SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File Number
0-16867
UNITED TRUST, INC.
(Exact name of registrant as specified in its charter)
5250 SOUTH SIXTH STREET
P.O. BOX 5147
SPRINGFIELD, IL 62705
(Address of principal executive offices, including zip code)
ILLINOIS 37-1172848
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (217) 241-6300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock
Registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12
months, and has been subject to such filing requirements for the past
90 days.
At March 1, 1997, the Registrant had outstanding 18,700,935 shares of
Common Stock, stated value $.02 per share.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's proxy
statement for the annual meeting of shareholders to be held during 1997
are incorporated by reference into Part III of this Report.
1 OF 69
PART 1
ITEM 1. BUSINESS
United Trust, Inc. (the "Registrant") was incorporated in 1984, under
the laws of the State of Illinois to serve as an insurance holding
company. At December 31, 1996, significant majority-owned
subsidiaries and affiliates of the Registrant were as depicted on the
following organizational chart:
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI
owns 53% of United Trust Group ("UTG") and 30% of United Income, Inc.
("UII"). UII owns 47% of UTG. UTG owns 72% of First Commonwealth
Corporation ("FCC"). FCC owns 100% of Universal Guaranty Life Insurance
Company ("UG"). UG owns 100% of United Security Assurance Company ("USA").
USA owns 84% of Appalachian Life Insurance Company ("APPL") and APPL owns
100% of Abraham Lincoln Insurance Company ("ABE").
2
ITEM 1. BUSINESS
The Registrant and its subsidiaries (the "Company") operate
principally in the individual life insurance business. The primary
business of the Company has been the servicing of existing insurance
business in force, the solicitation of new insurance business, and the
acquisition of other companies in similar lines of business.
United Trust, Inc., ("UTI") was incorporated December 14, 1984, as an
Illinois corporation. During the next two and a half years, UTI was
engaged in an intrastate public offering of its securities, raising
over $12,000,000 net of offering costs. In 1986, UTI formed a life
insurance subsidiary and by 1987 began selling life insurance
products.
United Income, Inc. ("UII"), an affiliated company, was incorporated
on November 2, 1987, as an Ohio corporation. Between March 1988 and
August 1990, UII raised a total of approximately $15,000,000 in an
intrastate public offering in Ohio. During 1990, UII formed a life
insurance subsidiary and began selling life insurance products.
UTI currently owns 30% of the outstanding common stock of UII and
accounts for its investment in UII using the equity method.
On February 20, 1992, UTI and UII, formed a joint venture, United
Trust Group, Inc., ("UTG"). On June 16, 1992, UTI contributed $2.7
million in cash, an $840,000 promissory note and 100% of the common
stock of its wholly owned life insurance subsidiary. UII contributed
$7.6 million in cash and 100% of its life insurance subsidiary to UTG.
After the contributions of cash, subsidiaries, and the note, UII owns
47% and UTI owns 53% of UTG.
On June 16, 1992, UTG acquired 67% of the outstanding common stock of
the now dissolved Commonwealth Industries Corporation, ("CIC") for a
purchase price of $15,567,000. Following the acquisition UTI
controlled eleven life insurance subsidiaries. The Company has taken
several steps to streamline and simplify the corporate structure
following the acquisitions.
On December 28, 1992, Universal Guaranty Life Insurance Company ("UG")
was the surviving company of a merger with Roosevelt National Life
Insurance Company ("RNLIC"), United Trust Assurance Company ("UTAC"),
Cimarron Life Insurance Company ("CIM") and Home Security Life
Insurance Company ("HSLIC"). On June 30, 1993, Alliance Life
Insurance Company ("ALLI"), a subsidiary of UG, was merged into UG.
On March 30, 1994, Farmers and Ranchers Life Insurance Company ("F&R")
was sold to an unrelated third party. F&R was a small life insurance
company which did not significantly contribute to the operations of
the group. F&R primarily represented a marketing opportunity. The
Company determined it would not be able to allocate the time and
resources necessary to properly develop the opportunity, due to
continued focus and emphasis on certain other agency forces of the
Company.
On July 31, 1994, Investors Trust Assurance Company ("ITAC") was
merged into Abraham Lincoln Insurance Company ("ALIC").
On August 15, 1995, the shareholders of CIC, Investors Trust, Inc.,
("ITI"), and Universal Guaranty Investment Company, ("UGIC"), all
intermediate holding companies within the UTI group, voted to
voluntarily liquidate each of the companies and distribute the assets
to the shareholders (consisting solely of common stock of their
respective subsidiary). As a result, the shareholders of the
liquidated companies became shareholders of FCC. Following the
liquidations, UTG owns 72% of the outstanding common stock of FCC.
3
PRODUCTS
The Company's portfolio consists of two universal life insurance
products. The primary universal life insurance product is referred to
as the "Century 2000". This product was introduced to the marketing
force in 1993 and has become the cornerstone of current marketing.
This product has a minimum face amount of $25,000 and currently
credits 6% interest with a guaranteed rate of 4.5% in the first 20
years and 3% in years 21 and greater. The policy values are subject
to a $4.50 monthly policy fee, an administrative load and a premium
load of 6.5% in all years. The administrative load and surrender
charge are based on the issue age, sex and rating class of the policy.
A surrender charge is effective for the first 14 policy years. In
general, the surrender charge is very high in the first couple of
years and then declines to zero at the end of 14 years. Policy loans
are available at 7% interest in advance. The policy's accumulated
fund will be credited the guaranteed interest rate in relation to the
amount of the policy loan.
The second universal life product referred to as the "UL90A", has a
minimum face amount of $25,000. The administrative load is based on
the issue age, sex and rating class of the policy. Policy fees vary
from $1 per month in the first year to $4 per month in the second and
third years and $3 per month each year thereafter. The UL90A
currently credits 5.5% interest with a 4.5% guaranteed interest rate.
Partial withdrawals, subject to a remaining minimum $500 cash
surrender value and a $25 fee, are allowed once a year after the first
duration. Policy loans are available at 7% interest in advance. The
policy's accumulated fund will be credited the guaranteed interest
rate in relation to the amount of the policy loan. Surrender charges
are based on a percentage of target premium starting at 120% for years
1-5 then grading downward to zero in year 15. This policy contains a
guaranteed interest credit bonus for the long term policyholder. From
years 10 through 20, additional interest bonuses are earned with a
total in the twentieth year of 1.375%. The bonus is calculated from
the policy issue date and is contractually guaranteed.
The Company markets other products, none of which is significant to
operations. The Company has a variety of policies in force different
from those which are currently being marketed. Approximately 30% of
the insurance in force is participating business. The Company's
average persistency rate for its policies in force for 1996 and 1995
has been 87.9% and 87.5%, respectively. The Company does not
anticipate any material fluctuations in these rates in the future that
may result from competition.
The Company's actual experience for earned interest, persistency and
mortality vary from the assumptions applied to pricing and for
determining premiums. Accordingly, differences between the Company's
actual experience and those assumptions applied may impact the
profitability of the Company. The minimum interest spread between
earned and credited rates is 1% on the "Century 2000" universal life
insurance product. The Company monitors investment yields, and when
necessary adjusts credited interest rates on its insurance products to
preserve targeted interest spreads. Credited rates are reviewed and
established by the Board of Directors of the respective life insurance
subsidiaries.
The premium rates are competitive with other insurers doing business
in the states in which the Company is marketing its products.
MARKETING
The Company markets its products through separate and distinct agency
forces. The Company has approximately 60 captive agents and 15
independent agents who actively write new business. No individual
sales agent accounted for over 10% of the Company's premium volume in
1996. The Company's sales agents do not have the power to bind the
Company.
The change in marketing strategy from traditional life insurance
products to universal life insurance products had a significant impact
on new business production. As a result of the change in marketing
strategy the agency force went through a restructuring and retraining
process. Marketing is based on a referral network of community
leaders and shareholders of UII and UTI. Recruiting of agents is also
based on the same referral network.
4
New sales are marketed by UG and USA through their agency forces using
contemporary sales approaches with personal computer illustrations.
Current marketing efforts are primarily focused on the Midwest region.
Recruiting of agents is based on obtaining people with little or no
experience in the life insurance business. These recruits go through
an extensive internal training program.
USA is licensed in Illinois, Indiana and Ohio. During 1996, Ohio
accounted for 99% of USA's direct premiums collected.
ALIC is licensed in Alabama, Arizona, Illinois, Indiana, Louisiana and
Missouri. During 1996, Illinois and Indiana accounted for 44% and
36%, respectively of ALIC's direct premiums collected.
APPL is licensed in Alabama, Arizona, Arkansas, Colorado, Georgia,
Illinois, Indiana, Kansas, Kentucky, Louisiana, Missouri, Montana,
Nebraska, Ohio, Oklahoma, Pennsylvania, Tennessee, Utah, Virginia,
West Virginia and Wyoming. During 1996, West Virginia accounted for
95% of APPL's direct premiums collected.
UG is licensed in Alabama, Arizona, Arkansas, Colorado, Delaware,
Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, Missouri,
Montana, Nebraska, Nevada, New Mexico, North Carolina, North Dakota,
Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina,
South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West
Virginia and Wisconsin. During 1996, Illinois and Ohio accounted for
33% and 15%, respectively, of UG's direct premiums collected. No
other states account for more than 7% of UG's direct premiums
collected.
UNDERWRITING
The underwriting procedures of the Company's insurance subsidiaries
are established by management. Insurance policies are issued by the
Company based upon underwriting practices established for each market
in which the Company operates. Most policies are individually
underwritten. Applications for insurance are reviewed to determine
additional information required to make an underwriting decision,
which depends on the amount of insurance applied for and the
applicant's age and medical history. Additional information may
include inspection reports, medical examinations, statements from
doctors who have treated the applicant in the past and, where
indicated, special medical tests. After reviewing the information
collected, the Company either issues the policy as applied for or with
an extra premium charge because of unfavorable factors or rejects the
application. Substandard risks may be referred to reinsurers for full
or partial reinsurance of the substandard risk.
The Company's insurance subsidiaries require blood samples to be drawn
with individual insurance applications for coverage over $45,000 (age
46 and above) or $95,000 (ages 16-45). Blood samples are tested for a
wide range of chemical values and are screened for antibodies to the
HIV virus. Applications also contain questions permitted by law
regarding the HIV virus which must be answered by the proposed
insureds.
RESERVES
The applicable insurance laws under which the Company's insurance
subsidiaries operate require that each insurance company report policy
reserves as liabilities to meet future obligations on the policies in
force. These reserves are the amounts which, with the additional
premiums to be received and interest thereon compounded annually at
certain assumed rates, are calculated in accordance with applicable
law to be sufficient to meet the various policy and contract
obligations as they mature. These laws specify that the reserves
shall not be less than reserves calculated using certain mortality
tables and interest rates.
The liabilities for traditional life insurance and accident and health
insurance policy benefits are computed using a net level method.
These liabilities include assumptions as to investment yields,
mortality, withdrawals, and other assumptions based on the life
insurance subsidiaries' experience adjusted to reflect anticipated
trends and to include provisions for possible unfavorable deviations.
The Company makes these assumptions at the time the contract is
5
issued or, in the case of contracts acquired by purchase, at the purchase
date. Benefit reserves for traditional life insurance policies
include certain deferred profits on limited-payment policies that are
being recognized in income over the policy term. Policy benefit
claims are charged to expense in the period that the claims are
incurred. Current mortality rate assumptions are based on 1975-80
select and ultimate tables. Withdrawal rate assumptions are based
upon Linton B or Linton C.
Benefit reserves for universal life insurance and interest sensitive
life insurance products are computed under a retrospective deposit
method and represent policy account balances before applicable
surrender charges. Policy benefits and claims that are charged to
expense include benefit claims in excess of related policy account
balances. Interest crediting rates for universal life and interest
sensitive products range from 5.0% to 6.0% in each of the years 1996,
1995 and 1994.
REINSURANCE
As is customary in the insurance industry, the Company's insurance
subsidiaries cede insurance to other insurance companies under
reinsurance agreements. Reinsurance agreements are intended to limit
a life insurer's maximum loss on a large or unusually hazardous risk
or to obtain a greater diversification of risk. The ceding insurance
company remains contingently liable with respect to ceded insurance
should any reinsurer be unable to meet the obligations assumed by it,
however it is the practice of insurers to reduce their financial
statement liabilities to the extent that they have been reinsured with
other insurance companies. The Company sets a limit on the amount of
insurance retained on the life of any one person. The Company will
not retain more than $125,000, including accidental death benefits, on
any one life. At December 31, 1996, the Company had insurance in
force of $3.953 billion of which approximately $1.109 billion was
ceded to reinsurers.
The Company's reinsured business is ceded to numerous reinsurers. The
Company believes the assuming companies are able to honor all
contractual commitments, based on the Company's periodic reviews of
their financial statements, insurance industry reports and reports
filed with state insurance departments.
The Company's insurance subsidiary ("UG") entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as
of September 30, 1996. Under the terms of the agreement, UG ceded to
FILIC substantially all of its paid-up life insurance policies. Paid-
up life insurance generally refers to non-premium paying life
insurance policies. A.M. Best, an industry rating company, assigned a
Best's Rating of A++ (Superior) to The Guardian Life Insurance Company
of America ("Guardian"), parent of FILIC, based on the consolidated
financial condition and operating performance of the company and its
life/health subsidiaries. The agreement with FILIC accounts for
approximately 66% of the reinsurance receivables as of December 31,
1996.
As a result of the FILIC coinsurance agreement, effective September
30, 1996, UG received a reinsurance credit in the amount of
$28,318,000 in exchange for an equal amount of assets. UG also
received $6,375,000 as a commission allowance.
Currently, the Company is utilizing reinsurance agreements with
Business Men's Assurance Company, ("BMA") and Life Reassurance
Corporation, ("LIFE RE") for new business. BMA and LIFE RE each hold
an "A+" (Superior) rating from A.M. Best, an industry rating company.
The reinsurance agreements were effective December 1, 1993, and cover
all new business of the Company. The agreements are a yearly
renewable term ("YRT") treaty where the Company cedes amounts above
its retention limit of $100,000 with a minimum cession of $25,000.
In selecting a reinsurance company, the Company examines many factors
including:
1) Whether the reinsurer is licensed in the states in which
reinsurance coverage is being sought;
2) the solvency and stability of the company. One source utilized
is the rating given the reinsurer by the A.M. Best Company, an
insurance industry rating company. Another source is the
statutory annual statement of the reinsurer;
6
3) the history and reputation of the Company;
4) competitive pricing of reinsurance coverage. The Company
generally seeks quotes from several reinsurers when considering a
new treaty.
The Company does not have any short-duration reinsurance contracts.
The effect of the Company's long-duration reinsurance contracts on
premiums earned in 1996, 1995 and 1994 was as follows:
Shown in thousands
1996 1995 1994
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 32,387 $ 35,201 $ 38,063
Assumed 0 0 0
Ceded (4,768) (5,203) (5,659)
Net
premiums $ 27,619 $ 29,998 $ 32,404
INVESTMENTS
The Company retains the services of a registered investment advisor to
assist the Company in managing its investment portfolio. The Company
may modify its present investment strategy at any time, provided its
strategy continues to be in compliance with the limitations of state
insurance department regulations.
Investment income represents a significant portion of the Company's
total income. Investments are subject to applicable state insurance
laws and regulations which limit the concentration of investments in
any one category or class and further limit the investment in any one
issuer. Generally, these limitations are imposed as a percentage of
statutory assets or percentage of statutory capital and surplus of
each company.
The following table reflects net investment income by type of
investment.
December 31,
1996 1995 1994
Fixed maturities and
fixed maturities
held for sale $ 13,326,312 $ 13,190,121 $ 12,185,941
Equity securities 88,661 52,445 3,999
Mortgage loans 1,047,461 1,257,189 1,423,474
Real estate 794,844 975,080 990,857
Policy loans 1,121,538 1,041,900 1,014,723
Short-term investments 515,346 505,637 444,135
Other 197,188 158,290 221,125
Total consolidated
investment income 17,091,350 17,180,662 16,284,254
Investment expenses (1,222,903) (1,724,438) (1,915,808)
Consolidated net
investment income $ 15,868,447 $ 15,456,224 $ 14,368,446
7
At December 31, 1996, the Company had a total of $6,025,000 of
investments, which did not produce income during 1996. These
investments are comprised of $5,325,000 in real estate including its
home office property and $700,000 in equity securities, which did not
produce income during 1996.
The following table summarizes the Company's fixed maturities
distribution at December 31, 1996 and 1995 by ratings category as
issued by Standard and Poor's, a leading ratings analyst.
