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 0-18540
UNITED INCOME, INC.
(Exact name of registrant as specified in its charter)
2500 CORPORATE EXCHANGE DRIVE
COLUMBUS, OH 43231
(Address of principal executive offices, including zip code)
OHIO 37-1224044
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (614) 899-6773
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
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 19,887,572 shares of
Common Stock, stated value $.033 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.
Page 1 of 72
PART I
ITEM 1. BUSINESS
United Income, Inc. (the "Registrant") was incorporated in 1987 under the
laws of the State of Ohio to serve as an insurance holding company. At
December 31, 1996, the 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").
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ITEM 1. BUSINESS
The Registrant and its affiliates (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 Income, Inc. ("UII"), 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.
On February 20, 1992, UII and its affiliate, UTI, formed a joint venture,
United Trust Group, Inc., ("UTG"). On June 16, 1992, UII contributed $7.6
million in cash and 100% of the common stock of its wholly owned life
insurance subsidiary. 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. 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, UTG 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, ITI, and UGIC voted to
voluntarily liquidate each of the companies and distribute the assets to
the shareholders (consisting solely of common stock of their respective
subsidiary). As a result, the shareholders of the liquidated companies
became shareholders of FCC. Following the liquidations, UTG holds 72% of
the common stock of FCC.
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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 affiliates.
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.
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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 affiliates 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 affiliates require blood samples to be drawn with
individual insurance applications for coverage over $45,000 (age 46 and
above) or $95,000 (age 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
affiliates 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 affiliates'
experience adjusted to reflect anticipated trends and to include provisions
for possible unfavorable deviations. The Company makes these assumptions
at the time the contract
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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 each of the years 1996, 1995 and 1994.
REINSURANCE
As is customary in the insurance industry, the Company's insurance
affiliates 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 affiliate (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.
INVESTMENTS
At December 31, 1996, substantially all of the assets of the Company
represent investments or receivables in affiliates. The Company does own
one mortgage loan as of December 31, 1996. Interest income was derived
from mortgage loans and cash and cash equivalents.
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 affiliates 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 affiliates, 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 affiliates 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 affiliates 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, and payment of dividends in excess of
specified amounts by the insurance affiliate within the holding company
system are required.
7
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 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.
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 reinsurance agreement with First
International Life Insurance Company ("FILIC"). Additional information
about the reinsurance agreement with FILIC can be found in the section
titled Reinsurance. 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.
8
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 affiliates has a
Ratio that is in excess of 300% of the authorized control level;
accordingly the Company's affiliates 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.
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
UII has no employees of its own. There are approximately 100 persons who
are employed by the Company's affiliates.
ITEM 2. PROPERTIES
The Company leases approximately 1,951 square feet of office space at 2500
Corporate Exchange Drive, Suite 345, Columbus, Ohio 43231. The lease
expires June 30, 1999 with annual lease rent of $23,000 unadjusted for
additional rent for the Company's pro rata share of building taxes,
operating expenses and management expenses. Under the current lease
agreement, the Company will pay a minimum of $59,000 through the remaining
term of the lease. The rent expense will be approximately $35,000 for
1997. The lease contains no renewal or purchase option clause. The leased
space cannot be sublet without written approval of lessor. Rent expense
for 1996, 1995 and 1994 was approximately $61,000, $69,000 and $68,000,
respectively.
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ITEM 3. LEGAL PROCEEDINGS
The Company and its affiliates 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
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDERS
MATTERS
As of March 1, 1997, there was no established public trading market for the
Company's common stock. The Company's common stock is not listed on any
exchange. The Company has entered into a stock purchase agreement with
LaSalle Group, Inc., whereby LaSalle will acquire 10,000,000 shares of
authorized but unissued shares of UII for $0.70 per share. Please refer to
Note 9 of the Notes to the Financial Statements, pending change in control
of United Income, Inc. and United Trust, Inc., for additional information
regarding the price per share of stock of United Income, Inc.
As of December 31, 1996, no cash dividends had been declared on the common
stock of UII.
See Note 7 in the accompanying financial statements for information
regarding dividend restrictions.
Number of Common Shareholders as of March 3, 1997 is 6,543.
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ITEM 6. SELECTED FINANCIAL DATA
The following table provides selected financial data for the Company for
five (5) years:
FINANCIAL HIGHLIGHTS
(000's omitted, except per share data)
1996 1995 1994 1993 1992
Net Operating
Revenues $ 1,791 $ 2,234 $ 1,667 $ 1,459 $ 4,255
Operating Costs
and Expenses $ 1,414 $ 1,976 $ 1,627 $ 1,384 $ 4,092
Income taxes $ 0 $ 0 $ 0 $ 0 $ 40
Equity in loss
of investees $ (696) $ (2,406) $ (384) $ (580) $ (346)
Net Income (loss) $ (319) $ (2,148) $ (344) $ (505) $ (223)
Net Income (loss)
per common share (1) $ (0.02) $ (0.11) $ (0.02) $ (0.03) $ (0.01)
Cash Dividend Declared
per common share $ 0 $ 0 $ 0 $ 0 $ 0
Total Assets $ 12,881 $ 13,386 $ 15,414 $ 14,919 $ 15,038
Long Term
Obligations $ 902 $ 0 $ 0 $ 0 $ 0
(1) The comparability of the selected financial data for the year 1992 is
materially affected by the formation of United Trust Group, Inc. ("UTG")
and the sale of UII's subsidiary, United Security Assurance Company ("USA").
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ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At December 31, 1996 and 1995, the balance sheet reflects the assets and
liabilities of UII and its 47% equity interest in UTG. The statements of
operations and statements of cash flows presented for 1996, 1995 and
1994 include the operating results of UII.
LIQUIDITY AND CAPITAL RESOURCES
UII's cash flow is dependent on revenues from a management agreement with
USA and its earnings received on invested assets and cash balances. At
December 31, 1996, substantially all of the shareholders equity
represents investment in affiliates. UII does not have significant day to
day operations of its own. Cash requirements of UII primarily relate to the
payment of interest on its convertible debentures and 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 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.
The Company currently has $440,000 in cash and cash equivalents. The
Company holds one mortgage loan. Operating activities of the Company
produced cash flows of $256,000, $ 327,000 and $27,000 in 1996, 1995 and
1994, respectively. The Company had uses of cash from investing activities
of $180,000, $193,000 and $811,000 in 1996, 1995 and 1994, respectively.
Cash flows from financing activities were $0, $0 and $905,000 in 1996, 1995
and 1994, respectively.
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company and
First of America Bank - Southeast Michigan, N.A., as trustee. The
Debentures are general nsecured obligations of UII, subordinate in right
of payment to any existing or future senior debt of UII. The Debentures
are exchangeable and transferrable, and are convertible at any time prior to
March 31, 1999 into UII's Common Stock at a conversion price of $1.75 per
share, subject to adjustment in certain events. The Debentures bear
interest from March 31, 1994, payable quarterly, at a variable rate
equal to one percentage point above the prime rate published in the Wall
Street Journal from time to time. On or after March 31, 1999, the
Debentures will be redeemable at UII's option, in whole or in part, at
redemption prices declining from 103% of their principal amount. No
sinking fund will be established to redeem the Debentures. The Debentures
will mature on March 31, 2004. The Debentures are not listed on any
national securities exchange or the NASDAQ National Market System.
