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 June 30, 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 July 31, 1996:
18,700,935
Common stock, no par value per share
UNITED TRUST, INC.
(the "Company")
INDEX
Part I: Financial Information
Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the six months
and three months ended June 30, 1996 and 1995 . . . . . . . . . 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 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
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . 20
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
ASSETS 1996 1995
Investments:
Fixed maturities at amortized cost
(market $192,654,841 and $197,006,257) $ 193,188,725 $ 191,074,220
Investments held for sale:
Fixed maturities, at market
(cost $2,775,587 and $3,224,039) 2,670,087 3,226,175
Equity securities, at market
(cost $2,086,159 and $2,181,783) 1,828,003 1,946,481
Mortgage loans on real estate at
amortized cost 12,925,481 13,891,762
Investment real estate, at cost, net of
accumulated depreciation 11,326,903 11,978,575
Real estate acquired in satisfaction of debt,
at cost net of accumulated depreciation 3,846,947 5,332,413
Policy loans 17,022,777 16,941,359
Short term investments 325,000 425,000
243,133,923 244,815,985
Cash and cash equivalents 16,461,424 12,528,025
Investment in affiliates 5,323,849 5,169,596
Indebtedness of affiliates, net 90,976 87,869
Accrued investment income 3,699,149 3,671,842
Reinsurance receivables:
Future policy benefits 13,752,819 13,540,413
Unpaid policy claims and benefits 257,160 733,524
Paid policy claims and benefits 345,787 127,964
Other accounts and notes receivable 1,139,054 1,246,367
Cost of insurance acquired 46,808,869 49,331,201
Deferred policy acquisition costs 11,678,042 11,436,728
Value of agency force acquired 6,324,513 6,485,733
Costs in excess of net assets purchased,
less accumulated amortization 5,579,492 5,661,462
Other assets 1,764,664 1,555,986
Total assets $ 356,359,721 $ 356,392,695
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 245,407,402 $ 243,044,963
Policy claims and benefits payable 1,981,696 3,110,378
Other policyholder funds 2,994,836 3,004,655
Dividend and endowment accumulations 13,361,740 12,636,949
Income taxes payable:
Current 54,066 215,944
Deferred 17,127,527 17,762,408
Notes payable 20,094,432 21,447,428
Other liabilities 4,749,126 5,009,637
Total liabilities 305,770,825 306,232,362
Minority interests in consolidated subsidiaries 31,317,215 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 18,301,972 18,288,411
Unrealized depreciation of investments
held for sale (79,910) (1,499)
Retained earnings 675,600 361,825
Total shareholders' equity 19,271,681 19,022,256
Total liabilities and
shareholders' equity $ 356,359,721 $ 356,392,695
See accompanying notes.
3
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
Revenues:
Premium income $ 8,749,389 $ 9,294,974 $17,677,871 $19,117,662
Reinsurance premium (1,072,667) (1,314,929) (2,363,646) (2,434,285)
Other considerations 876,639 833,667 1,762,138 1,627,323
Other considerations
paid to reinsurers (39,186) (47,908) (80,677) (99,674)
Net investment income 3,890,127 3,843,518 7,863,476 7,693,679
Net realized investment
gains (losses) (270,916) (61,239) (282,947) 7,268
Other income 322,489 385,287 749,800 715,868
12,455,875 12,933,370 25,326,015 26,627,841
Benefits and other expenses:
Benefits, claims and settlement expenses:
Life 6,111,321 8,933,564 11,221,641 15,671,639
Reinsurance benefits
and claims (536,079) (1,438,270) (776,044) (1,654,816)
Annuity 442,054 522,337 888,947 951,157
Dividends to
policyholders 1,066,507 1,096,302 2,278,019 2,243,783
Commissions and amortization
of deferred policy
acquisition costs 924,174 1,960,458 2,086,024 3,516,984
Amortization of cost of
insurance acquired 1,245,318 675,860 2,522,332 1,345,897
Amortization of agency
force 80,610 168,902 161,220 338,557
Operating expenses 2,851,752 2,492,689 6,299,081 5,696,906
Interest expense 407,416 460,889 853,608 953,061
12,593,073 14,872,731 25,534,828 29,063,168
Income (loss) before income
taxes, minority interest
and equity in earnings
of investees (137,198) (1,939,361) (208,813) (2,435,327)
Credit for income taxes 95,563 324,218 672,660 1,026,169
Minority interest in (income)
loss of consolidated
subsidiaries 35,486 1,082,694 (235,657) 1,014,968
Equity in earnings (loss)
of investees 15,187 (157,153) 85,585 (116,368)
Net income (loss) $ 9,038 $ (689,602) $ 313,775 $ (510,558)
Net income (loss)
per common share 0.00 (0.04) $ 0.02 $ (0.03)
Average common
shares outstanding 18,700,935 18,685,935 18,689,195 18,680,963
See accompanying notes.