Fixed Maturities
Rating % of Portfolio
1996 1995
Investment Grade
AAA 30% 27%
AA 13% 14%
A 46% 48%
BBB 10% 11%
Below investment
grade 1% 0%
100% 100%
The following table summarizes the Company's fixed maturities and
fixed maturities held for sale by major classification.
Carrying Value
1996 1995
U.S. government and $ 29,998,240 $ 29,492,006
government agencies
States, municipalities and 14,561,203 7,608,494
political subdivisions
Collateralized mortgage 13,246,780 15,428,596
obligations
Public utilities 51,941,647 59,254,524
Corporate 72,140,081 82,516,775
$ 181,887,951 $ 194,300,395
The following table shows the composition and average maturity of the
Company's investment portfolio at December 31, 1996.
Carrying Average Average
INVESTMENTS Value Maturity Yield
Fixed maturities and fixed
maturities held for sale $181,887,951 6 years 7.08%
Equity securities 1,794,405 not applicable 4.74%
Mortgage loans 11,022,792 11 years 8.41%
Investment real estate 14,390,436 not applicable 5.01%
Policy loans 14,438,120 not applicable 6.55%
Short-term investments 430,983 159 days 4.15%
Total Investments $223,964,687 7.21%
At December 31, 1996, fixed maturities and fixed maturities held for
sale have a market value of $183,776,000. Fixed maturities are
carried at amortized cost. Management has the ability and intent to
hold these securities until maturity. Fixed maturities held for sale
are carried at market.
8
The Company holds approximately $431,000 in short-term investments.
Management monitors its investment maturities and in their opinion is
sufficient to meet the Company's cash requirements. The following is
a summary of other investments maturing in one to five years. Fixed
maturities and mortgage loans of $13,362,000 and $1,039,000
respectively, maturing in one year and $75,691,000 and $885,000,
respectively, maturing in two to five years.
The Company holds approximately $11,023,000 in mortgage loans which
represents 3% of the total assets. All mortgage loans are first
position loans. Before a new loan is issued, the applicant is subject
to certain criteria set forth by Company management to ensure quality
control. These criteria include, but are not limited to, a credit
report, personal financial information such as outstanding debt,
sources of income, and personal equity. Loans issued are limited to
no more than 80% of the appraised value of the property and must be
first position against the collateral.
The Company has $603,000 of mortgage loans, net of a $10,000 reserve
allowance, which are in default or in the process of foreclosure.
These loans represent approximately 5% of the total portfolio. The
Company has one loan of $63,900 which is under a repayment plan.
Letters are sent to each mortgagee when the loan becomes 30 days or
more delinquent. Loans 90 days or more delinquent are placed on a
non-performing status and classified as delinquent loans. Reserves
for loan losses are established based on management's analysis of the
loan balances compared to the expected realizable value should foreclosure
take place. Loans are placed on a non-accrual status based on a
quarterly analysis of the likelihood of repayment. All delinquent and
troubled loans held by the Company are loans which were held in portfolios
by acquired companies at the time of acquisition. Management believes
the current internal controls surrounding, the mortgage loan selection
process provide a quality portfolio with minimal risk of foreclosure
and/or negative financial impact.
The Company has in place a monitoring system to provide management
with information regarding potential troubled loans. Management is
provided with a monthly listing of loans that are 30 days or more past
due along with a brief description of what steps are being taken to
resolve the delinquency. Quarterly, coinciding with external
financial reporting, the Company determines how each delinquent loan
should be classified. All loans 90 days or more past due are
classified as delinquent. Each delinquent loan is reviewed to
determine the classification and status the loan should be given.
Interest accruals are analyzed based on the likelihood of repayment.
In no event will interest continue to accrue when accrued interest
along with the outstanding principal exceeds the net realizable value
of the property. The Company does not utilize a specified number of
days delinquent to cause an automatic non-accrual status.
The mortgage loan reserve is established and adjusted based on
management's quarterly analysis of the portfolio and any deterioration
in value of the underlying property which would reduce the net
realizable value of the property below its current carrying value.
In addition, the Company also monitors that current and adequate
insurance on the properties are being maintained. The Company
requires proof of insurance on each loan and further requires to be
shown as a lienholder on the policy so that any change in coverage
status is reported to the Company. Proof of payment of real estate
taxes is another monitoring technique utilized by the Company.
Management believes a change in insurance status or non-payment of
real estate taxes are indicators that a loan is potentially troubled.
Correspondence with the mortgagee is performed to determine the
reasons for either of these events occurring.
The following table shows a distribution of mortgage loans by type.
Mortgage Amount % of
Loans Total
FHA/VA $ 676,176 6%
Commercial 1,878,158 17%
Residential 8,468,458 77%
9
The following table shows a geographic distribution of the mortgage
loan portfolio and real estate held.
Mortgage Real
Loans Estate
Colorado 2% 0%
Illinois 12% 60%
Kansas 12% 0%
Louisiana 14% 12%
Mississippi 0% 16%
Missouri 2% 1%
North Carolina 6% 5%
Oklahoma 7% 1%
Virginia 4% 0%
West Virginia 37% 3%
Other 4% 2%
Total 100% 100%
The following table summarizes delinquent mortgage loan holdings.
Delinquent
31 Days or More 1996 1995 1994
Non-accrual status $ 0 $ 0 $ 0
Other 613,000 628,000 911,000
Reserve on delinquent
loans (10,000) (10,000) (26,000)
Total Delinquent $ 603,000 $ 618,000 $ 885,000
Interest income
forgone (Delinquent
loans) $ 29,000 $ 16,000 $ 4,000
In Process of
Restructuring $ 0 $ 0 $ 0
Restructuring on
other than market
terms 0 0 0
Other potential
problem loans 0 0 0
Total Problem Loans $ 0 $ 0 $ 0
Interest income
foregone (Resturctured
loans) $ 0 $ 0 $ 0
See Item 2, Properties, for description of real estate holdings.
10
COMPETITION
The insurance business is a highly competitive industry and there are
a number of other companies, both stock and mutual, doing business in
areas where the Company operates. Many of these competing insurers
are larger, have more diversified lines of insurance coverage, have
substantially greater financial resources and have a greater number of
agents. Other significant competitive factors include policyholder
benefits, service to policyholders, and premium rates.
The insurance industry is a mature industry. In recent years, the
industry has experienced virtually no growth in life insurance sales,
though the aging population has increased the demand for retirement
savings products. The products offered (see Products) are similar to
those offered by other major companies. The product features are
regulated by the states and are subject to extensive competition among
major insurance organizations. The Company believes a strong service
commitment to policyholders, efficiency and flexibility of operations,
timely service to the agency force and the expertise of its key
executives help minimize the competitive pressures of the insurance
industry.
GOVERNMENT REGULATION
The Company's insurance subsidiaries are subject to government
regulation in each of the states in which they conduct business. Such
regulation is vested in state agencies having broad administrative
power dealing with all aspects of the insurance business, including
the power to: (i) grant and revoke licenses to transact business;
(ii) regulate and supervise trade practices and market conduct; (iii)
establish guaranty associations; (iv) license agents; (v) approve
policy forms; (vi) approve premium rates for some lines of business;
(vii) establish reserve requirements; (viii) prescribe the form and
content of required financial statements and reports; (ix) determine
the reasonableness and adequacy of statutory capital and surplus; and
(x) regulate the type and amount of permitted investments. Insurance
regulation is concerned primarily with the protection of
policyholders. The Company cannot predict the form of any future
proposals or regulation. The Company's insurance subsidiaries, USA,
UG, APPL and ALIC are domiciled in the states of Ohio, Ohio, West
Virginia and Illinois, respectively.
Most states also have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled
by other corporations licensed to transact business within their
respective jurisdictions. The insurance subsidiaries are subject to
such legislation and are registered as controlled insurers in those
jurisdictions in which such registration is required. Statutes vary
from state to state but typically require periodic disclosure
concerning the corporation that controls the registered insurers and
all subsidiaries of such corporation. In addition, prior notice to,
or approval by, the state insurance commission of material
intercorporate transfers of assets, reinsurance agreements, management
agreements (see Note 9 to Notes to Financial Statements), and payment
of dividends (see Note 2 to Notes to Financial Statements) in excess
of specified amounts by the insurance subsidiary within the holding
company system are required.
The National Association of Insurance Commissioners ("NAIC") is an
association whose membership consists of the insurance commissioners
or their designees of the various states. The NAIC has no direct
regulatory authority over insurance companies, however its primary
purpose is to provide a more consistent method of regulation and
reporting from state to state. This is accomplished through the
issuance of model regulations, which can be adopted by individual
states unmodified, modified to meet the state's own needs or
requirements, or dismissed entirely.
Each year the NAIC calculates financial ratio results (commonly
referred to as IRIS ratios) for each company. These ratios compare
various financial information pertaining to the statutory balance
sheet and income statement. The results are then compared to pre-
established normal ranges determined by the NAIC. Results outside the
range typically require explanation to the domiciliary insurance
department.
11
At year end 1996, UG had two ratios outside the normal range. The
first ratio compared commission allowances with statutory capital and
surplus. The ratio was outside the norm due to the coinsurance
agreement with First International Life Insurance Company ("FILIC").
Additional information about the coinsurance agreement with FILIC can
be found in the section titled Reinsurance or in Note 7 of the Notes
to the Consolidated Financial Statements. Management does not believe
that this ratio will be outside the normal range in future periods.
The second ratio is related to the decrease in premium income. The
ratio fell outside the normal range the last two years. The decrease
in premium income is directly attributable to the change in
distribution systems and marketing strategy. The Company changed its
focus from primarily a broker agency distribution system to a captive
agent system and changed its marketing strategy from traditional whole
life insurance products to universal life insurance products.
Management is taking a long-term approach to its recent changes to the
marketing and distribution systems and believes these changes will
provide long-term benefits to the Company.
The NAIC has adopted Risk Based Capital ("RBC") rules to evaluate the
adequacy of statutory capital and surplus in relation to a company's
investment and insurance risks. The RBC formula reflects the level of
risk of invested assets and the types of insurance products. The
formula classifies company risks into four categories:
1) Asset risk - the risk of loss of principal due to default
through creditor bankruptcy or decline in market value for
assets reported at market.
2) Pricing inadequacy - the risk of adverse mortality,
morbidity, and expense experience in relation to pricing
assumptions.
3) Asset and liability mismatch - the risk of having to
reinvest funds when market yields fall below levels
guaranteed to contract holders, and the risk of having to
sell assets when market yields are above the levels at which
the assets were purchased.
4) General risk - the risk of fraud, mismanagement, and other
business risks.
The RBC formula is used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately
capitalized. In addition, the formula defines new minimum capital
standards that will supplement the current system of low fixed minimum
capital and surplus requirements on a state-by-state basis.
Regulatory compliance is determined by a ratio of the insurance
company's regulatory total adjusted capital, as defined by the NAIC,
to its authorized control level RBC, as defined by the NAIC.
Insurance companies below specific trigger points or ratios are
classified within certain levels, each of which requires specific
corrective action. The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2.0*
Regulatory action level 1.5
Authorized control level 1.0
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1996, each of the Company's insurance subsidiaries has
a Ratio that is in excess of 300% of the authorized control level;
accordingly the Company's subsidiaries meet the RBC requirements.
12
The NAIC has recently released the Life Illustration Model Regulation.
This regulation requires products which contain non-guaranteed
elements, such as universal life and interest sensitive life, to
comply with certain actuarially established tests. These tests are
intended to target future performance and profitability of a product
under various scenarios. The regulation does not prevent a company
from selling a product which does not meet the various tests. The
only implication is the way in which the product is marketed to the
consumer. A product which does not pass the tests uses guaranteed
assumptions rather than current assumptions in presenting future
product performance to the consumer.
As states in which the Company does business adopt the regulation or
adopt a modified version of the regulation, the Company will be
required to comply with this new regulation. The Company may need to
modify existing products or sales methods.
The NAIC has proposed a new Model Investment Law that may affect the
statutory carrying values of certain investments; however, the final
outcome of that proposal is not certain, nor is it possible to predict
what impact the proposal will have or whether the proposal will be
adopted in the foreseeable future.
EMPLOYEES
There are approximately 100 persons who are employed by the Company
and its affiliates.
ITEM 2. PROPERTIES
The following table shows the distribution of real estate by type.
Real Estate Amount % of Total
Home Office $ 2,885,908 20%
Commercial $ 2,397,475 17%
Residential development $ 5,260,107 36%
Foreclosed real estate $ 3,846,946 27%
Real estate holdings represent approximately 4% of the total assets of
the Company net of accumulated depreciation of $1,341,000 and
$1,050,000 at year end 1996 and 1995 respectively. The Company owns
an office complex in Springfield, Illinois, which houses the primary
insurance operations. The office buildings contain 57,000 square feet
of office and warehouse space. The properties are carried at
approximately $2,688,000. In addition, an insurance subsidiary owns a
home office building in Huntington, West Virginia. The building has
15,000 square feet and is carried at $198,000. The facilities
occupied by the Company are adequate relative to the Company's present
operations.
Commercial property consists primarily of former home office buildings
of acquired companies no longer used in the operations of the Company.
These properties are leased to various unaffiliated companies and
organizations. Residential development property is primarily located
in Springfield, Illinois, and entails several developments, each
targeted for a different segment of the population. These targets
include a development primarily for the first time home buyer, an
upscale development for existing homeowners looking for a larger home,
and duplex condominiums for those who desire maintenance free
exteriors and surroundings. The Company's primary focus is on the
development and sale of lots, with an occasional home construction to
help stimulate interest.
Springfield is the State Capital of Illinois. The City's economy is
service oriented with the main employers being the State of Illinois,
two major area hospitals and two large insurance companies. This
provides for a very stable economy not as dramatically affected by
economic conditions in other parts of the United States.
13
Foreclosed property is carried at the unpaid loan principal balance
plus accrued interest on the loan and other costs associated with the
foreclosure process. The carrying value of foreclosed property does
not exceed management's estimate of net realizable value.
Management's estimate of net realizable value is based on significant
internal real estate experience, local market experience, independent
appraisals and evaluation of existing comparable property sales.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are named as defendants in a number
of legal actions arising primarily from claims made under insurance
policies. Those actions have been considered in establishing the
Company's liabilities. Management and its legal counsel are of the
opinion that the settlement of those actions will not have a material
adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS
None
14
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDERS MATTERS
On June 18, 1990, UTI became a member of NASDAQ. Quotations began on
that date under the symbol UTIN. The following table shows the high
and low bid quotations for each quarterly period during the past two
years, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
BID
PERIOD LOW HIGH
1996
First quarter 3/8 9/16
Second quarter 3/8 11/16
Third quarter 1/2 11/16
Fourth quarter 3/8 3/4
1995
First quarter 1/2 5/8
Second quarter 1/2 1
Third quarter 1/2 5/8
Fourth quarter 3/8 9/16
CURRENT MARKET MAKERS ARE:
M. H. Meyerson and Company Carr Securities Corporation
30 Montgomery Street 17 Battery Place
Jersey City, NJ 07303 New York, NY 10004
Herzog, Heine, Geduld, Inc. Howe, Barnes Investments, Inc.
26 Broadway, 1st Floor 135 South LaSalle, Suite 1500
New York, NY 10004 Chicago, IL 60603
As of December 31, 1996, no cash dividends had been declared on the
common stock of UTI.
See Note 2 in the accompanying consolidated financial statements for
information regarding dividend restrictions.
Number of Common Shareholders as of March 3, 1997 is 5,689.
15
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
1996 1995 1994 1993 1992
Premium income
net of reinsurance $ 27,619 $ 29,998 $ 32,404 $ 31,160 $ 19,076
Total revenues $ 46,976 $ 49,869 $ 49,207 $ 48,541 $ 36,826
Net income (loss)* $ (938)$ (3,001)$ (1,624)$ (862)$ 5,661
Net income (loss)
per share $ (0.05)$ (0.16)$ (0.09)$ (0.05)$ 0.30
Total assets $355,474 $356,305 $360,258 $375,755 $370,259
Total long term debt $ 19,574 $ 21,447 $ 22,053 $ 24,359 $ 27,494
Dividends paid per
share NONE NONE NONE NONE NONE
* Includes equity earnings of investees.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company and its consolidated subsidiaries have three principal
needs for cash - the insurance companies' 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 5% and 4% as of December 31, 1996, and 1995, respectively.
Fixed maturities as a percentage of total invested assets were 80% and
78% as of December 31, 1996 and 1995, respectively.
Future policy benefits are primarily long-term in nature and
therefore, the Company's investments are predominantly in long term
fixed maturity investments such as bonds and mortgage loans which
provide a sufficient return to cover these obligations. Most of the
insurance company assets, other than policy loans, are invested in
fixed maturities and other investments, substantially all of which are
readily marketable. Although there is no present need or intent to
dispose of such investments, the life companies could liquidate
portions of their investments if such a need arose. The Company has
the ability and intent to hold these investments to maturity;
consequently, the Company's investment in long term fixed maturities
are reported in the financial statements at their amortized cost.
