SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1996 Commission File No. 0-16867
UNITED TRUST, INC.
(Exact Name of Registrant as specified in its Charter)
Illinois 37-1172848
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 5147, Springfield, Illinois 62705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (217) 786-4300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date.
Shares outstanding at April 30, 1996:
18,700,935
Common stock, no par value per share
1
UNITED TRUST, INC.
(the "Company")
INDEX
Part I: Financial Information
Consolidated Balance Sheets as of March 31, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three months
ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . 12
Part II: Other Information
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
ASSETS 1996 1995
Investments:
Fixed maturities at amortized cost
(market $191,783,418 and $197,006,257) $ 191,246,296 $ 191,074,220
Investments held for sale:
Fixed maturities, at market
(cost $2,721,516 and $3,224,039) 2,675,215 3,226,175
Equity securities, at market
(cost $2,181,783 and $2,181,783) 1,912,552 1,946,481
Mortgage loans on real estate
at amortized cost 13,555,643 13,891,762
Investment real estate, at cost,
net of accumulated depreciation 11,585,197 11,978,575
Real estate acquired in satisfaction
of debt, at cost, net of accumulated
depreciation 4,770,956 5,332,413
Policy loans 16,927,638 16,941,359
Short term investments 425,000 425,000
243,098,497 244,815,985
Cash and cash equivalents 15,170,931 12,528,025
Investment in affiliates 5,317,053 5,169,596
Indebtedness of affiliates, net 48,598 87,869
Accrued investment income 4,251,060 3,671,842
Reinsurance receivables:
Future policy benefits 13,718,461 13,540,413
Unpaid policy claims and benefits 301,712 733,524
Paid policy claims and benefits 57,668 127,964
Other accounts and notes receivable 1,167,610 1,246,367
Cost of insurance acquired 48,054,187 49,331,201
Deferred policy acquisition costs 11,503,885 11,436,728
Value of agency force acquired 6,405,123 6,485,733
Costs in excess of net assets purchased,
net of accumulated amortization 5,620,742 5,661,462
Other assets 1,485,592 1,555,986
Total assets $ 356,201,119 $ 356,392,695
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 244,036,847 $ 243,044,963
Policy claims and benefits payable 2,042,671 3,110,378
Other policyholder funds 3,138,908 3,004,655
Dividend and endowment accumulations 13,159,857 12,636,949
Income taxes payable:
Current 50,000 215,944
Deferred 17,335,261 17,762,408
Notes payable 20,095,936 21,447,428
Other liabilities 5,681,241 5,009,637
Total liabilities 305,540,721 306,232,362
Minority interests in
consolidated subsidiaries 31,357,714 31,138,077
Shareholders' equity:
Common stock - no par value, stated
value $.02 per share
Authorized 35,000,000 shares - 18,700,935
and 18,675,935 shares issued after deducting
treasury shares of 423,840 and 423,840 374,019 373,519
Additional paid-in capital 18,301,974 18,288,411
Unrealized depreciation of investments
held for sale (39,871) (1,499)
Retained earnings 666,562 361,825
Total shareholders' equity 19,302,684 19,022,256
Total liabilities and
shareholders' equity $ 356,201,119 $ 356,392,695
See accompanying notes.
3
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
March 31, March 31,
1996 1995
Revenues:
Premium income $ 8,928,482 $ 9,822,688
Reinsurance premium (1,290,979) (1,119,356)
Other considerations 885,499 793,656
Other considerations paid to reinsurers (41,491) (51,766)
Net investment income 3,973,349 3,850,161
Net realized investment gains and (losses) (12,031) 68,507
Other income 427,311 330,581
12,870,140 13,694,471
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 5,110,320 6,738,075
Reinsurance benefits and claims (239,965) (216,546)
Annuity 446,893 428,820
Dividends to policyholders 1,211,512 1,147,481
Commissions and amortization of
deferred policy acquisition costs 1,161,850 1,556,526
Amortization of cost of insurance acquired 1,277,014 670,037
Amortization of agency force 80,610 169,655
Operating expenses 3,447,329 3,204,217
Interest expense 446,192 492,172
12,941,755 14,190,437
Loss before income taxes, minority interest
and equity in earnings of investees (71,615) (495,966)
Credit for income taxes 577,097 701,951
Minority interest in income
of consolidated subsidiaries (271,143) (67,726)
Equity in earnings of investees 70,398 40,785
Net income $ 304,737 $ 179,044
Net income per common share $ 0.02 $ 0.01
Average common
shares outstanding 18,677,324 18,655,935
See accompanying notes.