4
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
June 30, June 30,
1996 1995
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ 313,775 $ (510,558)
Adjustments to reconcile net income (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 (5,133,997) (4,891,143)
Change in policy liabilities and accruals (505,843) 4,269,592
Change in reinsurance receivables 46,135 (1,080,983)
Change in indebtedness of affiliates, net 3,107 (6,464)
Minority interest 235,657 (1,014,968)
Equity in earnings of investees (85,585) 116,368
Change in accrued investment income (27,307) (81,612)
Depreciation 263,946 286,136
Change in income taxes payable (796,759) (1,058,169)
Net realized investment (gains)losses 282,947 (7,268)
Policy acquisition costs deferred (977,000) (1,363,000)
Amortization of deferred policy
acquisition costs 1,218,314 1,507,126
Amortization of cost of insurance acquired 2,522,332 1,345,897
Amortization of value of agency force 161,220 338,557
Amortization of costs in excess of net
assets purchased 81,970 138,047
Change in other assets and liabilities, net (505,656) (1,959,773)
Net cash used in operating activities (2,902,744) (3,972,215)
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale matured 500,583 101,849
Fixed maturities sold 0 0
Fixed maturities matured 15,982,534 5,163,959
Equity securities 8,990 104,260
Mortgage loans 1,086,205 1,371,424
Real estate 2,225,127 485,169
Policy loans 2,177,694 2,312,670
Short term 400,000 200,000
Total proceeds from investments sold and matured 22,381,133 9,739,331
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (18,713,187) (8,244,414)
Fixed maturities matured 0 (1,000,000)
Mortgage loans (119,924) (332,454)
Real estate (385,147) (531,435)
Policy loans (2,262,305) (2,148,796)
Short term (300,000) (100,000)
Total cost of investments acquired (21,780,563) (12,357,099)
Net cash provided by (used in) investing activities 600,570 (2,617,768)
Cash flows from financing activities:
Policyholder contract deposits 12,108,411 12,999,801
Policyholder contract withdrawals (8,023,342) (8,719,786)
Interest credited to account balances 3,503,500 3,229,599
Proceeds from issuance of notes payable 400,000 0
Payments of principal on notes payable (1,752,996) (602,908)
Net cash provided by financing activities 6,235,573 6,906,706
Net increase in cash and cash equivalents 3,933,399 316,723
Cash and cash equivalents at beginning of period 12,528,025 11,697,067
Cash and cash equivalents at end of period $ 16,461,424 $ 12,013,790
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 June 30, 1996, the parent, significant subsidiaries and
affiliates of United Trust, Inc. were as depicted on the
following organizational chart.
6
ORGANIZATIONAL CHART
AS OF JUNE 30, 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 June 30, 1996, fixed maturities and fixed maturities held
for sale represented 81% 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 June 30, 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 $12,925,000 in mortgage loans and
$15,174,000 in real estate holdings which represent 5% and 6% of
total invested assets of the Company, respectively. All mortgage
loans held by the Company are first position loans. The Company
has $948,000 in mortgage loans net of a $10,000 reserve
allowance, which are in default or in the process of foreclosure
representing approximately 7% 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 $ 739,000 6%
Commercial $ 3,178,133 24%
Residential $ 9,008,348 70%
REAL ESTATE AMOUNT % OF TOTAL
Home Office $ 2,961,920 20%
Commercial $ 2,508,856 17%
Residential development $ 5,856,127 38%
Foreclosed real estate $ 3,846,947 25%
4. NOTES PAYABLE
At June 30, 1996, the Company has $20,094,000 in notes payable.
Notes payable is comprised of the following components:
Senior debt $ 8,900,000
Subordinated 10 yr. notes 6,194,000
Subordinated 20 yr. notes 3,830,000
Other notes payable 1,150,000
Encumbrance on real estate 20,000
$ 20,094,000
8
On May 8, 1996, FCC refinanced its senior debt of $8,900,000.