Many of the Company's products contain surrender charges and other
features which reward persistency and penalize the early withdrawal of
funds. With respect to such products, surrender charges are generally
sufficient to cover the Company's unamortized deferred policy
acquisition costs with respect to the policy being surrendered.
Consolidated operating activities of the Company produced cash flows
of $2,785,000, $453,000 and $2,145,000 in 1996, 1995 and 1994,
respectively. The net cash provided by operating activities plus
net policyholder contract deposits after the payment of policyholder
withdrawals, equalled $9,596,000 in 1996, $9,466,000 in 1995, and
$10,361,000 in 1994. Management utilizes this measurement of cash flows
as an indicator of 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 $16,163,000,
($8,030,000) and ($28,595,000), for 1996, 1995 and 1994, respectively.
The most significant aspect of cash provided by (used in) investing
activities is the fixed maturity transactions. Fixed maturities
account for 82%, 76% and 79% of the total cost of investments acquired
in 1996, 1995 and 1994, respectively. The net cash provided by
investing activities in 1996, is due to the fixed maturities sold in
conjunction with the coinsurance agreement with FILIC. The Company
has not directed its investable funds to so-called "junk bonds" or
derivative investments.
Net cash provided by (used in) financing activities was ($14,150,000),
$8,408,000 and $5,844,000 for 1996, 1995 and 1994, respectively. The
change between 1996 and 1995 is due to a coinsurance agreement with
First International Life Insurance Company as of September 30, 1996.
At closing of the transaction, UG received a reinsurance credit of
$28,318,000 for policy liabilities covered under the agreement. UG
transferred assets equal to the credit received. This transfer
included policy loans of $2,855,000 associated with policies under the
agreement and a net cash transfer of $19,088,000 after deducting the
ceding commission due UG of $6,375,000.
Policyholder contract deposits decreased 11% in 1996 compared to 1995,
and increased 8% in 1995 when compared to 1994. Policyholder contract
withdrawals has decreased 4% in 1996 compared to 1995, and increased
7% in 1995 compared to 1994. The changes in policyholder contract
withdrawals is not attributable to any one significant event. Factors
that impact policyholder contract withdrawals are 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.
17
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinancing was completed through First of America Bank - NA and is
subject to a credit agreement. The refinanced debt bears interest to
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 March 1, 1997.
Interest is paid quarterly and 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 8, 1997 principal payment.
On a parent only basis, UTI's cash flow is dependent on revenues from
a management agreement with UII and its earnings received on invested
assets and cash balances. At December 31, 1996, substantially all of
the consolidated shareholders equity represents net assets of its
subsidiaries. UTI does not have significant day to day operations of
its own. Cash requirements of UTI primarily relate to the payment of
expenses related to maintaining the Company as a corporation in good
standing with the various regulatory bodies which govern corporations
in the jurisdictions where the Company does business. The payment of
cash dividends to shareholders is not legally restricted. However,
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, 1996, UG had a statutory
gain from operations of $8,006,000. At December 31, 1996, UG's
statutory capital and surplus amounted to $10,227,000. Extraordinary
dividends (amounts in excess of ordinary dividend limitations) require
prior approval of the insurance commissioner and are not restricted to
a specific calculation.
A life insurance company's statutory capital is computed according to
rules prescribed by the National Association of Insurance
Commissioners ("NAIC"), as modified by the insurance company's state
of domicile. Statutory accounting rules are different from generally
accepted accounting principles and are intended to reflect a more
conservative view by, for example, requiring immediate expensing of
policy acquisition costs. The achievement of long-term growth will
require growth in the statutory capital of the Company's insurance
subsidiaries. The subsidiaries may secure additional statutory
capital through various sources, such as internally generated
statutory earnings or equity contributions by the Company from funds
generated through debt or equity offerings.
The NAIC's risk-based capital requirements require insurance companies
to calculate and report information under a risk-based capital
formula. These requirements are intended to allow insurance
regulators to identify inadequately capitalized insurance companies
based upon the types and mixtures of risks inherent in the insurer's
operations. The formula includes components for asset risk, liability
risk, interest rate exposure, and other factors. Based upon their
December 31, 1996, statutory financial reports, the Company's
insurance subsidiaries are adequately capitalized under the formula.
The Company is not aware of any litigation that will have a material
adverse effect on the financial position of the Company. The Company
does not believe that the regulatory initiatives currently under
consideration by various regulatory agencies will have a material
adverse impact on the Company. The Company is not aware of any
material pending or threatened regulatory action with respect to the
Company or any of its subsidiaries. The Company does not believe that
any insurance guaranty fund assessments will be materially different
from amounts already provided for in the financial statements.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
18
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
(a) REVENUES
Premium income, net of reinsurance premium, decreased 8% when
comparing 1996 to 1995. The decrease in premium income is primarily
attributed to the change in marketing strategy and to a lesser extent
the change in distribution systems. The Company changed its marketing
strategy from traditional life insurance products to universal life
insurance products. 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.
The Company changed its marketing strategy to remain competitive.
The Company 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 termination of the broker
agency force caused a non-recurring write down of the value of agency
force asset in 1995. See discussion of amortization of agency force
for further details.)
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. The Company's
average persistency rate for all policies in force for 1996 and 1995
has been approximately 87.9% and 87.5%, respectively.
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 3% when comparing 1996 to 1995. The
overall investment yields for 1996, 1995 and 1994, are 7.21%, 7.04%
and 7.13%, respectively. The improvement in investment yield is
primarily attributed to the fixed maturity portfolio. The Company has
invested financing cash flows generated by cash received through sales
of universal life insurance products.
The Company's investments are generally managed to match related
insurance and policyholder liabilities. The comparison of investment
return with insurance or investment product crediting rates
establishes an interest spread. The 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 adjusts credited
interest rates on its insurance products to preserve targeted spreads.
It is expected that the monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on insurance policies the Company has in force and
will write in the future.
Realized investment losses were $988,000 and $124,000 in 1996 and
1995, respectively. Approximately $522,000 of the realized losses in
1996 is due to the charge-off of two investments. The Company
realized a loss of $207,000 from a single loan and $315,000 from an
investment in First Fidelity Mortgage Company ("FFMC"). The charge-
off of the loan represented the entire loan balance at the time of the
charge-off. Additionally, the Company sold two foreclosed real estate
properties that resulted in approximately $357,000 in realized losses
in 1996. The Company had other gains and losses during the period
that comprised the remaining amount reported but were immaterial in
nature on an individual basis.
19
(b) EXPENSES
Life benefits, net of reinsurance benefits and claims, increased 2%
compared to 1995. The increase in life benefits is due primarily to
settlement expenses discussed in the following paragraph:
In 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 non-standard policies had a
face amount of $22,700,000 and represented 1/2 of 1% of the insurance
in-force in 1994. Management's initial analysis indicated that
expected death claims on the business in-force was adequate in
relation to mortality assumptions inherent in the calculation of
statutory reserves. Nevertheless, management determined it was in the
best interest of the Company to repurchase as many of the non-standard
policies as possible. Through December 31, 1996, the Company spent
approximately $7,099,000 for the settlement of non-standard policies
and for the legal defense of related litigation. In relation to
settlement of non-standard policies the Company incurred life benefits
of $3,307,000, $720,000 and $1,250,000 in 1996, 1995 and 1994,
respectively. The Company incurred legal costs of $906,000, $687,000
and $229,000 in 1996, 1995 and 1994, respectively. All the policies
associated with this issue have been settled as of December 31, 1996.
The Company has approximately $3,742,000 of insurance in-force and
$1,871,000 of reserves from the issuance of paid-up life insurance
policies for settlement of matters related to the original non-
standard policies. Management believes the reserves are adequate in
relation to expected mortality on this block of in-force.
Commissions and amortization of deferred policy acquisition costs
decreased 14% in 1996 compared to 1995. The decrease was due to the
decline in first year premium production.
Amortization of cost of insurance acquired increased 28% in 1996
compared to 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.
The Company reported a non-recurring write down of value of agency
force of $0 and $8,297,000 in 1996 and 1995, respectively. The write
down was directly related to the Company's change in distribution
systems. The Company changed its focus from primarily a broker agency
distribution system to a captive agent system. Business produced by
the broker agency force in recent years did not meet Company
expectations. With the change in focus of distribution systems, most
of the broker agents were terminated. The termination of most of the
agents involved in the broker agency force caused management to re-
evaluate the value of the agency force carried on the balance sheet.
Operating expenses increased 4% in 1996 compared to 1995. The primary
factor that caused the increase in operating expenses is directly
related to increased legal costs and reserves established for
litigation. The legal costs are due to the settlement of non-standard
insurance policies as was discussed in the review of life benefits.
The Company incurred legal costs of $906,000, $687,000 and $229,000 in
1996, 1995 and 1994, respectively in relation to the settlement of the
non-standard insurance policies.
Interest expense decreased 12% in 1996 compared to 1995. Since
December 31, 1995, notes payable decreased approximately $1,873,000
which has directly attributed to the decrease in interest expense
during 1996. Interest expense was also reduced as a result of the
refinancing of the senior debt under which the new interest rate is
more favorable. Please refer to Note 11 "Notes Payable" of the
Consolidated Notes to the Financial Statements for more information on
this matter.
20
(c) NET LOSS
The Company had a net loss of $938,000 in 1996 compared to a net loss
of $3,001,000 in 1995. The net loss in 1996 is attributed to the
increase in life benefits net of reinsurance and operating expenses
primarily associated with settlement and other related costs of the
non-standard life insurance policies.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
(a) REVENUES
Total revenue increased 1% when comparing 1995 to 1994.
Premium income, net of reinsurance premium, decreased 7% when
comparing 1995 to 1994. The decrease is primarily attributed to the
reduction in new business production and the change in products
marketed. In 1995, the Company streamlined the product portfolio, as
well as restructured the marketing force. The decrease in first year
premium production was 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
termination of the broker agency force caused a non-recurring write
down of the value of agency force asset. See discussion of
amortization of agency force for further details.)
The change in marketing strategy from traditional life insurance
products to universal life insurance products had a significant impact
on new business production. As a result of the change in marketing
strategy the agency force went through a restructuring and retraining
process. Cash collected from the universal life and interest
sensitive products contribute only the risk charge to premium income,
however traditional insurance products contribute monies received to
premium income. One factor that has had a positive impact on premium
income is the improvement of persistency. Persistency is a measure of
insurance in force retained in relation to the previous year.
Overall, persistency improved to 87.5% in 1995 compared to 86.3% in
1994.
Other considerations, net of reinsurance, increased 13% compared to
one year ago. Other considerations consists of administrative charges
on universal life and interest sensitive life insurance products. The
insurance in force relating to these types of products continues to
increase as marketing efforts are focused on universal life insurance
products.
Net investment income increased 8% when comparing 1995 to 1994. The
change reflected an increase in the amount of invested assets, which
was partially offset by a lower effective yield on investments
acquired during 1995. The overall investment yields for 1995, 1994
and 1993, are 7.04%, 7.13% and 7.22%, respectively. The Company has
been able to increase its investment portfolio through financing cash
flows, generated by cash received through sales of universal life
insurance products. Although the Company sold no fixed maturities
during the last few years, it did experience a significant turnover in
the portfolio. Many companies with bond issues outstanding took
advantage of lower interest rates and retired older debt which carried
higher rates. This was accomplished through early calls and
accelerated pay-downs of fixed maturity investments.
The Company's investments are generally managed to match related
insurance and policyholder liabilities. The Company, in conjunction
with the decrease in average yield of the Company's fixed maturity
portfolio has decreased the average crediting rate for the insurance
and investment products. The comparison of investment return with
insurance or investment product crediting rates establishes an
interest spread. The minimum interest spread between earned and
credited rates is 1% on the "Century 2000" universal life insurance
product, the Company's primary product. The Company monitors
investment yields, and when necessary takes action to adjust credited
21
interest rates on its insurance products to preserve targeted spreads.
Over 60% of the insurance and investment product reserves are
crediting 5% or less in interest and 39% of the insurance and
investment product reserves are crediting 5.25% to 6% in interest. It
is expected that the monitoring of the interest spreads by management
will provide the necessary margin to adequately provide for associated
costs on insurance policies the Company has in force and will write in
the future.
Realized investment losses were $124,000 and $1,437,000 in 1995 and
1994, respectively. Fixed maturities and equity securities realized
net investment losses of $224,000 and real estate realized net
investment gains of $100,000 in 1995. The realized loss in 1995
cannot be attributed to any one specific transaction. In 1994, the
Company realized losses of $865,000 due to a permanent impairment of
property located in Louisiana. The permanent impairment was based on
recent appraisals and marketing analysis of surrounding properties.
The Company realized a gain of $467,000 from the sale of an
insignificant subsidiary in 1994. In 1994, the Company realized a
loss of $212,000 from the charge off of its investment in its equity
subsidiary, United Fidelity, Inc. The Company had other gains and
losses during the period that comprised the remaining amount reported
but were routine or immaterial in nature to disclose on an individual
basis.
(b) EXPENSES
Total expenses increased 16% when comparing 1995 to 1994.
Life benefits, net of reinsurance benefits and claims, decreased 4%
compared to 1994. The decrease is related to the decrease in first
year premium production. Another factor that has caused life benefits
to decrease is that during 1994, the Company lowered its crediting
rates on interest sensitive products in response to financial market
conditions. This action will facilitate the appropriate spreads
between investment returns and credited interest rates. It takes
approximately one year to fully realize a change in credited rates
since a change becomes effective on each policy's next anniversary.
Please refer to discussion of net investment income for analysis of
interest spreads.
The Company experienced an increase of 6% in mortality during 1995
compared to 1994. The increase in mortality is due primarily to
settlement expenses discussed in the following paragraph:
During the third quarter of 1994, UG became aware that certain new
insurance business was being solicited by certain agents and issued to
individuals considered to be not insurable by Company standards.
These non-standard policies had a face amount of $22,700,000 and
represented 1/2 of 1% of the insurance in force in 1994. Management's
initial analysis indicated that the expected death claims on the
business in force to be adequately covered by the mortality
assumptions inherent in the calculation of statutory reserves.
Nevertheless, management determined it was in the best interest of the
Company to repurchase as many of the non-standard policies as
possible. As of December 31, 1995, there remained approximately
$5,738,000 of the original face amount which had not been settled.
Through December 31, 1995, the Company spent a total of $2,886,000 for
the repurchase of the non-standard policies and for the legal defense
of related litigation. In relation to settlement of non-standard
policies the Company incurred life benefits of $720,000 and $1,250,000
in 1995 and 1994, respectively. The Company incurred legal costs of
$687,000 and $229,000 in 1995 and 1994, respectively.
Dividends to policyholders increased approximately 16% when comparing
1995 to 1994. USA continued to market participating policies through
most of 1994. Management expects dividends to policyholders will
continue to increase in the future. A significant portion of the
insurance in force is participating insurance. A significant portion
of the participating business is relatively newer business, and the
dividend scale for participating policies increases in each duration.
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.
22
Commissions and amortization of deferred policy acquisition costs
increased 21% in 1995 compared to 1994. The increase is directly
attributed to the amortization of a larger asset. The increase is
also caused by the reduction in first year premium production. To a
lesser extent the increase in amortization of deferred policy
acquisition costs is directly related to the change in products that
is currently marketed. The Company revised its portfolio of products
as previously discussed in premium income. These new products pay
lower first year commissions than the products sold in prior periods.
The asset increased due to first year premium production by the agency
force. The Company did benefit from improved persistency.
Amortization of cost of insurance acquired decreased 37% in 1995
compared to 1994. Cost of insurance acquired is amortized in relation
to expected future profits, including direct charge-offs for any
excess of the unamortized asset over the projected future profits.
The Company did not have any charge-offs during the periods covered by
this report. The decrease in amortization during the current period
is a normal fluctuation due to the expected future profits.
Amortization of cost of insurance acquired is particularly sensitive
to changes in persistency of certain blocks of insurance in force.
The Company's average persistency rate for all policies in force for
1995 and 1994 has been approximately 87.5% and 86.3%, respectively.
During 1995, the Company reported a non-recurring write down of value
of agency force of $8,297,000. The write down is directly related to
the Company's change in distribution systems. The Company has changed
its focus from primarily a broker agency distribution system to a
captive agent system. Business produced by the broker agency force in
recent years did not meet Company expectations. With the change in
focus of distribution systems, most of the broker agents were
terminated. The termination of most of the agents involved in the
broker agency force caused management to re-evaluate the value of the
agency force and write-off the remaining value carried on the balance
sheet.
Operating expenses increased 18% in 1995 compared to 1994. The
increase was caused by several factors. The primary factor for the
increase in operating expenses is due to the decrease in production.
