UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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) 924-6007
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 May 6, 1996 was 4,200,528, excluding -0- treasury shares.
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION PAGE
Financial Statements:
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 2
Consolidated Statements of Income
Three months and six months ended June 30, 1996 and 1995 3
Consolidated Statements of Cash Flows
Six months ended June 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5-7
Management's Discussion and Analysis of Financial Condition and Results of Operations 8-14
Review by Independent Accountants 15
Independent Accountants' Report 16
PART II - OTHER INFORMATION
Exhibits and Current Reports on Form 8-K 17
Signatures 18
Index to Exhibits 19
</TABLE>
<PAGE>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
1996 December 31,
(UNAUDITED) 1995
--------------- -------------
(in thousands)
<S> <C> <C>
Assets
Investments:
Fixed maturity securities:
Available-for-sale at fair value $ 1,063,171 $ 1,140,160
Held-to-maturity at amortized cost 47,961 50,919
Equity securities at fair value 1,141 794
Mortgage loans on real estate 291,001 336,269
Investment real estate 33,700 32,423
Policy loans 20,492 20,291
Investments in limited partnerships 23,524 25,594
Short-term investments 39,281 22,804
Other invested assets 1,435 2,469
--------------- -------------
Total investments 1,521,706 1,631,723
--------------- -------------
Cash 11,681 3,028
Investment in indebtedness of affiliate 10,000 10,000
Accrued investment income 16,110 16,529
Due from reinsurers 32,868 33,583
Deferred policy acquisition costs 89,071 90,703
Other assets 2,633 3,831
Assets held in separate accounts 8,026 211
--------------- -------------
Total assets $ 1,692,095 $ 1,789,608
=============== =============
Liabilities and Stockholder's Equity
Policy reserves $ 1,474,268 $ 1,530,805
Repurchase agreements 33,340 40,857
Deferred income tax payable 7,619 22,770
Other liabilities 8,115 8,440
Liabilities related to separate accounts 8,026 211
--------------- -------------
Total liabilities $ 1,531,368 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 28,980 28,980
Retained earnings 123,018 119,667
Net unrealized gains on securities 328 29,477
--------------- -------------
Total stockholder's equity 160,727 186,525
--------------- -------------
Total liabilities and stockholder's equity $ 1,692,095 $ 1,789,608
=============== =============
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ----------------------------
1996 1995 1996 1995
-------------------- -------- ------------------ --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Revenues:
Net investment income $ 28,955 $32,286 $ 58,082 $62,648
Net insurance premiums 1,685 2,218 3,303 4,320
Realized investment losses (717) (527) (573) (955)
-------------------- -------- ------------------ --------
Total 29,923 33,977 60,812 66,013
-------------------- -------- ------------------ --------
EXPENSES:
Interest on annuity policies 18,211 20,062 36,760 39,588
Amortization of deferred policy acquisition cost 2,681 3,182 5,981 6,513
Insurance benefits 2,776 2,947 5,552 5,376
Other operating expenses 3,739 3,223 7,342 6,803
-------------------- -------- ------------------ --------
Total 27,407 29,414 55,635 58,280
-------------------- -------- ------------------ --------
Income before income taxes 2,516 4,563 5,177 7,733
-------------------- -------- ------------------ --------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 762 1,189 1,279 2,646
Deferred 132 411 546 (142)
-------------------- -------- ------------------ --------
Total 894 1,600 1,825 2,504
Net Income $ 1,622 $ 2,963 $ 3,352 $ 5,229
==================== ======== ================== ========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1996 1995
------------------ ----------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income from operations $ 3,352 $ 5,229
Adjustments to reconcile net income to net cash provided by operating activities:
(Increase) decrease in deferred policy acquisition 1,632 (908)
(Increase) decrease in policy loans (201) 411
(Increase) decrease in accrued interest and accounts receivable 419 (4,004)
Decrease in due from reinsurers 715 637
(Increase) decrease in other assets (6,612) 1,370
Decrease in policy benefit reserves (2,266) (3,042)
Interest on annuities 36,760 39,588
Decrease in unearned premium reserves (643) (1,662)
Income tax expense (benefit) 545 (141)
Increase (decrease) in other liabilities 7,490 (726)
Provision for losses 802 1,490
Amortization and depreciation 570 599
Amortization of prior loan sale gains 1,034 1,328
Investment gains (43) (432)
Net cash flows from trading investment securities (318) (159)
------------------ ----------
