- ------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period from ________________ to _____________________
Commission file number 33-91358, 33-95968, 33-91362, 33-95778
UNITED COMPANIES LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Louisiana 72-0475131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8545 United Plaza Boulevard
Baton Rouge, Louisiana 70809
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code
(504) 952-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares of $2.00 par value common stock issued and
outstanding as of November 8, 1996 was 4,200,528, excluding -0- treasury
shares.
- ------------------------------------------------------------------------------
<PAGE>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
INDEX TO FORM 10-Q/A
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION: PAGE NO.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
September 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . 2
Consolidated Condensed Statements of Operations -
The periods from July 24, 1996 to September 30, 1996, July 1, 1996 to July. . 3
23, 1996, and January 1, 1996 to July 23, 1996; and the three
months and nine months ended September 30, 1995
Consolidated Condensed Statements of Cash Flows -
The periods from July 24, 1996 to September 30, 1996, and January 1, 1996 to. 4
July 23, 1996; and the nine months ended September 30, 1995
Notes to Unaudited Consolidated Condensed Financial Statements. . . . . . . . . 5-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10-12
Operations
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . 13
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(Unaudited)
---------------
Purchase Historical
basis of basis of
accounting accounting
--------------- -------------
September 30, December 31,
1996 1995
--------------- -------------
<S> <C> <C>
ASSETS:
Investments:
Fixed maturity securities:
Held for investment at amortized cost (fair value $51,867 and $59,330) $ 50,904 $ 60,919
Available for sale at fair value (cost $1,057,290 and $1,094,386) . . 1,063,076 1,140,160
Mortgage loans on real estate . . . . . . . . . . . . . . . . . . . . . . . 225,584 336,269
Real estate held for investment . . . . . . . . . . . . . . . . . . . . . . 40 32,423
Policy loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,843 20,291
Investments in limited partnerships . . . . . . . . . . . . . . . . . . . . 6,047 25,594
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . 105,558 22,804
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,735 3,263
--------------- -------------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . 1,473,787 1,641,723
--------------- -------------
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,028
Accrued investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,851 16,529
Due from reinsurers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,748 33,583
Present value of insurance in force. . . . . . . . . . . . . . . . . . . . . . . 66,863 --
Deferred policy acquisition costs. . . . . . . . . . . . . . . . . . . . . . . . 2,194 90,703
Costs in excess of net assets acquired . . . . . . . . . . . . . . . . . . . . . 31,580 --
Deferred Federal income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 10,923 --
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 6,491 3,831
Assets held in separate accounts . . . . . . . . . . . . . . . . . . . . . . . . 13,547 211
--------------- -------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,654,984 $ 1,789,608
=============== =============
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
Policy liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,457,035 $ 1,530,805
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 40,857
Deferred Federal income taxes . . . . . . . . . . . . . . . . . . . . . . . -- 22,770
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,770 8,440
Liabilities related to separate accounts. . . . . . . . . . . . . . . . . . 13,547 211
--------------- -------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,481,352 1,603,083
--------------- -------------
Stockholder's equity:
Common stock, $2 par value;
Authorized - 4,200,528 shares;
Issued - 4,200,528 shares. . . . . . . . . . . . . . . . . . . . . . . 8,401 8,401
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 158,913 28,980
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,569 119,667
Net unrealized gains on securities. . . . . . . . . . . . . . . . . . . . . 3,749 29,477
--------------- -------------
Total stockholder's equity . . . . . . . . . . . . . . . . . . . . . . 173,632 186,525
--------------- -------------
Total liabilities and stockholder's equity . . . . . . . . . . . . . . $ 1,654,984 $ 1,789,608
=============== =============
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Purchase basis
of accounting Historical basis of accounting
---------------- ----------------------------------------------------
Period from July 1 Period from