The decrease in production was discussed in the analysis of premium
income. As such, the Company was positioned to handle significantly
more first year production than was produced. First year operating
expenses that were deferred and capitalized as a deferred policy
acquisition costs asset was $532,000 in 1995 compared to $1,757,000 in
1994. The difference between the policy acquisition costs deferred in
1995 compared to 1994, affected the increase in operating expenses.
The increase in operating expenses was offset, to a lesser extent,
from a 12% reduction in staff in 1995 compared to 1994. The reduction
in staff was achieved by attrition.
Another factor that caused the increase in operating expenses is
directly related to increased legal costs. During the third quarter
of 1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to be
not insurable by Company standards. These policies had a face amount
of $22,700,000 and represent 1/2 of 1% of the insurance in force of
the Company. As of December 31, 1995, there remained approximately
$5,738,000 of the original face amount which have not been settled.
The Company will continue its efforts to repurchase as many of the
policies as possible and regularly apprise the Ohio Department of
Insurance regarding the status of this situation. The Company
incurred legal costs of $687,000 and $229,000 in 1995 and 1994,
respectively, for the legal defense of related litigation.
Interest expense increased slightly in 1995 compared to 1994. The
increase was due to the increase in the interest rate on the Company's
senior debt, which is tied to the base rate of the First Bank of
Missouri. The interest rate on the senior debt increased to 10% on
March 1, 1995 compared to 7% on March 1, 1994. The Company was able
to minimize the effect of the higher interest rate in 1995 by early
payments of principal. The Company paid $600,000 in principal
payments in early 1995. The interest rate on the senior debt has
decreased to 9.25% as of March 1, 1996.
23
(c) NET LOSS
The Company had a net loss of $3,001,000 in 1995 compared to a net
loss of $1,624,000 in 1994. The decline in 1995 is attributed to the
non-recurring write down of the value of agency force and the increase
in operating expenses. The write down of agency force, net of
deferred income taxes and minority interest, caused $2,608,000 of the
$3,001,000 net loss in 1995. The net loss was minimized by the
improvement of net investment income and realized investment losses
when compared to the previous year.
FINANCIAL CONDITION
The financial condition of the Company was affected by a coinsurance
agreement between First International Life Insurance Company ("FILIC")
and the Company's insurance subsidiary Universal Guaranty Life
Insurance Company ("UG") on September 30, 1996. The agreement
provided UG an additional $6,375,000 of statutory capital and surplus.
Under the terms of the agreement, UG ceded to FILIC substantially all
of its paid-up life insurance policies. Paid-up life insurance
generally refers to non-premium paying life insurance policies.
Certain balance sheet line items were impacted by this agreement and
effects the comparability of the current period with the prior period.
(a) ASSETS
The Company's insurance subsidiaries are regulated by insurance
statutes and regulations as to the type of investments that they are
permitted to make and the amount of funds that may be used for any one
type of investment. In light of these statutes and regulations and
the Company's business and investment strategy, the Company generally
seeks to invest in United States government and government agency
securities and corporate securities rated investment grade by
established nationally recognized rating organizations.
The liabilities are predominantly long term in nature and therefore,
the Company invests in long term fixed maturity investments which are
reported in the financial statements at their amortized cost. The
Company has the ability and intent to hold these investments to
maturity; consequently, the Company does not expect to realize any
significant loss from these investments. The Company does not own any
derivative investments or "junk bonds". As of December 31, 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, with changes in market value
charged directly to shareholders' equity.
Mortgage loans decreased 21% in 1996 as compared to 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 $603,000 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.
The mortgage delinquency rate for the insurance industry as published
by the National Association of Insurance Commissioners ("NAIC") as the
"Industry Experience Factor" is 6.5%.
Investment real estate and real estate acquired in satisfaction of
debt decreased 17% in 1996 compared to 1995. The decrease was due to
the sale of lots from the Company's Lake Pointe development and the
sale of two foreclosed properties. Real estate holdings represent
approximately 4% of the total assets of the Company. Total real
estate is separated into four categories: Home Office 20%, Commercial
17%, Residential Development 36% and Foreclosed Properties 27%.
24
Policy loans decreased 15% in 1996 compared to 1995. Policy
loans decreased approximately $2,787,000 due to the coinsurance
agreement with FILIC. 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.
Reinsurance receivables increased significantly due to the coinsurance
agreement with FILIC. The coinsurance agreement contributed
approximately $28,000,000 to reinsurance receivables for future
policy benefits as of December 31, 1996.
Deferred policy acquisition costs decreased 1% in 1996 compared to
1995. The costs, which vary with, and are primarily related to
producing new business are referred to as deferred policy acquisition
costs ("DAC"). DAC consists primarily of commissions and certain
costs of policy issuance and underwriting, net of fees charged to the
policy in excess of ultimate fees charged. To the extent that these
costs are recoverable from future profits, the Company defers these
costs and amortizes them with interest in relation to the present
value of expected gross profits from the contracts, discounted using
the interest rate credited by the policy. The Company had $1,276,000
in policy acquisition costs deferred, $408,000 in interest accretion
and $1,796,000 in amortization in 1996. The Company did not recognize
any impairments during the period.
Cost of insurance acquired decreased significantly during 1996. The
decrease is primarily attributed to the coinsurance agreement with
FILIC.
(b) LIABILITIES
Total liabilities increased slightly in 1996 compared to 1995. Future
policy benefits increased 2% in 1996 and represented 81% of total
liabilities at December 31, 1996. Management expects future policy
benefits to increase in the future due to the aging of the volume of
insurance in force and continued production by the Company's sales
force.
Policy claims and benefits payable increased 3% in 1996 compared to
1995. There is no single event that caused this item to increase.
Policy claims vary from year to year and therefore, fluctuations in
this liability are to be expected and are not considered unusual by
management.
Other policyholder funds decreased 7% in 1996 compared to 1995. The
decrease can be attributed to a decrease in premium deposit funds.
Premium deposit funds are funds deposited by the policyholder with the
insurance company to accumulate interest and pay future policy
premiums. The change in marketing from traditional insurance products
to universal life insurance products is the primary reason for the
decrease. Universal life insurance products do not have premium
deposit funds. All premiums received from universal life insurance
policyholders are credited to the life insurance policy and are
reflected in future policy benefits.
Dividend and endowment accumulations increased 10% in 1996 compared to
1995. The increase is attributed to the significant amount of
participating business the Company has in force. There are generally
four options a policyholder can select to pay policy dividends. Over
47% of all dividends paid were put on deposit to accumulate with
interest. Accordingly, management expects this liability to increase
in the future.
Income taxes payable and deferred income taxes payable decreased
significantly in 1996 compared to 1995. The primary reason for the
decrease in deferred income taxes is due to the coinsurance agreement
with FILIC. The change in deferred income taxes payable is
attributable to temporary differences between Generally Accepted
Accounting Principles ("GAAP") and tax basis. Federal income taxes
are discussed in more detail in Note 3 of the Consolidated Notes to
the Financial Statements.
25
Notes payable decreased approximately $1,873,000 in 1996 compared to
1995. On May 8, 1996, FCC refinanced its senior debt of $8,900,000.
The refinancing was completed through First of America Bank - NA. The
refinanced debt bears interest to 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 March 1, 1997. 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 8, 1997 principal payment.
The Company's long term debt is discussed in more detail in Note 11 of
the Notes to the Financial Statements.
(c) SHAREHOLDERS' EQUITY
Total shareholders' equity decreased 5% in 1996 compared to 1995. The
decrease in shareholders' equity is primarily due to the net loss of
$938,000 in 1996. The Company experienced $85,000 in unrealized
depreciation of equity securities and investments held for sale in
1996.
REGULATORY ENVIRONMENT
The Company's insurance subsidiaries are subject to government
regulation in each of the states in which they conduct business. Such
regulation is vested in state agencies having broad administrative
power dealing with all aspects of the insurance business, including
the power to: (i) grant and revoke licenses to transact business;
(ii) regulate and supervise trade practices and market conduct; (iii)
establish guaranty associations; (iv) license agents; (v) approve
policy forms; (vi) approve premium rates for some lines of business;
(vii) establish reserve requirements; (viii) prescribe the form and
content of required financial statements and reports; (ix) determine
the reasonableness and adequacy of statutory capital and surplus; and
(x) regulate the type and amount of permitted investments. Insurance
regulation is concerned primarily with the protection of
policyholders. The Company cannot predict the form of any future
proposals or regulation. The Company's insurance subsidiaries, USA,
UG, APPL and ALIC are domiciled in the states of Ohio, Ohio, West
Virginia and Illinois, respectively.
Most states also have insurance holding company statutes which require
registration and periodic reporting by insurance companies controlled
by other corporations licensed to transact business within their
respective jurisdictions. The insurance subsidiaries are subject to
such legislation and are registered as controlled insurers in those
jurisdictions in which such registration is required. Statutes vary
from state to state but typically require periodic disclosure
concerning the corporation that controls the registered insurers and
all subsidiaries of such corporation. In addition, prior notice to,
or approval by, the state insurance commission of material
intercorporate transfers of assets, reinsurance agreements, management
agreements (see Note 9 of the Notes to the Financial Statements), and
payment of dividends (see Note 2 of the Notes to the Financial
Statements) in excess of specified amounts by the insurance subsidiary
within the holding company system are required.
The National Association of Insurance Commissioners ("NAIC") is an
association whose membership consists of the insurance commissioners
or their designees of the various states. The NAIC has no direct
regulatory authority over insurance companies, however its primary
purpose is to provide a more consistent method of regulation and
reporting from state to state. This is accomplished through the
issuance of model regulations, which can be adopted by individual
states unmodified, modified to meet the state's own needs or
requirements, or dismissed entirely.
Each year the NAIC calculates financial ratio results (commonly
referred to as IRIS ratios) for each company. These ratios compare
various financial information pertaining to the statutory balance
sheet and income statement. The results are then compared to pre-
established normal ranges determined by the NAIC. Results outside the
range typically require explanation to the domiciliary insurance
department.
26
At year end 1996, UG had two ratios outside the normal range. The
first ratio compared commission allowances with statutory capital and
surplus. The ratio was outside the norm due to the coinsurance
agreement with First International Life Insurance Company ("FILIC").
Additional information about the coinsurance agreement with FILIC can
be found in Note 7 of the Notes to the Consolidated Financial
Statements. Management does not believe that this ratio will be
outside the normal range in future periods.
The second ratio is related to the decrease in premium income. The
ratio fell outside the normal range the last two years. The decrease
in premium income is directly attributable to the change in
distribution systems and marketing strategy. The Company changed its
focus from primarily a broker agency distribution system to a captive
agent system and changed its marketing strategy from traditional whole
life insurance products to universal life insurance products.
Management is taking a long-term approach to its recent changes to the
marketing and distribution systems and believes these changes will
provide long-term benefits to the Company.
The Company receives funds from its insurance subsidiaries in the form
of management and cost sharing arrangements (See Note 9 of the
Consolidated Notes to the Financial Statements) and through dividends.
Annual dividends in excess of maximum amounts prescribed by state
statutes ("extraordinary dividends") may not be paid without the prior
approval of the insurance commissioner in which an insurance
subsidiary is domiciled. (See Note 2 of the Consolidated Notes to the
Financial Statements.)
The NAIC has adopted Risk-Based Capital ("RBC") requirements for
life/health insurance companies to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks such
as asset quality, mortality and morbidity, asset and liability
matching and other business factors. The RBC formula will be used by
state insurance regulators as an early warning tool to identify, for
the purpose of initiating regulatory action, insurance companies that
potentially are inadequately capitalized. In addition, the formula
defines new minimum capital standards that will supplement the current
system of low fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio
of the insurance company's regulatory total adjusted capital, as
defined by the NAIC, to its authorized control level RBC, as defined
by the NAIC. Insurance companies below specific trigger points or
ratios are classified within certain levels, each of which requires
specific corrective action. The levels and ratios are as follows:
Ratio of Total Adjusted Capital to
Authorized Control Level RBC
Regulatory Event (Less Than or Equal to)
Company action level 2*
Regulatory action level 1.5
Authorized control level 1
Mandatory control level 0.7
* Or, 2.5 with negative trend.
At December 31, 1996, each of the Company's insurance subsidiaries has
a Ratio that is in excess of 300% of the authorized control level;
accordingly the Company's subsidiaries meet the RBC requirements.
The NAIC has recently released the Life Illustration Model Regulation.
This regulation requires products which contain non-guaranteed
elements, such as universal life and interest sensitive life, to
comply with certain actuarially established tests. These tests are
intended to target future performance and profitability of a product
under various scenarios. The regulation does not prevent a company
from selling a product which does not meet the various tests. The
only implication is the way in which the product is marketed to the
consumer. A product which does not pass the tests uses guaranteed
assumptions rather than current assumptions in presenting future
product performance to the consumer.
27
As states in which the Company does business adopt the regulation or
adopt a modified version of the regulation, the Company will be
required to comply with this new regulation. The Company may need to
modify existing products or sales methods.
The NAIC has proposed a new Model Investment Law that may affect the
statutory carrying values of certain investments; however, the final
outcome of that proposal is not certain, nor is it possible to predict
what impact the proposal will have on the Company or whether the
proposal will be adopted in the foreseeable future.
FUTURE OUTLOOK
The Company operates in a highly competitive industry. In connection
with the development and sale of its products, the Company encounters
significant competition from other insurance companies, many of which
have financial resources or ratings greater than those of the Company.
The insurance industry is a mature industry. In recent years, the
industry has experienced virtually no growth in life insurance sales,
though the aging population has increased the demand for retirement
savings products. Management believes that the Company's ability to
compete is dependent upon, among other things, its ability to attract
and retain agents to market its insurance products and its ability to
develop competitive and profitable products.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 123, accounting for stock-based compensation. The adoption of this
standard did not have a material impact on the Company's financial statements.
Listed below are the financial statements included in this Part of the
Annual Report on SEC Form 10-K:
UNITED TRUST, INC. AND CONSOLIDATED SUBSIDIARIES
Page No.
Independent Auditor's Report for the
Years ended December 31, 1996, 1995, 1994 30
Consolidated Balance Sheets 31
Consolidated Statements of Operations 32
Consolidated Statements of Shareholders' Equity 33
Consolidated Statements of Cash Flows 34
Notes to Consolidated Financial Statements 35-55
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
29
Independent Auditors' Report
Board of Directors and Shareholders
United Trust, Inc.
We have audited the accompanying consolidated balance sheets of United
Trust, Inc. (an Illinois corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
United Trust, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
We have also audited Schedule I as of December 31, 1996, and Schedules
II, IV and V as of December 31, 1996 and 1995, of United Trust, Inc. and
subsidiaries and Schedules II, IV and V for each of the three years in the
period then ended. In our opinion, these schedules present fairly, in all
material respects, the information required to be set forth therein.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1997
30
UNITED TRUST, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 and 1995
ASSETS
1996 1995
Investments:
Fixed maturities at amortized cost
(market $181,815,225 and $197,006,257) $179,926,785 $191,074,220
Investments held for sale:
Fixed maturities, at market
(cost $1,984,661 and $3,224,039) 1,961,166 3,226,175
Equity securities, at market
(cost $2,086,159 and $2,086,159) 1,794,405 1,946,481
Mortgage loans on real estate at
amortized cost 11,022,792 13,891,762
Investment real estate, at cost,
net of accumulated depreciation 10,543,490 11,978,575
Real estate acquired in satisfaction of
debt, at cost, net of accumulated
depreciation 3,846,946 5,332,413
Policy loans 14,438,120 16,941,359
Short term investments 430,983 425,000
223,964,687 244,815,985
Cash and cash equivalents 17,326,235 12,528,025
Investment in affiliates 4,826,584 5,169,596
Accrued investment income 3,461,799 3,671,842
Reinsurance receivables:
Future policy benefits 38,745,013 13,540,413
Policy claims and other benefits 3,856,124 861,488
Other accounts and notes receivable 894,321 1,246,367
Cost of insurance acquired 43,917,280 55,816,934
Deferred policy acquisition costs 11,325,356 11,436,728
Cost in excess of net assets purchased,
net of accumulated amortization 5,496,808 5,661,462
Other assets 1,659,455 1,555,986
Total assets $355,473,662 $356,304,826
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $248,879,317 $243,044,963
Policy claims and benefits payable 3,193,806 3,110,378
Other policyholder funds 2,784,967 3,004,655
Dividend and endowment accumulations 13,913,676 12,636,949
Income taxes payable:
Current 70,663 215,944
Deferred 13,193,431 17,762,408
Notes payable 19,573,953 21,447,428
Indebtedness to (from) affiliates, net 31,837 (87,869)
Other liabilities 5,975,483 5,009,637
Total liabilities 307,617,133 306,144,493
Minority interests in consolidated subsidiaries 29,842,672 31,138,077
Shareholders' equity:
Common stock - no par value, stated
value $.02 per share.