Net cash provided by operating activities 43,236 39,578
------------------ ----------
Cash flows from investing activities:
Proceeds from sales of loans held for investment 681,051 594,061
Principal collected on loans 36,489 29,313
Loan originations and acquisitions (16,578) (10,552)
Loans purchased from affiliates (655,935) (605,210)
Proceeds from sales, calls or maturities of available-for-sale securities 32,315 42,345
Proceeds from maturities or calls of held-to-maturity securities 2,467 2,547
Purchase of available-for-sale securities (158) (108,615)
Change in investment in limited partnerships 2,070 1,989
Change in short-term investments (16,477) 31,730
Capital expenditures (1,922) 110
------------------ ----------
Net cash provided (used) by investing activities 63,322 (22,282)
------------------ ----------
Cash flows from financing activities:
Deposits received from annuities 50,964 85,375
Payments on annuities (141,352) (113,251)
Decrease in repurchase agreements (7,517)
------------------ ----------
Net cash used by financing activities (97,905) (27,876)
------------------ ----------
Increase (decrease) in cash 8,653 (10,580)
Cash at beginning of period 3,028 13,169
------------------ ----------
Cash at end of period $ 11,681 $ 2,589
================== ==========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION.
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting of only
normal accruals necessary to present fairly the financial position, the
results of operations and the cash flows for the interim periods presented.
The consolidated results of operations for the three months and six
months ended June 30, 1996 and 1995, are not necessarily indicative of the
results to be expected for the full year.
2. INVESTMENTS.
FIXED MATURITY SECURITIES
The Company's portfolio of fixed maturity securities consisted of the
following at June 30, 1996:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ----------- ------------ ----------
(in thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Government $ 8,998 $ 76 $ (5) $ 9,069
Municipal 425 15 440
Foreign 20,340 904 (113) 21,131
Corporate 322,662 8,914 (3,175) 328,401
Mortgage-backed 709,846 4,943 (10,659) 704,130
--------------- ----------- ------------ ----------
Total $ 1,062,271 $ 14,852 $ (13,952) $1,063,171
=============== =========== ============ ==========
HELD-TO-MATURITY:
Corporate $ 6,286 $ 313 $ 6,599
Mortgage-backed 41,675 648 (3,972) 38,351
Total $ 47,961 $ 961 $ (3,972) $ 44,950
=============== =========== ============ ==========
</TABLE>
Net unrealized gains of $.3 million on available-for-sale securities
included in Stockholder's equity at June 30, 1996, are presented net of
deferred income taxes of $.2 million.
A summary of the Company's investment in the commercial loan pass-through
certificates, for which an election under the real estate mortgage investment
conduit provisions of the Internal Revenue Code has been made, at June 30,
1996, included in the category Held-to-Maturity, Mortgage-backed is as
follows:
<TABLE>
<CAPTION>
Remaining
Date of Principal Carrying Interest Maturity
Issue Balance Value Rate Date
------------ --------------- --------- --------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
United Companies Life REMIC:
Series 90-1, Class B-1 Mar 29, 1990 $ 10,874 $ 10,372 10.05% Sep 25, 2009
Series 90-2, Class A-3 Dec 18, 1990 18,070 17,839 9.88% May 25, 2000
Series 90-2, Class B-1 Dec 18, 1990 15,509 13,464 9.88% Jan 25, 2009
--------------- ---------
$ 44,453 $ 41,675
=============== =========
</TABLE>
<PAGE>
EQUITY SECURITIES
The net unrealized capital gains and losses on common stocks were as
follows:
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------------
Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ----------- ------------ ------
(in thousands)
<S> <C> <C> <C> <C>
Trading $ 689 $ 387 $ (6) $1,070
Available-for-Sale 467 (396) 71
--------------- ----------- ------------ ------
Total $ 1,156 $ 387 $ (402) $1,141
=============== =========== ============ ======
</TABLE>
MORTGAGE LOANS ON REAL ESTATE
The following schedule summarizes the composition of mortgage loans on
real estate at the indicated periods ending:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
--------------- -------------------
(in thousands)
<S> <C> <C>
Residential $ 118,656 $ 169,175
Unearned loan charges (284) (301)
--------------- -------------------
118,372 168,874
--------------- -------------------
Commercial 174,216 169,512
Allowance for loan losses (1,587) (2,117)
--------------- -------------------
172,629 167,395
--------------- -------------------
Total $ 291,001 $ 336,269
=============== ===================
</TABLE>
Included in the mortgage loans on real estate at June 30, 1996 and
December 31, 1995, were non-accrual loans of $2.1 million and $2.4 million,
respectively.