Period from through January 1 Three month
July 24 through July 23, through period ending
September 30, July 23, September 30,
1996 1996 1996 1995
---------------- -------------------- ------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Premiums. . . . . . . . . . . . . . . . $ 1,034 $ 428 $ 3,732 $ 1,897
Interest sensitive policy product
charges . . . . . . . . . . . . . . . 485 125 1,421 509
Net investment income . . . . . . . . . 21,681 7,041 67,458 31,440
Realized investment gains (losses). . . 356 (1,008) (1,581) (1,558)
---------------- -------------------- ------------- ---------------
Total revenues . . . . . . . . . . 23,556 6,586 71,030 32,288
---------------- -------------------- ------------- ---------------
EXPENSES:
Interest on annuity policies. . . . . . 14,067 4,378 42,434 20,391
Insurance benefits. . . . . . . . . . . 1,134 415 5,967 2,383
Amortization of present value of
insurance in force and deferred
policy acquisition costs . . . . .. . 2,214 3,718 9,699 3,096
Amortization of costs in excess of net
assets acquired. . . . . . . . . . . . 265 -- -- --
Underwriting and other administrative
expenses. . . . . . . . . . . . . . . 1,781 1,070 10,749 3,747
---------------- -------------------- ------------- ---------------
Total benefits and expenses. . . . . 19,461 9,581 68,849 29,617
---------------- -------------------- ------------- ---------------
Income (loss) before income taxes. . . . . . 4,095 (2,995) 2,181 2,671
---------------- -------------------- ------------- ---------------
Provision (benefit) for income
taxes:
Current . . . . . . . . . . . . . . . . 701 (140) 1,139 1,112
Deferred. . . . . . . . . . . . . . . . 825 (916) (370) (173)
---------------- -------------------- ------------- ---------------
Total income tax (benefit) . . . . 1,526 (1,056) 769 939
---------------- -------------------- ------------- ---------------
Net income (loss). . . . . . . . . $ 2,569 $ (1,939) $ 1,412 $ 1,732
================ ==================== ============= ===============
Historical basis of accounting
------------------------------
Nine month period
ending
September 30,
1995
-------------------
<S> <C>
REVENUES:
Premiums. . . . . . . . . . . . . . . . $ 6,217
-------------------
Interest sensitive policy product
charges . . . . . . . . . . . . . . . 1,402
Net investment income . . . . . . . . . 94,088
Realized investment gains (losses). . . (2,513)
-------------------
Total revenues . . . . . . . . . . 99,194
-------------------
EXPENSES:
Interest on annuity policies. . . . . . 60,872
Insurance benefits. . . . . . . . . . . 7,759
Amortization of present value of
insurance in force and deferred
policy acquisition costs . . . . . . . . 9,609
Amortization of costs in excess of net
assets acquired. . . . . . . . . . . . --
Underwriting and other administrative
expenses. . . . . . . . . . . . . . . 10,550
-------------------
Total benefits and expenses. . . . . 88,790
-------------------
Income (loss) before income taxes. . . . . . 10,404
-------------------
Provision (benefit) for income
taxes:
Current . . . . . . . . . . . . . . . . 3,758
Deferred. . . . . . . . . . . . . . . . (315)
-------------------
Total income tax (benefit) . . . . 3,443
-------------------
Net income (loss). . . . . . . . . $ 6,961
===================
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Purchase Historical
basis of basis of
accounting accounting
----------------- -------------------
Period from Period from
July 24 through January 1 through
September 30, July 23,
----------------- -------------------
1996 1996
----------------- -------------------
<S> <C> <C>
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . $ 18,029 $ 46,679
Cash flows from investing activities:
Purchases of invested assets. . . . . . . . . . . . . . . . . . . . . . . . . . (11,365) (158)
Loan originations and acquisitions. . . . . . . . . . . . . . . . . . . . . . . (4,187) (749,952)
Sales of invested assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,549 758,804
Principal collected on loans and mortgage-backed securities . . . . . . . . . . 19,575 46,774
Calls or maturities of invested assets. . . . . . . . . . . . . . . . . . . . . 2,000 9,652
Other, primarily short-term investments, net. . . . . . . . . . . . . . . . . . (55,209) (37,491)
----------------- -------------------
Net cash provided (used) by investing activities. . . . . . . . . . . 16,363 27,629
----------------- -------------------
Cash flows from financing activities:
Receipts from interest sensitive policies credited to policyholder accounts 22,680 56,403
Return of policyholder account balances on interest sensitive policies. . . (48,117) (160,622)
Increase (decrease) in repurchase agreements. . . . . . . . . . . . . . . . (52,839) 11,982
Other, primarily capital contribution from Parent, net. . . . . . . . . . . 57,525 --
----------------- -------------------
Net cash used by financing activities. . . . . . . . . . . . . . . . . (20,751) (92,237)
