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 September 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 SecuritiesExchange Act
of 1934 during the preceding 12 months (or such shorter period that the
Registrant was required to file such reports), and (2) has beensubject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of theRegistrant's
classes of common stock, as of the latest practicable date.
Shares outstanding at October 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 September 30, 1996 and
December 31, 1995 3
Consolidated Statements of Operations for the nine months
and three months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the nine months
ended September 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 21
Signatures 22
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
September30, December 31,
1996 1995
ASSETS
Investments:
Fixed maturities at amortized cost
(market $197,404,996 and$197,006,257) $197,708,844 $191,074,220
Investments held for sale:
Fixed maturities, at market (cost
$2,507,309 and$3,224,039) 2,470,934 3,226,175
Equity securities, at market (cost
$2,086,159 and$2,181,783) 1,799,001 1,946,481
Mortgage loans on real estate at amortized cost 12,721,704 13,891,762
Investment real estate, at cost, net of
accumulateddepreciation 10,787,777 11,978,575
Real estate acquired in satisfaction of debt,
at cost net of accumulated depreciation 3,846,946 5,332,413
Policy loans 17,262,173 16,941,359
Short term investments 325,000 425,000
246,922,379 244,815,985
Cash and cash equivalents 15,196,332 12,528,025
Investment in affiliates 5,147,273 5,169,596
Accrued investment income 4,345,787 3,671,842
Reinsurance receivables:
Future policy benefits 13,888,853 13,540,413
Unpaid policy claims and benefits 993,165 733,524
Paid policy claims and benefits 312,776 127,964
Other accounts and notes receivable 1,154,101 1,246,367
Cost of insurance acquired 45,887,534 49,331,201
Deferred policy acquisition costs 11,900,199 11,436,728
Value of agency force acquired 6,249,176 6,485,733
Costs in excess of net assets purchased,
less accumulated amortization 5,537,057 5,661,462
Other assets 1,623,845 1,555,986
TOTAL ASSETS $359,158,477 $356,304,826
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $248,569,248 $243,044,963
Policy claims and benefits payable 3,079,631 3,110,378
Other policyholder funds 2,855,563 3,004,655
Dividend and endowment accumulations 13,668,727 12,636,949
Income taxes payable:
Current 73,640 215,944
Deferred 16,891,596 17,762,408
Notes payable 20,073,953 21,447,428
Indebtedness of affiliates, net 11,272 (87,869)
Other liabilities 5,571,375 5,009,637
TOTAL LIABILITIES 310,795,005 306,144,493
Minority interests in consolidated subsidiaries 29,994,394 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 issuedafter deducting
treasury shares of 423,840 and 423,840 in
1996 and 1995, respectively 374,019 373,519
Additional paid-in capital 18,301,972 18,288,411
Unrealized depreciation of investments held for sale (89,752) (1,499)
(Accumulated deficit) retained earnings (217,161) 361,825
TOTAL SHAREHOLDERS' EQUITY 18,369,078 19,022,256
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $359,158,477 $356,304,826
See accompanying notes.