INVESTMENT IN LIMITED PARTNERSHIPS
Following is an analysis of the Company's investment in limited
partnerships for the indicated periods:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1996 December 31, 1995
------------------ -------------------
(in thousands)
<S> <C> <C>
Balance, beginning of period $ 25,594 $ 26,672
Contributions and capitalized costs 620 9,869
Net partnership income 965 6,279
Distributions (3,655) (17,226)
------------------ -------------------
Balance, end of period $ 23,524 $ 25,594
================== ===================
</TABLE>
The limited partnerships were formed for the purpose of participating in
privately placed mezzanine investments. These investments generally include
higher risk subordinated debt combined with equity securities.
<PAGE>
INVESTMENT INCOME
Investment income by type that exceeds five percent of total investment
income was as follows for the indicated periods:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
---------- -----------
(in thousands)
<S> <C> <C>
Fixed maturity securities $ 42,162 $ 42,854
Mortgage loans on real estate 18,582 19,479
All other investment income 3,801 6,491
---------- ------------
64,545 68,824
Less: Investment expenses 6,463 6,176
---------- ------------
Net investment income $ 58,082 $ 62,648
========== ============
</TABLE>
3. CASH PAID FOR INTEREST AND INCOME TAXES.
During the six months ended June 30, 1996 and 1995, the Company paid
interest on repurchase agreements in the approximate amounts of $2.3 million
and $1.9 million, respectively. During the six months ended June 30, 1996 and
1995, the Company made income tax payments of $2.8 million and $1.7 million,
respectively.
4. CONTINGENCIES.
The Company is subject to various litigation arising during the ordinary
course of business. While the outcome of such litigation cannot be predicted
with certainty, management does not expect the resolution of these matters to
have a material adverse effect on the financial condition or results of
operations of the Company.
5. SALE OF THE COMPANY.
On July 24, 1996, United Companies Financial Corporation ("UCFC") and
Pacific Life and Accident Insurance Company ("PLAIC"), a wholly-owned
subsidiary of PennCorp Financial Group, Inc. ("PennCorp") consummated the sale
of UCFC's wholly-owned subsidiary, United Companies Life Insurance Company
("UCLIC"). Pursuant to an Amended and Restated Stock Purchase Agreement (the
"Agreement") dated as of July 24, 1996, UCFC sold 100% of the outstanding
capital stock of UCLIC (the "UCLIC Common Stock") to PLAIC for $167.6 million,
comprised of $100.3 million in cash from PLAIC, a $10 million each dividend
paid by, and certain real estate and other assets distributed by UCLIC to UCFC
immediately prior to the closing of the acquisition of UCLIC. PLAIC
ultimately obtained the right to acquire the UCLIC Common Stock from an
affiliate of Knightsbridge Capital Fund I, L.P., a private investor
partnership.
In connection with the transaction, UCFC purchased a convertible note
from PennCorp in the principal amount of $14,990,000, and immediately
converted the note into 483,839 shares of PennCorp's $0.01 par value per share
common stock. Immediately following the acquisition of UCLIC, PLAIC
contributed $57.3 million in cash to UCLIC, which represented the market value
of the real estate and other assets (but excluded the $10.0 million cash
dividend) distributed by UCLIC to UCFC.
PennCorp borrowed funds under its revolving credit agreement with The
Bank of New York as Administrative Agent (I) to fund the cash portion of the
purchase price for UCLIC, (ii) to make required capital contributions to UCLIC
and (iii) to pay related acquisition expenses. PennCorp subsequently used the
net proceeds from the sale of its $3.50 Series II Convertible Preferred Stock
to repay a substantial portion of such borrowings.
In connection with the sale of the Company, the Company entered into an
agreement wit UCFC which will provide for the Company's purchase of up to $300
million in first mortgage residential loans. The agreement provides that UCFC
will have the right for a limited time to repurchase certain loans which are
eligible for securitization by UCFC. The agreement also has a sublimit of
$150 million for loans that are not eligible for securitization by UCFC.