----------------- -------------------
Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . 13,641 (17,929)
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . (14,901) 3,028
----------------- -------------------
Cash (overdraft) at end of period. . . . . . . . . . . . . . . . . . . . . . . . $ (1,260) $ (14,901)
================= ===================
Historical
basis of
accounting
---------------
Nine months
ended
September 30,
---------------
1995
---------------
<S> <C>
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . $ 71,463
Cash flows from investing activities:
Purchases of invested assets. . . . . . . . . . . . . . . . . . . . . . . . . . (126,528)
Loan originations and acquisitions. . . . . . . . . . . . . . . . . . . . . . . (958,137)
Sales of invested assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 939,344
Principal collected on loans and mortgage-backed securities . . . . . . . . . . 72,192
Calls or maturities of invested assets. . . . . . . . . . . . . . . . . . . . . 15,934
Other, primarily short-term investments, net. . . . . . . . . . . . . . . . . . 34,786
---------------
Net cash provided (used) by investing activities. . . . . . . . . . . (22,409)
---------------
Cash flows from financing activities:
Receipts from interest sensitive policies credited to policyholder accounts 110,932
Return of policyholder account balances on interest sensitive policies. . . (167,099)
Increase (decrease) in repurchase agreements. . . . . . . . . . . . . . . . --
Other, primarily capital contribution from Parent, net. . . . . . . . . . . (333)
---------------
Net cash used by financing activities. . . . . . . . . . . . . . . . . (56,500)
---------------
Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . (7,446)
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . 13,169
---------------
Cash (overdraft) at end of period. . . . . . . . . . . . . . . . . . . . . . . . $ 5,723
===============
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</TABLE>
<PAGE>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Business and Organization
United Companies Life Insurance Company (the "Company" or "UCLIC") is a
wholly-owned subsidiary of Pacific Life and Accident Insurance Company
("PLAIC"), a wholly-owned subsidiary of PennCorp Financial Group, Inc.
("PennCorp"). (See note 2 to Notes to Unaudited Consolidated Condensed
Financial Statements.) PennCorp is an insurance holding company which offers,
through its wholly-owned subsidiaries, a broad range of life insurance,
annuity and accident and sickness products.
(B) Basis of Presentation
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP") on a historical cost
basis of accounting through the date of acquisition and on a purchase GAAP
push-down basis of accounting ("purchase GAAP") from the date of acquisition
to the end of the period. The comparability of the financial condition and
the operating results for the post-acquisition period and the pre-acquisition
periods are affected by the mark to market valuation of assets and liabilities
under purchase accounting.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. Accounts that the Company deems to be
acutely sensitive to changes in estimates include deferred policy acquisition
costs, future policy benefits, policy and contract claims and present value of
insurance in force. In addition, the Company must determine requirements for
disclosure of contingent assets and liabilities as of the date of the
financial statements based upon estimates. In all instances, actual results
could differ from these estimates.
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments, primarily all of which
are normal recurring accruals, necessary to present fairly the financial
position as of September 30, 1996, on a purchase GAAP basis, and the results
of operations and cash flows on a purchase GAAP basis for the period July 24,
1996 to September 30, 1996, and on a historical basis for the periods July 1,
1996, to July 23, 1996, and January 1, 1996 to July 23, 1996, and for the
three month and nine month periods ended September 30, 1995. Results of
operations for interim periods are not necessarily indicative of results for
the entire year.
2. SALE OF THE COMPANY
On July 24, 1996, PLAIC consummated the acquisition of the Company from
United Companies Financial Corporation ("UC Financial"). Pursuant to an
Amended and Restated Stock Purchase Agreement (the "Agreement") dated as of
July 24, 1996, PLAIC acquired 100% of the outstanding capital stock of UCLIC
(the "UCLIC Common Stock") for $100.3 million in cash excluding expenses
incurred as part of the acquisition (see note 3 to Notes to Unaudited
Consolidated Condensed Financial Statements). Immediately following the
acquisition of UCLIC, PLAIC contributed $57.3 million in cash to UCLIC, which
represented the market value of certain real estate and other assets
distributed to UC Financial immediately prior to the consummation of the
acquisition.
