was $7,274,000 and $7,683,000 at December 31, 1995 and 1994,
respectively. The combined statutory gain from operations (exclusive of
intercompany dividends) was $4,076,000, $3,071,000 and $1,628,000 for 1995,
1994 and 1993, respectively.
53
7. REINSURANCE
In December 1991, UG entered into a 50% coinsurance arrangement with Republic
Vanguard Life Insurance Company to enable the Company to maintain increased
production levels while containing first year statutory costs. The ceding of
new business under this treaty was terminated December 31, 1993. Republic
Vanguard holds an "A" (Excellent) rating from A. M. Best, an industry rating
company. The coinsurance arrangement, which was effective January 1, 1991,
allowed UG to cede to Republic Vanguard a 50% quota share of all new universal
life policies issued after the effective date through date of termination. UG
receives a commission allowance of 11% of excess premium and renewal premium.
Monies pertaining to the coinsurance arrangement are settled monthly. The
agreement contains a provision whereby risks in excess of UG's retention
($125,000 maximum) are transferred to the reinsurer. Risks are transferred
under an automatic ceding arrangement up to $1,000,000 and a facultative
arrangement for amounts in excess of $1,000,000.
In December 1993, UG entered into reinsurance agreements with Business Men's
Assurance Company, ("BMA") and Life Reassurance Corporation, ("LIFE RE"). BMA
and LIFE RE each hold an "A+" (Superior) rating from A.M. Best, an industry
rating company. The reinsurance arrangement was effective December 1, 1993,
and covered 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.
During 1993, USA entered into a coinsurance agreement with LIFE RE. The
coinsurance arrangement allows USA to cede to LIFE RE a 50% quota share of the
traditional participating policies issued by USA after the effective date of
July 1, 1992. USA entered into the arrangement to enable the Company to
maintain increased production levels while containing first year statutory
costs. USA receives commission allowances of 150% of first year premium, 27%
of second year premium, 32% of third year premium and 37% of fourth year and
beyond. Monies pertaining to the coinsurance arrangement are settled monthly.
The Company does not have any short-duration reinsurance contracts. The
effect of the Company's long-duration reinsurance contracts on premiums earned
in 1995, 1994 and 1993 was as follows:
Shown in thousands
1995 1994 1993
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 35,201 $ 38,063 $ 39,848
Assumed 0 0 0
Ceded (5,203) (5,659) (8,688)
Net premiums $ 29,998 $ 32,404 $ 31,160
Reinsurance receivables for future policy benefits were $13,540,000 and
$12,819,000 at December 31, 1995 and 1994, respectively, for estimated
recoveries under reinsurance treaties.
54
8. COMMITMENTS AND CONTINGENCIES
During the third quarter of 1994, UG became aware that certain new insurance
business was being solicited by certain agents and issued to individuals
considered to be not insurable by Company standards. These policies had a
face amount of $22,700,000 and represent 1/2 of 1% of the insurance in force.
Management's analysis indicates that the expected death claims on the business
in force to be adequately covered by the mortality assumptions inherent in the
calculation of statutory reserves. Nevertheless, management has determined it
is in the best interest of the Company to repurchase as many of the policies
as possible. As of December 31, 1995, there remained approximately $5,738,000
of the original face amount which have not been settled. The Company will
continue its efforts to repurchase as many of the policies as possible and
regularly apprise the Ohio Department of Insurance regarding the status of
this situation. Through December 31, 1995, the Company spent a total of
$2,886,000 for the repurchase of these policies and for the defense of related
litigation.
The Company is currently involved in the following litigation: Freeman v.
Universal Guaranty Life Insurance Company (U.S.D.C.,N.D.Ga, 1994, 1-94-CV-
2593-RCF); Armstrong v. Universal Guaranty Life Insurance Company and James
Melville (Circuit Court of Davidson County, Tenn., 1994, 94C3222); Armstrong
v. Universal Guaranty Life Insurance Company and James Melville (Circuit Court
of Davidson County, Tenn., 1994, 94C3720); Ridings v. Universal Guaranty Life
Insurance Company and James Melville (Circuit Court of Davidson County, Tenn.,
1994, 94C3221).
Four general agents of UG filed independent suits against UG in the latter
part of September or early October 1994. Kathy Armstrong (3-94-1085), another
general agent, filed her suit on November 16, 1994. All of the suits allege
that the plaintiff was libeled by statements made in a letter sent by UG. The
letter was sent to persons who had been issued life insurance policies by UG
as the result of policy applications submitted by the five agents. Mr.
Melville is a defendant in some of the suits because he signed the letter as
president of UG.
In addition to the defamation count, Mr. Freeman alleges that UG also breached
a contract by failing to pay his commissions for policies issued. Mr. Freeman
claims unpaid commissions of $104,000. In the libel claim, Mr. Freeman claims
compensatory damages of over $5,000,000, punitive damages of over $3,000,000,
costs, and litigation expenses. The other plaintiffs request the award of
unspecified compensatory damages and punitive (or special) damages as well as
costs and attorney's fees. UG has filed Answers to all of these suits
asserting various defenses and, where appropriate, counterclaims. UG believes
that it has no liability to any of the plaintiffs and intends to defend each
of the suits vigorously. The Freeman suit is scheduled for trial April 8,
1996.