Also, in connection with the sale, the servicing of substantially all of
the commercial real estate mortgage loans and commercial pass-through
certificates were transferred to the Company by UCFC.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following analysis should be read in conjunction with the Company's
consolidated financial statements and accompanying notes presented elsewhere
herein.
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.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Net income for the six months ended June 30, 1996 was $3.4 million,
compared to $5.2 million for the first six months of 1995. The decrease in
net income during the first six months of 1996 resulted primarily from the
better than expected results in the first six months of 1995 from the
Company's investments in limited partnerships compared to the first six months
of 1996.
The following table sets forth certain financial data for the periods
indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
1996 1995
--------------------------- -------
(in thousands)
<S> <C> <C>
Total revenues $ 60,812 $66,013
Total expenses 55,635 58,280
Income before taxes 5,177 7,733
Net income 3,352 5,229
</TABLE>
REVENUES. The following table sets forth information regarding the
components of the Company's revenues for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------
1996 1995
---------------------------- --------
(in thousands)
<S> <C> <C>
Net investment income $ 58,082 $62,648
Net insurance premiums 3,303 4,320
Realized investment losses (573) (955)
---------------------------- --------
Total $ 60,812 $66,013
============================ ========
</TABLE>
Net investment income totaled $58.1 million on average investments of
approximately $1.58 billion for the first six months of 1996, compared to net
investment income of $62.6 million on average investments of approximately
$1.51 billion during the same period of 1995. The Company's investment in
limited partnerships contributed approximately
$1.0 million in the first six months of 1996 compared to $3.6 million in the
same period of 1995. At June 30, 1996, the amortized cost of the fixed income
portfolio totaled $1.1 billion and was comprised principally of $709.8 million
in investment grade mortgage-backed securities and $331.0 million in
investment grade bonds. At June 30, 1996, the weighted average rating of the
publicly traded bond portfolio, according to nationally recognized statistical
rating agencies, was "AA." At June 30, 1996 and 1995, the carrying value of
investments in the Company's trading account for common stocks was $1.1
million and $0.8 million, respectively, reflecting a $0.4 million unrealized
gain at June 30, 1996, and a $0.2 million unrealized gain at June 30, 1995,
which is included in investment income for the first six months of 1996 and
1995.
Interest, charges and fees on mortgage real estate loans decreased
approximately $0.9 million during the first six months of 1996 compared to the
same period of 1995. A reduction in the holding periods for home equity loans
acquired by the Company from United Companies Lending Corporation ("UC
Lending"), an affiliate, contributed to the reduction in interest charges and
fees on loans in the first six months of 1996. At June 30, 1996, the
Company's mortgage loans were comprised of $118.4 million in home equity loans
and $172.6 million in commercial real estate loans, compared to $168.9 million
and $167.4 million, respectively at December 31, 1995. The mortgage loan
portfolio of the Company is serviced by UC Lending. The Company has full
credit recourse to UC Lending with respect to all home equity mortgage loans
acquired by it from UC Lending with the exception of $2.2 million in loans
which were acquired from the financial institutions under conservatorship by
the Resolution Trust Corporation (the "RTC") or from the RTC as receiver of
failed financial institutions.
The Company estimates that non-accrual loans reduced mortgage loan
interest by approximately $104,000 and $110,300 during the first six months of
1996 and 1995, respectively. During the six months ended June 30, 1996, the
average amount of non-accrual mortgage loans owned by the Company was $2.1
million, compared to approximately $2.2 million during the same period of
1995. At June 30, 1996, the Company owned approximately $6.1 million of
commercial loans which were on an accrual status, but which the Company
considers as potential problem loans, compared to $7.2 million at December 31,
1995. The Company evaluates each of these commercial loans to estimate its
risk of loss in the investment and provides for such loss through a charge to
earnings.
Net insurance premiums declined approximately $1 million for the first
six months of 1996 compared to the same period of 1995. 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 decrease in premium income
reflects the run-off of the pre-need life and credit insurance business.
Realized investment gains and losses may vary significantly from year to
year since the decision to sell investments is determined principally by
considerations on investment timing and tax consequences. Realized investment
gains and losses can also result from early redemption of securities at the
election of the issuer (calls) and changes in write-downs and reserves.