The Company's acquisition has been accounted for using purchase
GAAP. The total purchase price of the acquisition was allocated to the
tangible and intangible assets and liabilities acquired based upon their
respective fair values as of the date of acquisition. Based upon such
respective fair values, the value of the net assets acquired was $78.2
million, resulting in costs in excess of net assets acquired of $31.8 million.
The following pro forma statement of operations for the three months and
nine months ended September 30, 1995 and 1996, adjust the historical financial
information of the Company to give effect to the sale of the Company described
above as if the sale occurred on January 1, 1995. These pro forma statements
have been prepared for comparative purposes only and do not purport to be
indicators of what would have occurred had the acquisitions been made as of
January 1, 1995, or results which may occur in the future.
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
RESULTS FOR 1996 RESULTS FOR 1995
----------------------------------- ---------------------------------------
Acquisition Acquisition
Historical by PLAC Pro Forma Historical by PLAC Pro Forma
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Premiums $ 4,766 $ 4,766 $ 6,217 $ 6,217
Interest sensitive policy product charges 1,906 1,906 1,402 1,402
Net investment income 89,328 8,478 (1) 97,806 94,088 7,982 (1) 102,070
Realized investment gains (losses) (1,225) 420 (2) (805) (2,513) 1,384 (2) (1,129)
-------- --------- -------- ---------
Total revenues 94,775 103,673 99,194 108,560
-------- --------- -------- ---------
EXPENSES:
Interest on annuity policies 56,501 56,501 60,872 60,872
Insurance benefits 7,101 7,101 7,759 7,759
Amortization
Present value of insurance inforce and
deferred policy acquisition costs 11,709 1,840 (3)(4) 13,549 9,609 6,652 (3)(4) 16,261
Costs in excess of net assets acquired - 1,194 (5) 1,194 - 1,194 (5) 1,194
Underwriting and other administrative expenses 13,443 (2,850) (6) 10,593 10,550 (2,850) (6) 7,700
-------- --------- -------- ---------
Total benefits and expenses 88,754 88,938 88,790 93,786
-------- --------- -------- ---------
Income before income taxes 6,021 $ 14,735 10,404 14,774
Income tax expense 2,107 3,468 (7) 5,575 3,443 2,145 (7) 5,588
-------- --------- -------- ---------
Net income $ 3,914 $ 9,160 $ 6,961 $ 9,186
======== ========= ======== =========
<FN>
See accompanying notes to pro forma unaudited consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(DOLLARS IN THOUSANDS)
(UNAUDITED)
RESULTS FOR 1996 RESULTS FOR 1995
----------------------------------- ------------------------------------
Acquisition Acquisition
Historical by PLAC Pro Forma Historical by PLAC Pro Forma
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Premiums $ 1,462 $ 1,462 $ 1,897 $ 1,897
Interest sensitive policy product charges 610 610 509 509
Net investment income 28,533 2,826 (1) 31,359 31,440 2,660 (1) 34,100
Realized investment gains (losses) (652) 175 (2) (477) (1,558) 575 (2) (983)
-------- -------- -------- --------
Total revenues 29,953 32,954 32,288 35,523
-------- -------- -------- --------
Expenses:
Interest on annuity policies 18,445 18,445 20,391 20,391
Insurance benefits 1,549 1,549 2,383 2,383
Amortization
Present value of insurance inforce and
deferred policy acquisition costs 5,728 (1,440) (3)(4) 4,288 3,096 2,218 (3)(4) 5,314
Costs in excess of net assets acquired - 398 (5) 398 - 398 (5) 398
Underwriting and other administrative expenses 3,764 (950) (6) 2,814 3,747 (950) (6) 2,797
-------- -------- -------- --------
Total benefits and expenses 29,486 27,494 29,617 31,283
-------- -------- -------- --------
Income before income taxes 467 5,460 2,671 4,240
Income tax expense 163 1,887 (7) 2,050 939 684 (7) 1,623
-------- -------- -------- --------
Net income $ 304 $ 3,410 $ 1,732 $ 2,617
======== ======== ======== ========
<FN>
See accompanying notes to pro forma unaudited consolidated condensed financial statements.