The refinancing was completed through First of America Bank -
Illinois NA and is subject to a credit agreement. The refinanced
debt bears interest at a rate equal to the "base rate" plus nine-
sixteenths of one percent. The Base rate is defined as the
floating daily, variable rate of interest determined and
announced by First of America Bank from time to time as its "base
lending rate." The base rate at issuance of the loan was 8.25%,
and has remained unchanged through August 8, 1996. Interest is
paid quarterly. Principal payments of $1,000,000 are due in May
of each year beginning in 1997, with a final payment due May 8,
2005.
The credit agreement contains certain covenants with which the
Company must comply. These covenants contain provisions common
to a loan of this type and include such items as; a minimum
consolidated net worth of FCC to be no less than 400% of the
outstanding balance of the debt; Statutory capital and surplus of
Universal Guaranty Life Insurance Company be maintained at no
less than $6,500,000; an earnings covenant requiring the sum of
the pre-tax earnings of Universal Guaranty Life Insurance Company
and its subsidiaries (based on Statutory Accounting Practices)
and the after-tax earnings plus non-cash charges of FCC (based on
parent only GAAP practices) shall not be less than two hundred
percent (200%) of the Company's interest expense on all of its
debt service. The Company is in compliance with all of the
covenants of the agreement and does not foresee any problem in
maintaining compliance in the future.
United Income, Inc. and First Fidelity Mortgage Company through
an assignment from United Trust, Inc. owned a participating
interest of $300,000 and $700,000 respectively of the previous
senior debt. At the date of refinance, these obligations were
converted from participations of senior debt to promissory notes.
These notes bear interest at the rate of 1% above the variable
per annum rate of interest most recently published by the Wall
Street Journal as the prime rate. Interest is payable quarterly
with principal due at maturity on May 8, 2006.
In February 1996, FCC borrowed $150,000 from an affiliate to
provide additional cash for liquidity. The note bears interest
at the rate of 1% over prime as published in the Wall Street
Journal, with interest payments due quarterly and principal due
upon maturity of the note on June 1, 1999.
The subordinated debt was incurred June 16, 1992 as a part of the
acquisition of Commonwealth Industries Corporation. 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.
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
9
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 June 30, 1996, there
remained approximately $5,700,000 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 June 30, 1996, the Company
spent a total of $3,358,000 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. In May 1996,
UG filed an appeal. The Company 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 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 $25,000.00, 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. This suit is currently in the discovery
stage, with a trial date set for late October.
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.
10
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 4.6% and 3.5% as of June 30,
1996, and December 31, 1995, respectively. Fixed maturities as a
percentage of total invested assets were 79% and 78% as of June
30, 1996 and December 31, 1995, respectively. Fixed maturities
increased slightly in 1996 compared to 1995.
The Company holds approximately $325,000 in short term
investments with fixed maturities of $7,222,000 maturing in one
year and $95,648,000 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 ($2,903,000) and $(3,972,000) in second
quarter of 1996 and 1995, respectively. The net cash used in
operating activities plus interest credited to account balances
and net policyholder contract deposits after the payment of
policyholder withdrawals, equalled $4,686,000 in second quarter
of 1996 and $3,537,000 in second 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 $601,000 and
($2,618,000) for second quarter of 1996 and 1995, respectively.
The most significant aspect of investing activities is the fixed
maturity transactions. Fixed maturities account for 86% and 67%
of the total cost of investments acquired in second quarter of
1996 and 1995, respectively. The Company has not directed its
investable funds to so-called "junk bonds" or derivative
investments. Real estate sold increased significantly when
comparing second quarter of 1996 to second quarter of 1995.
Approximately $1,500,000 of real estate sold during 1996, is the
result of two properties that were originally acquired by
satisfaction of debt. The sale of the two properties produced a
net realized loss of $200,000. Management believes investing the
proceeds received from the sale of the two properties will
improve future investment returns.
Net cash provided by financing activities was $6,236,000 and
$6,907,000 for second quarter of 1996 and 1995, respectively.
Policyholder contract deposits decreased 7% in second quarter of
1996 compared to second quarter of 1995. The decrease between
1996 and 1995 is due to the decline in first year premium
production. Policyholder contract withdrawals has decreased 8%
in second quarter of 1996 compared to second quarter of 1995.