3
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30 Sept. 30, Sept. 30
1996 1995 1996 1995
REVENUES:
Premium income $ 7,836,950 $ 8,585,351 $ 25,514,821 $ 27,703,013
Reinsurance premium (1,303,035) (1,513,299) (3,666,681) (3,947,584)
Other considerations 866,137 837,140 2,628,275 2,464,463
Other considerations paid
to reinsurers (51,853) (40,389) (132,530) (140,063)
Net investment income 4,038,831 3,747,069 11,902,307 11,440,748
Realized investment gains
(losses) (37,858) (115,524) (320,805) (108,256)
Other income 287,442 329,573 1,037,242 1,045,441
11,636,614 11,829,921 36,962,629 38,457,762
BENEFITS AND OTHER EXPENSES:
Benefits, claims and settlement expenses:
Life 8,319,522 5,322,841 19,541,163 20,994,480
Reinsurance benefits
and claims (1,294,964) (844,340) (2,071,008) (2,499,156)
Annuity 398,034 454,355 1,286,981 1,405,512
Dividends to policyholde 956,118 1,045,939 3,234,137 3,289,722
Commissions and amortization of
deferred acquisition costs 703,196 1,350,662 2,789,220 4,867,646
Amortization of cost of
insurance acquired 921,335 1,460,230 3,443,667 2,806,127
Amortization of agency force 75,337 184,718 236,557 523,275
Operating expenses 3,422,654 2,232,938 9,721,735 7,929,844
Interest expense 481,834 502,185 1,335,442 1,455,246
13,983,066 11,709,528 39,517,894 40,772,696
Income (loss) before income taxes, minority
interest and equity in
earnings of investees (2,346,452) 120,393 (2,555,265) (2,314,934)
Credit for income taxes 317,751 214,525 990,411 1,240,694
Minority interest in (income) loss
of colidated subsidiaries 1,310,454 (175,775) 1,074,797 839,193
Equity in earnings (loss)
of investees (174,514) 39,321 (88,929) (77,047)
Net income (loss) $ (892,761) $ 198,464 $ (578,986)$ (312,094)
Net income (loss) per common
share $ (0.05) $ 0.01 $ (0.03)$ (0.02)
Average common
shares outstanding 18,700,935 18,695,935 18,693,151 18,686,008
See accompanying notes.
4
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
September 30, September 30,
1996 1995
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net income (loss) $ (578,986) $ (312,094)
Adjustments to reconcile net income
(loss) to net cash provided (used)
by 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 (7,681,478) (7,351,824)
Change in policy liabilities
and accruals 2,454,616 2,988,239
Change in reinsurance receivable 46,135 (523,236)
Change in indebtedness of
affiliates, net (99,141) (31,268)
Minority interest (1,074,797) (839,193)
Equity in earnings of investees 88,929 77,047
Change in accrued investment
income (673,945) (683,740)
Depreciation 392,018 419,584
Change in income taxes payable (1,013,116) (1,282,728)
Net realized investment (gains)
losses 320,805 108,256
Policy acquisition costs
deferred (1,477,000) (1,862,000)
Amortization of deferred
acquisition costs 1,940,471 2,206,189
Amortization of cost of
insurance acquired 3,443,667 2,806,127
Amortization of value of
agency force 236,557 523,275
Amortization of costs in
excess of net assets purchased 124,405 (114,525)
Change in other assets and
liabilities, net 371,524 (798,571)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (3,179,336) (4,670,462)
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale
matured 704,583 101,849
Fixed maturities sold 0 0
Fixed maturities matured 19,168,548 9,226,009
Equity securities 8,990 104,260
Mortgage loans 1,858,246 1,917,743
Real estate 2,886,187 897,183
Policy loans 2,985,381 3,269,380
Short term 400,000 200,000
Total proceeds from investments sold
and matured 28,011,935 15,716,424
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (26,559,403) (11,994,414)
Equity securities 0 (1,000,000)
Mortgage loans (488,188) (405,148)
Real estate (837,866) (1,065,675)
Policy loans (3,334,865) (3,572,857)
Short term (300,000) (125,000)
Total cost of investments acquired (31,520,322) (18,163,094)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (3,508,387) (2,446,670)
Cash flows from financing activities:
Policyholder contract deposits 17,339,900 19,338,007
Policyholder contract withdrawal (12,033,894) (12,551,380)
Interest credited to account balances 5,423,499 4,962,323
Proceeds from issuance of note payable 400,000 0
Payments of principal on notes payable (1,773,475) (604,379)
NET CASH PROVIDE BY (USED IN)
FINANCING ACTIVITIES 9,356,030 11,144,571
Net increase (decrease) in cash and cash
equivalents 2,668,307 4,027,439
Cash and cash equivalents at beginning
of period 12,528,025 11,697,067
Cash and cash equivalents at end of
period $ 15,196,332 $ 15,724,506
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 forthe periods
presented. Operating results for interim periods are not necessarily
indicative of operating results to be expected for the yearor of the
Company's future financial condition.
At September 30, 1996, the parent, significant subsidiaries andaffiliates
of United Trust, Inc. were as depicted on the followingorganizational
chart.