Management believes that the overall sources of liquidity available to the
Company will be more than sufficient to satisfy its financial obligations.
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RESULTS OF OPERATIONS
1996 compared to 1995
(a) REVENUES
The Company's source of revenues is derived from service fee income which
is provided via a service agreement with USA. The service agreement
between UII and USA is to provide USA with certain administrative services.
The fees are based on a percentage of premium revenue of USA. The
percentages are applied to both first year and renewal premiums at
different rates.
The Company holds $864,100 of notes receivable from affiliates. The notes
receivable from affiliates consists of three separate notes. The $700,000
note bears 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 remaining $14,100 are 20 year
notes of UTG with interest at 8.5% payable semi-annually. At current
interest levels, the notes will generate approximately $80,000 annually.
(b) EXPENSES
The Company has a sub-contract service agreement with United Trust, Inc.
("UTI") for certain administrative services. Through its facilities and
personnel, UTI performs such services as may be mutually agreed upon between
the parties. The fees are based on a percentage of the fees paid to UII by
USA. The Company has incurred $1,241,000, $1,809,000, and $1,210,000 in
service fee expense in 1996, 1995, and 1994, respectively.
Interest expense of $84,000, $89,000 and $59,000 was incurred in 1996, 1995
and 1994, respectively. The interest expense is directly attributable to
the convertible debentures. The Debentures bear interest at a variable rate
equal to one percentage point above the prime rate published in the Wall
Street Journal from time to time.
(c) EQUITY IN LOSS OF INVESTEES
Equity in earnings of investees represents UII's 47% share of the net
loss of UTG. Included with this filing as Exhibit 99(d) are audited
financial statements of UTG. Following is a discussion of the results of
operations of UTG:
REVENUES OF UTG
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.
13
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 $466,000 and $114,000 in 1996 and 1995,
respectively. 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.
EXPENSES OF UTG
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.
14
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 26% 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 6% 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 $1,623,000 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 10 "Notes Payable" of the Consolidated Notes to the
Financial Statements for more information on this matter.
NET LOSS OF UTG
UTG had a net loss of $1,661,000 in 1996 compared to a net loss of
$5,321,000 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.
(d) Net loss
The Company recorded a net loss of $319,000 for 1996 compared to a
net loss of $2,148,000 for the same period one year ago. The net loss
is from the equity share of UTG's operating results.
RESULTS OF OPERATIONS
1995 compared to 1994
(a) Revenues
The Company's source of revenues is derived from service fee income which
is provided via a service agreement with USA. The service agreement between
UII and USA is to provide USA with certain administrative services. The
fees are based on a percentage of premium revenue of USA. The percentages
are applied to both first year and renewal premiums at different rates.
15
The Company holds $714,100 of notes receivable from affiliates.
$700,000 of these notes represent a participation interest in the senior
debt of FCC. The notes carry interest at a rate of 1% above prime,
with interest received quarterly. The remaining $14,100 are 20 year
notes of UTG with interest at 8.5% payable semi-annually. At current
interest levels, the notes will generate approximately $66,000 annually.
(b) EXPENSES
The Company has a sub-contract service agreement with United Trust, Inc.
("UTI") for certain administrative services. Through its facilities and
personnel, UTI performs such services as may be mutually agreed upon between
the parties. The fees are based on a percentage of the fees paid to UII by
USA. The Company has incurred $1,809,000, $1,210,000, and $921,000 in
service fee expense in 1995, 1994, and 1993 respectively.
Interest expense of $89,000 and $59,000 was incurred in 1995 and 1994,
respectively. The interest expense is directly attributable to the
convertible debentures. The Debentures bear interest at a variable rate
equal to one percentage point above the prime rate published in the Wall
Street Journal from time to time.
(c) EQUITY IN LOSS OF INVESTEES
Equity in earnings of investees represents UII's 47% share of the net
loss of UTG. Included with this filing as Exhibit 99(d) are audited
financial statements of UTG. Following is a discussion of the results of
operations of UTG:
REVENUES OF UTG
Total revenue increased slightly when comparing 1995 to 1994.
Premium income, net of reinsurance premium, decreased 7% when
comparing 1995 to 1994. The decrease is primarily attributed to the
reduction in new business production and the change in products
marketed. In 1995, the Company has streamlined the product portfolio,
as well as restructured the marketing force. The decrease in first
year premium production is directly related to the Company's
change in distribution systems. The Company has changed its focus
from primarily a broker agency distribution system to a captive
agent system. Business written by the broker agency force in recent
years did not meet Company expectations. With the change in focus of
distribution systems, most of the broker agents were terminated.
(The termination of the broker agency force caused a non-recurring
write down of the value of agency force asset. See discussion of
amortization of agency force for further details.)
The change in marketing strategy from traditional life insurance
products to universal life insurance products had a significant
impact on new business production. As a result of the change in
marketing strategy the agency force went through a restructure and
retraining process. Cash collected from the universal life and
interest sensitive products contribute only the risk charge to
premium income, however traditional insurance products contribute
monies received to premium income. One factor that has had a
positive impact on premium income is the improvement of persistency.
Persistency is a measure of insurance in force retained in
relation to the previous year. Overall, persistency improved to 87.5%
in 1995 compared to 86.3% in 1994.
Other considerations, net of reinsurance, increased 13% compared to
one year ago. Other considerations consists of administrative charges
on universal life and interest sensitive life insurance products. The
insurance in force relating to these types of products continues to
increase as marketing efforts are focused on universal life insurance
products.
16
Net investment income increased 8% when comparing 1995 to 1994.
The change reflected an increase in the amount of invested assets,
which was partially offset by a lower effective yield on investments
made during 1995. The overall investment yields for 1995, 1994 and
1993, are 7.04%, 7.13% and 7.22%, respectively. The Company has been
able to increase its investment portfolio through financing cash flows,
generated by cash received through sales of universal life insurance
products. Although the Company sold no fixed maturities during the
last few years, it did experience a significant turnover in the
portfolio. Many companies with bond issues outstanding took advantage
of lower interest rates and retired older debt which carried higher
rates. This was accomplished through early calls and accelerated
pay-downs of fixed maturity investments.
The Company's investments are generally managed to match related
insurance and policyholder liabilities. The Company, in conjunction
with the decrease in average yield of the Company's fixed maturity
portfolio has decreased the average crediting rate for the insurance
and investment products. The comparison of investment return with
insurance or investment product crediting rates establishes an interest
spread. The minimum interest spread between earned and credited rates
is 1% on the "Century 2000" universal life insurance product, the
Company's primary product. The Company monitors investment yields,
and when necessary takes action to adjust credited interest
rates on its insurance products to preserve targeted spreads. Over 60%
of the insurance and investment product reserves are crediting 5% or
less in interest and 39% of the insurance and investment product
reserves are crediting 5.25% to 6% in interest. It is expected that
the monitoring of the interest spreads by management will provide the
necessary margin to adequately provide for associated costs on
insurance policies the Company has in force and will write in the
future.