4
UNITED TRUST INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
March 31, March 31,
1996 1995
Increase in cash and cash equivalents
Cash flows from operating activities:
Net income $ 304,737 $ 179,044
Adjustments to reconcile net income 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 (2,537,539) (2,420,614)
Change in policy liabilities and accruals (524,288) 1,508,853
Change in reinsurance receivables 324,060 105,031
Change in indebtedness of affiliates, net (39,271) (1,599)
Minority interest 271,143 67,726
Equity in earnings of investees (70,398) (40,785)
Change in accrued investment income (579,218) (678,738)
Depreciation 127,657 145,873
Change in income taxes payable (593,091) (733,951)
Net realized investment (gains) losses 12,031 (68,507)
Policy acquisition costs deferred (509,000) (762,000)
Amortization of deferred policy
acquisition costs 441,843 637,937
Amortization of cost of insurance acquired 1,277,014 670,037
Amortization of value of agency force 80,610 169,655
Amortization of costs in excess of net
assets purchased 40,720 246,811
Change in other assets and liabilities, net 1,146,033 (13,489)
Net cash used in operating activities (826,957) (988,716)
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale matured 134,283 0
Fixed maturities sold 0 0
Fixed maturities matured 11,242,187 3,366,123
Equity securities 8,990 0
Mortgage loans 386,844 275,590
Real estate 1,123,088 383,022
Policy loans 1,049,195 1,292,537
Short term 0 100,000
Total proceeds from investments sold and matured 13,810,304 5,417,272
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (11,337,342) (3,932,860)
Equity securities 0 0
Mortgage loans (50,724) (79,655)
Real estate (208,574) (267,376)
Policy loans (1,035,474) (1,103,024)
Short term 0 (100,000)
Total cost of investments acquired (12,632,114) (5,482,915)
Net cash provided by (used in)
investing activities 1,178,190 (65,643)
Cash flows from financing activities:
Policyholder contract deposits 6,472,538 6,312,725
Policyholder contract withdrawals (4,553,787) (3,948,502)
Interest credited to account balances 1,724,414 1,695,703
Proceeds from issuance of note payable 150,000 0
Payments of principal on notes payable (1,501,492) (901,449)
Net cash provided by financing activities 2,291,673 3,158,477
Net increase in cash and cash equivalents 2,642,906 2,104,118
Cash and cash equivalents at beginning of period 12,528,025 11,697,067
Cash and cash equivalents at end of period $ 15,170,931 $ 13,801,185
See accompanying notes
5
UNITED TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
United Trust, Inc. ("Trust") and its consolidated subsidiaries (the "Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission. Although the Company believes the disclosures are adequate to
make the information presented not be misleading, it is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto presented in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the
year ended December 31, 1995.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals) necessary for a
fair presentation of the results of operations for the periods presented.
Operating results for interim periods are not necessarily indicative of
operating results to be expected for the year or of the Company's future
financial condition.
At March 31, 1996, the parent, significant subsidiaries and affiliates of
United Trust, Inc. were as depicted on the following organizational chart.
6
ORGANIZATIONAL CHART
AS OF MARCH 31, 1996
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").
7
2. FIXED MATURITIES
As of March 31, 1996, fixed maturities and fixed maturities held for sale
represented 80% of total invested assets. As prescribed by the various state
insurance department statutes and regulations, the insurance companies'
investment portfolio is required to be invested primarily in investment grade
securities to provide ample protection for policyholders. The liabilities of
the insurance companies are predominantly long term in nature and therefore,
the companies invest primarily in long term fixed maturity investments. The
Company has analyzed its fixed maturities portfolio and reclassified those
securities expected to be sold prior to maturity as investments held for sale.
The investments held for sale are carried at market. Management has the
intent and ability to hold its fixed maturity portfolio to maturity and as
such carries these securities at amortized cost. As of March 31, 1996, 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.
3. MORTGAGE LOANS AND REAL ESTATE
The Company holds approximately $13,556,000 in mortgage loans and $16,356,000
in real estate holdings which represent 4% and 5% of the total assets of the
Company, respectively. All mortgage loans held by the Company are first
position loans. The Company has $393,000 in mortgage loans net of a $10,000
reserve allowance, which are in default or in the process of foreclosure
representing approximately 3% of the total portfolio.
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 on
delinquent loans are established based on management's analysis of the loan
balances and what is believed to be the realizable value of the property
should foreclosure take place. Loans are placed on a non-accrual status based
on a quarterly case by case analysis of the likelihood of repayment.