ORGANIZATIONAL CHART
AS OF SEPTEMBER 30, 1996
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns 53%
of the United Trust Group ("UTG") and 30% of United Income, Inc. ("UII"). UII
ownes 100% of Universal Guaranty Life Insurance Company ("UG"). UG ownes 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.
2. FIXED MATURITIES
As of September 30, 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, theinsurance
companies' investment portfolio is required to be invested primarily in
investment grade securities to provide ample protection forpolicyholders.
The liabilities of the insurance companies are predominantlylong term in
nature and therefore, the companies invest primarily in longterm 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 holdits fixed
maturity portfolio to maturity and as such carries these securities at
amortized cost. As of September 30, 1996, the carrying valueof fixed
maturity securities in default as to principal or interest wasimmaterial
in the context of consolidated assets or shareholders' equity.
3. MORTGAGE LOANS AND REAL ESTATE
The Company holds approximately $12,722,000 in mortgage loans and
$14,635,000 in real estate holdings which represent 5% and 6%of total
invested assets of the Company, respectively. All mortgageloans held by
the Company are first position loans. The Company has $651,000in mortgage
loans net of a $10,000 reserve allowance, which are in defaultor in the
process of foreclosure representing approximately 5% 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 realizablevalue of the
property should foreclosure take place. Loans are placed on anon-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 and VA $ 671,373 5%
Commercial $ 3,112,100 25%
Residential $ 8,938,231 70%
REAL ESTATE AMOUNT % OF TOATL
Home Office $ 2,910,915 20%
Commercial $ 2,715,383 19%
Residential development $ 5,161,479 35%
Foreclosed real estate $ 3,846,946 26%
4. NOTES PAYABLE
At September 30, 1996, the Company has $20,074,000 in notespayable. 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
$ 20,074,000
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 totime as its
"base lending rate." The base rate at issuance of the loan was8.25%, and
has remained unchanged through November 8, 1996. Interest is paid
quarterly. Principal payments of $1,000,000 are due in May ofeach year
beginning in 1997, with a final payment due May 8, 2005. On November 8,
1996, the Company prepaid $500,000 of the May 8, 1997 principalpayment.
The credit agreement contains certain covenants with which theCompany must
comply. These covenants contain provisions common to a loan ofthis type
and include such items as; a minimum consolidated net worth ofFCC 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 sumof the pre-
tax earnings of Universal Guaranty Life Insurance Company and its
subsidiaries (based on Statutory Accounting Practices) and theafter-tax
earnings plus non-cash charges of FCC (based on parent only GAAPpractices)
shall not be less than two hundred percent (200%) of theCompany's interest
expense on all of its debt service. The Company is incompliance 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 participatinginterest of
$700,000 and $300,000 respectively of the previous seniordebt. At the
date of refinance, these obligations were converted fromparticipations of
senior debt to promissory notes. These notes bear interest at the rate of
1% above the variable per annum rate of interest most recentlypublished by
the Wall Street Journal as the prime rate. Interest is payablequarterly
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 therate of 1%
over prime as published in the Wall Street Journal, withinterest payments
due quarterly and principal due upon maturity of the note on June1, 1999.
The subordinated debt was incurred June 16, 1992 as a part of an
acquisition. The 10 year notes bear interest at the rate of 7 1/2% per
annum, payable semi-annually beginning December 16, 1992. These notes,
except for one $840,000 note, 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
$840,000 note provides for a lump sum principal payment due June16, 2002.
The 20 year notes bear interest at the rate of 8 1/2% perannum, payable
semi-annually beginning December 16, 1992, with a lump sumprincipal
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 represented 1/2 of1% of the
insurance in force. Management's analysis indicates that the expected
death claims on the business in force to be adequatelycovered by the
mortality assumptions inherent in the calculation of statutoryreserves.