Authorized 35,000,000 shares -
18,700,935 and 18,675,935 shares
issued after deducting treasury
shares of 423,840 and 423,840 374,019 373,519
Additional paid-in capital 18,301,974 18,288,411
Unrealized depreciation of investments
held for sale (86,058) (1,499)
Retained earnings (accumulated deficit) (576,078) 361,825
Total shareholders' equity 18,013,857 19,022,256
Total liabilities and shareholders'
equity $355,473,662 $356,304,826
See accompanying notes.
31
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1996
1996 1995 1994
Revenues:
Premium income $ 32,386,635 $ 35,200,815 $ 38,063,186
Reinsurance premium (4,767,743) (5,202,690) (5,658,697)
Other considerations 3,504,974 3,280,823 2,969,131
Other considerations paid
to reinsurers (179,408) (180,412) (229,093)
Net investment income 15,868,447 15,456,224 14,368,446
Realized investment gains
and (losses), net (987,930) (124,235) (1,436,521)
Other income 1,151,395 1,438,559 1,130,176
46,976,370 49,869,084 49,206,628
Benefits and other expenses:
Benefits, claims and settlement
expenses:
Life 26,568,062 26,680,217 27,479,315
Reinsurance benefits
and claims (2,283,827) (2,850,228) (2,766,776)
Annuity 1,892,489 1,797,475 1,314,384
Dividends to
policyholders 4,149,308 4,228,300 3,634,311
Commissions and amortization
of deferred policy
acquisition costs 4,224,885 4,907,653 4,060,425
Amortization of cost of
insurance acquired 5,524,815 4,303,237 6,878,074
Amortization of agency force 0 396,852 382,006
Non-recurring write down of
value of agency force 0 8,296,974 0
Operating expenses 11,994,464 11,517,648 9,787,962
Interest expense 1,731,309 1,966,776 1,936,324
53,801,505 61,244,904 52,706,025
Loss before income taxes,
minority interest and
equity in loss of investees (6,825,135) (11,375,820) (3,499,397)
Credit for income taxes 4,703,741 4,571,028 1,965,084
Minority interest in loss
of consolidated subsidiaries 1,278,883 4,439,496 1,035,831
Equity in loss of investees (95,392) (635,949) (1,125,118)
Net loss $ (937,903) $ (3,001,245) $ (1,623,600)
Net loss per
common share $ (0.05) $ (0.16) $ (0.09)
Weighted average common
shares outstanding 18,695,113 18,668,510 18,664,830
See accompanying notes
32
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1996
1996 1995 1994
Common stock
Balance, beginning of year $ 373,519 $ 373,119 $ 373,297
Issued during year 500 400 0
Purchase treasury stock 0 0 (178)
Balance, end of year $ 374,019 $ 373,519 $ 373,119
Additional paid-in capital
Balance, beginning of year $18,288,411 $18,276,311 $18,066,119
Issued during year 13,563 12,100 0
Public offering of affiliate 0 0 277,559
Purchase treasury stock 0 0 (67,367)
Balance, end of year $18,301,974 $18,288,411 $18,276,311
Unrealized appreciation
(depreciation) of investments
held for sale
Balance, beginning of year $ (1,499) $ (143,405) $ (23,624)
Change during year (84,559) 141,906 (119,781)
Balance, end of year $ (86,058) $ (1,499) $ (143,405)
Retained earnings
(accumulated deficit)
Balance, beginning of year $ 361,825 $ 3,363,070 $ 4,986,670
Net loss (937,903) (3,001,245) (1,623,600)
Balance, end of year $ (576,078) $ 361,825 $ 3,363,070
Total shareholders' equity,
end of year $18,013,857 $19,022,256 $21,869,095
See accompanying notes.
33
UNITED TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1996
1996 1995 1994
Increase (decrease) in cash
and cash equivalents
Cash flows from operating
activities:
Net loss $ (937,903) $ (3,001,245) $ (1,623,600)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities
net of changes in assets
and liabilities resulting
from the sales and purchases
of subsidiaries:
Amortization/accretion of
fixed maturities 899,445 803,696 1,173,981
Realized investment (gains)
losses, net 987,930 124,235 1,436,521
Policy acquisition costs
deferred (1,276,000) (2,370,000) (4,939,000)
Amortization of deferred
policy acquisition costs 1,387,372 1,567,748 1,137,923
Amortization of cost of
insurance acquired 5,524,815 4,303,237 6,878,074
Amortization of value of
agency force 0 396,852 382,006
Non-recurring write down
of value of agency force 0 8,296,974 0
Amortization of costs in
excess of net assets
purchased 185,279 423,192 297,676
Depreciation 390,357 720,605 510,459
Minority interest (1,278,883) (4,439,496) (1,035,831)
Equity in loss of investees 95,392 635,949 1,125,118
Change in accrued
investment income 210,043 (171,257) (543,476)
Change in reinsurance
receivables 83,871 (482,275) (1,009,745)
Change in policy liabilities
and accruals 3,326,651 3,581,928 4,487,982
Charges for mortality and
administration of
universal life and annuity
products (10,239,476) (9,757,354) (9,178,363)
Interest credited to
account balances 7,075,921 6,644,282 5,931,019
Change in income taxes
payable (4,714,258) (4,595,571) (2,120,009)
Change in indebtedness
(to) from affiliates,
net 119,706 (20,004) 375,848
Change in other assets and
liabilities, net 944,824 (2,208,660) (1,142,055)
Net cash provided by operating
activities 2,785,086 452,836 2,144,528
Cash flows from investing
activities:
Proceeds from investments
sold and matured:
Fixed maturities held
for sale 1,152,736 619,612 250,000
Fixed maturities sold 18,736,612 0 0
Fixed maturities matured 20,787,782 16,265,140 23,894,954
Equity securities 8,990 104,260 49,557
Mortgage loans 3,364,427 2,252,423 4,029,630
Real estate 3,219,851 1,768,254 2,640,025
Policy loans 3,937,471 4,110,744 4,064,602
Short term 825,000 25,000 1,103,856
Total proceeds from investments
sold and matured 52,032,869 25,145,433 36,032,624
Cost of investments acquired:
Fixed maturities (29,365,111) (25,112,358) (52,768,480)
Equity securities 0 (1,000,000) (249,925)
Mortgage loans (503,113) (322,129) (5,611,967)
Real estate (841,793) (1,927,413) (3,321,599)
Policy loans (4,329,124) (4,713,471) (3,886,821)
Short term (830,983) (100,000) (650,000)
Total cost of investments
acquired (35,870,124) (33,175,371) (66,488,792)
Cash of subsidiary at
date of sale 0 0 (3,134,343)
Cash received in sale
of subsidiary 0 0 4,995,804
Net cash provided by (used
in) investing activities 16,162,745 (8,029,938) (28,594,707)
Cash flows from financing
activities:
Policyholder contract
deposits 22,245,369 25,021,983 23,110,031
Policyholder contract
withdrawals (15,433,644) (16,008,462) (14,893,221)
Net cash transferred from
coinsurance ceded (19,088,371) 0 0
Proceeds from notes payable 9,050,000 300,000 0
Payments of principal on
notes payable (10,923,475) (905,861) (2,305,687)
Purchase of treasury stock 0 0 (67,545)
Proceeds from issuance of
common stock 500 400 0
Net cash provided by (used in)
financing activities (14,149,621) 8,408,060 5,843,578
Net increase (decrease) in
cash and cash equivalents 4,798,210 830,958 (20,606,601)
Cash and cash equivalents at
beginning of year 12,528,025 11,697,067 32,303,668
Cash and cash equivalents at
end of year $ 17,326,235 $ 12,528,025 $ 11,697,067
See accompanying notes.
34
UNITED TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1996, the parent,
significant majority-owned subsidiaries and affiliates
of United Trust, Inc. were as depicted on the following
organizational chart.
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").
35
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements follows.
B. NATURE OF OPERATIONS - United Trust, Inc. is an
insurance holding company that through its insurance
subsidiaries sells individual life insurance products.
The Company's principal market is the midwestern United
States. The primary focus of the Company has been the
servicing of existing insurance business in force, the
solicitation of new life insurance products and the
acquisition of other companies in similar lines of
business.
C. PRINCIPLES OF CONSOLIDATION - The consolidated financial
statements include the accounts of the Company and its
majority-owned subsidiaries. Investments in 20% to 50%
owned affiliates in which management has the ability to
exercise significant influence are included based on the
equity method of accounting and the Company's share of
such affiliates' operating results is reflected in
Equity in loss of investees. Other investments in
affiliates are carried at cost. All significant
intercompany accounts and transactions have been
eliminated.
D. BASIS OF PRESENTATION - The financial statements of
United Trust, Inc.'s life insurance subsidiaries have
been prepared in accordance with generally accepted
accounting principles which differ from statutory
accounting practices permitted by insurance regulatory
authorities.
E. USE OF ESTIMATES - In preparing financial statements in
conformity with generally accepted accounting
principles, management is required to make estimates and
assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
F. INVESTMENTS - Investments are shown on the following
bases:
Fixed maturities -- at cost, adjusted for amortization
of premium or discount and other-than-temporary market
value declines. The amortized cost of such investments
differs from their market values; however, the Company
has the ability and intent to hold these investments to
maturity, at which time the full face value is expected
to be realized.
Investments held for sale -- at current market value,
unrealized appreciation or depreciation is charged
directly to shareholders' equity.
Mortgage loans on real estate -- at unpaid balances,
adjusted for amortization of premium or discount, less
allowance for possible losses.
Real estate -- at cost, less allowances for depreciation
and any impairment which would result in a carrying
value below net realizable value. Foreclosed real
estate is adjusted for any impairment at the foreclosure
date. Accumulated depreciation on real estate was
$1,340,746 and $1,049,652 as of December 31, 1996 and
1995, respectively.
Policy loans -- at unpaid balances including accumulated
interest but not in excess of the cash surrender value.
Short-term investments -- at cost, which approximates
current market value.
Realized gains and losses on sales of investments are
recognized in net income on the specific identification
basis.
36
G. RECOGNITION OF REVENUES AND RELATED EXPENSES - Premiums
for traditional life insurance products, which include
those products with fixed and guaranteed premiums and
benefits, consist principally of whole life insurance
policies, limited-payment life insurance policies, and
certain annuities with life contingencies are recognized
as revenues when due. Accident and health insurance
premiums are recognized as revenue pro rata over the
terms of the policies. Benefits and related expenses
associated with the premiums earned are charged to
expense proportionately over the lives of the policies
through a provision for future policy benefit
liabilities and through deferral and amortization of
deferred policy acquisition costs. For universal life
and investment products, generally there is no
requirement for payment of premium other than to
maintain account values at a level sufficient to pay
mortality and expense charges. Consequently, premiums
for universal life policies and investment products are
not reported as revenue, but as deposits. Policy fee
revenue for universal life policies and investment
products consists of charges for the cost of insurance,
policy administration, and surrenders assessed during
the period. Expenses include interest credited to
policy account balances and benefit claims incurred in
excess of policy account balances.
H. DEFERRED POLICY ACQUISITION COSTS - Commissions and
other costs of acquiring life insurance products that
vary with and are primarily related to the production of
new business have been deferred. Traditional life
insurance acquisition costs are being amortized over the
premium-paying period of the related policies using
assumptions consistent with those used in computing
policy benefit reserves.
For universal life insurance and interest sensitive life
insurance products, acquisition costs are being
amortized generally in proportion to the present value
of expected gross profits from surrender charges and
investment, mortality, and expense margins. Under SFAS
No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments,"
the Company makes certain assumptions regarding the
mortality, persistency, expenses, and interest rates it
expects to experience in future periods. These
assumptions are to be best estimates and are to be
periodically updated whenever actual experience and/or
expectations for the future change from initial
assumptions. The amortization is adjusted
retrospectively when estimates of current or future
gross profits to be realized from a group of products
are revised.
The following table summarizes deferred policy
acquisition costs and related data for the years shown.
1996 1995 1994
Deferred, beginning of year $ 11,437,000 $ 10,634,000 $ 7,160,000
Acquisition costs deferred:
Commissions, net of
reinsurance of $0
$0 and $1,837,000 845,000 1,838,000 3,182,000
Marketing, salaries and
other expenses 431,000 532,000 1,757,000
Total 1,276,000 2,370,000 4,939,000
Interest accretion 408,000 338,000 181,000
Amortization charged
to income (1,796,000) (1,905,000) (1,319,000)
Net amortization (1,388,000) (1,567,000) (1,138,000)
Deferred acquisition
costs disposed of at
sale of subsidiary 0 0 (327,000)
Change for the year (112,000) 803,000 3,474,000
Deferred, end of year $ 11,325,000 $ 11,437,000 $ 10,634,000
37
The following table reflects the components of the income
statement for the line item Commissions and amortization of
deferred policy acquisition costs:
1996 1995 1994
Net amortization of
deferred policy
acquisition costs $ 1,388,000 $ 1,567,000 $ 1,138,000
Commissions 2,837,000 3,341,000 2,922,000
Total $ 4,225,000 $ 4,908,000 $ 4,060,000
Estimated net amortization expense of deferred policy
acquisition costs for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1997 $ 400,000 $ 1,600,000 $ 1,200,000
1998 400,000 1,500,000 1,100,000
1999 300,000 1,300,000 1,000,000
2000 300,000 1,200,000 900,000
2001 300,000 1,000,000 700,000
I. COST OF INSURANCE ACQUIRED - When an insurance company
is acquired, the Company assigns a portion of its cost
to the right to receive future cash flows from insurance
contracts existing at the date of the acquisition. The
cost of policies purchased represents the actuarially
determined present value of the projected future cash
flows from the acquired policies. Cost of Insurance
Acquired is amortized with interest in relation to
expected future profits, including direct charge-offs
for any excess of the unamortized asset over the
projected future profits. The interest rates utilized
in the amortization calculation are 9% on approximately
24% of the balance and 15% on the remaining balance.
The interest rates vary due to differences in the blocks
of business.
1996 1995 1994
Cost of insurance acquired,
beginning of year $ 55,817,000 $ 60,120,000 $ 68,995,000
Additions from
acquisitions 0 0 0
Interest accretion 6,313,000 7,044,000 7,593,000
Amortization (11,838,000) (11,347,000) (14,471,000)
Net amortization (5,525,000) (4,303,000) (6,878,000)
Balance attributable to
coinsurance agreement(6,375,000) 0 0
Balance attributable to
subsidiary at date
of sale 0 0 (1,379,000)
Balance attributable to
downstream merger of
subsidiary 0 0 (618,000)
Write-offs due to impairment 0 0 0
Cost of insurance acquired,
end of year $ 43,917,000 $ 55,817,000 $ 60,120,000
38
Estimated net amortization expense of cost of insurance
acquired for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1997 $ 5,500,000 $ 9,200,000 $3,700,000
1998 5,100,000 8,200,000 3,100,000
1999 4,800,000 7,200,000 2,400,000
2000 4,600,000 6,700,000 2,100,000
2001 4,400,000 6,700,000 2,300,000
J. COST IN EXCESS OF NET ASSETS PURCHASED - Cost in excess
of net assets purchased is the excess of the amount paid
to acquire a company over the fair value of its net
assets. Cost in excess of net assets purchased are
amortized over periods not exceeding forty years using
the straight-line method. Management reviews the
valuation and amortization of goodwill on an annual
basis. As part of this review, the Company estimates
the value of and the estimated undiscounted future cash
flows expected to be generated by the related
subsidiaries to determine that no impairment has
occurred. Accumulated amortization of cost in excess of
net assets purchased was $1,265,146 and $1,079,867 as of
December 31, 1996 and 1995, respectively.
K. FUTURE POLICY BENEFITS AND EXPENSES - The liabilities
for traditional life insurance and accident and health
insurance policy benefits are computed using a net level
method. These liabilities include assumptions as to
investment yields, mortality, withdrawals, and other
assumptions based on the life insurance subsidiaries'
experience adjusted to reflect anticipated trends and to
include provisions for possible unfavorable deviations.
The Company makes these assumptions at the time the
contract is issued or, in the case of contracts acquired
by purchase, at the purchase date. Benefit reserves for
traditional life insurance policies include certain
deferred profits on limited-payment policies that are
being recognized in income over the policy term. Policy
benefit claims are charged to expense in the period that
the claims are incurred. Current mortality rate
assumptions are based on 1975-80 select and ultimate
tables. Withdrawal rate assumptions are based upon
Linton B or Linton C.