Jeffrey Ploskonka, Keith Bohn and Paul Phinney v. Universal Guaranty Life
Insurance Company (Circuit Court of the Seventh Judicial Circuit Sangamon
County, Illinois Case No.: 95-L-0213)
On March 9, 1995 a lawsuit was filed against Universal Guaranty Life Insurance
on behalf of three insureds and a potential class of other insureds. The
Plaintiffs allege that UG violated the insurance contract in attempting to
cancel life insurance contracts. Additionally, the Plaintiffs assert
violations of Illinois law alleging vexations and unreasonable insurance
practices, breach of duty of good faith and fair dealing, and that Illinois
consumer fraud laws have been violated. The Plaintiffs seek unspecified
compensatory damages, injunctive relief, attorneys' fees, statutory damages in
an amount up to $25,000.00, punitive damages of $1,000,000.00, and other
equitable relief. UG filed an Answer to this lawsuit in May 1995, asserting
various defenses and reserving the right to
55
assert counterclaims. UG has also filed motions to dismiss certain
allegations and claims made in the lawsuit. UG believes it has no liability
to any of the plaintiffs, or other potential class members, and intends to
defend the lawsuit vigorously. In June 1995, the court conditionally
certified a class of non-settling insureds.
The Company and its subsidiaries are named as defendants in a number of legal
actions arising primarily from claims made under insurance policies. Those
actions have been considered in establishing the Company's liabilities.
Management and its legal counsel are of the opinion that the settlement of
those actions will not have a material adverse effect on the Company's
financial position or results of operations.
The number of insurance companies that are under regulatory supervision has
increased, and that increase is expected to result in an increase in
assessments by state guarantee funds to cover losses to policyholders of
insolvent or rehabilitated companies. Those mandatory assessments may be
partially recovered through a reduction in future premium taxes in some
states. For all assessment notifications received, the Company has accrued
for those assessments.
9. RELATED PARTY TRANSACTIONS
United Trust, Inc. has a service agreement with its affiliate, UII (equity
investee), to perform services and provide personnel and facilities. The
services included in the agreement are 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 service agreement states that USA is to pay 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's subcontract agreement
with UTI states that UII is to pay UTI monthly fees equal to 60% of collected
service fees from USA as stated above.
USA paid $2,015,000, $1,357,000 and $1,202,000 under their agreement with UII
for 1995, 1994 and 1993, respectively. UII paid $1,209,000, $814,000 and
$721,000 under their agreement with UTI for 1995, 1994 and 1993, respectively.
The agreements of the insurance companies have been approved by their
respective domiciliary insurance departments and it is Management's opinion
that where applicable, costs have been allocated fairly and such allocations
are based upon generally accepted accounting principles. The costs paid by
UTI for these services include costs related to the production of new business
which are deferred as policy acquisition costs and charged off to the income
statement through "Amortization of deferred policy acquisition costs". Also
included are costs associated with the maintenance of existing policies which
are charged as current period costs and included in "general expenses".
The transactions described below, which transpired during 1994, were necessary
to position Universal Guaranty Investment Company ("UGIC"), Investors Trust,
Inc. ("ITI") and Commonwealth Industries Corporation ("CIC") for liquidation
and dissolution.
Pursuant to an Agreement of Merger dated July 7, 1994 between Investors Trust
Assurance Company, an Illinois life insurance company ("ITAC"), and ALIC, on
July 31, 1994, ITAC merged with and into ALIC and ALIC was the surviving
company. On the effective date of the merger, ALIC succeeded to all the
rights and property of ITAC and assumed all of the liabilities and obligations
and became subject to all of the debts of ITAC in the same manner as if ALIC
had itself incurred them. The merger was approved by the Illinois Director of
Insurance.
56
Prior to the merger of ITAC with and into ALIC, ITAC was a wholly owned
subsidiary of ITI. ITAC owned 1,549,549 (approximately 66%) of the issued and
outstanding common stock of UGIC. Prior to July 31, 1994, ITI was the
indirect beneficial owner of the shares of UGIC common stock directly owned by
ITAC. On July 31, immediately prior to the effectiveness of the merger of
ITAC with and into ALIC, ITI purchased 758,946 shares of the UGIC common stock
owned by ITAC. The total purchase price was $2,276,793. On July 31, 1994,
ITAC also transferred to ITI at no cost 790,603 shares of the common stock of
the Company. On such date, ITI became the direct beneficial owner of all
1,549,549 shares of the common stock of UGIC. In order to purchase the
758,946 shares of UGIC common stock, ITI received a loan from UTI and UII in
the aggregate principal amount of $2,164,293. ITI transferred 721,431 shares
of the common stock of UGIC that it purchased from ITAC to UTI and UII in
payment of the loan. These shares were then contributed by UTI and UII to
their subsidiary, UTG.
The balance sheet of Commonwealth Industries Corporation for the period ended
July 31, 1994, included liabilities in the aggregate amount of $402,861
comprised of a future liability under a consulting agreement, escheat funds
and an account payable. On July 31, 1994, these liabilities were assumed by
UTG in exchange for 1,558,318 shares of the common stock of ITI.