Realized gains and (losses) were as follows for the indicated periods:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------
1996 1995
--------------------------- --------
(in thousands)
<S> <C> <C>
Sales of fixed maturity securities $ $ 421
Calls and maturities of fixed maturity securities 43 11
Sales of equity securities 186 131
Write-downs/reserve changes (802) (1,518)
--------------------------- --------
Realized investment losses $ (573) $ (955)
=========================== ========
</TABLE>
<PAGE>
EXPENSES. The following table presents the components of the Company's
expenses for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
1996 1995
--------------------------- -------
(in thousands)
<S> <C> <C>
Interest on annuity policies $ 36,760 $39,588
Amortization of deferred policy acquisition costs 5,981 6,513
Insurance commissions 236 229
Insurance benefits 5,552 5,376
Other operating 7,106 6,574
--------------------------- -------
Total $ 55,635 $58,280
=========================== =======
</TABLE>
Interest on annuity policies decreased approximately $2.8 million in the
first six months of 1996 compared to the same period of 1995, primarily as the
result of a decrease in annuity reserves. Average annuity reserves were
approximately $1.39 billion and $1.43 billion during the first six months of
1996 and 1995, respectively. As expected, annuity surrenders increased in
comparison with 1995, primarily because of the current interest rate
environment, the effect of policies first coming out of the surrender period,
and the announcement by United Companies Financial Corporation ("UCFC") that
it had signed a Stock Purchase Agreement ("the Agreement") dated as of January
30, 1996, for the sale of all the outstanding capital stock of the Company.
Management continues to aggressively manage its interest spread between
earnings and crediting rates in an effort to balance competitiveness and
profitability goals.
Net insurance commissions for the first six months of 1996 were
approximately level with the same period of 1995. During the six months ended
June 30, 1996, the Company capitalized as deferred policy acquisition costs
approximately $4.0 million in commissions paid on sales of annuities, compared
to $7.0 million during 1995. Amortization of commission expense on annuities
capitalized in prior periods was $5.4 million during the six months of 1996,
compared to $5.3 million during the first six months of 1995.
Insurance benefits, primarily credit life, for the first six months ended
June 30, 1996 increased approximately $.2 million, compared to the comparable
period of 1995.
Other operating expenses, which include general insurance and taxes,
licenses and fees, increased approximately
$.5 million or 8.1% during the six month period of 1996, compared to the
comparable period in 1995. Certain one time charges associated with
litigation and assessments comprised the increase.
ASSET QUALITY AND RESERVES
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.
The Company has full credit recourse to UC Lending for principal and interest
on its home equity loans originated by UC Lending.
Substantially all of the loans owned by the Company were originated by UC
Lending, 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 June 30, 1996, was comprised primarily of $118.4 million in home
equity mortgage loans and $172.6 million in commercial mortgage loans.
At June 30, 1996, the contractual balance of loans serviced by UC Lending
for the Company was approximately $292.9 million. Included in the serviced
portfolio are the Company's commercial loans, a substantial portion of which
were originated in Florida (19.7%), Georgia (20.6%), Colorado (15.2%),
Virginia (8.3%), Tennessee (7.8%), Texas
(5.5%) and Louisiana (4.8%). No other state accounted for more than 4.8% by
outstanding principal balance of the Company's commercial loan portfolio. The
risk inherent in such concentrations is dependent not only upon regional and
general economic stability which affects property values, but also the
financial well-being and credit worthiness of the borrower.
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 $14.8 million at
June 30, 1996, compared to $13.6 million at December 31, 1995. In conjunction
with the sale of the Company (see "Sale of the Company") these foreclosed
loans were distributed to UCFC.
The following table provides a summary of mortgage loans owned by the
Company, those which are past due 30 days or more, and net loans charged-off
as of the dates indicated:
<TABLE>
<CAPTION>
Contractual Delinquencies % of % of
Balance Contractual Contractual Net Loans Average
Period Ended of Loans Balance Balance Charged-Off Loans*
- ------------------------------ ----------------------- -------------- ------------ ------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Six months ended June 30, 1996
Home equity $ 118,656 $ 568 .48% $ - - %
Commercial 174,216 1,253 .72% 771 .45%
----------------------- -------------- ------------
Total $ 292,872 $ 1,821 .62% $ 771 .24%
======================= ============== ============
Year ended December 31, 1995
Home equity $ 169,175 $ 1,020 .60% $ - - %
Commercial 169,512 3,238 1.91% 194 .11%
----------------------- -------------- ------------
Total $ 338,687 $ 4,258 1.26% $ 194 .06%
======================= ============== ============
Year ended December 31, 1994
Home equity $ 158,943 $ 1,516 .96% $ - - %
Commercial 154,790 2,335 1.51% 1,510 .98%
----------------------- -------------- ------------
Total $ 313,733 $ 3,851 1.23% $ 1,510 .48%
======================= ============== ============
<FN>
* Annualized for six months ended June 30, 1996.