Benefit reserves for universal life insurance and
interest sensitive life insurance products are computed
under a retrospective deposit method and represent
policy account balances before applicable surrender
charges. Policy benefits and claims that are charged to
expense include benefit claims in excess of related
policy account balances. Interest crediting rates for
universal life and interest sensitive products range
from 5.0% to 6.0% in 1996, 1995 and 1994.
L. POLICY AND CONTRACT CLAIMS - Policy and contract claims
include provisions for reported claims in process of
settlement, valued in accordance with the terms of the
policies and contracts, as well as provisions for claims
incurred and unreported based on prior experience of the
Company.
M. PARTICIPATING INSURANCE - Participating business
represents 30% and 34% of the ordinary life insurance in
force at December 31, 1996 and 1995, respectively.
Premium income from participating business represents
52%, 55%, and 53% of total premiums for the years ended
December 31, 1996, 1995 and 1994, respectively. The
amount of dividends to be paid is determined annually by
the respective insurance subsidiary's Board of
Directors. Earnings allocable to participating
policyholders are based on legal requirements which vary
by state.
39
N. INCOME TAXES - Income taxes are reported under Statement
of Financial Accounting Standards Number 109. Deferred
income taxes are recorded to reflect the tax
consequences on future periods of differences between
the tax bases of assets and liabilities and their
financial reporting amounts at the end of each such
period.
O. BUSINESS SEGMENTS - The Company operates principally in
the individual life insurance business.
P. EARNINGS PER SHARE - Earnings per share are based on the
weighted average number of common shares outstanding
during the respective period.
Q. CASH EQUIVALENTS - The Company considers certificates of
deposit and other short-term instruments with an
original purchased maturity of three months or less cash
equivalents.
R. RECLASSIFICATIONS - Certain prior year amounts have been
reclassified to conform with the 1996 presentation.
Such reclassifications had no effect on previously
reported net income, total assets, or shareholders'
equity.
S. REINSURANCE - In the normal course of business, the
Company seeks to limit its exposure to loss on any
single insured and to recover a portion of benefits paid
by ceding reinsurance to other insurance enterprises or
reinsurers under excess coverage and coinsurance
contracts. The Company retains a maximum of $125,000 of
coverage per individual life.
Amounts paid or deemed to have been paid for reinsurance
contracts are recorded as reinsurance receivables.
Reinsurance premiums, commissions, expense
reimbursements, and reserves on reinsured business are
accounted for on a basis consistent with those used in
accounting for the original policies issued and the
terms of the reinsurance contracts. Expense
reimbursements received in connection with reinsurance
ceded have been accounted for as a reduction of the
related policy acquisition costs or, to the extent such
reimbursements exceed the related acquisition costs, as
revenue.
Reinsurance contracts do not relieve the Company from
its obligations to policyholders. Failure of reinsurers
to honor their obligations could result in losses to the
Company; consequently, allowances are established for
amounts deemed uncollectible. The Company evaluates the
financial condition of its reinsurers and monitors
concentrations of credit risk arising from similar
geographic regions, activities, or economic
characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer
insolvencies.
2. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1996, substantially all of consolidated shareholders'
equity represents net assets of UTI's subsidiaries. The payment of
cash dividends to shareholders by UTI or UTG is not legally
restricted. UG's dividend limitations are described below.
Ohio domiciled insurance companies require five days prior
notification to the insurance commissioner for the payment of an
ordinary dividend. Ordinary dividends are defined as the greater of:
a) prior year statutory earnings or b) 10% of statutory capital and
surplus. For the year ended December 31, 1996, UG had a statutory
gain from operations of $8,006,000. At December 31, 1996, UG's
statutory capital and surplus amounted to $10,227,000. Extraordinary
dividends (amounts in excess of ordinary dividend limitations) require
prior approval of the insurance commissioner and are not restricted to
a specific calculation.
40
3. FEDERAL INCOME TAXES
Until 1984, the insurance companies were taxed under the provisions of
the Life Insurance Company Income Tax Act of 1959 as amended by the
Tax Equity and Fiscal Responsibility Act of 1982. These laws were
superseded by the Deficit Reduction Act of 1984. All of these laws
are based primarily upon statutory results with certain special
deductions and other items available only to life insurance companies.
If any of the life companies pay shareholder dividends in excess of
"shareholders' surplus" they will be required to pay taxes on income
not taxed under the pre-1984 acts.
The following table summarizes the companies with this situation and
the maximum amount of income which has not been taxed in each.
Shareholders' Untaxed
Company Surplus Balance
ABE $ 5,242,000 $ 1,150,000
APPL 4,943,000 1,525,000
UG 24,038,000 4,364,000
USA 981,000 0
The payment of taxes on this income is not anticipated; and,
accordingly, no deferred taxes have been established.
The life insurance company subsidiaries file a consolidated federal
income tax return. The holding companies of the group file separate
returns.
Life insurance company taxation is based primarily upon statutory
results with certain special deductions and other items available only
to life insurance companies. Income tax expense consists of the
following components:
1996 1995 1994
Current tax
expense (credit) $ (148,000) $ 3,000 $ 51,000
Deferred tax
expense (credit) (4,556,000) (4,574,000) (2,016,000)
$(4,704,000) $(4,571,000) $(1,965,000)
The Companies have net operating loss carryforwards for federal income
tax purposes expiring as follows:
UTI UG FCC
2002 $ 0 $ 0 $ 527,000
2003 50,000 0 285,000
2004 826,000 0 283,000
2005 293,000 0 139,000
2006 213,000 2,109,000 33,000
2007 111,000 783,000 676,000
2008 0 940,000 4,000
2009 0 0 169,000
2010 0 0 19,000
TOTAL $ 1,493,000 $ 3,832,000 $ 2,135,000
41
The Company has established a deferred tax asset of $2,611,000
for its operating loss carryforwards and has established an allowance
of $2,088,000.
The following table shows the reconciliation of net income to taxable
income of UTI:
1996 1995 1994
Net income (loss) $ (938,000) $ (3,001,000) $ (1,624,000)
Federal income tax
provision (credit) (60,000) 154,000 40,000
Loss (earnings) of
subsidiaries 715,000 2,613,000 341,000
Loss (earnings) of
investees 95,000 636,000 1,125,000
Write off of investment
in affiliate 315,000 10,000 212,000
Write off of note
receivable 211,000 0 0
Depreciation 1,000 3,000 4,000
Other 26,000 22,000 20,000
Taxable income (loss) $ 365,000 $ 437,000 $ 118,000
UTI has a net operating loss carryforward of $1,493,000 at December
31, 1996. UTI has averaged $270,000 in taxable income over the past
four years and must average taxable income of $136,000 per year to
fully realize its net operating loss carryforwards. UTI's operating
loss carryforwards do not begin to expire until 2003. Management
believes future earnings of UTI will be more than sufficient to fully
utilize its net operating loss carryforwards.
The provision or (credit) for income taxes shown in the statements of
operations does not bear the normal relationship to pre-tax income as
a result of certain permanent differences. The sources and effects of
such differences are summarized in the following table:
1996 1995 1994
Tax computed at standard
corporate rate $ (2,389,000) $ (3,982,000) $ (1,225,000)
Changes in taxes due to:
Cost in excess of net
assets purchased 65,000 61,000 104,000
Special insurance deductions 0 0 (24,000)
Benefit of prior losses (2,393,000) (602,000) (649,000)
Other 13,000 (48,000) (171,000)
Income tax expense
(credit) $ (4,704,000) $ (4,571,000) $ (1,965,000)
42
The following table summarizes the major components which comprise the
deferred tax liability as reflected in the balance sheets:
1996 1995
Investments $ (122,251) $ (48,918)
Cost of insurance
acquired 16,637,884 20,860,602
Other assets (187,747) 0
Deferred policy
acquisition costs 3,963,875 4,002,855
Agent balances (65,609) (71,625)
Furniture and
equipment (37,683) (82,257)
Discount of notes 922,766 1,003,038
Management/consulting
fees (733,867) (841,991)
Future policy benetits(5,906,087) (5,039,938)
Gain on sale of
subsidiary 2,312,483 2,312,483
Net operating loss
carryforward (522,392) (650,358)
Other liabilities (1,151,405) (818,484)
Federal tax DAC (1,916,536) (2,862,999)
Deferred tax
liability $ 13,193,431 $ 17,762,408
4. ANALYSIS OF INVESTMENTS, INVESTMENT INCOME AND INVESTMENT GAIN
A. NET INVESTMENT INCOME - The following table reflects net
investment income by type of investment:
December 31,
1996 1995 1994
Fixed maturities and
fixed maturities
held for sale $ 13,326,312 $ 13,190,121 $ 12,185,941
Equity securities 88,661 52,445 3,999
Mortgage loans 1,047,461 1,257,189 1,423,474
Real estate 794,844 975,080 990,857
Policy loans 1,121,538 1,041,900 1,014,723
Short-term investments 515,346 505,637 444,135
Other 197,188 158,290 221,125
Total consolidated
investment income 17,091,350 17,180,662 16,284,254
Investment expense (1,222,903) (1,724,438) (1,915,808)
Consolidated net
investment income $ 15,868,447 $ 15,456,224 $ 14,368,446
At December 31, 1996, the Company had a total of $6,025,000 of investments,
comprised of $5,325,000 in real estate including its home office
property and $700,000 in equity securities, which did not produce income
during 1996.
43
The following table summarizes the Company's fixed maturity holdings and
investments held for sale by major classifications:
Carrying Value
1996 1995
Investments held for sale:
Fixed maturities $ 1,961,166 $ 3,226,175
Equity securities 1,794,405 1,946,481
Fixed maturities:
U.S. Government, government agencies
and authorities 28,554,631 27,488,188
State, municipalities and political
subdivision 14,421,735 6,785,476
Collateralized mortgage obligations 13,246,781 15,395,913
Public utilities 51,821,989 59,136,696
All other corporate bonds 71,881,649 82,267,947
$ 183,682,356 $196,246,876
By insurance statute, the majority of the Company's investment
portfolio is required to be invested in investment grade securities
to provide ample protection for policyholders. The Company does not
invest in so-called "junk bonds" or derivative investments.
Below investment grade debt securities generally provide higher yields
and involve greater risks than investment grade debt securities because
their issuers typically are more highly leveraged and more vulnerable
to adverse economic conditions than investment grade issuers. In
addition, the trading market for these securities is usually more limited
than for investment grade debt securities. Debt securities classified
as below-investment grade are those that receive a Standard & Poor's
rating of BB or below.
The following table summarizes by category securities held that are below
investment grade at amortized cost:
Below Investment
Grade Investments 1996 1995 1994
State, Municipalities
and Political
Subdivisions $ 10,042 $ 0 $ 32,370
Public Utilities 117,609 116,879 168,869
Corporate 813,717 819,010 848,033
Total $ 941,368 $ 935,889 $1,049,272
44
B. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments
in securities including investments held for sale are as follows:
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
Investments Held
for Sale:
U.S. Government
and govt. agencies
and authorities $1,461,068 $ 0 $ 17,458 $ 1,443,609
States, municipalities
and political
subdivisions 145,199 665 6,397 139,467
Collateralized
mortgage
obligations 0 0 0 0
Public utilities 119,970 363 675 119,658
All other
corporate bonds 258,424 4,222 4,215 258,432
1,984,661 5,250 28,745 1,961,166
Equity securities 2,086,159 37,000 328,754 1,794,405
Total $4,070,820 $ 42,250 $ 357,499 $ 3,755,571
Held to Maturity
Securities:
U.S. Government
and govt. agencies
and authorities $28,554,631 $ 421,523 $ 136,410 $28,839,744
States, municipalities
and political
subdivisions 14,421,735 318,682 28,084 14,712,333
Collateralized
mortgage
obligations 13,246,780 175,163 157,799 13,264,145
Public utilities 51,821,990 884,858 381,286 52,325,561
All other
corporate bond 71,881,649 1,240,230 448,437 72,673,442
Total $179,926,785 $ 3,040,456 $1,152,016 $181,815,225
45
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1995 Cost Gains Losses Value
Investments Held
for Sale:
U.S. Government
and govt. agencies
and authorities $2,001,860 $ 2,579 $ 621 $ 2,003,818
States, municipalities
and political
subdivisions 812,454 14,313 3,749 823,018
Collateralized
mortgage obligations 32,177 506 0 32,683
Public utilities 119,379 572 2,123 117,828
All other corporate
bonds 258,169 337 9,678 248,828
3,224,039 18,307 16,171 3,226,175
Equity securities 2,086,159 80,721 220,399 1,946,481
Total $5,310,198 $ 99,028 $ 236,570 $ 5,172,656
Held to Maturity
Securities:
U.S. Government
and govt. agenciees
and authorities $27,488,188 $ 841,786 $ 76,417 $28,253,557
States, municipalities
and political
subdivisions 6,785,476 305,053 10,895 7,079,634
Collateralized
mortgage
obligations 15,395,913 295,344 67,472 15,623,785
Public utilities 59,136,696 2,279,509 134,091 61,282,114
All other corporate
bonds 82,267,947 2,974,553 475,333 84,767,167
Total $191,074,220 $6,696,245 $ 764,208 $197,006,257
The amortized cost of debt securities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
Fixed Maturities Held for Sale Amortized
December 31, 1996 Cost
Due in one year or less $ 139,724
Due after one year
through five years 1,569,804
Due after five years
through ten years 115,183
Due after ten years 159,950
$1,984,661
Fixed Maturities Held to Amortized
Maturity Cost
December 31, 1996
Due in one year or less $13,222,084
Due after one year
through five years 74,120,886
Due after five years
through ten years 77,222,430
Due after ten years 15,361,385
$179,926,785
46
Proceeds from sales, calls and maturities of investments in debt
securities during 1996 were $40,677,000. Gross gains of $101,000 and
gross losses of $276,000 were realized on those sales, calls and
maturities.
Proceeds from sales, calls and maturities of investments in debt
securities during 1995 were $16,885,000. Gross gains of $126,000 and
gross losses of $246,000 were realized on those sales, calls and
maturities.
Proceeds from sales, calls and maturities of investments in debt
securities during 1994 were $24,145,000. Gross gains of $84,000 and
gross losses of $554,000 were realized on those sales, calls and
maturities.
C. INVESTMENTS ON DEPOSIT - At December 31, 1996, investments
carried at approximately $18,016,000 were on deposit with
various state insurance departments.
D. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES - The
Company's investment in United Income, Inc., a 30% owned
affiliate, is carried at an amount equal to the Company's
share of the equity of United Income. The Company's equity
in United Income, Inc. includes the original investment of
$194,304, an increase of $4,359,749 resulting from a public
offering of stock and the Company's share of earnings and
losses since inception.
5. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value
information at December 31, 1996 and 1995, as required by Statement of
Financial Accounting Standards 107, Disclosure about Fair Value of
Financial Instruments ("SFAS 107"). Such information, which pertains
to the Company's financial instruments, is based on the requirements
set forth in that Statement and does not purport to represent the
aggregate net fair value of the Company.
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument required to be valued by
SFAS 107 for which it is practicable to estimate that value:
(a) Cash and Cash equivalents
The carrying amount in the financial statements approximates fair
value because of the relatively short period of time between the
origination of the instruments and their expected realization.
(b) Fixed maturities and investments held for sale
Quoted market prices, if available, are used to determine the fair
value. If quoted market prices are not available, management
estimates the fair value based on the quoted market price of a
financial instrument with similar characteristics.
(c) Mortgage loans on real estate
An estimate of fair value is based on management's review of the
portfolio in relation to market prices of similar loans with similar
credit ratings, interest rates, and maturity dates. Management
conservatively estimates fair value of the portfolio is equal to the
carrying value.
(d) Investment real estate and real estate acquired in satisfaction
of debt
An estimate of fair value is based on management's review of the
individual real estate holdings. Management utilizes sales of
surrounding properties, current market conditions and geographic
considerations. Management conservatively estimates the fair value of
the portfolio is equal to the carrying value.
47
(e) Policy loans
It is not practicable to estimate the fair value of policy loans as
they have no stated maturity and their rates are set at a fixed spread
to related policy liability rates. Policy loans are carried at the
aggregate unpaid principal balances in the consolidated balance
sheets, and earn interest at rates ranging from 4% to 8%. Individual
policy liabilities in all cases equal or exceed outstanding policy
loan balances.
(f) Short-term investments
For short-term instruments, the carrying amount is a reasonable
estimate of fair value. All short-term instruments represent
certificates of deposit with various banks and all are protected under
FDIC.
(g) Notes and accounts receivable and uncollected premiums
The Company holds a $840,000 note receivable for which the
determination of fair value is estimated by discounting the future
cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same
remaining maturities. Accounts receivable and uncollected premiums
are primarily insurance contract related receivables which are
determined based upon the underlying insurance liabilities and added
reinsurance amounts, and thus are excluded for the purpose of fair
value disclosure by paragraph 8(c) of SFAS 107.