The balance sheet of UGIC for the period ended July 31, 1994, included
liabilities in the aggregate amount of $461,102. On July 31, 1994, these
liabilities were assumed by UTG in exchange for 106,392 shares of the common
stock of FCC and 315 shares of the common stock of CIC. The FCC shares
transferred reduced UGIC's percentage ownership of FCC from 50.396% to
49.959%.
Prior to these transactions, UGIC, ITI and CIC each had liabilities in excess
of assets excluding the stock holdings of their respective subsidiary. The
1994 transactions enabled the companies to extinguish their liabilities.
On August 15, 1995, the shareholders of CIC, ITI, and UGIC voted to
voluntarily liquidate each of the companies and distribute the assets to the
shareholders (consisting solely of common stock of their respective
subsidiary). As a result of the liquidations, the shareholders of each
company became shareholders of FCC, following the liquidations, UTG holds 72%
of the common stock of FCC.
10. CAPITAL STOCK TRANSACTIONS
A. PUBLIC OFFERING OF AFFILIATE STOCK
During 1991, an affiliated company, United Fidelity, Inc., (UFI) began a
stock offering in the State of Illinois. UFI was offering 400,000
units, each unit consisting of one share of no par value common stock
and one share of Class A Preferred Stock, $15 par value per share, 9%
non-cumulative convertible. The units were being offered to the public
at $30 per unit. Due to large losses reported by UFI, the sale of stock
units to the public was stopped on June 2, 1994. The Board of Directors
of UFI voted to voluntarily terminate the offering on August 18, 1994.
Since the inception of the offering, the Company's ownership interest
dropped from 46% to 36%. The Company accounted for the investment in
UFI using the equity method. At December 31, 1994, the Company charged
off its remaining investment in UFI of $212,247. The Company determined
any material recoverability of its investment to be unlikely due to
continuing losses and limited capital of UFI. On May 26, 1995, pursuant
to a plan of restructure of UFI's subsidiary, First Fidelity Mortgage
Company, UTI surrendered its common stock holdings of UFI for no value.
57
B. STOCK OPTION PLAN
In 1985, the Company initiated a nonqualified stock option plan for
employees, agents and directors of the Company under which options to
purchase up to 440,000 shares of the company's common stock are granted
at $.02 per share. A total of 399,375 options had been granted by
December 31, 1994, of which 20,000 were granted during 1993. All of the
options have been exercised as of December 31, 1995. Options for 20,000
shares were exercised during 1995. No options were exercised during
1994 and 1993.
Following is a summary of stock option transactions for the three years
ended December 31, 1995:
1995 1994 1993
Option Shares exercised 20,000 0 0
Compensation expense charged
to operations $ 12,100 $ 0 $ 0
Approximate percent of market
value at which options
were granted 3.2% 0% 0%
C. DEFERRED COMPENSATION PLAN
UTI and FCC have instituted a deferred compensation plan effective May
1, 1993 pursuant to which an officer or agent of FCC, UTI or affiliates
of UTI, may 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 UTI. An officer or agent will
receive an immediately exercisable option to purchase 23,000 shares of
UTI common stock at $1.75 per share for each $25,000 ($10,000 per year
for two and one-half years) of total income deferred. The option
expires on December 31, 2000. At December 31, 1995 and 1994, the
Company held a liability of $1,167,000 and $851,000, respectively,
relating to this plan.
11. NOTES PAYABLE
At December 31, 1995, the Company has $21,447,000 in long term debt
outstanding. The debt is comprised of the following components:
1995 1994
Senior debt $ 11,400,000 $ 12,000,000
Subordinated 10 yr. notes 6,209,000 6,494,000
Subordinated 20 yr. notes 3,815,000 3,530,000
Encumbrance on real estate 23,000 29,000
$ 21,447,000 $ 22,053,000
58
The senior debt is comprised of participations of the First Bank of Missouri,
(First Bank of Missouri was the successor bank to a merger with First Bank of
Gladstone, Citizen's Bank and Trust Company, and Bank of St. Joseph, all
Missouri Banks), Massachusetts General Life Insurance Company and Philadelphia
Life Insurance Company (the "Senior Lenders"). The loan is subject to a
certain Credit Agreement between the parties stipulating the terms of the
loan. The FCC Senior Debt bears interest equal to 1% over the variable per
annum rate of interest most recently announced by the First Bank of Missouri
as its "Base Rate". As of March 1, 1996, the "Base Rate" was 8.25%. The
principal balance of the FCC Senior Debt is payable in installments on June
1st of each year commencing June 1, 1994 and ending June 1, 1998. On January
31, 1996, FCC prepaid $1,500,000 of the $3,900,000 scheduled principal payment
due June 1, 1996. At December 31, 1995, the principal amount of the FCC
Senior Debt to outside parties was $10,400,000.
The Credit Agreement includes an earnings covenant which provides that FCC
will not permit the sum of (i) the combined pre-tax earnings of the
subsidiaries of FCC, excluding the results of any surplus relief reinsurance
and any intercompany dividends, determined in accordance with statutory
accounting practices, and (ii) the pre-tax earnings of FCC plus interest
expense and non-cash charges, determined in accordance with generally accepted
accounting practices, to be less than the amounts specified in the Credit
Agreement. The Credit Agreement requires that the earnings as specified
above, be not less than $7,450,000 for 1995. The Company has not satisfied
the earnings requirement for the past several years. The lenders have granted
waivers or modifications to the earnings requirement in each of the past years
in which the Company did not meet the requirement. Management expects similar
treatment of the 1995 requirement.