The decrease in 1996 is not attributable to any one significant
event. Factors that contribute to the decrease 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 8% in second
quarter of 1996 compared to second quarter of 1995. The increase
in 1996 is due to the larger account balances from continued
sales of UL products. Insurance products that are marketed
currently are crediting between 5.5% and 6% interest. On May 1,
12
1996, the Company reduced the crediting rate from 6% to 5.5% on
the "UL90A" product as well as other less significant plans. The
reduction in interest rates was due to the Company's analysis of
interest spreads between investment portfolio yield and product
crediting 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.
The payment of cash dividends to shareholders is not legally
restricted. At June 30, 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.
On May 8, 1996, FCC refinanced its senior debt of $8,900,000.
The refinancing was completed through First of America Bank -
Illinois NA. The Company's senior debt bears interest at a rate
equal to the "base rate" plus nine-sixteenths of one percent.
The Base rate is defined as the floating daily, variable rate of
interest determined and announced by First of America Bank from
time to time as its "base lending rate." Interest is paid
quarterly. Principal payments of $1,000,000 are due in May of
each year beginning in 1997, with a final payment due May 8,
2005.
Management believes the overall sources of liquidity available
will be sufficient to satisfy its financial obligations.
RESULTS OF OPERATIONS
YEAR-TO-DATE 1996 COMPARED TO 1995:
(a) REVENUES
Total revenue decreased 5% when comparing the first six months of
1996 to the first six months of 1995.
Premium income, net of reinsurance premium, decreased 8% when
comparing the first six months of 1996 to the same period one
year ago. 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
13
to premium income; however, traditional insurance products
contribute all 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 10% 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 2% when comparing the first six
months of 1996 to the first six months of 1995. 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.
(b) EXPENSES
Total expenses decreased 12% when comparing the first six months
of 1996 to the same period one year ago.
Life benefits, net of reinsurance benefits and claims, decreased
24% when comparing the first six months of 1996 to the same
period one year ago. The decrease is primarily due to the
decrease in mortality. Mortality decreased approximately
$1,100,000 in the first six months of 1996 when compared to 1995.
The decrease can also be attributed 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 slightly when comparing the
first six months of 1996 to the first six months of 1995. USA
continued to market participating policies through most of 1994.
Management expects dividends to policyholders will continue to
increase in the future. However, a decrease in the dividend
scales on certain products was approved by the Board of Directors
in late 1995. 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 41% in the first six months of 1996 when compared to
the same period one year ago. 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. Also, the Company benefited from improved
persistency.
14
Amortization of cost of insurance acquired increased
significantly in first six months of 1996 compared to the same
period one year ago. 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.
Operating expenses increased 11% in the first six months of 1996
when compared to the same period one year ago. 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 by the
agency force. The difference between the policy acquisition
costs deferred in the first six months 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 June 30,
1996, there remained approximately $5,700,000 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 $453,000 and $429,000 in the first six months of
1996 and the first six months of 1995, respectively, for the
legal defense of related litigation.
Interest expense decreased 10% in the first six months of 1996
compared to the first six months of 1995. Since December 31,
1995, notes payable has decreased $1,353,000 which has provided
the decrease in interest expense during 1996. Additionally, the
interest rate charged on the senior debt following the
restructure is slightly lower than on the previous debt.
(c) NET INCOME
The Company had net income of $314,000 for the first six months
of 1996 compared to a net loss of ($511,000) for the first six
months of 1995. The improvement in results can be attributed
primarily to the decrease in life benefits.
SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 1995:
(a) REVENUES
Total revenue decreased 4% when comparing second quarter of 1996
to second quarter of 1995.
Premium income, net of reinsurance premium, decreased 4% when
comparing second quarter of 1996 to second 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 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.
15
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 all 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 7% 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 slightly when comparing second
quarter of 1996 to second quarter of 1995. 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.
(b) EXPENSES
Total expenses decreased 15% when comparing second quarter of
1996 to second quarter of 1995.
Life benefits, net of reinsurance benefits and claims, decreased
25% when comparing second quarter of 1996 to the same period one
year ago. The decrease is primarily due to the decrease in
mortality. Mortality decreased approximately $781,000 in the
second quarter of 1996 when compared to the second quarter of
1995. The decrease can also be attributed 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 decreased slightly when comparing
second quarter of 1996 to second quarter of 1995. The decrease
in dividends to policyholders is due to a decrease in the
dividend scales on certain products, approved by the Board of
Directors, in late 1995. 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.