The following tables show the distribution of mortgage loans and real estate
by type.
MORTGAGE LOANS AMOUNT % OF TOTAL
FHA/VA $ 773,117 6%
Commercial $ 3,273,464 24%
Residential $ 9,509,062 70%
REAL ESTATE AMOUNT % OF TOTAL
Home Office $ 3,015,560 19%
Commercial $ 2,988,234 18%
Residential development $ 5,581,403 34%
Foreclosed real estate $ 4,770,956 29%
8
4. LONG-TERM DEBT
At March 31, 1996, the Company has $20,096,000 in long term debt outstanding.
The debt is comprised of the following components:
Senior debt $ 9,900,000
Subordinated 10 yr. notes 6,194,000
Subordinated 20 yr. notes 3,830,000
Notes to affiliates 150,000
Encumbrance on real estate 22,000
$ 20,096,000
The senior debt is comprised of participations of several lenders. Interest
is based on 1% above the lead bank's base rate and is payable quarterly. On
January 31, 1996, the Company made a principal payment of $1,500,000 on the
senior debt.
The subordinated debt was incurred June 16, 1992 as a part of the acquisition
of CIC. 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. 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.
In February 1996, FCC borrowed $150,000 from an affiliate to provide
additional cash for liquidity. The note bears interest at the same rate as
the senior debt, with interest payments due quarterly and principal due upon
maturity of the note on June 1, 1999.
Scheduled principal reductions on the Company's debt for the next five years
are as follows:
Year Amount
1996 $ 0
1997 1,537,000
1998 1,537,000
1999 1,687,000
2000 1,537,000
5. 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
9
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 $65,000. 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. The Freeman
suit went to trial in April 1996. The jury awarded Mr. Freeman $365,000 in
general damages and $700,000 in punitive damages. The Company plans to file
an appeal. UG believes the ultimate settlement of these lawsuits will not
have a material impact on the financial statements and intends to defend these
suits vigorously.
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 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.
10
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.
11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's financial
condition, changes in financial condition and results of operations which
reflect the performance of the Company. The information in the consolidated
financial statements and related notes should be read in conjunction with this
section.
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 4.3% and 3.5% as of
March 31, 1996, and December 31, 1995, respectively. Fixed maturities as a
percentage of total invested assets were 79% and 78% as of March 31, 1996 and
December 31, 1995, respectively. Fixed maturities increased slightly in 1996
compared to 1995.
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 ($827,000) and ($989,000) in first quarter of 1996 and 1995, 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 $2,916,000 in first quarter of 1996 and
$3,071,000 in first quarter of 1995. 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 provided by (used in) investing activities was $1,178,000 and ($66,000),
for first quarter of 1996 and 1995, respectively. The most significant aspect
of investing activities is the fixed maturity transactions. Fixed maturities
account for 90% and 72% of the total cost of investments acquired in first
quarter of 1996 and 1995, 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 two years was provided by
investing excess cash and cash equivalents and financing activities.
Net cash provided by financing activities was $2,292,000 and $3,158,000 for
first quarter of 1996 and 1995, respectively. Policyholder contract deposits
increased 2% in first quarter of 1996 compared to first quarter of 1995. The
increase between 1996 and 1995 is due to the change in marketing focus of the
Company. All of the Company's agency forces are marketing universal life
insurance products. Policyholder contract withdrawals has increased 15% in
first quarter of 1996 compared to first quarter of 1995. The increase in 1996
12
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.
Interest credited to account balances increased 2% in first quarter of 1996
compared to first quarter of 1995. The increase in 1996 is due to the
increase in policyholder contract deposits. It is expected that interest
credited to account balances will continue to benefit from 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
is currently reviewing product interest rates.
The payment of cash dividends to shareholders is not legally restricted. At
March 31, 1996, 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 January 31, 1996, the Company made a principal payment of $1,500,000
on the senior debt.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
13
RESULTS OF OPERATIONS
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995:
(a) REVENUES
Total revenue decreased 6% when comparing first quarter of 1996 to first
quarter of 1995.
Premium income, net of reinsurance premium, decreased 12% when comparing first
quarter of 1996 to first quarter of 1995. 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. 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 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.
Other considerations, net of reinsurance, increased 14% 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 3% when comparing first quarter of 1996 to
first quarter of 1995. Although the Company sold no fixed maturities during
the first quarter of 1996, 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
14
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.
(b) EXPENSES
Total expenses decreased 9% when comparing first quarter of 1996 to first
quarter of 1995.