The subordinated debt was incurred June 16, 1992 as a part of an acquisition.
The 10 year notes bear interest at the rate of 7 1/2% per annum, payable semi-
annually beginning December 16, 1992. These notes provide for principal
payments equal to 1/20th of the principal balance due with each interest
installment beginning June 16, 1997, with a final payment due June 16, 2002.
During 1995, the Company refinanced $300,695 of 10 year notes to 20 year notes
bearing interest at the rate of 8.75%. The repayment terms of these notes are
similar to the original 20 year notes. The 20 year notes bear interest at the
rate of 8 1/2% per annum, payable semi-annually beginning December 16, 1992,
with a lump sum principal payment due June 16, 2012. Scheduled principal
reductions on the Company's debt for the next five years is as follows:
Year Amount
1996 $ 3,900,000
1997 4,437,000
1998 3,137,000
1999 537,000
2000 537,000
12. OTHER CASH FLOW DISCLOSURE
The Company recognized an increase in its paid-in capital of $0, $277,559 and
$723,618 for the years 1995, 1994 and 1993 respectively, from its equity
investment in UFI from the offering price per share of UFI exceeding UTI's
carrying amount per share.
On a cash basis, the Company paid $1,934,326, $1,937,123 and $1,923,286 in
interest expense for the years 1995, 1994 and 1993, respectively. The Company
paid $25,821, $190 and $328,287 in federal income tax for 1995, 1994 and 1993,
respectively.
59
13. NON-RECURRING WRITE DOWN OF VALUE OF AGENCY FORCE ACQUIRED
The Company recognized a non-recurring write down of $8,297,000 on its value
of agency force acquired for the year ended December 31, 1995. The write down
released $2,904,000 of the deferred tax liability and $3,327,000 was
attributed to minority interest in loss of consolidated subsidiaries. In
addition, equity loss of investees was negatively impacted by $542,000. The
effect of this write down resulted in an increase in the net loss of
$2,608,000. This write down is directly related to the Company's change in
distribution systems. Due to the broker agency force not meeting management's
expectations and lack of production, the Company has changed its focus from
primarily broker agency distribution system to a captive agent system. With
the change in focus, most of the broker agents were terminated and therefore,
management re-evaluated the value of the agency force carried on the balance
sheet. For purposes of the write-down, the broker agency force has no future
expected cash flows and therefore warranted a write-off of the value. The
write down is reported as a separate line item "non-recurring write down of
value of agency force acquired" and the release of the deferred tax liability
is reported in the credit for income taxes payable in the Statement of
Operations. In addition, the impact to minority interest in loss of
consolidated subsidiaries and equity loss of investees is in the Statement of
Operations.
14. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions which at times
may exceed federally insured 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.
15. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 114 entitled "Accounting by Creditors for
Impairment of a Loan" and Statement of Financial Accounting Standards No. 118,
an amendment of Statement No. 114. The Statement amends FASB Statement No. 5
"Accounting for Contingencies" and FASB Statement No. 15 "Accounting by
Debtors and Creditors for Troubled Debt Restructuring". This Statement, which
became effective for financial statements for fiscal years beginning after
December 15, 1994, applies to all troubled debt restructuring involving a
modification of terms.
A loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. As used in this Statement and
in Statement 5, as amended, all amounts due according to the contractual terms
means that both the contractual interest payments and the contractual
principal payments of a loan will be collected as scheduled in the loan
agreement. This Statement does not specify how a creditor should determine
that it is probable that it will be unable to collect all amounts due
according to the contractual terms of a loan. A creditor should apply its
normal loan review procedures in making that judgment. An insignificant delay
or insignificant shortfall in amount of payments does not require application
of this Statement. A loan is not impaired during a period of delay in payment
if the creditor expects to collect all amounts due including interest accrued
at the contractual interest rate for the period of delay. Thus, a demand loan
or other loan with no stated maturity is not impaired if the creditor expects
to collect all amounts due including interest accrued at the contractual
interest rate during the period the loan is outstanding.
This statement was adopted for the 1995 Financial Statements. The adoption
did not have any impact on the Company's financial statement.
60
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 121 entitled "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This
Statement, becomes effective for financial statements for fiscal years
beginning after December 31, 1995, with early adoption encouraged.
An entity shall review long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If certain events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, the entity shall estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. Future cash
flows are the future cash inflows expected to be generated by an asset less
the future cash outflows expected to be necessary to obtain those inflows. If
the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the entity shall
recognize an impairment loss in accordance with this Statement. Otherwise, an
impairment loss shall not be recognized; however, a review of depreciation
policies may be appropriate.
This statement was adopted for the 1995 financial statements. The adoption
did not have any impact on the Company's financial statements.