Realized investment losses were $114,000 and $1,224,000 in 1995
and 1994, respectively. Fixed maturities and equity securities
realized net investment losses of $224,000 and real estate realized net
investment gains of $100,000 in 1995. The realized loss in 1995 can
not be attributed to any one specific transaction. In 1994, the
Company realized losses of $865,000 due to a permanent impairment of
property located in Louisiana. The permanent impairment was based on
recent appraisals and marketing analysis of surrounding properties.
The Company realized a gain of $467,000 from the sale of an
insignificant subsidiary in 1994. 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.
EXPENSES OF UTG
Total expenses increased 16% when comparing 1995 to 1994.
Life benefits, net of reinsurance benefits and claims, decreased 4%
compared to 1994. The decrease is related to the decrease in first
year premium production. Another factor that has caused life benefits
to decrease is that during 1994, the Company lowered its crediting
rates on interest sensitive products in response to financial
market conditions. This action will facilitate the appropriate
spreads between investment returns and credited interest rates. It
takes approximately one year to fully realize a change in credited
rates since a change becomes effective on each policy's next
anniversary. Please refer to discussion of net investment income for
analysis of interest spreads.
The Company experienced an increase of 6% in mortality during 1995
compared to 1994. The increase in mortality is due primarily to
settlement expenses discussed in the following paragraph:
During the third quarter of 1994, UG became aware that certain new
insurance business was being solicited by certain agents and
issued to individuals considered to be not insurable by Company
standards. These policies had a face amount of $22,700,000 and
represent 1/2 of 1% of the insurance in force. Management's analysis
indicates that the expected death claims on the business in force to
be adequately covered by the mortality assumptions inherent in the
calculation of statutory reserves. Nevertheless, management has
determined it is in the best interest of the Company to repurchase as
many of the policies as possible. As of December 31, 1995, there
remained approximately $5,738,000 of the original face amount which
have not been settled. The Company will continue its efforts to
repurchase as many of the policies as possible and
17
regularly apprise the Ohio Department of Insurance regarding the status
of this situation. Through December 31, 1995, the Company spent a
total of $2,886,000 for the repurchase of these policies and for the
legal defense of related litigation. In relation to the repurchase of
insurance policies the Company incurred life benefits of $720,000 and
$1,250,000 in 1995 and 1994, respectively. The Company incurred legal
costs of $687,000 and $229,000 in 1995 and 1994, respectively.
Dividends to policyholders increased approximately 16% when
comparing 1995 to 1994. USA continued to market participating policies
through most of 1994. Management expects dividends to policyholders
will continue to increase in the future. A significant portion of
the insurance in force is participating insurance. A significant
portion of the participating business is relatively newer business,
and the dividend scale for participating policies increases in the
early durations. The dividend scale is subject to approval of
the Board of Directors and may be changed at their discretion. The
Company has discontinued its marketing of participating policies.
Commissions and amortization of deferred policy acquisition costs
increased 21% in 1995 compared to 1994. The increase is
directly attributed to the amortization of a larger asset. The increase
is also caused by the reduction in first year premium production. To
a lesser extent the increase in amortization of deferred policy
acquisition costs is directly related to the change in
products that is currently marketed. The Company revised its
portfolio of products as previously discussed in premium income.
These new products pay lower first year commissions than the products
sold in prior periods. The asset increased due to first year premium
production by the agency force. The Company did benefit from improved
persistency.
Amortization of cost of insurance acquired decreased 40% in 1995
compared to 1994. Cost of insurance acquired is amortized in
relation to expected future profits, including direct charge-offs for
any excess of the unamortized asset over the projected future profits.
The Company did not have any charge-offs during the periods covered by
this report. The decrease in amortization during the current period
is a normal fluctuation due to the expected future profits.
Amortization of cost of insurance acquired is particularly sensitive
to changes in persistency of certain blocks of insurance in force. The
Company's average persistency rate for all policies in force for
1995 and 1994 has been approximately 87.5% and 86.3%, respectively.
During 1995, the Company reported a non-recurring write down of value
of agency force of $8,297,000. The write down is directly related to
the Company's change in distribution systems. The Company has changed
its focus from primarily a broker agency distribution system to a
captive agent system. Business produced by the broker agency force in
recent years did not meet Company expectations. With the change in
focus of distribution systems, most of the broker agents were
terminated. The termination of most of the agents involved in the
broker agency force caused management to re-evaluate the value of the
agency force carried on the balance sheet. As of December 31, 1995,
the remaining value of the agency force on the balance sheet
represents the active agency forces that continue to originate premium
production.
Operating expenses increased 20% in 1995 compared to 1994. The
increase was caused by several factors. The primary factor for the
increase in operating expenses is due to the decrease in production.
The decrease in production was discussed in the analysis of premium
income. As such, the Company was positioned to handle significantly
more first year production than was produced. First year operating
expenses that were deferred and capitalized as a deferred policy
acquisition costs asset was $532,000 in 1995 compared to $1,757,000 in
1994. The difference between the policy acquisition costs deferred
in 1995 compared to 1994, effected the increase in operating expenses.
The increase in operating expenses was offset, to a lesser extent, from
a 12% reduction in staff in 1995 compared to 1994. The reduction in
staff was achieved by attrition.
Another factor that caused the increase in operating expenses is
directly related to increased legal costs. During the third quarter
of 1994, UG became aware that certain new insurance business was being
solicited by certain agents and issued to individuals considered to be
not insurable by Company standards. These policies had a face amount of
$22,700,000 and represent 1/2 of 1% of the insurance in force of the
Company. As of December 31, 1995, there remained approximately
$5,738,000 of the original face amount which have not been
settled. The Company will continue its efforts to repurchase as
many of the policies as possible and
18
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.
NET LOSS OF UTG
UTG had a net loss of $5,321,000 in 1995 compared to a net loss of
$1,116,000 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.
(d) NET LOSS
The Company recorded a net loss of $2,148,000 for 1995 compared to a
net loss of $344,000 for the same period one year ago. The increase in
net loss is from the equity share of UTG's operating results for the year.
FINANCIAL CONDITION
The Company owns 47% equity interest in UTG which controls total
assets of approximately $355,000,000. Audited financial statements of UTG
are presented as Exhibit 99(d) of this filing.
REGULATORY ENVIRONMENT
The Company's insurance affiliates 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 affiliates, 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 affiliates 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 affiliates 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, and payment of dividends in excess of specified
amounts by the insurance affiliate within the holding company system are
required.
19
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 it's 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 the individual state 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.
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 normal range due to the reinsurance
agreement with First International Life Insurance Company ("FILIC").
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 affiliates in the form of
managementand cost sharing arrangements 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 affiliate is domiciled.
The NAIC has adopted Risk-Based Capital ("RBC") requirements for
life/health insurance companies to evaluate the adequacy of statutory
capital and urplus 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.
20
At December 31, 1996, each of the Company's insurance affiliates has a
Ratio that is in excess of 300% of the authorized control level;
accordingly the Company's affiliates 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.
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.
21
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:
Page No.
UNITED INCOME, INC.
Independent Auditor's Report for the
Years ended December 31, 1996, 1995, 1994 . . . . . . . . 23
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . 24
Statements of Operations . . . . . . . . . . . . . . . . . 25
Statements of Shareholders' Equity . . . . . . . . . . . . 26
Statements of Cash Flows . . . . . . . . . . . . . . . . . 27
Notes to Financial Statements . . . . . . . . . . . . 28-34
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
22
Independent Auditors' Report
Board of Directors and Shareholders
United Income, Inc.