Life benefits, net of reinsurance benefits and claims, decreased 25% when
comparing first quarter of 1996 to the same period one year ago. 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.
Dividends to policyholders increased approximately 6% when comparing first
quarter of 1996 to first quarter of 1995. 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 decreased
25% in first quarter of 1996 compared to first quarter of 1995. The Company
revised its portfolio of products as previously discussed in premium income.
These new products pay lower first year commissions than the products sold in
prior periods. The Company did benefit from improved persistency.
Amortization of cost of insurance acquired increased significantly in first
quarter of 1996 compared to first quarter of 1995. 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. Amortization of cost
of insurance acquired is particularly sensitive to changes in persistency of
certain blocks of insurance in force.
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Operating expenses increased 8% in first quarter of 1996 compared to first
quarter of 1995. 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. The difference between the
policy acquisition costs deferred in first quarter of 1996 compared to the
same period one year ago, effected the increase in operating expenses.
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 March 31, 1996, 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 $82,000 and $202,000 in first quarter of 1996 and first quarter of
1995, respectively, for the legal defense of related litigation.
Interest expense decreased 9% in first quarter of 1996 compared to first
quarter of 1995. On January 31, 1996, the Company made a principal payment of
$1,500,000 on the senior debt.
(c) NET INCOME
The Company had net income of $305,000 in first quarter of 1996 compared to
$179,000 in first quarter of 1995. The improvement in results can be
attributed to the decrease in life benefits and increase in net investment
income.
FINANCIAL CONDITION
(a) ASSETS
The Company's financial position at March 31, 1996, has had minimal change
since December 31, 1995. At March 31, 1996 and December 31, 1995, cash and
invested assets represented approximately 72% of consolidated assets. Cash
and cash equivalents increased 21% when comparing March 31, 1996 to December
31, 1995. The increase in cash and cash equivalents is directly related to
the decrease in invested assets. As of March 31, 1996 and December 31, 1995,
fixed maturities represented 74% of total invested assets and cash.
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 March 31, 1996, the carrying value of
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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
$20,605,424 and $21,415,000 at March 31, 1996 and December 31, 1995,
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 March 31, 1996, 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.
Mortgage loans decreased 2% in first quarter of 1996 as compared to December
31, 1995. 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 $420,000 in mortgage loans, net of a $10,000
reserve allowance, which are in default or in the process of foreclosure, this
represents approximately 3% of the total portfolio.
Investment real estate and real estate acquired in satisfaction of debt
decreased 6% in first quarter of 1996 compared to December 31, 1995. The
decrease is primarily due to the sale of two commercial properties.
Policy loans decreased slightly in first quarter of 1996 compared to December
31, 1995. 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.
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Cost of insurance acquired and cost in excess of net assets purchased
decreased 2% in first quarter of 1996 compared to December 31, 1995. 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 slightly in first quarter of 1996
compared to December 31, 1995. 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 decreased slightly in first quarter of 1996 compared to
December 31, 1995. Future policy benefits increased less than 1% in first
quarter of 1996 and represented 80% of total liabilities at March 31, 1996.
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 34% in first quarter of 1996
compared to December 31, 1995. 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.
Dividend and endowment accumulations increased 4% in first quarter of 1996
compared to December 31, 1995. 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.
Income taxes payable and deferred income taxes payable decreased 3% in the
aggregate in first quarter of 1996 compared to December 31, 1995. The change
in deferred income taxes payable is attributable to temporary differences
between Generally Accepted Accounting Principles ("GAAP") and tax basis.
Notes payable decreased 6% in first quarter of 1996 compared to December 31,
1995. On January 31, 1996, the Company made a principal payment of $1,500,000
on the senior debt. The Company's long term debt is discussed in more detail
in Note 4 of the Notes to the Financial Statements.
(c) SHAREHOLDERS' EQUITY
Total shareholders' equity increased 1% in first quarter of 1996 compared to
December 31, 1995. The increase in shareholders' equity is primarily due to
the net income of $305,000 in first quarter of 1996. The Company experienced
$38,000 in unrealized depreciation of investments held for sale in first
quarter of 1996.
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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 products; 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 on demographic variables such as income growth, wealth
accumulation, populations and workforce changes.
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PART II. OTHER INFORMATION
Omitted as the required information is inapplicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED TRUST, INC.
(Registrant)
Date May 10, 1996 By /s/ Thomas F. Morrow
Thomas F. Morrow, Chief Operating
Officer, President, Treasurer
and Director
Date May 10, 1996 By /s/ James E. Melville
James E. Melville, Chief Financial
Officer and Senior Executive Vice
President
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