Nevertheless, management determined it was in the bestinterest of the
Company to repurchase as many of the policies as possible. AtSeptember
30, 1996, all of the original policies, with a total faceamount of
$22,700,000, have been settled with the exception of oneremaining lawsuit
with a $100,000 original face amount still to be determined. There remains
$4,166,000 of insurance in force from reduced face amount policies issued
in certain instances as settlements. UG maintains reserves on these
policies in excess of 25% of the face amount of insurance. Through
September 30, 1996, the Company spent a total of $4,218,000 for the
repurchase of these policies and for the defense of relatedlitigation.
During 1996, the Company has been 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 LifeInsurance
Company and James Melville (Circuit Court of Davidson County,Tenn., 1994,
94C3222); Armstrong v. Universal Guaranty Life Insurance Companyand 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 inthe 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 applicationssubmitted by
the five agents. Mr. Melville is a defendant in some of thesuits because
he signed the letter as president of UG.
In addition to the defamation count, Mr. Freeman allegesthat UG also
breached a contract by failing to pay his commissions forpolicies issued.
Mr. Freeman claims unpaid commissions of $65,000. In the libelclaim, Mr.
Freeman claims compensatory damages of over $5,000,000, punitivedamages 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. UGhas filed
Answers to all of these suits asserting various defensesand, where
appropriate, counterclaims. The Freeman suit went to trial inApril 1996.
The jury awarded Mr. Freeman $365,000 in general damages and$700,000 in
punitive damages. In May 1996, UG filed an appeal.
Jeffrey Ploskonka, Keith Bohn and Paul Phinney v. Universal Guaranty Life
Insurance Company (Circuit Court of the Seventh JudicialCircuit 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 classof 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 faithand fair
dealing, and that Illinois consumer fraud laws have beenviolated. The
Plaintiffs seek unspecified compensatory damages, injunctive relief,
attorneys' fees, statutory damages in an amount up to $25,000 punitive
damages of $1,000,000 and other equitable relief. UG filed anAnswer to
this lawsuit in May 1995, asserting various defenses and reserving the
right to assert counterclaims. UG has also filed motionsto dismiss
certain allegations and claims made in the lawsuit. In June1995, the
court conditionally certified a class of non-settling insureds. This class
represents approximately $5,000,000 of insurance in force. UGhas reached
a tentative settlement of this suit. Pending approval of thecourt, UG
will issue a paid up policy to each class member equal to70% of the
original face amount and pay $600,000 to the class. The third quarter
financial statements include a charge to the income statement of$1,600,000
to life benefits and $600,000 to general expenses for this tentative
settlement.
Universal Guaranty Life Insurance Company v. Fred Boxley (United States
District Court, Middle District of Florida, Orlando Division,Civil Action
File No. 95-1145-CIV-ORL-19).
On October 9, 1995, UG filed the above named suit seekingrescission of two
life insurance policies issued to the Defendant with a total faceamount of
$100,000. The claims against the Defendant include fraud, breach of
fiduciary duty and material misrepresentation. The Defendanthas filed an
Answer and Counterclaims, alleging breach of contract and bad faith.
Motions for summary judgment filed by both parties are currently pending.
The case is currently scheduled for trial in January 1997.
The Company and its subsidiaries are named as defendants in anumber of
legal actions arising primarily from claims made under insurancepolicies.
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 regulatorysupervision has
increased, and that increase is expected to result in an increase in
assessments by state guarantee funds to cover losses topolicyholders of
insolvent or rehabilitated companies. Those mandatoryassessments may be
partially recovered through a reduction in future premium taxes in some
states. For all assessment notifications received, the Companyhas accrued
for those assessments.
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. Theinformation
in the consolidated financial statements and related notesshould be read
in conjunction with this section.
LIQUIDITY AND CAPITAL RESOURCES:
The Company and its consolidated subsidiaries have threeprincipal needs
for cash - the insurance company's contractual obligations to
policyholders, the payment of operating expenses and servicing ofits long-
term debt. Cash and cash equivalents as a percentage of totalassets were
4.2% and 3.5% as of September 30, 1996, and December 31, 1995,
respectively. Fixed maturities as a percentage of totalinvested assets
were 80% and 78% as of September 30, 1996 and December 31, 1995,
respectively. Fixed maturities increased 3% in 1996 compared to1995.