16
Commissions and amortization of deferred policy acquisition costs
decreased 53% in second quarter of 1996 compared to second
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. Also, the Company benefited from improved persistency.
Amortization of cost of insurance acquired increased
significantly in second quarter of 1996 compared to second
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.
Operating expenses increased 14% in second quarter of 1996
compared to second 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
second 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 June 30,
1996, there remained approximately $5,700,000 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 $371,000 and $227,000 in second quarter of 1996
and second quarter of 1995, respectively, for the legal defense
of related litigation.
(c) NET INCOME
The Company had net income of $9,000 in second quarter of 1996
compared to a net loss of ($690,000) in second quarter of 1995.
The improvement in results can be attributed primarily to the
decrease in life benefits.
FINANCIAL CONDITION
(a) ASSETS
At June 30, 1996 and December 31, 1995, cash and invested assets
represented approximately 73% of consolidated assets. Cash and
cash equivalents increased 31% when comparing June 30, 1996 to
December 31, 1995. The increase in cash and cash equivalents is
a temporary fluctuation and it is anticipated that future cash
balances will return to levels similar to December 31, 1995. As
of June 30, 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
17
these investments. The Company does not own any derivative
investments or "junk bonds". As of June 30, 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. 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 $19,415,000 and $21,415,000 at June 30, 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 June 30, 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 7% in second 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 $948,000 in mortgage loans, net of a $10,000 reserve
allowance, which are in default or in the process of foreclosure,
this represents approximately 7% of the total portfolio.
Investment real estate and real estate acquired in satisfaction
of debt decreased 12% in second quarter of 1996 compared to
December 31, 1995. The decrease is primarily due to the sale of
two commercial properties.
Policy loans increased slightly in second 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.
Cost of insurance acquired and cost in excess of net assets
purchased decreased 5% in second 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 second
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.
18
(b) LIABILITIES
Total liabilities decreased slightly in second quarter of 1996
compared to December 31, 1995. Future policy benefits increased
less than 1% in second quarter of 1996 and represented 80% of
total liabilities at June 30, 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 36% in second
quarter of 1996 compared to December 31, 1995. There is no
single event that caused this item to decrease. Policy claims
vary from period to period and therefore, fluctuations in this
liability are to be expected and are not considered unusual by
management.
Dividend and endowment accumulations increased 6% in second
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 decreased 4% in the aggregate in second
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 second quarter of 1996 compared to
December 31, 1995. On May 8, 1996, FCC refinanced its senior
debt of $8,900,000. The refinancing was completed through First
of America Bank - Illinois NA and is subject to a credit
agreement. The refinanced debt bears interest at a rate equal to
the "base rate" plus nine-sixteenths of one percent. The Base
rate is defined as the floating daily, variable rate of interest
determined and announced by First of America Bank from time to
time as its "base lending rate." The base rate at issuance of
the loan was 8.25%, and has remained unchanged through August 8,
1996. Interest is paid quarterly. Principal payments of
$1,000,000 are due in May of each year beginning in 1997, with a
final payment due May 8, 2005. 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 slightly in second quarter
of 1996 compared to December 31, 1995. The increase in
shareholders' equity is primarily due to net income of $314,000
through second quarter of 1996. The Company experienced $78,000
in unrealized depreciation of investments held for sale through
second quarter of 1996.
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.
19
PART II. OTHER INFORMATION
Item 6. Exhibits
4(a) Term note for $8,900,000 of First Commonwealth
Corporation to First of America Bank - Illinois, N.A.
dated as of May 8, 1996.
4(b) Credit agreement dated May 8, 1996, between First of
America Bank - Illinois, N.A. and First Commonwealth
Corporation.
The Company hereby incorporates by reference the exhibits as
reflected in the Index to Exhibits of the Company's Form 10-K for
the year ended December 31, 1995.
20
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 August 9, 1996 By /s/ Thomas F. Morrow
Thomas F. Morrow, Chief Operating
Officer, President, Treasurer
and Director
Date August 9, 1996 By /s/ James E. Melville
James E. Melville, Chief Financial
Officer and Senior Executive Vice
President
21