61
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1995
1st 2nd 3rd 4th
Premium income and other
considerations, net $ 9,445,222 $ 8,765,804 $ 7,868,803 $ 7,018,707
Net investment income $ 3,850,161 $ 3,843,518 $ 3,747,069 $ 4,015,476
Total revenues $13,694,471 $12,933,370 $11,829,921 $11,411,322
Policy benefits
including dividends $ 8,097,830 $ 9,113,933 $ 5,978,795 $ 6,665,206
Amortization of def.
policy acquisitions $ 1,556,526 $ 1,960,458 $ 1,350,662 $ 40,007
Operating expenses $ 3,204,217 $ 2,492,689 $ 2,232,938 $ 3,587,804
Operating income $ (495,966) $(1,939,361) $ 120,393 $(9,060,886)
Net income (loss) $ 179,044 $ (689,602) $ 198,464 $(2,689,151)
Net income (loss) per
share $ 0.01 $ (0.04) $ 0.01 $ (0.14)
1994
1st 2nd 3rd 4th
Premium income and other
considerations, net $ 9,042,475 $10,011,855 $ 7,913,497 $ 8,176,700
Net investment income $ 3,366,995 $ 3,556,633 $ 3,633,334 $ 3,811,484
Total revenues $12,245,881 $14,052,428 $10,900,385 $12,007,934
Policy benefits
including dividends $ 6,927,743 $ 7,496,765 $ 7,483,568 $ 7,753,158
Amortization of def.
policy acquisitions $ 1,685,682 $ 4,099,100 $ 3,086,901 $ 2,448,822
Operating expenses $ 2,366,726 $ 1,898,048 $ 2,328,443 $ 3,194,745
Operating income $ 801,718 $ 67,387 $(2,477,301) $(1,891,201)
Net income (loss) $ (404,022) $ (117,149) $ (515,134) $ (587,295)
Net income (loss) per
share $ (0.02) $ (0.01) $ (0.03) $ (0.03)
1993
1st 2nd 3rd 4th
Premium income and other
considerations, net $ 9,170,565 $ 8,257,439 $ 6,793,145 $ 9,309,090
Net investment income $ 4,001,522 $ 3,365,708 $ 3,437,618 $ 3,600,888
Total revenues $13,912,696 $12,456,824 $11,386,080 $10,785,685
Policy benefits
including dividends $ 7,738,370 $ 8,408,456 $ 6,508,099 $ 5,709,053
Amortization of def.
policy acquisitions $ 1,259,896 $ 152,405 $ 1,072,019 $ 1,033,481
Operating expenses $ 2,933,969 $ 2,903,669 $ 2,429,503 $ 2,971,685
Operating income $ (116,446) $ (563,021) $ (180,353) $(1,255,066)
Net income (loss) $ (79,010) $ (163,835) $ (164,107) $ (454,580)
Net income (loss) per
share $ (0.00) $ (0.01) $ (0.01) $ (0.03)
62
PART III
With respect to Items 10 through 13, the Company will file with the Securities
and Exchange Commission, within 120 days of the close of its fiscal year, a
definitive proxy statement pursuant to Regulation 14-A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held June 4, 1996, and is incorporated herein by reference. Information
regarding executive officers of the Company is set forth under the caption
"Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth in the
Company's proxy statement relating to the annual meeting of shareholders to be
held June 4, 1996, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management will be set forth in the Company's proxy statement relating to the
annual meeting of shareholders to be held June 4, 1996, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will be
set forth in the Company's proxy statement relating to the annual meeting of
shareholders to be held June 4, 1996, and is incorporated herein by reference.
63
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
for the reasons 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 Page 65-68).
64
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) (1) Compromise and Settlement Agreement dates as of February 27, 1991,
among First Commonwealth Corporation, Universal Guaranty Life
Insurance Company, Alliance Life Insurance Company, Roosevelt
National Life Insurance Company of America, Abraham Lincoln
Insurance Company, Appalachian Life Insurance Company, Liberty
American Assurance Company, and Farmers and Ranchers Life Insurance
Company, and Southshore Holding Corp., Public Investors, Inc.,
Fidelity Fire and Casualty Insurance Company, Insurance Premium
Assistance Company, Agency Premium Assistance Company, Coastal
Loans Acquisition Company, Bob F. Shamburger, Gary E. Jackson,
Leonard H. Aucoin, Dennis J. Lafont, William Joel Herron and Jerry
Palmer
10(b) (1) Credit Agreement dated as of December 11, 1989 among First
Commonwealth Corporation, Commonwealth Industries Corporation,
Investors Trust, Inc., Universal Guaranty Investment Company, John
K. Cantrell, Mildred G. Cantrell and First Bank of Gladstone
10(c) (1) Guaranty Agreement among Commonwealth Industries Corporation,
Investors Trust, Inc. and Universal Guaranty Investment Company
dated as of December 11, 1989
10(d) (1) Security Agreement-Pledge dated as of December 11, 1989 between
First Commonwealth Corporation and First Bank of Gladstone
10(e) (1) Security Agreement-Pledge dated as of December 11, 1989 between
Commonwealth Industries Corporation and First Bank of Gladstone
10(f) (1) Security Agreement-Pledge dated as of December 11, 1989 between
Universal Guaranty Investment Company and First Bank of Gladstone
10(g) (1) Security Agreement-Pledge dated as of December 11, 1989 between
Investors Trust, Inc. and First Bank of Gladstone
10(h) (1) Amendment to the Credit Agreement dated as of May 31, 1991 among
First Commonwealth Corporation, Commonwealth Industries
Corporation, Investors Trust, Inc., Universal Guaranty Investment
Company, John K. Cantrell,, Mildred G. Cantrell, and the Banks
65
INDEX TO EXHIBITS
Exhibit
Number
10(i) (1) Confirmation of Guaranty Agreement dated as of May 31, 1991 by
Commonwealth Industries Corporation, Investors Trust, Inc. and
Universal Guaranty Investment Company
10(j) (1) Confirmation of Security Agreement-Pledge dated as of May 31, 1991
by Universal Guaranty Investment Company
10(k) (1) Confirmation of Security Agreement-Pledge dated as of May 31, 1991
by First Commonwealth Corporation
10(l) (1) Confirmation of Security Agreement-Pledge dated as of May 31, 1991
by Commonwealth Industries Corporation
10(m) (1) Confirmation of Security Agreement-Pledge dated as of May 31, 1991
by Investors Trust, Inc.