</TABLE>
<PAGE>
Notes to Pro Forma Consolidated Condensed Statements of Operations
(1) Investments - In connection with and immediately prior to closing the sale
of the Company all of the Company's real estate investments and the Company's
investment in a limited partnership, as well as $10 million cash, was
distributed to UC Financial. Immediately after the sale PLAIC contributed
$57.3 million in cash. For purposes of these pro forma financial statements,
the Company assumes that the cash contribution was invested in corporate AAA
rated bonds and thus, yield on the distributed assets is replaced with yield
on such bonds.
As of January 1, 1995, the average fair market value of the Company's
investment portfolio was less than its average historical cost. Based upon
purchase GAAP adjustments, the Company's investment yield would increase
approximately 69 basis points resulting in an increase in investment income of
approximately $8.5 million and $2.8 million for the nine months and the three
months ended September 30, 1996, respectively, and $8 million and $2.7 million
for the nine months and the three months ended September 30, 1995,
respectively.
(2) Realized investment gains (losses) - In conjunction with the acquisition
of the Company, all of the Company's real estate was distributed to UC
Financial, the Company's former parent. Realized investment losses
attributable to real estate of $.4 million and $.2 million for the nine months
and three months ended September 30, 1996, respectively and $1.4 million and
$.6 million for the nine months and three months ended September 30, 1995,
respectively, were included in the Company's historical statements of
operations and have been eliminated for purposes of these pro forma financial
statements.
(3) Present value of insurance in force - As part of the purchase accounting
adjustments of the Company's acquisition, the Company established an asset for
the present value of the insurance in force as of the date of the acquisition
based upon the present value of future premiums or the emergence of gross
profits utilizing appropriate purchase accounting actuarial assumptions.
As part of the pro forma purchase accounting adjustments for the Company's
acquisition, the Company established a present value of insurance in force
asset of $74.1 million. This asset is determined based upon the present value
of future gross profits for the business acquired using appropriate actuarial
assumptions established by the Company (as of January 1, 1995) and discounting
such profits at a risk rate of return of 18.0 percent. On a pro forma basis,
the first five years' expected amortization of the present value of insurance
in force related to the Company's acquisition, as if such assets had been
established on January 1, 1995, would be as follows:
Gross Interest Expected
Amortization Accreted Amortization
1995 $24,841 $4,262 $20,579
1996 18,869 3,170 15,699
1997 13,595 2,300 11,295
1998 9,721 1,638 8,083
1999 7,033 1,142 5,891
(4) Deferred policy acquisition costs - As described in Note 2, the Company
established a present value of insurance in force asset as of the acquisition
date which approximated the discounted value of anticipated profits of the
business in force as of such date. As a result of establishing such an asset,
the historical amount for deferred policy acquisition costs was eliminated.
Subsequent to the date of acquisition, deferred policy acquisition costs are
established and amortized for new business issuance costs.
On a pro forma basis, the amortization of deferred policy acquisition costs
for the Company for nine months and three months ended September 30, 1996,
amounted to $1.8 million and $.4 million, respectively, and $.8 million and
$.2 million for the nine months and three months ended September 30, 1995,
respectively.
<PAGE>
(5) Costs in excess of net assets acquired - The Company established an asset
for costs in excess of net assets acquired to the extent that the purchase
price exceeded the net assets acquired. The aggregate purchase price for the
Company was approximately $110.1 million (including estimated expenses
incurred of $9.7 million and earnings through the date of consummation of the
Company's acquisition of $3.6 million (see note 3 to Notes to Unaudited
Consolidated Condensed Financial Statements)). The estimated fair value of
the net assets acquired amounted to $78.2 million resulting in costs in excess
of net assets acquired of $31.8 million. On a pro forma basis the
amortization of costs in excess of net assets acquired would be $1.2 million
for each of the nine months ended September 30, 1996 and September 30, 1995,
and approximately $398,000 for each of the three months ended September 30,
1996 and 1995
(6) Underwriting and other administrative expenses - On a pro forma basis, the
costs associated with the Company's service agreement with its former parent,
UC Financial, have been eliminated because that agreement was canceled as of
the closing date. With its current cost structure, PLAIC, the Company's new
parent, will be able to perform any such similar services required by the
Company without an incremental increase in overhead expenses. Fees charged to
the Company under the service agreement amounted to approximately $2.9 million
and approximately $950,000, respectively, for each of the nine months and
three months ended September 30, 1996 and 1995.