We have audited the accompanying balance sheets of United Income, Inc.
(an Ohio corporation) as of December 31, 1996 and 1995, and the related
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 financial position of United Income, Inc. as
of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 26, 1997
23
UNITED INCOME, INC.
BALANCE SHEET
As of December 31, 1996 and 1995
ASSETS
1996 1995
Cash and cash equivalents $ 439,676 $ 364,370
Mortgage loans 122,853 182,206
Notes receivable from affiliate 864,100 714,100
Accrued interest income 11,784 7,040
Property and equipment (net of accumulated
depreciation $92,140 and $102,208) 2,578 12,058
Investment in affiliates 11,324,947 11,985,958
Receivable from (Indebtedness to) affiliate 31,837 (87,869)
Other assets (net of accumulated
amortization $146,011 and $108,995) 83,274 120,290
TOTAL ASSETS $ 12,881,049 $ 13,298,153
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities and accruals:
Convertible debentures $ 902,300 $ 902,300
Other liabilities 1,273 40,722
TOTAL LIABILITIES 903,573 943,022
Shareholders' equity:
Common stock - no par value, stated value
$0.033 per share. 33,000,000 shares
authorized, 22,424,572 issued in 1996,
and 22,423,572 issued in 1995 740,010 739,977
Additional paid-in capital 14,634,122 14,633,455
Unrealized depreciation of investments held
for sale of affiliate (59,508) (236)
Accumulated deficit (3,253,427) (2,934,344)
12,061,197 12,438,852
Common stock in treasury, at cost
(2,537,000 shares) (83,721) (83,721)
TOTAL SHAREHOLDERS' EQUITY 11,977,476 12,355,131
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 12,881,049 $ 13,298,153
See accompanying notes
24
UNITED INCOME, INC.
STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1996
1996 1995 1994
Revenues:
Interest income $ 13,099 $ 16,516 $ 26,520
Interest income from affiliates 79,433 71,646 71,811
Service agreement income from
affiliates 1,567,891 2,015,325 1,392,141
Other income from affiliates 127,922 129,627 171,682
Realized investment gains 2,599 905 0
Other income 3 130 5,192
1,790,947 2,234,149 1,667,346
Expenses:
Management fee to affiliate 1,240,735 1,809,195 1,210,284
Operating expenses 89,529 78,505 358,074
Interest expense 84,027 88,538 58,630
1,414,291 1,976,238 1,626,988
Income before provision for income taxes
and equity in loss of investees 376,656 257,911 40,358
Provision for income taxes 0 0 0
Equity in loss of investees (695,739) (2,405,813) (384,395)
Net loss $ (319,083)$(2,147,902) $ (344,037)
Net loss per common share $ (0.02)$ (0.11) $ (0.02)
Weighted average common
shares outstanding 19,886,920 19,886,572 19,838,931
See accompanying notes.
25
UNITED INCOME, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1996
1996 1995 1994
Common stock
Balance, beginning of year $ 739,977 $ 739,977 $ 738,047
Exercise of stock options 33 0 1,930
Balance, end of year $ 740,010 $ 739,977 $ 739,977
Additional paid-in capital
Balance beginning of year $14,633,455 $14,633,455 $14,541,786
Exercise of stock options 667 0 91,669
Balance, end of year $14,634,122 $14,633,455 $14,633,455
Unrealized appreciation (depreciation)
of investments held for sale
of affiliate
Balance, beginning of year $ (236) $ (99,907) $ (16,435)
Change during year (59,272) 99,671 (83,472)
Balance, end of year $ (59,508) $ (236) $ (99,907)
Accumulated deficit
Balance, beginning of year $(2,934,344) $ (786,442) $ (442,405)
Net loss (319,083) (2,147,902) (344,037)
Balance, end of year $(3,253,427) $(2,934,344) $ (786,442)
Treasury stock $ (83,721) $ (83,721) $ (83,721)
Total shareholders' equity,
end of year $11,977,476 $12,355,131 $14,403,362
See accompanying notes
26
UNITED INCOME, INC.
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 $ (319,083) $(2,147,902) $ (344,037)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization 45,331 52,169 53,642
Gain on payoff of mortgage loan (2,599) 0 0
Accretion of discount on mortgage
loans (481) (1,591) 0
Compensation expense through stock
option plan 667 0 91,227
Equity in loss of investees 695,739 2,405,813 384,395
Changes in assets and liabilities:
Change in accrued interest income (4,744) (1,713) 1,181
Change in indebtedness of affiliates (119,706) 25,598 (105,249)
Change in deposits and other assets 0 0 (85,471)
Change in other liabilities (39,449) (5,469) 31,559
Net cash provided by operating activities 255,675 326,905 27,247
Cash flows from investing activities:
Change in notes receivable from
affiliate (150,000) 0 300,000
Purchase of investments in
affiliates 0 (26,091) (1,050,651)
Capital contribution to investee (94,000) (47,000) 0
Sale of investments in affiliates 0 1,810 0
Payments of principal on mortgage
loans 62,434 4,480 0
Purchase of mortgage loan 0 (126,000) (60,000)
Proceeds from sale of property
and equipment 1,164 0 0
Net cash used in investing activities (180,402) (192,801) (810,651)
Cash flows from financing activities:
Proceeds from sale of debentures 0 0 902,300
Proceeds from sale of common stock 33 0 2,371
Net cash provided by financing activities 33 0 904,671
Net increase in cash and cash
equivalents 75,306 134,104 121,267
Cash and cash equivalents at
beginning of year 364,370 230,266 108,999
Cash and cash equivalents at
end of year $ 439,676 $ 364,370 $ 230,266
See accompanying notes
27
UNITED INCOME, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION - At December 31, 1996, the affiliates of United Income,
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").
28
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 Income, Inc. ("UII"), referred to as the
("Company"), was incorporated November 2, 1987, and commenced its
activities January 20, 1988. UII is an insurance holding company that
through its insurance affiliates sells individual life insurance
products. UII is an affiliate of UTI, an Illinois insurance holding
company. UTI owns 29.7% of UII.
C. MORTGAGE LOANS - at unpaid balances, adjusted for amortization premium
or discount, less allowance for possible losses.
Realized gains and losses on sales of mortgage loans are recognized in
net income on a specific identification basis.
D. PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost.
Depreciation is provided using both straight-line and accelerated
methods. Accumulated depreciation was $92,140 in 1996 and $102,208 in
1995. Depreciation expense for the years ended December 1996, 1995,
and 1994 was $8,315, $11,265, and $17,080 respectively.
E. CASH AND CASH EQUIVALENTS - The Company considers certificates of
deposit and other short-term investment instruments with an original
purchased maturity of three months or less as cash equivalents.
F. EARNINGS PER SHARE - Earnings per share are based upon the weighted
average number of common shares outstanding during the respective
period.
G. 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.
H. RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform with the current year presentation. Such reclassifications
had no effect on previously reported net income, total assets, or
shareholders' equity.
2. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
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) Mortgage loans
Mortgage loans are carried at the unpaid principal balances net of
unamortized purchase discounts. Yields on these loans exceed current
mortgage loan rates in the market. Therefore, management believes the
market value of these loans is at least equal to carrying value.
29
(b) Notes receivable from affiliate
For notes receivable from affiliate, which is subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
(c) Convertible debentures
For the convertible debentures, which are subject to a floating rate of
interest, carrying value is a reasonable estimate of fair value.
3. RELATED PARTY TRANSACTIONS
Effective November 8, 1989, United Security Assurance Company ("USA")
entered into a service agreement with its then direct parent, UII, for
certain administrative services. The Company recognized service agreement
income of $1,568,000, $2,015,000 and $1,392,000 in 1996, 1995 and 1994,
respectively.
Effective September 1, 1990, the Company entered into a service agreement
with United Trust, Inc. (UTI) for certain administrative services. Through
its personnel, UTI performs such services as may be mutually agreed upon
between the parties. In compensation for its services, the Company pays
UTI a contractually established fee. The Company incurred expenses of
approximately $941,000, $1,209,000 and $835,000 during 1996, 1995 and 1994,
respectively, pursuant to the terms of the service agreement with UTI. In
addition, the Company incurred $300,000, $600,000 and $375,000 during 1996,
1995 and 1994, respectively, as reimbursement for services performed on its
behalf by FCC.
At December 31, 1996, the Company owns a $864,000 note receivable from
affiliate. In December 1993, the Company acquired $1,000,000 of FCC, an
affiliate, senior debt from outside third parties. The notes carry
interest at a rate of 1% above prime. Interest is received quarterly.
During 1994, the Company sold $300,000 of the debt to UTI for cash.
4. STOCK OPTION PLANS
The Company has a stock option plan under which certain directors, officers
and employees may be issued options to purchase up to 450,000 shares of
common stock at $.915 per share. Options become exercisable at 25%
annually beginning one year after date of grant and expire generally in
five years. In November 1992, 149,100 option shares were granted. At
December 31, 1996, options for 155,550 shares were exercisable and options
for 293,950 shares were available for grant. No options were exercised
during 1996.
On January 15, 1991, the Company adopted an additional Non-Qualified Stock
Option Plan under which certain employees and sales personnel may be
granted options. The plan provides for the granting of up to 600,000
options at an exercise price of $.033 per share. The options generally
expire five years from the date of grant. Options for 146,000 shares of
common stock were granted in 1991, options for 19,000 shares were granted
in 1993 and options for 4,300 shares were granted in 1995. A total of
166,000 option shares have been exercised as of December 31, 1996. At
December 31, 1996, 3,300 options have been granted and are exercisable.
Options for 1,000 and 0 shares were exercised during 1996 and 1995,
respectively.
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.
30
5. FEDERAL INCOME TAXES
The Company has net operating loss carryforwards for federal income tax
purposes expiring as follows:
UII
2006 $ 319,000
2007 532,000
TOTAL $ 851,000
The Company has established a deferred tax asset of $298,000 for its
operating loss carryforwards and has established an allowance of $298,000
against this asset. The Company has no other deferred tax components which
would be reflected in the consolidated balance sheets.
The provision 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
Income tax at statutory rate of
35% of income before income taxes $ 132,000 $ 90,000 $ 14,000
Dividends received deduction 0 0 (3,000)
Amortization of start up costs 0 0 (11,000)
Utilization of net operating loss
carryforward (134,000) (92,000) 0
Depreciation 2,000 2,000 0
Provision for income taxes $ 0 $ 0 $ 0
31
6. SUMMARIZED FINANCIAL INFORMATION OF UNITED TRUST GROUP, INC.
The following provides summarized financial information for the Company's
50% or less owned affiliate:
December 31, December 31,
ASSETS 1996 1995
Total investments $ 223,964,687 $ 244,815,985
Cash and cash equivalents 16,903,789 12,024,668
Cost of insurance acquired 41,362,973 59,601,720
Other assets 72,768,173 38,831,261
Total assets $ 354,999,622 $ 355,273,634
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 268,771,766 $ 261,796,945
Notes payable 19,839,853 21,463,328
Deferred taxes 11,591,086 16,100,283
Other liabilities 6,335,866 5,315,613
Total liabilities 306,538,571 304,676,169
Minority interests in
consolidated subsidiaries 13,332,034 13,881,640
Shareholders' equity
Common stock no par value 45,926,705 45,726,705
Authorized 10,000 shares - 100 issued
Unrealized depreciation of investment
in stocks (126,612) (501)
Accumulated deficit (10,671,076) (9,010,379)
Total shareholders' equity 35,129,017 36,715,825
Total liabilities and
shareholders' equity $ 354,999,622 $ 355,273,634
1996 1995 1994
Premiums, net of reinsurance $ 27,618,892 $ 29,998,125 $ 32,404,489
Net investment income 15,902,107 15,497,547 14,325,243
Other 2,955,112 3,101,648 1,678,268
46,476,111 48,597,320 48,408,000
Benefits, claims and
settlement expenses 30,326,032 29,855,764 29,661,234
Other expenses 22,953,093 30,725,908 22,379,433
53,279,125 60,581,672 52,040,667
Loss before income tax and
minority interest (6,803,014) (11,984,352) (3,632,667)
Income tax credit (provision) 4,643,961 4,724,792 2,005,207
Minority interest in loss of
consolidated subsidiaries 498,356 1,938,684 511,178
Net loss $ (1,660,697) $ (5,320,876) $ (1,116,282)
32
7. SHAREHOLDER DIVIDEND RESTRICTION
At December 31, 1996, substantially all of consolidated shareholders'
equity represents investment in affiliates. The payment of cash dividends
to shareholders by UII and 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 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.
8. CONVERTIBLE DEBENTURES
In early 1994, UII received $902,300 from the sale of Debentures. The
Debentures were issued pursuant to an indenture between the Company and
First of America Bank - Southeast Michigan, N.A., as trustee. The
Debentures are general unsecured obligations of UII, subordinate in right
of payment to any existing or future senior debt of UII. The Debentures
are exchangeable and transferrable, and are convertible at any time prior
to March 31, 1999 into UII's Common Stock at a conversion price of $1.75
per share, subject to adjustment in certain events. The Debentures bear
interest from March 31, 1994, payable quarterly, at a variable rate equal
to one percentage point above the prime rate published in the Wall Street
Journal from time to time. On or after March 31, 1999, the Debentures will
be redeemable at UII's option, in whole or in part, at redemption prices
declining from 103% of their principal amount. No sinking fund will be
established to redeem Debentures. The Debentures will mature on March 31,
2004. The Debentures are not listed on any national securities exchange or
the NASDAQ National Market System.
9. PENDING CHANGE IN CONTROL OF UNITED INCOME, INC.
On September 23, 1996, UII and UTI 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 affiliates). It is anticipated the transaction
will be completed during the second quarter of 1997.