10(n) (1) Second Amendment to Credit Agreement dated as of June 12, 1992
among First Commonwealth Corporation, Commonwealth Industries
Corporation, Investors Trust, Inc., Universal Guaranty Investment
Company, John K. Cantrell, Mildred G. Cantrell, United Trust Group,
Inc. and the Banks
10(o) (1) Confirmation of Guaranty Agreement dated as of June 16, 1992 by
Commonwealth Industries Corporation, Investors Trust, Inc. and
Universal Guaranty Investment Company
10(p) (1) Confirmation of Security Agreement-Pledge dated as of June 16, 1992
by Commonwealth Industries Corporation
10(q) (1) Amendment and Confirmation of Security Agreement-Pledge dated as of
June 16, 1992 by First Commonwealth Corporation
10(r) (1) Amendment and Confirmation of Security Agreement-Pledge dated as of
June 16, 1992 by Investors Trust, Inc.
10(s) (1) Amendment and Confirmation of Security Agreement-Pledge dated as of
June 16, 1992 by Universal Guaranty Investment Company
10(t) (1) Pledge Agreement dated as of June 16, 1992 by United Trust Group,
Inc.
10(u) (1) Note Purchase Agreement dated as of June 16, 1992 by United Trust
Group, Inc.
10(v) (1) $1,909,882.00 Term Note of First Commonwealth Corporation to
Massachusetts General Life Insurance Company dated as of June 16,
1992
10(w) (1) $6,909,867.00 Term Note of First Commonwealth Corporation to
Philadelphia Life Insurance Company dated as of June 16, 1992
66
INDEX TO EXHIBITS
Exhibit
Number
10(x) (1) $5,453,509.30 Term Note of First Commonwealth Corporation to First
Bank of Gladstone dated as of June 16, 1992
10(y) (1) $879,588.60 Term Note of First Commonwealth Corporation to Citizens
Bank & Trust Co. dated as of June 16, 1992
10(z) (1) $1,847,153.10 Term Note of First Commonwealth Corporation to Bank
of St. Joseph dated as of June 16, 1992
10(aa)(1) Subcontract Agreement dated September 1, 1990 between United Trust,
Inc. and United Income, Inc.
10(bb)(1) Service Agreement dated November 8, 1989 between United Security
Assurance Company and United Income, Inc.
10(cc)(1) Management and Consultant Agreement dated as of January 1, 1993
between First Commonwealth Corporation and Universal Guaranty Life
Insurance Company
10(dd)(1) Management Agreement dated December 20, 1981 among Commonwealth
Industries Corporation, Executive National Life Insurance Company
(now known as Investors Trust Assurance Company) and Abraham
Lincoln Insurance Company
10(ee)(1) Reinsurance Agreement dated January 1, 1991 between Universal
Guaranty Life Insurance Company and Republic-Vanguard Life
Insurance Company
10(ff)(1) Reinsurance Agreement dated July 1, 1992 between United Security
Assurance Company and Life Reassurance Corporation of America
10(gg)(1) United Trust, Inc. Stock Option Plan
10(hh)(1) Board Resolution adopting United Trust, Inc.'s Officer Incentive
Fund
10(ii)(1) Employment Agreement dated as of April 15, 1993 between Larry E.
Ryherd and First Commonwealth Corporation and United Trust, Inc.
10(jj)(1) Employment Agreement dated as of April 15, 1993 between Thomas F.
Morrow and First Commonwealth Corporation and United Trust, Inc.
10(kk)(1) Employment Agreement dated as of April 15, 1993 between James E.
Melville and First Commonwealth Corporation and United Trust, Inc.
10(ll)(1) Employment Agreement dated as of June 16, 1992 between George E.
Francis and First Commonwealth Corporation
10(mm)(1) Amendment Number One to Employment Agreement dated as of April 15,
1993 between George E. Francis and First Commonwealth Corporation
67
INDEX TO EXHIBITS
Exhibit
Number
10(nn)(1) Consulting Arrangement entered into June 15, 1987 between Robert E.
Cook and United Trust, Inc.