(7) Income taxes - Amounts shown represent the tax effects of the foregoing
adjustments calculate based upon the Company's effective tax rates for the
periods presented.
3. COMMITMENTS AND CONTINGENCIES
In connection with the sale of the Company, the Company entered into an
agreement with UC Financial which will provide for the Company's purchase of
up to $300 million, at any one time outstanding, of first mortgage residential
loans originated by UC Financial. The agreement provides that UC Financial
will have the right for a limited time to repurchase certain loans which are
eligible for securitization by UC Financial. The agreement also has a
sublimit of $150 million for loans that are not eligible for securitization by
UC Financial.
In conjunction with the sale of the Company, and in accordance with past
practices, historical basis deferred acquisition cost assumptions were
adjusted to reflect actual experience through July 24, 1996, the acquisition
date. This adjustment resulted in a $2.9 million increase in amortization of
deferred acquisition costs associated with certain annuity plans, primarily as
a result of revised surrender estimates. As a result of the purchase price
adjustment provision contained in the Agreement, and the adjustment noted
immediately above, the final aggregate purchase price paid for the Company is
yet to be determined, although UCLIC does not expect the final aggregate
purchase price to vary materially from estimates utilized in the preparation
of these financial statements.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with the comparable
discussion filed with the Company's annual filing with the Securities and
Exchange Commission on form 10-K for the fiscal year ended December 31, 1995.
The following discussion should be read in conjunction with the unaudited
consolidated condensed financial statements and related notes of this
Quarterly Report on Form 10-Q.
Cautionary Statement for purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995. The statements below that
relate to future plans, events or performances are forward-looking statements
that involve a number of risks or uncertainties. Among those items that could
adversely affect the Company's financial condition, results of operations and
cash flows are the following: changes in regulations affecting insurance
companies, interest rates, the federal income tax code, particularly as it
relates to tax deferred accumulation products, the ratings assigned to the
Company by independent rating organizations such as A.M. Best (which the
Company believes are particularly important to the sale of annuity and other
accumulation products) and unanticipated litigation. There can be no
assurance that other factors not currently anticipated by management will not
also materially and adversely affect the Company's results of operations.
General. On July 24, 1996, PLAIC, a wholly-owned subsidiary of PennCorp,
acquired all of the outstanding stock of the Company (see note 2 to Notes to
Unaudited Consolidated Condensed Financial Statements). The sale was
accounted for using the purchase method of accounting. Therefore, the
comparability of certain financial statement items for the period prior to the
date of acquisition to the amounts related to the period subsequent to
acquisition are affected.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
ASSET QUALITY
The quality of the Company's commercial loan and bond portfolios
significantly affects the profitability of the Company. The values of and
markets for these assets are dependent on a number of factors, including
general economic conditions, interest rates and governmental regulations.
Adverse changes in such factors, which become more pronounced in periods of
economic decline, may affect the quality of these assets and the Company's
resulting ability to sell these assets for acceptable prices. General
economic deterioration can result in increased delinquencies on existing
loans, reductions in collateral values and declines in the value of
investments resulting from a reduced capacity of issuers to repay the bonds.
At September 30, 1996, the weighted average rating of the publicly traded bond
portfolio, according to nationally recognized statistical rating agencies, was
"AA."
Substantially all of the loans owned by the Company were originated by
United Companies Lending Corporation ("UC Lending"), a subsidiary of UC
Financial, with the home equity loans being originated primarily through its
branch (i.e., retail) network or wholesale loan programs. The Company's loan
portfolio at September 30, 1996, was comprised primarily of $61.1 million on
home equity mortgage loans and $164 million in commercial mortgage loans
compared to $167.4 million of home equity mortgage loans and $168.9 million of
commercial mortgage loans as of December 31, 1995. The reduction in the
balance of outstanding mortgage loans resulted from the decrease in purchases
of new loans under the current agreement with UC Lending. The Company's
expenses with regard to default rates has been consistent. Delinquencies,
mortgage loans which are past due 30 days or more, as a percentage of the
total contractual balance of mortgage loans was less than 1.5% for all periods
presented.