The Company holds approximately $325,000 in short term investments with
fixed maturities of $5,751,000 maturing in one year and $95,222,000
maturing in two to five years, which in the opinion ofmanagement is
sufficient to meet the Company's cash requirements.
Consolidated operating activities of the Company produced negative cash
flows of ($3,179,000) and ($4,670,000) in third quarter of 1996and 1995,
respectively. The net cash used in operating activities plus interest
credited to account balances and net policyholder contractdeposits after
the payment of policyholder withdrawals, equalled $7,550,000in third
quarter of 1996 and $7,078,000 in third quarter of 1995. Management
believes this measurement of cash flows more accuratelyindicates the
performance of the Company's insurance operations, since reporting
regulations require cash inflows and outflows from universal lifeinsurance
products to be shown as financing activities.
Consolidated investing activities of the Company produced negative cash
flows of ($3,508,000) and ($2,447,000) for third quarter of 1996and 1995,
respectively. The most significant aspect of investingactivities is the
fixed maturity transactions. Fixed maturities account for 84%and 66% of
the total cost of investments acquired in third quarter of 1996and 1995,
respectively. The Company has not directed its investablefunds to so-
called "junk bonds" or derivative investments. Real estate soldincreased
significantly when comparing third quarter of 1996 to third 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 netrealized loss of
$200,000. Management believes investing the proceeds receivedfrom the
sale of the two properties will improve future investmentreturns.
Net cash provided by financing activities was $9,356,000 and $11,145,000
for third quarter of 1996 and 1995, respectively. Policyholder contract
deposits decreased 10% in third quarter of 1996 compared tothird quarter
of 1995. The decrease is due to the decline in first year premium
production. Policyholder contract withdrawals has decreased 4%in third
quarter of 1996 compared to third quarter of 1995. The decreasein 1996 is
not attributable to any one significant event. Factors thatcontribute 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 existingcustomer base and
at the same time increase the customer base through new policyproduction.
Interest credited to account balances increased 9% inthird quarter
of 1996 compared to third quarter of 1995. The increase in 1996is due to
the larger account balances from continued sales of UL products. Insurance
products that are marketed currently are crediting between5.5% and 6%
interest. On May 1, 1996, the Company reduced the creditingrate from 6%
to 5.5% on the "UL90A" product as well as other lesssignificant plans.
The reduction in interest rates was due to the Company'sanalysis of
interest spreads between investment portfolio yield and productcrediting
rates. It takes approximately one year to fully realize achange in
credited rates since a change becomes effective on each policy's next
anniversary.
The payment of cash dividends to shareholders is not legallyrestricted.
At September 30, 1996, substantially all of the consolidatedshareholders
equity represents net assets of its subsidiaries. UTI does not have
significant day to day operations of its own. Cashrequirements 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 itsmanagement
agreement with UII and its income received on invested assetsand 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 priornotification to
the insurance commissioner for the payment of an ordinarydividend.
Ordinary dividends are defined as the greater of: a) prior yearstatutory
earnings or b) 10% of statutory capital and surplus. For theyear 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 insurancecommissioner
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 isdefined as the
floating daily, variable rate of interest determined andannounced 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. On November
8, 1996, the Company prepaid $500,000 of the May 1997 principalpayment.
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 4% when comparing the first nine monthsof 1996 to
the first nine months of 1995.
Premium income, net of reinsurance premium, decreased 8% when
comparing the first nine 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, theCompany has
streamlined the product portfolio, as well as restructured themarketing
force. The decrease in first year premium production is directly related
to the Company's change in distribution systems. The Companyhas changed
its focus from primarily a broker agency distribution system toa captive
agent system. Business written by the broker agency force inrecent 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 lifeinsurance products
to universal life insurance products had a significantimpact on new
business production. As a result of the change in marketingstrategy the
agency force went through a restructure and retrainingprocess. 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 premiumincome. One
factor that has had a positive impact on premium income is theimprovement
of persistency. Persistency is a measure of insurance in forceretained in
relation to the previous year.
Other considerations, net of reinsurance, increased 7% comparedto one year
ago. Other consideratiojns 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 insuranceproducts.