33
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1996
1st 2nd 3rd 4th
Net investment income $ 3,673 $ 3,793 $ 2,893 $ 2,740
Interest income/affil. 18,078 20,717 20,249 20,389
Service agreement income 536,604 459,454 406,952 164,881
Total revenues 583,627 535,094 456,715 215,511
Management fee 421,963 425,672 294,170 98,930
Operating expenses 51,804 14,514 12,045 11,166
Interest expense 21,430 20,865 20,866 20,866
Operating income 88,430 74,043 129,634 84,549
Net income (loss) 235,469 50,795 (583,728) (21,619)
Net income (loss) per
share 0.01 0.00 (0.03) 0.00
1995
1st 2nd 3rd 4th
Net investment income $ 1,431 $ 7,283 $ 4,064 $ 3,738
Interest income/affil. 22,111 13,830 17,778 17,927
Service agreement income 505,118 529,411 494,867 485,929
Total revenues 570,284 587,002 540,031 536,832
Management fee 437,041 483,677 452,935 435,542
Operating expenses 46,264 23,951 12,243 (3,953)
Interest expense 21,485 22,676 22,384 21,993
Operating income 65,494 56,698 52,469 83,250
Net income (loss) 137,752 (530,781) 132,804 (1,887,677)
Net income (loss)
per share 0.01 (0.03) 0.01 (0.11)
1994
1st 2nd 3rd 4th
Net investment income $ 3,567 $ 16,569 $ 4,901 $ 1,483
Investment income/affil. 17,994 19,890 17,574 16,353
Service agreement income 313,531 369,475 330,001 379,134
Total revenues 371,022 463,826 415,056 417,442
Management fee 288,119 321,685 295,999 304,481
Operating expenses 75,334 65,305 108,768 108,667
Interest expense 1,281 35,282 2,314 19,753
Operating income (loss) 6,288 41,554 7,975 (15,459)
Net income (loss) 280,796 (73,133) (393,095) (158,605)
Net income (loss)
per share 0.01 (0.00) (0.02) (0.01)
34
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 the
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.
35
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
NOTE: Schedules other than those listed above are omitted for the
reasons they are not required or the information is disclosed in
the financial statements or footnotes.
(b) Reports on Form 8-K filed during fourth quarter.
None
(c) Exhibits:
Index to Exhibits (See Page 37).
36
INDEX TO EXHIBITS
Exhibit
Number
3(i) (1) Articles of Incorporation for the Company dated November 2,
1987.
3(i) (1) Amended Articles of Incorporation for the Company dated
January 27, 1988.
3(ii) (1) Code of Regulations for the Company.
10(a) (1) Service Agreement between United Income, Inc. and United
Security Assurance Company dated November 8, 1989.
10(b) (2) Subcontract Service Agreement between United Income, Inc. and
United Trust, Inc. dated September 1, 1990.
10(c) (2) Non-Qualified Stock Option Plan
10(d) (2) Stock Option Plan
10(e) Credit Agreement dated May 8, 1996 between First of America
Bank - Illinois, N.A., as lender and First Commonwealth
Corporation, as borrower.
10(f) $8,900,000 Term Note of First Commonwealth Corporation to
First of America Bank - Illinois, N.A. dated May 8, 1996.
10(g) 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.
99(a) (1) Order of Ohio Division of Securities registering United's
Securities dated March 9, 1988.
99(b) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s Securities dated April 5, 1989.
99(c) (1) Order of Ohio Division of Securities registering United
Income, Inc.'s Securities dated April 23, 1990.
99(d) Audited financial statements of United Trust Group, Inc.
FOOTNOTE
(1) Incorporated by reference from the Company's
Registration Statement on Form 10, File No. 0-
18540, filed on April 30, 1990.
(2) Incorporated by reference from the Company's
Annual Report on Form 10-K, File No. 0-18540, as
of December 31, 1991.
37
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 INCOME, INC.
Registrant
/s/ Vincent T. Aveni Date: March 25, 1997
Vincent T. Aveni, Director
/s/ Marvin W. Berschet Date: March 25, 1997
Marvin W. Berschet, Director
/s/ John K. Cantrell Date: March 25, 1997
John K. Cantrell, Director
/s/ Gertrude W. Donahey Date: March 25, 1997
Gertrude W. Donahey, Director
/s/ Thomas F. Morrow Date: March 25, 1997
Thomas F. Morrow, Chief Operating
Officer, Vice Chairman, and Director
/s/ Charlie E. Nash Date: March 25, 1997
Charlie E. Nash, Director
/s/ Larry E. Ryherd Date: March 25, 1997
Larry E. Ryherd, Chairman of the Board,
Chief Executive Officer, President,
and Director
/s/ Robert W. Teater Date: March 25, 1997
Robert W. Teater, Director
/s/ James E. Melville Date: March 25, 1997
James E. Melville, Chief Financial Officer
and Senior Executive Vice President
38
EXHIBIT 99(d)
AUDITED FINANCIAL STATEMENTS OF
UNITED TRUST GROUP, INC.
39
Independent Auditors' Report
Board of Directors and Shareholders
United Trust Group, Inc.
We have audited the accompanying consolidated balance sheets of United
Trust Group, 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 Group, 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 Group, 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
40
UNITED TRUST GROUP, 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 16,903,789 12,024,668
Investment in affiliates 350,000 350,000
Accrued investment income 3,459,748 3,655,569
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 1,734,321 1,803,468
Cost of insurance acquired 47,536,812 59,601,720
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 1,626,964 1,522,133
Total assets $ 354,999,622 $ 355,273,634
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 70,663 215,200
Deferred 11,591,086 16,100,283
Notes payable 19,839,853 21,463,328
Indebtedness to (from) affiliates, net 62,084 (162,388)
Other liabilities 6,203,119 5,262,801
Total liabilities 306,538,571 304,676,169
Minority interests in consolidated
subsidiaries 13,332,034 13,881,640
Shareholders' equity:
Common stock no par value.
Authorized 10,000 shares - 100
shares issued 45,926,705 45,726,705
Unrealized depreciation of investments
held for sale (126,612) (501)
Accumulated deficit (10,671,076) (9,010,379)
Total shareholders' equity 35,129,017 36,715,825
Total liabilities and
shareholders' equity $ 354,999,622 $ 355,273,634
See accompanying notes.
41
UNITED TRUST GROUP, 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 15,902,107 15,497,547 14,325,243
Realized investment gains
and (losses), net (465,879) (114,235) (1,224,274)
Other income 95,425 115,472 162,504
46,476,111 48,597,320 48,408,000
Benefits and 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 5,690,069 4,509,755 7,128,247
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 11,285,566 10,634,314 8,859,740
Interest expense 1,752,573 1,980,360 1,949,015
53,279,125 60,581,672 52,040,667
Loss before income taxes
and minority interest (6,803,014) (11,984,352) (3,632,667)
Credit for income taxes 4,643,961 4,724,792 2,005,207
Minority interest in loss
of consolidated subsidiaries 498,356 1,938,684 511,178
Net loss $ (1,660,697) $ (5,320,876) $ (1,116,282)
Net loss per
common share $ (16,607) $ (53,209) $ (11,163)
Weighted average common
shares outstanding 100 100 100
See accompanying notes
42
UNITED TRUST GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Years Ended December 31, 1996
1996 1995 1994
Common stock
Balance, beginning of year $ 45,726,705 $ 45,626,705 $ 43,078,761
Capital contribution 200,000 100,000 2,547,944
Balance, end of year $ 45,926,705 $ 45,726,705 $ 45,626,705
Unrealized appreciation
(depreciation) of
investments held for sale
Balance, beginning of year $ (501) $ (212,567) $ (34,968)
Change during year (126,111) 212,066 (177,599)
Balance, end of year $ (126,612) $ (501) $ (212,567)
Accumulated deficit
Balance, beginning of year $ (9,010,379) $ (3,689,503) $ (2,573,221)
Net loss (1,660,697) (5,320,876) (1,116,282)
Balance, end of year $(10,671,076) $ (9,010,379) $ (3,689,503)
Total shareholders' equity,
end of year $ 35,129,017 $ 36,715,825 $ 41,724,635
See accompanying notes.