</TABLE>
The above delinquencies of home equity loans are covered by full credit
recourse to UC Lending except $.5 million, $.2 million, and $.3 million at
June 30, 1996, December 31, 1995 and 1994, respectively. The Company,
however, retains the entire risk associated with its commercial loans.
The Company owns senior and subordinated pass-through certificates issued
in 1990 backed by commercial mortgage loans previously owned by the Company
for which an election has been made under the real estate mortgage investment
conduit provisions of the Internal Revenue Code. The outstanding principal
balance of all of the senior and subordinated certificates was $44.5 million
as of June 30, 1996. The principal balance of the subordinated certificates
at June 30, 1996, all of which were owned by the Company, as $26.4 million.
Losses associated with defaults and related foreclosures which may occur on
the loans backing these pass-through certificates first reduce the principal
balance of the subordinated certificates. The losses resulting from such
foreclosures were $0.1 million, $1.7 million and $2.5 million for the periods
ending June 30, 1996, December 31, 1995 and 1994, respectively.
<PAGE>
The Company provides an estimate for future credit losses in an allowance
for losses. A summary analysis of the changes in the Company's allowance for
losses for the indicated periods is as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------------------------------------------
1996 1995
---------------------------------------------------- --------------------------------
Real Mortgage Real Mortgage
Bonds Estate (1) Loans Bonds Estate (1) Loans
--------------------------- ----------- ---------- ------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 666 $ 3,987 $ 2,117 $ 404 $ 5,033 $ 1,778
Losses charged to allowance (115) (604) (771) (746) (214) (194)
Loss provision 491 70 241 342 835 340
--------------------------- ----------- ---------- ------- ----------- ----------
Balance at end of period $ 1,042 $ 3,453 $ 1,587 - $ 5,654 $ 1,924
=========================== =========== ========== ======= =========== ==========
Specific reserves $ 1,042 $ 3,453 $ 587 - $ 5,654 $ 924
Unallocated reserves - - 1,000 - - 1,000
--------------------------- ----------- ---------- ------- ----------- ----------
Total Reserves $ 1,042 $ 3,453 $ 1,587 $ - $ 5,654 $ 1,924
=========================== =========== ========== ======= =========== ==========
<FN>
(1) The provision for real estate losses relate to losses from properties acquired in satisfaction of debt.
</TABLE>
At June 30, 1996 and December 31, 1995, the Company owned $14.8 million
and $13.6 million, respectively, of property acquired in settlement of loans,
excluding the specific reserves attributed to these properties, which is
included in the Company's allowance for loan losses to reduce the carrying
value of these properties to their market value.
The Company's fixed maturity securities portfolio consists primarily of
mortgage-backed securities and corporate bonds, comprising 67.7% and 29.6% of
the portfolio at June 30, 1996, respectively. Investment purchases are made
with the intention of holding fixed maturity securities until maturity. At
June 30, 1996, the amortized cost of the Company's fixed maturity portfolio
was $1.1 billion, consisting primarily of $751.5 million in mortgage-backed
securities and $328.9 million in corporate bonds. At June 30, 1996, bonds
with an amortized cost of approximately $1.1 billion or 95.7% of the Company's
portfolio of fixed maturity securities were classified in an
available-for-sale category and the carrying value adjusted to fair value by
means of an adjustment to stockholder's equity. The remainder of the
portfolio consists primarily of private placement investments traded directly
and are classified as held-to-maturity and valued at cost. At June 30, 1996,
the Company owned $1.1 million in equity securities classified as trading
securities. The pre-tax net unrealized gain in the available-for-sale fixed
maturity and equity portfolio (fair value over amortized cost) at June 30,
1996, was $.5 million, compared to a $45.4 million gain at December 31, 1995.