Net investment income increased 4% when comparing the first ninemonths of
1996 to the first nine months of 1995. The Company's investments are
generally managed to match related insurance and policyholderliabilities.
The Company, in conjunction with the decrease in average yield of the
Company's fixed maturity portfolio, has decreased the averagecrediting
rate for the insurance and investment products. The comparison of
investment return with insurance or investment productcrediting rates
establishes an interest spread. The minimum interest spreadbetween earned
and credited rates is 1% on the "Century 2000" universal lifeinsurance
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 themonitoring of
the interest spreads by management will provide the necessarymargin to
adequately provide for associated costs on insurance policiesthe Company
has in force and will write in the future.
(b) EXPENSES
Total expenses decreased 3% when comparing the first nine monthsof 1996 to
the same period one year ago.
Life benefits, net of reinsurance benefits and claims, decreased 6% when
comparing the first nine months of 1996 to the same period one year ago.
The decrease is attributed to the decrease in first year premium.
Mortality decreased approximately $176,000 in the first ninemonths of 1996
when compared to 1995. Life benefits was negatively effected by$1,600,000
charge for the tentative settlement of a class action lawsuit. The lawsuit
is discussed in detail in Note five of the Notes to the Consolidated
Financial Statements.
Dividends to policyholders decreased slightly when comparing thefirst nine
months of 1996 to the first nine months of 1995. USA continued to market
participating policies through most of 1994. Management expectsdividends
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 theinsurance in
force is participating insurance. A significant portion of the
participating business is relatively newer business, and thedividend scale
for participating policies increases in the early
durations. The dividend scale is subject to approval of the Board of
Directors and maybe changed at their discretion. The Company has
discontinued its marketing of participating policies.
Commissions and amortization of deferred policy acquisition costsdecreased
43% in the first nine months of 1996 when compared to the sameperiod one
year ago. The decrease is attributed to two factors. Thedecline in first
year premium production and design of products that is currentlymarketed.
These new products pay lower first year commissions than theproducts sold
in prior periods. Also, the Company benefited from improvedpersistency.
Amortization of cost of insurance acquired increased 23% in first nine
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 23% in the first nine 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 nine 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. As of September 30, 1996, all of the original policies
with a total face amount of $22,700,000 have been settled with the
exception of one remaining lawsuit with a $100,000 original face amount
still to be determined. The Company has reached a tentative settlement
with a class of non-settling insureds. Pending approval of the court, UG
will issue a paid up policy to each class member equal to 70% of the
original face amount and pay $600,000 to the class. The third quarter
financial statements include a charge to the income statement of $1,600,000
to life benefits and $600,000 to general expenses for this tentative
settlement. The Company incurred legal costs of $711,000 and $596,000 in
the first nine months of 1996 and the first nine months of 1995,
respectively, for the legal defense of related litigation.
Interest expense decreased 8% in the first nine months of 1996 compared to
the first nine months of 1995. Since December 31, 1995, notes payable has
decreased $1,373,000 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 (LOSS)
The Company had a net loss of ($579,000) for the first nine months of 1996
compared to a net loss of ($312,000) for the first nine months of 1995.
The net loss for the current period is primarily due to expenses associated
with the litigation and settlement of legal matters discussed in operating
expenses, life benefits and Note five of the Consolidated Notes to the
Financial Statements.
THIRD QUARTER 1996 COMPARED TO THIRD QUARTER 1995:
(a) REVENUES
Total revenue decreased 2% when comparing third quarter of 1996 to third
quarter of 1995.
Premium income, net of reinsurance premium, decreased 8% when comparing
third quarter of 1996 to third 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.
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 2% compared to one year
ago. Other considerations consists of administrative charges on universal
life and interest sensitive life insurance products. The insurance in
force relating to these types of products continues to increase as
marketing efforts are focused on universal life insurance products.
Net investment income increased 8% when comparing third quarter of 1996 to
third 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 increased 19% when comparing third quarter of 1996 to third
quarter of 1995.