43
UNITED TRUST GROUP, 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 $ (1,660,697) $ (5,320,876) $ (1,116,282)
Adjustments to reconcile
net loss to net cash provided
by 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 465,879 114,235 1,224,274
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 5,690,069 4,509,755 7,128,247
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 371,991 694,194 466,213
Minority interest 498,356 (1,938,684) (511,178)
Change in accrued investment
income 195,821 (173,517) (572,900)
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 (4,653,734) (4,749,335) (2,160,132)
Change in indebtedness (to)
from affiliates, net 224,472 (3,023) 158,606
Change in other assets and
liabilities, net 41,277 (1,562,548) (342,382)
Net cash provided by operating
activities 2,616,497 675,244 2,557,945
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 9,300,000 300,000 0
Payments of principal on
notes payable (10,923,475) (1,205,861) (2,005,687)
Net cash provided by (used in)
financing activities (13,900,121) 8,107,660 6,211,123
Net increase (decrease) in cash
and cash equivalents 4,879,121 752,966 (19,825,639)
Cash and cash equivalents at
beginning of year 12,024,668 11,271,702 31,097,341
Cash and cash equivalents at
end of year $ 16,903,789 $ 12,024,668 $ 11,271,702
See accompanying notes.
44
UNITED TRUST GROUP, 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
Group, 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").
45
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 Group, 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. All significant intercompany
accounts and transactions have been eliminated.
D. BASIS OF PRESENTATION - The financial statements of United
Trust Group, 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.
46
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
47
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 30% 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 $ 59,602,000 $ 64,111,000 $ 73,237,000
Additions from
acquisitions 0 0 0
Interest accretion 6,649,000 7,044,000 7,593,000
Amortization (12,339,000) (11,553,000) (14,722,000)
Net amortization (5,690,000) (4,509,000) (7,129,000)
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
down-stream merger of
subsidiary 0 0 (618,000)
Write-offs due to impairment 0 0 0
Cost of insurance acquired,
end of year $ 47,537,000 $ 59,602,000 $ 64,111,000
48
Estimated net amortization expense of cost of insurance
acquired for the next five years is as follows:
Interest Net
Accretion Amortization Amortization
1997 $ 5,800,000 $ 9,700,000 $ 3,900,000
1998 5,500,000 8,700,000 3,200,000
1999 5,100,000 7,600,000 2,500,000
2000 4,900,000 7,200,000 2,300,000
2001 4,700,000 7,100,000 2,400,000
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.
49
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 upon the
weighted average number of common shares outstanding during
the year.
Q. CASH EQUIVALENTS - The Company considers certificates of
deposit and other short term instruments with an original
purchased maturity of three months or less as cash equivalents.
R. RECLASSIFICATIONS - Certain prior year amounts have been
reclassified to conform with the current year 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 co-insurance 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 UTG's subsidiaries. The payment of cash
dividends to shareholders by 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.
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 certain 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) $ 2,000 $ 51,000
Deferred tax expense (credit) (4,496,000) (4,727,000) (2,056,000)
$(4,644,000) $(4,725,000) $(2,005,000)
The Companies have net operating loss carryforwards for federal income tax
purposes expiring as follows:
UG FCC
2002 $ 0 $ 527,000
2003 0 285,000
2004 0 283,000
2005 0 139,000
2006 2,109,000 33,000
2007 783,000 676,000
2008 940,000 4,000
2009 0 169,000
2010 0 19,000
TOTAL $ 3,832,000 $ 2,135,000
51
The Company has established a deferred tax asset of $2,088,000 for its
operating loss carryforwards and has established an allowance of
$2,088,000.
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 $(2,381,000) $(4,195,000) $(1,271,000)
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) (599,000) (649,000)
Other 65,000 8,000 (165,000)
Income tax expense (credit) $(4,644,000 )$(4,725,000) $(2,005,000)
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 16,637,883 20,860,602
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 benefits (5,906,087) (5,039,938)
Other liabilities (1,151,405) (818,484)
Federal tax DAC (1,916,536) (2,862,999)
Deferred tax liability $ 11,591,086 $ 16,100,283
52
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 $ 13,253,122 $ 12,185,941
Equity securites 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 512,322 498,496 419,416
Other 233,872 143,753 202,641
Total consolidated investment
income 17,125,010 17,221,985 16,241,051
Investment expenses (1,222,903) (1,724,438) (1,915,808)
Consolidated net investment
income $ 15,902,107 $ 15,497,547 $ 14,325,243
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.
The following tabel 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 subdivisions 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.
53
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
54
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 bonds 71,881,649 1,240,230 448,437 72,673,442
Total $179,926,785 $3,040,456 $1,152,016 $181,815,225
55
Cost or Gross Gross Estimated
Amortized Unrealized Unrealized Market
1995 Cost Gains Losses Value
Investments Held for Sale:
U.S. Government and govt.
agencies and authorities $ 2,001,860 $ 2,579 $ 621 $ 2,003,818
States, municipalities and
political subdivisions 812,454 14,313 3,749 823,018
Collateralized mortgage
obligations 32,177 506 0 32,683
Public utilities 119,379 572 2,123 117,828
All other corporate bonds 258,169 337 9,678 248,828
3,224,039 18,307 16,171 3,226,175
Equity securities 2,086,159 80,721 220,399 1,946,481
Total $ 5,310,198 $ 99,028 $ 236,570 $ 5,172,656
Held to Maturity Securities:
U.S. Government and govt.
agencies and authorities $ 27,488,188 $ 841,786 $ 76,417 $ 28,253,557
States, municipalities and
political subdivisions 6,785,476 305,053 10,895 7,079,634
Collateralized mortgage
obligations 15,395,913 295,344 67,472 15,623,785
Public utilities 59,136,696 2,279,509 134,091 61,282,114
All other corporate bonds 82,267,947 2,974,553 475,333 84,767,167
Total $191,074,220 $6,696,245 $ 764,208 $ 197,006,257
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 Maturity Amortized
December 31, 1996 Cost
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
56
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.
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.
57
(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 notes receivable of $1,680,066 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 Estimate
Carrying Fair Carrying Fair
Assets 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 1,680,066 1,566,562 1,680,066 1,550,742
Liabilities
Notes payable 19,839,853 18,671,155 21,463,328 20,763,009
58
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 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.
59
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 Income, Inc. ("UII") has a service agreement with its affiliate,
USA, 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.
60
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 and its subsidiaries 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. NOTES PAYABLE
At December 31, 1996, the Company has $19,840,000 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 3,831,000 3,831,000
Other notes payable 1,400,000 1,000,000
Encumbrance on real estate 0 23,000
$19,840,000 $ 21,463,000
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.