Management has continued to emphasize reducing the level of non-earning
assets owned by focusing on expediting the foreclosure process on its
commercial loans. The balance of foreclosed loans totaled $13.9 million at
July 23, 1996. In conjunction with the sale of the Company (see note 2 to
Notes to Unaudited Consolidated Condensed Financial Statements), these
foreclosed loans were distributed to UC Financial immediately prior to
closing.
Prior to the closing of the sale of the Company, the Company had
investments in two limited partnerships which were formed for the purpose of
participating in privately placed mezzanine investments. These investments
generally include higher risk subordinated debt combined with equity
securities. Included in the assets distributed to UC Financial immediately
prior to the closing of the sale of the Company (See note 2 to Notes to
Unaudited Consolidated Condensed Financial Statements) was one of the limited
partnership investments with a value of $17.8 million at July 23, 1996.
<PAGE>
The Company had an increase in short-term investments of approximately
$82.8 million at September 30, 1996, compared to December 31, 1995, resulting
primarily from the proceeds of the capital contribution immediately subsequent
to closing of the sale of the Company, as well as from the reduction in the
purchases of home equity mortgage loans from UC Financial. The reinvestment
of these amounts are pending the strategic and operational evaluation by the
Company concerning investment opportunities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements consist of funding the payment
of policyholder claims and surrenders. Liquidity requirements for the
Company's operations are generally met by funds provided from the sale of
annuities and cash flow from its investments in fixed income securities and
mortgage loans.
Net cash flows from annuity operations are used to build the Company's
investment portfolio, which in turn produces future cash flows from investment
income and provides a secondary source of liquidity. Net cash provided by
operating activities, which excludes annuity sales and surrenders, was
approximately $64.7 million and $71.5 million for the nine months ended
September 30, 1996 and 1995, respectively, resulting primarily from cash
earnings on investments. The Company monitors available cash and cash
equivalents to maintain adequate balances for current payments while
maximizing cash available for longer term investment activities. The
Company's financing activities during the nine months ended September 30, 1996
and 1995, reflect cash received primarily from sales by the Company of its
annuity products of approximately $79.1 million and $110.9 million,
respectively. The Company believes that the decrease in annuity sales in the
period is due in part to the interest rate environment, particularly the
relative relationship between short term and intermediate term interest rates,
and to the announcement related to the sale of the Company ("the
announcement").
Net cash used by financing activities during the nine months ended
September 30, 1996, also reflects payments of $208.7 million, primarily on
annuity products resulting from policyholder surrenders and claims compared to
$167.1 million for the nine months ended September 30, 1995. The increase in
annuity surrenders was expected, due in part to an increase in the amount of
annuity policies first coming out of the surrender penalty period, to the
general interest rate environment during this period, and to the announcement.
The annualized interest margin on the Company's annuity liabilities was
approximately 2.44% and 2.41% for the nine months ended September 30, 1996 and
1995, respectively.
RESULTS OF OPERATIONS
Net income was $4.0 million and $7.0 million for the nine months ended
September 30, 1996 and 1995, respectively. Net income for the nine months
ended September 30, 1996, was affected by an adjustment of approximately $2.9
million to historical basis deferred acquisition cost amortization primarily
resulting from surrender activity (see note 3 to Notes to Unaudited
Consolidated Condensed Financial Statements).
REVENUES
Net investment income totaled $89.2 million and $94.1 million for the
nine months ended September 30, 1996 and 1995, respectively. The Company's
investment in limited partnerships contributed approximately $1.8 million
during the nine month period ended September 30, 1996, compared to $5.2
million for the nine month period ended September 30, 1995. The decrease
from 1995 was primarily the result of unusually large capital gains in the
partnerships in 1995, as well as the distribution of one of the partnerships
immediately prior to the closing of the sale of the Company (see note 2 to
Notes to Unaudited Consolidated Condensed Financial Statements).
Net insurance premiums were $4.7 million and $6.2 million for the nine
month period ended September 30, 1996 and 1995, respectively. Net insurance
premiums reflect revenues associated primarily with pre-need life insurance
and credit insurance. Management has chosen to focus on deferred annuities,
its primary product line, and its new variable annuity product introduced in
the third quarter of 1995, and thus new sales of pre-need life insurance and
credit insurance have been discontinued. The premium income reflects the
run-off of the pre-need life and credit insurance business.