(h) Notes payable
For borrowings under the senior loan agreement, which is subject to
floating rates of interest, carrying value is a reasonable estimate of
fair value. For subordinated borrowings fair value was determined
based on the borrowing rates currently available to the Company for
loans with similar terms and average maturities.
The estimated fair values of the Company's financial instruments
required to be valued by SFAS 107 are as follows as of December 31:
1996 1995
Estimated Estimated
Assets Carrying Fair Carrying Fair
Amount Value Amount Value
Fixed maturities $179,926,785 $181,815,225 $191,074,220 $197,006,257
Fixed maturities
held for sale 1,961,166 1,961,166 3,226,175 3,226,175
Equity securities 1,794,405 1,794,405 1,946,481 1,946,481
Mortgage loans on
real estate 11,022,792 11,022,792 13,891,762 13,891,762
Policy loans 14,438,120 14,438,120 16,941,359 16,941,359
Short-term
investments 430,983 430,983 425,000 425,000
Investment in real
estate 10,543,490 10,543,490 11,978,575 11,978,575
Real estate acquired
in satisfaction
of debt 3,846,946 3,846,946 5,332,413 5,332,413
Notes receivable 840,066 783,310 840,066 775,399
Liabilities
Notes payable 19,573,953 18,937,055 21,447,428 20,747,991
48
6. STATUTORY EQUITY AND GAIN FROM OPERATIONS
The Company's insurance subsidiaries are domiciled in Ohio, Illinois
and West Virginia and prepare their statutory-based financial
statements in accordance with accounting practices prescribed or
permitted by the respective insurance department. These principles
differ significantly from generally accepted accounting principles.
"Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners
("NAIC"). "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may
differ from state to state, from company to company within a state,
and may change in the future. The NAIC currently is in the process of
codifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory
accounting practices. Accordingly, that project, which is expected to
be completed in 1997, will likely change prescribed statutory
accounting practices and may result in changes to the accounting
practices that insurance enterprises use to prepare their statutory
financial statements. UG's total statutory shareholders' equity was
$10,227,000 and $7,274,000 at December 31, 1996 and 1995,
respectively. The Company's insurance subsidiaries reported combined
statutory gain from operations (exclusive of intercompany dividends)
was $10,692,000, $4,076,000 and $3,071,000 for 1996, 1995 and 1994,
respectively.
7. REINSURANCE
The Company assumes risks from, and reinsures certain parts of its
risks with other insurers under yearly renewable term and coinsurance
agreements which are accounted for by passing a portion of the risk to
the reinsurer. Generally, the reinsurer receives a proportionate part
of the premiums less commissions and is liable for a corresponding
part of all benefit payments. While the amount retained on an
individual life will vary based upon age and mortality prospects of
the risk, the Company generally will not carry more than $125,000
individual life insurance on a single risk.
The Company has reinsured approximately $1.109 billion, $1.088 billion
and $1.217 billion in face amount of life insurance risks with other
insurers for 1996, 1995 and 1994, respectively. Reinsurance
receivables for future policy benefits were $38,745,000 and
$13,540,000 at December 31, 1996 and 1995, respectively, for estimated
recoveries under reinsurance treaties. Should any of the reinsurers
be unable to meet its obligation at the time of the claim, obligation
to pay such claim would remain with the Company.
The Company's insurance subsidiary (UG) entered into a coinsurance
agreement with First International Life Insurance Company ("FILIC") as
of September 30, 1996. Under the terms of the agreement, UG ceded to
FILIC substantially all of its paid-up life insurance policies. Paid-
up life insurance generally refers to non-premium paying life
insurance policies. A.M. Best, an industry rating company, assigned a
Best's Rating of A++ (Superior) to The Guardian Life Insurance Company
of America ("Guardian"), parent of FILIC, based on the consolidated
financial condition and operating performance of the company and its
life/health subsidiaries. The agreement with FILIC accounts for
approximately 66% of the reinsurance receivables as of December 31,
1996.
As a result of the FILIC coinsurance agreement, effective September
30, 1996, UG received a reinsurance credit in the amount of
$28,318,000 in exchange for an equal amount of assets. UG also
received $6,375,000 as a commission allowance.
Currently, the Company is utilizing reinsurance agreements with
Business Men's Assurance Company, ("BMA") and Life Reassurance
Corporation, ("LIFE RE") for new business. BMA and LIFE RE each hold
an "A+" (Superior) rating from A.M. Best, an industry rating company.
The reinsurance agreements were effective December 1, 1993, and cover
all new business of the Company. The agreements are a yearly
renewable term ("YRT") treaty where the Company cedes amounts above
its retention limit of $100,000 with a minimum cession of $25,000.
49
The Company does not have any short-duration reinsurance
contracts. The effect of the Company's long-duration reinsurance
contracts on premiums earned in 1996, 1995 and 1994 was as follows:
Shown in thousands
1996 1995 1994
Premiums Premiums Premiums
Earned Earned Earned
Direct $ 32,387 $ 35,201 $ 38,063
Assumed 0 0 0
Ceded (4,768) (5,203) (5,659)
Net premiums$ 27,619 $ 29,998 $ 32,404
8. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the
insurers' sales practices, alleged agent misconduct, failure to
properly supervise agents, and other matters. Some of the lawsuits
have resulted in the award of substantial judgments against the
insurer, including material amounts of punitive damages. In some
states, juries have substantial discretion in awarding punitive
damages in these circumstances.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to
prescribed limits for policyholder losses incurred by insolvent or
failed insurance companies. Although the Company cannot predict the
amount of any future assessments, most insurance guaranty fund laws
currently provide that an assessment may be excused or deferred if it
would threaten an insurer's financial strength. Those mandatory
assessments may be partially recovered through a reduction in future
premium taxes in some states. The Company does not believe such
assessments will be materially different from amounts already provided
for in the financial statements.
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.
9. RELATED PARTY TRANSACTIONS
United Trust, Inc. has a service agreement with its affiliate, UII
(equity investee), to perform services and provide personnel and
facilities. The services included in the agreement are claim
processing, underwriting, processing and servicing of policies,
accounting services, agency services, data processing and all other
expenses necessary to carry on the business of a life insurance
company.
UII's service agreement states that USA is to pay UII monthly fees
equal to 22% of the amount of collected first year premiums, 20% in
second year and 6% of the renewal premiums in years three and after.
UII's subcontract agreement with UTI states that UII is to pay UTI
monthly fees equal to 60% of collected service fees from USA as stated
above.
USA paid $1,568,000, $2,015,000 and $1,357,000 under their agreement
with UII for 1996, 1995 and 1994, respectively. UII paid $941,000,
$1,209,000 and $814,000 under their agreement with UTI for 1996, 1995
and 1994, respectively.
50
The agreements of the insurance companies have been approved by their
respective domiciliary insurance departments and it is Management's
opinion that where applicable, costs have been allocated fairly and
such allocations are based upon generally accepted accounting
principles. The costs paid by UTI for these services include costs
related to the production of new business which are deferred as policy
acquisition costs and charged off to the income statement through
"Amortization of deferred policy acquisition costs". Also included
are costs associated with the maintenance of existing policies which
are charged as current period costs and included in "general
expenses".
10. CAPITAL STOCK TRANSACTIONS
A. PUBLIC OFFERING OF AFFILIATE STOCK
During 1991, an affiliated company, United Fidelity, Inc.,
("UFI") began a stock offering in the State of Illinois.
UFI was offering 400,000 units, each unit consisting of one
share of no par value common stock and one share of Class A
Preferred Stock, $15 par value per share, 9% non-cumulative
convertible. The units were being offered to the public at
$30 per unit. Due to large losses reported by UFI, the sale
of stock units to the public was stopped on June 2, 1994.
The Board of Directors of UFI voted to voluntarily terminate
the offering on August 18, 1994.
The Company accounted for the investment in UFI using the
equity method. At December 31, 1994, the Company charged
off its remaining investment in UFI of $212,247. The
Company determined any material recoverability of its
investment to be unlikely due to continuing losses and
limited capital of UFI. On May 26, 1995, pursuant to a plan
of restructure of UFI's subsidiary, First Fidelity Mortgage
Company (FFMC), UTI surrendered its common stock holdings of
UFI for no value. Additionally, as a part of the FFMC
restructure, UTI invested $615,000 in preferred stock of
FFMC, representing 100% of the outstanding preferred stock
of FFMC, and $10,000 in common stock of FFMC, representing
approximately 14% of the outstanding common stock. Due to
continued losses by FFMC, UTI realized losses of $315,000
and $10,000 from writedowns of their investment in FFMC at
December 31, 1996 and 1995, respectively.
B. STOCK OPTION PLAN
In 1985, the Company initiated a nonqualified stock option
plan for employees, agents and directors of the Company
under which options to purchase up to 440,000 shares of the
company's common stock are granted at $.02 per share.
Through December 31, 1996 options for 424,375 shares were
granted and exercised. Options for 15,625 shares remain
available for grant.
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, accounting for stock-based compensation. The
adoption of this standard did not have a material impact on the
Company's financial statements.
Following is a summary of stock option transactions for the
three years ended December 31, 1996:
1996 1995 1994
Option Shares exercised 25,000 20,000 0
Compensation expense
charged to operatiions $ 13,563 $ 12,100 $ 0
Approximate percent of
market value at which
options were granted 3.6% 3.2% 0%
51
C. DEFERRED COMPENSATION PLAN
UTI and FCC established a deferred compensation plan during
1993 pursuant to which an officer or agent of FCC, UTI or
affiliates of UTI, could defer a portion of their income
over the next two and one-half years in return for a
deferred compensation payment payable at the end of seven
years in the amount equal to the total income deferred plus
interest at a rate of approximately 8.5% per annum and a
stock option to purchase shares of common stock of UTI. An
officer or agent received an immediately exercisable option
to purchase 23,000 shares of UTI common stock at $1.75 per
share for each $25,000 ($10,000 per year for two and one-
half years) of total income deferred. The option expires on
December 31, 2000. A total of 1,050,000 options were
granted in 1993 under this plan. As of December 31, 1996 no
options were exercised. At December 31, 1996 and 1995, the
Company held a liability of $1,268,000 and $1,167,000,
respectively, relating to this plan.
11. NOTES PAYABLE
At December 31, 1996, the Company has $19,574,000 in long term debt
outstanding. The debt is comprised of the following components:
1996 1995
Senior debt $ 8,400,000 $ 10,400,000
Subordinated 10 yr. notes 6,209,000 6,209,000
Subordinated 20 yr. notes 3,815,000 3,815,000
Other notes payable 1,150,000 1,000,000
Encumbrance on real estate 0 23,000
$ 19,574,000 $ 21,447,000
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinancing was completed through First of America Bank - NA and is
subject to a credit agreement. The refinanced debt bears interest to
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 March 1, 1997.
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 8,
1997 principal payment.
The credit agreement contains certain covenants with which the Company
must comply. The 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 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 current and in compliance with all of
the terms on all of its outstanding debt and does not foresee any
problem in maintaining compliance in the future.
52
United Income, Inc. (UII) and First Fidelity Mortgage Company through
an assignment from United Trust, Inc. owned a participating interest
of $700,000 and $300,000 respectively of the senior debt. At the date
of the 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 an additional $150,000 from UII 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 an
acquisition. The 10 year notes bear interest at the rate of 7 1/2%
per annum, payable semi-annually beginning December 16, 1992. These
notes provide for principal payments equal to 1/20th of the principal
balance due with each interest installment beginning June 16, 1997,
with a final payment due June 16, 2002. During 1995, the Company
refinanced $300,695 of 10 year notes to 20 year notes bearing interest
at the rate of 8.75%. The repayment terms of these notes are similar
to the original 20 year notes. The 20 year notes bear interest at the
rate of 8 1/2% per annum, payable semi-annually beginning December 16,
1992, with a lump sum principal payment due June 16, 2012. The Company's
subordinated debt consists of $4,495,000 and $3,532,000 of ten year and
twenty year notes, respectively, owed to current officers and directors
of the Company or its affiliates.
Scheduled principal reductions on the Company's debt for the next five
years is as follows:
Year Amount
1997 $ 1,037,000
1998 1,537,000
1999 1,687,000
2000 1,537,000
2001 1,537,000
12. OTHER CASH FLOW DISCLOSURE
The Company recognized an increase in its paid-in capital of $0, $0
and $277,559 for the years 1996, 1995 and 1994 respectively, from its
equity investment in UFI from the offering price per share of UFI
exceeding UTI's carrying amount per share.
On a cash basis, the Company paid $1,700,973, $1,934,326 and
$1,937,123 in interest expense for the years 1996, 1995 and 1994,
respectively. The Company paid $17,634, $25,821 and $190 in federal
income tax for 1996, 1995 and 1994, respectively.
The Company's insurance subsidiary (UG) entered into a coinsurance
agreement with First International Life Insurance Company (FILIC) as
of September 30, 1996. At closing of the transaction, UG received a
coinsurance credit of $28,318,000 for policy liabilities covered under
the agreement. UG transferred assets equal to the credit received.
This transfer included policy loans of $2,855,000 associated with
policies under the agreement and a net cash transfer of $19,088,000
after deducting the ceding commission due UG of $6,375,000.
53
13. NON-RECURRING WRITE DOWN OF VALUE OF AGENCY FORCE ACQUIRED
The Company recognized a non-recurring write down of $8,297,000 on its
value of agency force acquired for the year ended December 31, 1995.
The write down released $2,904,000 of the deferred tax liability and
$3,327,000 was attributed to minority interest in loss of consolidated
subsidiaries. In addition, equity loss of investees was negatively
impacted by $542,000. The effect of this write down resulted in an
increase in the net loss of $2,608,000. This write down is directly
related to the Company's change in distribution systems. Due to the
broker agency force not meeting management's expectations and lack of
production, the Company has changed its focus from a primarily broker
agency distribution system to a captive agent system. With the change
in focus, most of the broker agents were terminated and therefore,
management re-evaluated the value of the agency force carried on the
balance sheet. For purposes of the write-down, the broker agency
force has no future expected cash flows and therefore warranted a
write-off of the value. The write down is reported as a separate line
item "non-recurring write down of value of agency force acquired" and
the release of the deferred tax liability is reported in the credit
for income taxes payable in the Statement of Operations. In addition,
the impact to minority interest in loss of consolidated subsidiaries
and equity loss of investees is in the Statement of Operations.
14. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances in financial institutions which at
times may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed
to any significant credit risk on cash and cash equivalents.
15. PENDING CHANGE IN CONTROL OF UNITED TRUST, INC.
On September 23, 1996, UTI and UII entered into a stock purchase
agreement with LaSalle Group, Inc., a Delaware corporation
("LaSalle"), whereby LaSalle will acquire 12,000,000 shares of
authorized but unissued shares of UTI for $1.00 per share and
10,000,000 shares of authorized but unissued shares of UII for $0.70
per share. Additionally, LaSalle intends, contemporaneously with the
closing of the above transaction, to purchase in privately negotiated
transactions additional shares of UTI and UII so that LaSalle will own
not less than 51% of the outstanding common stock of UTI and
indirectly control 51% of UII.
The agreement requires and is pending approval of the Commissioner of
Insurance of the State of Ohio, Illinois and West Virginia, (the
states of domicile of the insurance subsidiaries). It is anticipated
the transaction will be completed during the second quarter of 1997.