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 and $250,000 from UTI 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,
61
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 1,937,000
2000 1,537,000
2001 1,537,000
11. OTHER CASH FLOW DISCLOSURE
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.
12. 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.
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 $1,495,000
was attributed to minority interest in loss of consolidated subsidiaries.
The effect of this write down resulted in an increase in the net loss of
$3,898,000. This write down is directly related to the Company's change in
distribution systems. Due to the broker agency force not meeting
management's expectations and lack of production, the Company has changed
its focus from primarily broker agency distribution system to a captive
agent system. With the change in focus, most of the broker agents were
terminated and therefore, management re-evaluated the value of the agency
force carried on the balance sheet. For purposes of the write-down, the
broker agency force has
62
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.
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.
63
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1996
1st 2nd 3rd 4th
Premium income and
other considerations, net $ 7,637,503 $ 8,514,175 $ 7,348,199 $ 7,444,581
Net investment income 3,974,407 3,930,487 4,002,258 3,994,955
Total revenues 12,513,692 12,187,077 11,331,283 10,444,059
Policy benefits including
dividends 6,528,760 7,083,803 8,378,710 8,334,759
Commissions and
amortization of DAC 2,567,921 2,298,549 1,734,048 3,314,436
Operating expenses 3,616,660 3,072,535 3,685,600 910,771
Operating loss (198,649) (267,810) (2,467,075) (3,869,480)
Net income (loss) 268,675 (93,640) (1,563,817) (271,915)
Net income (loss) per
share 2,686.75 (936.40) (15,638.17) (2,719.15)
1995
1st 2nd 3rd 4th
Premium income and
other considerations, net $ 8,703,332 $ 9,507,694 $ 7,868,803 $ 7,018,707
Net investment income 3,857,562 3,849,212 3,757,605 3,918,933
Total revenues 13,385,477 12,566,391 11,514,869 11,130,583
Policy benefits including
dividends 8,097,830 9,113,933 5,978,795 6,665,206
Commissions and
amortization of DAC 2,451,030 2,860,032 3,044,057 1,459,141
Operating expenses 3,449,062 2,742,174 2,498,472 3,924,966
Operating loss (612,445) (2,149,748) (6,455) (9,215,704)
Net income (loss) 95,608 (1,305,599) 126,751 (4,237,636)
Net income (loss) per
share 956.08 (13,055.99) 1,267.51 (42,376.60)
1994
1st 2nd 3rd 4th
Premium income and
other considerations, net $ 8,370,746 $ 9,270,226 $ 9,326,855 $ 8,176,700
Net investment income 3,358,729 3,515,440 3,632,044 3,819,030
Total revenues 12,001,846 13,765,861 10,671,956 11,968,337
Policy benefits including
dividends 6,927,743 7,496,765 7,483,568 7,753,158
Commissions and
amortization of DAC 1,756,091 4,169,240 3,141,884 2,503,463
Operating expenses 2,598,764 2,138,533 2,574,920 1,547,523
Operating income (loss) 719,248 38,677 (2,528,416) (1,784,822)
Net income (loss) 506,003 (165,957) (1,083,563) (372,765)
Net income (loss) per
share 5060.03 (1,659.57) (10,835.63) (3,727.65)
64
UNITED TRUST GROUP, 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
65
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION
PARENT ONLY BALANCE SHEETS
As of December 31, 1996 and 1995 Schedule II
1996 1995
ASSETS
Investment in affiliates $ 35,548,414 $ 37,265,534
Notes receivable from affiliates 10,039,853 10,039,853
Accrued interest income 35,202 35,202
Cash and cash equivalents 39,529 45,031
Total assets $ 45,662,998 $ 47,385,620
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 10,009,853 $ 10,009,853
Notes payable to affiliate 30,000 30,000
Income taxes payable 6,663 3,221
Accrued interest payable 35,202 35,202
Other liabilities 452,263 591,519
Total liabilities 10,533,981 10,669,795
Shareholders' equity:
Common stock 45,926,705 45,726,705
Unrealized depreciation of
investments held for sale of affiliates (126,612) (501)
Accumulated deficit (10,671,076) (9,010,379)
Total shareholders' equity 35,129,017 36,715,825
Total liabilities and shareholders'
equity $ 45,662,998 $ 47,385,620
66
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION
PARENT ONLY STATEMENTS OF OPERATIONS
Three Years Ended December 31, 1996 Schedule II
1996 1995 1994
Revenues:
Interest income from affiliates $ 792,046 $ 790,334 $ 790,477
Other income 34,600 31,774 4,481
826,646 822,108 794,958
Expenses:
Interest expense 789,496 787,784 787,920
Interest expense to affiliates 2,550 2,550 2,557
Operating expenses 4,624 3,341 13
796,670 793,675 790,490
Operating income 29,976 28,433 4,468
Provision for income taxes (4,664) (3,221) 0
Equity in loss of subsidiaries (1,686,009) (5,346,088) (1,120,750)
Net loss $(1,660,697) $(5,320,876) $(1,116,282)
67
UNITED TRUST GROUP, INC.
CONDENSED FINANCIAL INFORMATION
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 $(1,660,697) $(5,320,876) $(1,116,282)
Adjustments to reconcile
net loss to net cash provided
by operating activities:
Equity in loss of subsidiaries 1,686,009 5,346,088 1,120,750
Change in accrued interest
income 0 (167) (2,189)
Change in accrued interest
payable 0 167 2,189
Change in income taxes payable 3,442 3,221 0
Change in other liabilities (139,256) (96,843) (21,599)
Net cash used in operating activities (110,502) (68,410) (17,131)
Cash flows from investing activities:
Cost of investments acquired:
Purchase of stock of affiliates (95,000) (200) 0
Net cash used in investing activities (95,000) (200) 0
Cash flows from financing activities:
Capital contribution from affiliates 200,000 100,000 0
Net cash provided by financing
activities 200,000 100,000 0
Net increase (decrease) in cash
and cash equivalents (5,502) 31,390 (17,131)
Cash and cash equivalents at
beginning of year 45,031 13,641 30,772
Cash and cash equivalents at
end of year $ 39,529 $ 45,031 $ 13,641
68
UNITED TRUST GROUP, 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).
69
UNITED TRUST GROUP, 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).
70
UNITED TRUST GROUP, 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%
Premiums:
Life
insurance $ 37,800,871 $ 5,597,512 $ 0 $ 32,203,359 0.0%
Accident
and health
insurance 262,315 61,185 0 201,130 0.0%
$ 38,063,186 $ 5,658,697 $ 0 $ 32,404,489 0.0%
* All assumed business represents the Company's participation in the
Servicemen's Group Life Insurance Program (SGLI).
71
UNITED TRUST GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1995, & 1994 Schedule V
Balance at Additions Balances
Beginning Charges at End
Description Of Period and Expenses Deductions 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 35,413 80,897 0 116,310
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 $2,174,932 $ 557,270 $ 0 $ 2,732,202
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 391,615 393,798 750,000 35,413
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 $1,876,766 $1,117,386 $ 819,220 $ 2,174,932
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 226,545 165,070 0 391,615
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 $1,454,877 $ 763,889 $ 342,000 $1,876,766
72