Life benefits, net of reinsurance benefits and claims, increased 57% when
comparing third quarter of 1996 to the same period one year ago. The
increase is primarily the result of two factors. Mortality increased
approximately $924,000 in the third quarter of 1996 when compared to the
third quarter of 1995. There was no one event or specific occurrence which
caused this increase. The other factor is a $1,600,000 charge for the
tentative settlement of a class action lawsuit. The lawsuit is discussed
in detail in Note five of the Notes to the Consolidated Financial
Statements.
Dividends to policyholders decreased 9% when comparing third quarter of
1996 to third 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.
Commissions and amortization of deferred policy acquisition costs decreased
48% in third quarter of 1996 compared to third quarter of 1995. The
decrease is attributed to two factors. The decline in first year premium
production and the design of products that are currently marketed. These
new products pay lower first year commissions than the products sold in
prior periods.
Amortization of cost of insurance acquired decreased 37% in third quarter
of 1996 compared to third 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 decrease in amortization during the current
period is a normal fluctuation due to the expected future profits.
Amortization of cost of insurance acquired is particularly sensitive to
changes in persistency of certain blocks of insurance in force.
Operating expenses increased 53% in third quarter of 1996 compared to third
quarter of 1995. The increase was caused by several factors. One factor
for the increase in operating expenses is due to the decrease in first year
premium 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 nine 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. As of September 30, 1996, all of the original policies
with a total face amount of $22,700,000 have been settled with the
exception of one remaining lawsuit with a $100,000 original face amount
still to be determined. The Company has reached a tentative settlement
with a class of non-settling insureds. Pending approval of the court, UG
will issue a paid up policy to each class member equal to 70% of the
original face amount and pay $600,000 to the class. The third quarter
financial statements include a charge to the income statement of $1,600,000
to life benefits and $600,000 to general expenses for this tentative
settlement. The Company incurred legal costs of $258,000 and $167,000 in
third quarter of 1996 and third quarter of 1995, respectively, for the
legal defense of related litigation.
(c) NET INCOME (LOSS)
The Company had a net loss of ($893,000) in third quarter of 1996 compared
to a net income of $198,000 in third quarter of 1995. The net loss for the
current period is primarily due to expenses associated with the litigation
and settlement of legal matters discussed in operating expenses, life
benefits and Note five of the Consolidated Notes to the Financial
Statements.
FINANCIAL CONDITION
(a) ASSETS
At September 30, 1996 cash and invested assets represented approximately
73% of consolidated assets. Cash and cash equivalents increased 21% when
comparing September 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 September 30, 1996 and December 31, 1995, fixed maturities
represented 75% and 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 September 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
$18,665,000 and $21,415,000 at September 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 September 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 8% in third 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 $661,000 in mortgage
loans, net of a $10,000 reserve allowance, which are in default or in the
process of foreclosure, this represents approximately 5% of the total
portfolio.
Investment real estate and real estate acquired in satisfaction of debt
decreased 12% in third 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 third 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 6% in third 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 4% in third 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 increased slightly in third quarter of 1996 compared to
December 31, 1995. Future policy benefits increased 2% in third quarter of
1996 and represented 80% of total liabilities at September 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 slightly in third 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 8% in third 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 6% in the aggregate in third 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 third 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 decreased 3% in third quarter of 1996 compared
to December 31, 1995. The decrease in shareholders' equity is primarily
due to the net loss of ($579,000) through third quarter of 1996. The
Company experienced $88,000 in unrealized depreciation of investments held
for sale through third 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(1) 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.
(1) 4(b) Credit agreement dated May 8, 1996, between First
of America Bank - Illinois, N.A. and First
Commonwealth Corporation.
(1) The Company hereby incorporates by reference the exhibits
as reflected in the Index to Exhibits of the Company's
Form 10-Q for the quarter ended June 30, 1996.
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.
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: NOVEMBER 6, 1996 By /s/ Thomas F. Morrow
Thomas F. Morrow, Chief
Operating Officer, President,
Treasurer and Director
Date: NOVEMBER 6, 1996 By /s/ James E. Melville
James E. Melville, Chief
Financial Officer and Senior
Executive Vice President