<PAGE>
EXPENSES
Insurance benefits, primarily credit life, for the nine months ended
September 30, 1996, were approximately $6.4 million, compared to $7.8 million
for the nine months ended September 30, 1995. This reflects the continued
runoff of the Company's pre-need life and credit insurance business.
The Company established a present value of insurance in force at July 24,
1996, the date of acquisition, of $69.1 million, which is being amortized over
the estimated average life of the underlying business. Amortization of the
value of insurance in force for the post-acquisition period July 24, 1996, to
September 30, 1996, was $2.2 million.
As of result of establishing the present value of insurance in force, the
historical amount for deferred policy acquisition costs was eliminated.
Subsequent to the date of acquisition, deferred policy acquisition costs were
established and amortized for new business issuance costs.
The Company also established the costs in excess of net assets acquired
at July 24, 1996, of $31.8 million, which is being amortized on a
straight-line basis. The amortization during the period from July 24, 1996,
to September 30, 1996, was $.3 million.
Underwriting and other administrative expenses which includes general
insurance, taxes, licenses and fees were approximately $12.5 million and $10.5
million for the nine month periods ended September 30, 1996 and 1995,
respectively. The increase during 1996 reflects the impact of increased
guaranty fund assessments as compared to the same period in 1995.
RATINGS
In the second quarter of 1996, A.M. Best Company ("Best"), an independent
rating organization, reaffirmed its "A-" (Excellent) rating of the Company.
Best placed the Company's rating under review on February 2, 1996, after UC
Financial announced the pending sale of the Company. Best indicated that it
will keep the Company's rating under review until the acquisition is finalized
and Best has completed a review of the financing details. Best's ratings
depend in part on its analysis of an insurance company's financial strength,
operating performance and claims paying ability In addition, the Company's
claims paying ability has been rated "A+" (Single-A-Plus) by Duff & Phelps
Credit Rating Company ("Duff & Phelps"). On October 24, 1995, Duff & Phelps
placed its "A+" rating of the Company on its Rating Watch-Uncertain list
because of the announcement of the Company's former parent that strategic
alternatives which it was considering included the possible sale of the
Company. Duff & Phelps reported that the claims paying ability rating would
remain on Rating Watch-Uncertain until more information becomes known about
the Company's ultimate position within its then current organization or
another organization. In 1995, Standard & Poor's Ratings Group, a division of
The McGraw-Hill Companies, Inc. revised the Company's rating to "Aq" in
conjunction with its revision of its rating scale and with all companies. To
date no changes have been made to the Company's ratings from those described.
Ratings such as those held by the Company can affect the Company's ability to
market its annuity products. Any lowering of the Company's ratings could
materially and adversely affect the Company's ability to market its products,
particularly the sale of annuities through financial institutions, and could
increase the surrender of its annuity policies. Both of these consequences
could, depending upon the extent thereof, have a materially adverse effect on
the Company's liquidity and, under certain circumstances, net income. The
Company believes that its ratings will enable it to continue to compete
successfully.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various pending or threatened legal actions
arising in the ordinary course of business. Although the outcome of such
actions is not presently determinable, management does not believe that such
matters, individually or in the aggregate, would have a material adverse
affect on the Company's financial position or results of operations if
resolved against the Company.
ITEM 6. CURRENT REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
--------
27 Financial Data Schedule
(b) Current Reports on Form 8-K:
On August 14, 1996, the Company filed a current report on Form 8-K, stating
that on July 24, 1996, UC Financial and Pacific Life and Accident Insurance
Company, a wholly-owned subsidiary of PennCorp Financial Group, Inc.
consummated the sale of UC Financial's wholly-owned subsidiary, United
Companies Life Insurance Company.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED COMPANIES LIFE INSURANCE COMPANY
Date: November 18, 1996 By: /s/ Robert B. Thomas, Jr.
-------------------- ------------------------------------------
Robert B. Thomas, Jr.
Chairman of the Board and President
Date: November 18, 1996 By: /s/ Donald M. Woodard
-------------------- ------------------------------------------
Donald M. Woodard
Senior Vice President and Controller
<PAGE>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
Index to Exhibits
Exhibit No. Page No.
- ----------- --------
27 Financial Data Schedule 24
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<INCOME-CONTINUING> 3,981
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