54
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1996
1st 2nd 3rd 4th
Premium income and other
considerations, net $8,481,511 $ 8,514,175 $ 7,348,199 $ 6,600,573
Net investment income 3,973,349 3,890,127 4,038,831 3,966,140
Total revenues 12,870,140 12,455,875 11,636,614 10,013,741
Policy benefits
including dividends 6,528,760 7,083,803 8,378,710 8,334,759
Commissions and
amortization of DAC 1,161,850 924,174 703,196 1,435,665
Operating expenses 3,447,329 2,851,752 3,422,654 2,272,729
Operating income (71,615) (137,198) (2,346,452) (4,269,870)
Net income (loss) 304,737 9,038 (892,761) (358,917)
Net income (loss)
per share 0.02 0.00 (0.05) (0.02)
1995
1st 2nd 3rd 4th
Premium income and
other considerations,
net $ 9,445,222 $ 8,765,804 $ 7,868,803 $ 7,018,707
Net investment income 3,850,161 3,843,518 3,747,069 4,015,476
Total revenues 13,694,471 12,933,370 11,829,921 11,411,322
Policy benefits including
dividends 8,097,830 9,113,933 5,978,795 6,665,206
Commissions and
amortization of DAC 1,556,526 1,960,458 1,350,662 40,007
Operating expenses 3,204,217 2,492,689 2,232,938 3,587,804
Operating income (495,966) (1,939,361) 120,393 (9,060,886)
Net income (loss) 179,044 (689,602) 198,464 (2,689,151)
Net income (loss) per
share 0.01 (0.04) 0.01 (0.14)
1994
1st 2nd 3rd 4th
Premium income and
other considerations,
net $9,042,475 $ 10,011,855 $ 7,913,497 $ 8,176,700
Net investment income 3,366,995 3,556,633 3,633,334 3,811,484
Total revenues 12,245,881 14,052,428 10,900,385 12,007,934
Policy benefits including
dividends 6,927,743 7,496,765 7,483,568 7,753,158
Commissions and
amortization of DAC 1,685,682 4,099,100 3,086,901 2,448,822
Operating expenses 2,366,726 1,898,048 2,328,443 3,194,745
Operating income 801,718 67,387 (2,477,301) (1,891,201)
Net income (loss) (404,022) (117,149) (515,134) (587,295)
Net income (loss) per
share (0.02) (0.01) (0.03) (0.03)
55
PART III
With respect to Items 10 through 13, the Company will file with the
Securities and Exchange Commission, within 120 days of the close of
its fiscal year, a definitive proxy statement pursuant to Regulation
14-A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company will be set forth in
the Company's proxy statement relating to the annual meeting of
shareholders to be held during 1997 and is incorporated herein by
reference. Information regarding executive officers of the Company is
set forth under the caption "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be set forth in the
Company's proxy statement relating to the annual meeting of
shareholders to be held during 1997 and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management will be set forth in the Company's proxy statement
relating to the annual meeting of shareholders to be held during
1997 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
will be set forth in the Company's proxy statement relating to the
annual meeting of shareholders to be held during 1997 and is
incorporated herein by reference.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) The following documents are filed as a part of the report:
(1) Financial Statements:
See Item 8, Index to Financial Statements
(2) Financial Statement Schedules
Schedule I - Summary of Investments - other than
invested in related parties.
Schedule II - Condensed financial information of
registrant
Schedule IV - Reinsurance
Schedule V - Valuation and qualifying accounts
NOTE: Schedules other than those listed above are
omitted for the reasons they are not required or the
information is disclosed in the financial statements or
footnotes.
(b) Reports on Form 8-K filed during fourth quarter.
None
(c) Exhibits:
Index to Exhibits (See Pages 58 and 59).
57
INDEX TO EXHIBITS
Exhibit
Number
3(a) (1) Amended Articles of Incorporation for the
Company dated November 20, 1987.
3(b) (1) Amended Articles of Incorporation for the
Company dated December 6, 1991.
3(c) (1) Amended Articles of Incorporation for the
Company dated March 30, 1993.
3(d) (1) Code of By-Laws for the Company.
10(a) (1) Compromise and Settlement Agreement dates as
of February 27, 1991, among First Commonwealth
Corporation, Universal Guaranty Life Insurance
Company, Alliance Life Insurance Company, Roosevelt
National Life Insurance Company of America, Abraham
Lincoln Insurance Company, Appalachian Life
Insurance Company, Liberty American Assurance
Company, and Farmers and Ranchers Life Insurance
Company, and Southshore Holding Corp., Public
Investors, Inc., Fidelity Fire and Casualty
Insurance Company, Insurance Premium Assistance
Company, Agency Premium Assistance Company, Coastal
Loans Acquisition Company, Bob F. Shamburger, Gary
E. Jackson, Leonard H. Aucoin, Dennis J. Lafont,
William Joel Herron and Jerry Palmer.
10(b) Credit Agreement dated May 8, 1996 between First of
America Bank - Illinois, N.A., as lender and First
Commonwealth Corporation, as borrower.
10(c) $8,900,000 Term Note of First Commonwealth Corporation to
First of America Bank - Illinois, N.A. dated May 8, 1996.
10(d) Coinsurance Agreement dated September 30, 1996 between
Universal Guaranty Life Insurance Company and First
International Life Insurance Company, including
assumption reinsurance agreement exhibit and amendments.
10(aa) (1) Subcontract Agreement dated September 1, 1990
between United Trust, Inc. and United Income, Inc.
10(bb) (1) Service Agreement dated November 8, 1989 between
United Security Assurance Company and United Income,
Inc.
10(cc) (1) Management and Consultant Agreement dated as of
January 1, 1993 between First Commonwealth
Corporation and Universal Guaranty Life Insurance
Company.
10(dd) (1) Management Agreement dated December 20, 1981 among
Commonwealth Industries Corporation, Executive
National Life Insurance Company (now known as
Investors Trust Assurance Company) and Abraham
Lincoln Insurance Company.
10(ee) (1) Reinsurance Agreement dated January 1, 1991 between
Universal Guaranty Life Insurance Company and
Republic-Vanguard Life Insurance Company.
10(ff) (1) Reinsurance Agreement dated July 1, 1992 between
United Security Assurance Company and Life
Reassurance Corporation of America.
58
INDEX TO EXHIBITS
Exhibit
Number
10(gg) (1) United Trust, Inc. Stock Option Plan.
10(hh) (1) Board Resolution adopting United Trust, Inc.'s
Officer Incentive Fund.
10(ii) (1) Employment Agreement dated as of April 15, 1993
between Larry E. Ryherd and First Commonwealth
Corporation and United Trust, Inc.
10(jj) (1) Employment Agreement dated as of April 15, 1993
between Thomas F. Morrow and First Commonwealth
Corporation and United Trust, Inc.
10(kk) (1) Employment Agreement dated as of April 15, 1993
between James E. Melville and First Commonwealth
Corporation and United Trust, Inc.
10(ll) (1) Employment Agreement dated as of June 16, 1992
between George E. Francis and First Commonwealth
Corporation.
10(mm) (1) Amendment Number One to Employment Agreement dated
as of April 15, 1993 between George E. Francis and
First Commonwealth Corporation.
10(nn) (1) Consulting Arrangement entered into June 15, 1987
between Robert E. Cook and United Trust, Inc.
10(oo) (1) Agreement dated June 16, 1992 between John K.
Cantrell and First Commonwealth Corporation.
10(pp) (1) Termination Agreement dated as of January 29, 1993
between Scott J. Engebritson and United Trust, Inc.,
United Fidelity, Inc., United Income, Inc., First
Commonwealth Corporation and United Security
Assurance Company.
10(qq) (1) Stock Purchase Agreement dated February 20, 1992
between United Trust Group, Inc. and Sellers.
10(rr) (1) Amendment No. One dated April 20, 1992 to the Stock
Purchase Agreement between the Sellers and United
Trust Group, Inc.
10(ss) (1) Security Agreement dated June 16, 1992 between
United Trust Group, Inc. and the Sellers.
10(tt) (1) Stock Purchase Agreement dated June 16, 1992 between
United Trust Group, Inc. and First Commonwealth
Corporation
Footnote:
(1) Incorporated by reference from the Company's Annual
Report on Form 10-K, File No. 0-5392, as of December
31, 1993.
59
UNITED TRUST, INC. Schedule I
SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
As of December 31, 1996
Column A Column B Column C Column D
Amount at
Which Shown
in Balance
Cost Value Sheet
Fixed maturities:
United States Goverment and
government agencies and
authorities $ 28,554,631 $ 28,839,743 $ 28,554,631
State, municipalities, and
political subdivisions 14,421,735 14,712,334 14,421,735
Collateralized mortgage
obligations 13,246,780 13,264,145 13,246,780
Public utilities 51,821,990 52,325,561 51,821,990
All other corporate bonds 71,881,649 72,673,442 71,881,649
Total fixed maturities 179,926,785 $181,815,225 179,926,785
Investments held for sale:
Fixed maturities:
United States Goverment and
government agencies and
authorities 1,461,068 $ 1,443,609 1,443,609
State, municipalities, and
political subdivisions 145,199 139,467 139,467
Public utilities 119,970 119,658 119,658
All other corporate bonds 258,424 258,432 258,432
1,984,661 $ 1,961,166 1,961,166
Equity securities:
Public utilities 82,073 $ 56,053 56,053
All other corporate securities 2,004,086 1,738,352 1,738,352
2,086,159 $ 1,794,405 1,794,405
Mortgage loans on real estate 11,022,792 11,022,792
Investment real estate 10,543,490 10,543,490
Real estate acquired in
satisfaction of debt 3,846,946 3,846,946
Policy loans 14,438,120 14,438,120
Short term investments 430,983 430,983
Total investments $224,279,936 $223,964,687
60
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT Schedule II
NOTES TO CONDENSED FINANCIAL INFORMATION
(a) The condensed financial information should be read in
conjunction with the consolidated financial statements and
notes of United Trust, Inc. and Consolidated Subsidiaries.
61
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY BALANCE SHEETS
As of December 31, 1996 and 1995 Schedule II
1996 1995
ASSETS
Investment in affiliates $ 19,475,431 $ 20,494,198
Cash and cash equivalents 422,446 503,357
Notes receivable from affiliate 265,900 15,900
Indebtedness from (to) affiliates, net 30,247 (74,519)
Accrued interest income 2,051 16,273
Other assets 262,927 572,716
Total assets $ 20,459,002 $ 21,527,925
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable to affiliate $ 840,000 $ 840,000
Deferred income taxes 1,602,345 1,662,869
Other liabilities 2,800 2,800
Total liabilities 2,445,145 2,505,669
Shareholders' equity:
Common stock 374,019 373,519
Additional paid-in capital 18,301,974 18,288,411
Unrealized depreciation of
investments held for sale
of affiliates (86,058) (1,499)
Retained earnings (accumulated deficit) (576,078) 361,825
Total shareholders' equity 18,013,857 19,022,256
Total liabilities and
shareholders' equity $ 20,459,002 $21,527,925
62
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1996 Schedule II
1996 1995 1994
Revenues:
Management fees from affiliates $ 940,734 $1,209,196 $ 835,284
Other income from affiliates 115,235 113,869 130,437
Interest income from affiliates 21,264 13,583 65,560
Interest income 29,340 21,678 53,509
Realized investment losses (207,051) 0 0
Loss from write down of investee (315,000) (10,000) (212,247)
584,522 1,348,326 872,543
Expenses:
Management fee to affiliate 575,000 800,000 850,000
Interest expense to affiliates 63,000 63,000 63,175
Operating expenses 133,897 83,312 76,271
771,897 946,312 989,446
Operating income (loss) (187,375) 402,014 (116,903)
Credit (provision) for income taxes 59,780 (153,764) (40,123)
Equity in loss of investees (95,392) (635,949) (1,125,118)
Equity in loss of subsidiaries (714,916) (2,613,546) (341,456)
Net loss $ (937,903)$(3,001,245)$(1,623,600)
63
UNITED TRUST, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT ONLY STATEMENTS OF CASH FLOWS
Three Years Ended December 31, 1996 Schedule II
1996 1995 1994
Increase (decrease) in cash and
cash equivalents
Cash flows from operating activities:
Net loss $ (937,903) $(3,001,245) $(1,623,600)
Adjustments to reconcile net
loss to net cash provided
by operating activities:
Equity in loss of subsidiaries 714,916 2,613,546 341,456
Equity in loss of investees 95,392 635,949 1,125,118
Compensation expense through
stock option plan 13,563 12,100 0
Change in accrued interest income 14,222 2,260 29,424
Depreciation 18,366 26,412 44,246
Realized investment losses 207,051 0 0
Loss from writedown of investee 315,000 10,000 212,247
Change in deferred income taxes (60,524) 153,764 40,123
Change in indebtedness (to)
from affiliates, net (104,766) (23,027) 217,242
Change in other assets and
liabilities (728) (274,167) 75,737
Net cash provided by operating activities 274,589 155,592 461,993
Cash flows from investing activities:
Purchase of stock of affiliates 0 (325,000) (1,350,410)
Change in notes receivable from
affiliate (250,000) 300,000 175,000
Capital contribution to affiliate (106,000) (53,000) 0
Net cash used in investing activities (356,000) (78,000) (1,175,410)
Cash flows from financing activities:
Purchase of treasury stock 0 0 (67,545)
Proceeds from issuance of common stock 500 400 0
Net cash provided by (used in)
financing activities 500 400 (67,545)
Net increase (decrease) in cash and
cash equivalents (80,911) 77,992 (780,962)
Cash and cash equivalents at
beginning of year 503,357 425,365 1,206,327
Cash and cash equivalents at end of year $ 422,446 $ 503,357 $ 425,365
64
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1996 and the year ended December 31, 1996 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
Life insurance
in force $3,952,958,000 $1,108,534,000 $1,271,766,000 $4,116,190,000 30.9%
Premiums:
Life
insurance $ 32,128,258 $ 4,717,488 $ 0 $ 27,410,770 0.0%
Accident
and health
insurance 258,377 50,255 0 208,122 0.0%
$ 32,386,635 $ 4,767,743 $ 0 $ 27,618,892 0.0%
* All assumed business represents the Company's participation in
the Servicemen's Group Life Insurance Program (SGLI).
65
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1995 and the year ended December 31, 1995 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other assumed to
Gross amount companies companies* Net amount net
Life insurance
in force $4,207,695,000 $1,087,774,000 $1,039,517,000 $4,159,438,000 25.0%
Premiums:
Life
insurance $ 34,952,367 $ 5,149,939 $ 0$ 29,802,428 0.0%
Accident
and health
insurance 248,448 52,751 0 195,697 0.0%
$ 35,200,815 $ 5,202,690 $ 0 $ 29,998,125 0.0%
* All assumed business represents the Company's participation in
the Servicemen's Group Life Insurance Program (SGLI).
66
UNITED TRUST, INC.
REINSURANCE
As of December 31, 1994 and the year ended December 31, 1994 Schedule IV
Column A Column B Column C Column D Column E Column F
Percentage
Ceded to Assumed of amount
other from other Assumed to
Gross amount companies companies* Net amount net
Life insurance
in force $4,543,746,000 $1,217,119,000 $1,077,413,000 $4,404,040,000 24.5%
Life
insurance $ 37,800,871 $ 5,597,512 $ 0 $ 32,203,359 0.0%
Accident
and health
insurance 262,315 61,185 0 201,130 0.0%
$ 38,063,186 $ 5,658,697 $ 0 $ 32,404,489 0.0%
* All assumed business represents the Company's participation in
the Servicemen's Group Life Insurance Program (SGLI).
67
UNITED TRUST, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1995 and 1994 Schedule V
Balance at Additions
Beginning Charges Balances at
Description Of Period and Expenses Deductions End of Period
December 31, 1996
Allowance for doubtful accounts -
mortgage loans $ 10,000 $ 0 $ 0 $ 10,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 619,817 99,263 0 719,080
Accumulated amortization of
costs in excess of net
assets purchased 1,079,867 185,279 0 1,265,146
Accumulated depreciation on
real estate 1,049,652 291,094 0 1,340,746
Total $ 2,759,336 $ 575,636 $ 0 $ 3,334,972
December 31, 1995
Allowance for doubtful accounts -
mortgage loans $ 26,000 $ 0 $ 16,000 $ 10,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 949,608 420,209 750,000 619,817
Accumulated amortization
of costs in excess of
net assets purchased 656,675 423,192 0 1,079,867
Accumulated depreciation on
real estate 802,476 300,396 53,220 1,049,652
Total $ 2,434,759 $ 1,143,797 $ 819,220 $ 2,759,336
December 31, 1994
Allowance for doubtful accounts -
mortgage loans $ 300,000 $ 0 $ 274,000 $ 26,000
Accumulated depreciation on
property and equipment and
EDP conversion costs 740,292 209,316 0 949,608
Accumulated amortization
of costs in excess of
net assets purchased 426,999 297,676 68,000 656,675
Accumulated depreciation on
real estate 501,333 301,143 0 802,476
Total $ 1,968,624 $ 808,135 $ 342,000 $ 2,434,759
68
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
UNITED TRUST, INC.
(Registrant)
/s/ John S. Albin March 25, 1997
John S. Albin, Director
/s/ William F. Cellini March 25, 1997
William F. Cellini, Director
/s/ Robert E. Cook March 25, 1997
Robert E. Cook, Director
/s/ Larry R. Dowell March 25, 1997
Larry R. Dowell, Director
/s/ Donald G. Geary March 25, 1997
Donald G. Geary, Director
/s/ Raymond L. Larson March 25, 1997
Raymond L. Larson, Director
/s/ Paul D. Lovell March 25, 1997
Paul D. Lovell, Director
/s/ Dale E. McKee March 25, 1997
Dale E. McKee, Director
/s/ Thomas F. Morrow March 25, 1997
Thomas F. Morrow, Chief Operating
Officer, President, and Director
/s/ Larry E. Ryherd March 25, 1997
Larry E. Ryherd, Chairman of the Board,
Chief Executive Officer and Director
/s/ Robert J. Webb March 25, 1997
Robert J. Webb, Director
/s/ James E. Melville March 25, 1997
James E. Melville, Chief Financial Officer
and Senior Executive Vice President
69