10(oo)(1) Agreement dated June 16, 1992 between John K. Cantrell and First
Commonwealth Corporation
10(pp)(1) Termination Agreement dated as of January 29, 1993 between Scott J.
Engebritson and United Trust, Inc., United Fidelity, Inc., United
Income, Inc., First Commonwealth Corporation and United Security
Assurance Company
10(qq)(1) Stock Purchase Agreement dated February 20, 1992 between United
Trust Group, Inc. and Sellers
10(rr)(1) Amendment No. One dated April 20, 1992 to the Stock Purchase
Agreement between the Sellers and United Trust Group, Inc.
10(ss)(1) Security Agreement dated June 16, 1992 between United Trust Group,
Inc. and the Sellers
10(tt)(1) Stock Purchase Agreement dated June 16, 1992 between United Trust
Group, Inc. and First Commonwealth Corporation
Footnote
(1) Incorporated by reference from the Company's Annual Report on Form
10-K, File No. 0-5392, as of December 31, 1993.
68
UNITED TRUST, INC. Schedule I
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 1995
Column A Column B Column C Column D
Amount at
Which Shown
in Balance
Cost Value Sheet
Fixed maturities:
Bonds:
United States Goverment
and government agencies
and authorities $ 27,488,188 $ 28,253,558 $ 27,488,188
State, municipalities,
and political subdivisions 6,785,476 7,079,634 6,785,476
Collateralized mortgage
obligations 15,395,913 15,623,785 15,395,913
Public utilities 59,136,696 61,282,113 59,136,696
All other corporate bonds 82,267,947 84,767,168 82,267,947
Total fixed maturities 191,074,220 $ 197,006,258 191,074,220
Investments held for sale:
Fixed maturities:
United States Goverment and
government agencies
and authorities 2,001,860 $ 2,003,817 2,003,817
State, municipalities, and
political subdivisions 812,454 823,018 823,018
Collateralized mortgage
obligations 32,177 32,683 32,683
Public utilities 119,379 117,829 117,829
All other corporate bonds 258,169 248,828 248,828
3,224,039 $ 3,226,175 3,226,175
Equity securities:
Public utilities 82,073 $ 60,923 60,923
All other corporate
securities 1,164,091 1,885,558 1,885,558
1,246,164 $ 1,946,481 1,946,481
Mortgage loans on real estate 13,891,762 13,891,762
Investment real estate 11,683,575 11,978,575
Real estate acquired in
satisfaction of debt 5,332,413 5,332,413
Policy loans 16,941,359 16,941,359
Short term investments 425,000 425,000
TOTAL INVESTMENTS $243,818,532 $244,815,985
69
UNITED TRUST, 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, Inc. and Consolidated Subsidiaries.
70
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1995 and 1994 Schedule III
1995 1994
ASSETS
Investment in affiliates $ 20,494,198 $ 22,933,787
Accrued investment income 16,273 18,533
Cash and cash equivalents 503,357 425,365
Other assets 588,616 940,861
TOTAL ASSETS $ 21,602,444 $ 24,318,546
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable to affiliate $ 840,000 $ 840,000
Deferred income taxes 1,662,869 1,509,105
Indebtedness of subsidiaries
and affiliates, net 74,519 97,546
Other liabilities 2,800 2,800
TOTAL LIABILITIES 2,580,188 2,449,451
Shareholders' equity:
Common stock 373,519 373,119
Additional paid-in capital 18,288,411 18,276,311
Unrealized depreciation of
investments held for sale
of affiliates (1,499) (143,405)
Retained earnings 361,825 3,363,070
TOTAL SHAREHOLDERS' EQUITY 19,022,256 21,869,095
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $21,602,444 $24,318,546
71
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1995 Schedule III
1995 1994 1993
Revenues:
Management fees from affiliates $ 1,209,196 $ 835,284 $ 720,977
Net investment income 35,261 119,069 68,675
Realized investment gains 0 0 139,350
Loss from write down of investee (10,000) (212,247) 0
Other income from affiliates 113,869 130,437 138,918
1,348,326 872,543 1,067,920
Expenses:
Interest expense 63,000 63,175 83,775
Operating expenses 883,312 926,271 840,568
946,312 989,446 924,343
Operating income (loss) 402,014 (116,903) 143,577
Credit (provision) for income taxes (153,764) (40,123) 34,550
Equity in loss of investees (635,949) (1,125,118) (495,990)
Equity in loss of subsidiaries (2,613,546) (341,456) (543,669)
Net loss $(3,001,245) $(1,623,600) $ (861,532)
72
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1995 Schedule III
1995 1994 1993
Increase (decrease) in cash and
cash equivalents
Cash flows from operating activities:
Net loss $ (3,001,245) $ (1,623,600) $ (861,532)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Equity in loss of subsidiaries 2,613,546 341,456 543,669
Equity in loss of investees 635,949 1,125,118 495,990
Change in accrued investment
income 2,260 29,424 (47,957)
Depreciation 26,412 44,246 80,955
Realized investment gains 0 0 (139,950)
Loss from writedown of investee 10,000 212,247 0
Change in deferred income taxes 153,764 40,123 (34,550)
Change in indebtedness of
affiliates, net (23,027) 217,242 312,720
Change in other assets
and liabilities 25,833 250,737 (117,927)
Net cash provided by
operating activities 443,492 636,993 231,418
Cash flows from investing activities:
Proceeds from investments
sold and matured:
Fixed maturities sold 0 0 0
Fixed maturities matured 0 0 4,137
Real estate 0 0 957,492
Short term 0 0 465,359
Total proceeds from investments
sold and matured 0 0 1,426,988
Cost of investments acquired:
Purchase of common stock
of affiliates (325,000) (1,350,410) 0
Capital contribution to
affiliate (53,000) 0 0
Total cost of investments acquired (378,000) (1,350,410) 0
Net cash provided (used) by
investing activities (378,000) (1,350,410) 1,426,988
Cash flows from financing activities:
Payments of principal on
notes payable 0 0 (413,527)
Purchase of treasury stock 0 (67,545) (113,068)
Proceeds from issuance of
common stock 12,500 0 3,415
Net cash provided (used) by
financing activities 12,500 (67,545) (523,180)
Net increase (decrease) in
cash and cash equivalents 77,992 (780,962) 1,135,226
Cash and cash equivalents at
beginning of year 425,365 1,206,327 71,101
Cash and cash equivalents at
end of year $ 503,357 $ 425,365 $ 1,206,327
73
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1995 and the year ended December 31, 1995 Schedule VI
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 $4,207,695,000 $1,087,774,000 $1,039,517,000 $4,159,438,000 25.0%
Premiums:
Life
insurance $ 34,952,367 $ 5,149,939 $ 0 $ 29,802,428 0.0%
Accident and health
insurance 248,448 52,751 0 195,697 0.0%
$ 35,200,815 $ 5,202,690 $ 0 $ 29,998,125 0.0%
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
74
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1994 and the year ended December 31, 1994 Schedule VI
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 $4,543,746,000 $1,217,119,000 $1,077,413,000 $4,404,040,000 24.5%
Premiums:
Life
insurance $ 37,800,871 $ 5,597,512 $ 0 $ 32,203,359 0.0%
Accident and health
insurance 262,315 61,185 0 201,130 0.0%
$ 38,063,186 $ 5,658,697 $ 0 $ 32,404,489 0.0%
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
75
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1993 and the year ended December 31, 1993 Schedule VI
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 $4,475,766,000 $1,432,713,000 $2,026,910,000 $5,069,963,000 40.0%
Premiums:
Life
insurance $ 39,433,287 $ 8,692,446 $ 0 $ 30,740,841 0.0%
Accident and health
insurance 414,937 (4,853) 0 419,790 0.0%
$ 39,848,224 $ 8,687,593 $ 0 $ 31,160,631 0.0%
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
76
UNITED TRUST, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1995, 1994, & 1993 Schedule V
Balance at Additions
Beginning Charges Balances at
Description Of Period and Expenses Deductions End of Period
December 31, 1995
Allowance for doubtful accounts -
mortgage loans $ 26,000 $ 0 $ 16,000 $ 10,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 1,385,875 45,208 0 1,431,083
Accumulated amortization
of costs in excess of
net assets purchased 656,675 423,192 0 1,079,867
Accumulated depreciation
on real estate 802,476 300,396 53,220 1,049,652
Total $2,871,026 $ 768,796 $ 69,220 $3,570,602
December 31, 1994
Allowance for doubtful accounts -
mortgage loans $ 300,000 $ 0 $ 274,000 $ 26,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 1,211,502 280,308 105,935 1,385,875
Accumulated amortization
of costs in excess of
net assets purchased 426,999 297,676 68,000 656,675
Accumulated depreciation
on real estate 501,333 301,143 0 802,476
Total $2,439,834 $ 879,127 $ 447,935 $2,871,026
December 31, 1993
Allowance for doubtful accounts -
mortgage loans $ 500,000 $ 0 $ 200,000 $ 300,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 979,975 235,480 3,953 1,211,502
Accumulated amortization of
costs in excess of
net assets purchased 142,000 284,999 0 426,999
Accumulated depreciation
on real estate 377,323 329,226 205,216 501,333
Total $1,999,298 $ 849,705 $ 409,169 $2,439,834
77
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, INC.
(Registrant)
/s/ John S. Albin March 26, 1996
John S. Albin, Director
/s/ Robert E. Cook March 26, 1996
Robert E. Cook, Senior Vice President
and Director
/s/ Larry R. Dowell March 26, 1996
Larry R. Dowell, Director
/s/ March 26, 1996
Raymond L. Larson, Director
/s/ Paul D. Lovell March 26, 1996
Paul D. Lovell, Director
/s/ Dale E. McKee March 26, 1996
Dale E. McKee, Director
/s/ Thomas F. Morrow March 26, 1996
Thomas F. Morrow, Chief Operating
Officer, President, and Director
/s/ Larry E. Ryherd March 26, 1996
Larry E. Ryherd, Chairman of the Board,
Chief Executive Officer and Director
/s/ Robert J. Webb March 26, 1996
Robert J. Webb, Director
/s/ James E. Melville March 26, 1996
James E. Melville, Chief Financial Officer
and Senior Executive Vice President
78