The Company has an investment in certain 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. The partnerships are carried on an
equity basis of $23.5 million and $25.6 million at June 30, 1996 and December
31, 1995, respectively. Income attributable to the partnerships for the six
months ended June 30, 1996 and 1995 was $1.0 million and $3.8 million,
respectively. Included in the assets distributed to UCFC immediately prior to
the closing of the sale of the Company (see "Sale of the Company") were
partnership investments of $17.7 million at June 30, 1996. Income associated
with the distributed partnership investments was $.8 million and $.5 million
at June 30, 1996 and 1995, respectively.
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 flow from annuity operations is 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, for the six
months ended June 30, 1996 and 1995, was approximately $43.2 million and $39.6
million, 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 first
six months of 1996 and 1995 reflect cash received primarily from sales by the
Company of its annuity products of approximately $51.0 million and $85.4
million, respectively. The Company believes that the decrease in annuity
sales in the first six months of 1996 compared to the same period of 1995 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 by UCFC that it had signed a Stock Purchase Agreement ("the
Agreement") dated as of January 30, 1996, for the sale of all the outstanding
stock of the Company. The Agreement was consummated on July 24, 1996 (see
"Sale of the Company"). As reflected in the net cash used by investing
activities during the same periods, investment purchases were approximately
$672.7 million and $724.4 million, respectively, reflecting the investment of
these funds and the reinvestment of proceeds from maturities of investment.
Cash used by financing activities during the first six months of 1996 and 1995
also reflects payments of $141.4 million and $113.3 million, respectively,
primarily on annuity products resulting from policyholder surrenders and
claims. The increase in annuity surrenders during the first six months of
1996 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 Agreement discussed
above. The interest margin on the Company's annuity liabilities during the
six months ended June 30, 1996 was 2.60% compared to 2.39% during the same
period of 1995. Investments at June 30, 1996, included approximately $291.0
million in home equity and commercial mortgage loans, and the amortized cost
of the bond portfolio included $358.7 million in corporate, government and
foreign bonds and private debt placements and $751.5 million in
mortgage-backed securities.
The investment portfolio is also managed to provide a secondary source of
liquidity as investments can be sold, if necessary to fund abnormal levels of
policy surrenders, claims and expenses. An unanticipated increase in
surrenders would impact the Company's liquidity, potentially requiring the
sale of certain assets, such as bonds and loans, prior to their maturities,
which may be at a loss.
Reserves for annuity policies comprise the primary liabilities of the
Company. The Company believes it has established adequate reserves on these
products as well as on its other insurance products.
The Company is a Louisiana domiciled insurance company, and, as such, is
subject to certain regulatory restrictions on the payment of dividends. The
Company's capacity at June 30, 1996, to pay dividends was $9.2 million. No
dividends were paid during the first six months of 1995 and 1996 in order to
retain capital in the Company.
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 UCFC
announced its 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 parent that strategic alternatives which it
was considering included the possible sale of the Company (see "Pending Sale
of the Company" below). 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 the 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.
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>
PROPERTIES
The Company owns two office buildings in Baton Rouge, Louisiana. All of
one and part of the other building are leased to affiliates of the Company.
The Company's executive offices are located in a third building owned by an
affiliate, from which the Company leases approximately 30,000 square feet.
Management believes that the properties are adequately maintained and insured
and satisfactorily meet the requirements of the business conducted therein.
The two owned buildings comprised a portion of the sale price of the
Company (see "Sale of the Company") and were distributed to UCFC immediately
prior to the closing. The Company's lease with UCFC on the property it
currently occupies extends through 1998.
SALE OF THE COMPANY
On July 24, 1996, United Companies Financial Corporation ("UCFC") and
Pacific Life and Accident Insurance Company ("PLAIC"), a wholly-owned
subsidiary of PennCorp Financial Group, Inc. ("PennCorp") consummated the sale
of UCFC's wholly-owned subsidiary, United Companies Life Insurance Company
("UCLIC"). Pursuant to an Amended and Restated Stock Purchase Agreement (the
"Agreement") dated as of July 24, 1996, UCFC sold 100% of the outstanding
capital stock of UCLIC (the "UCLIC Common Stock") to PLAIC for $167.6 million,
comprised of $100.3 million in cash from PLAIC, a $10 million each dividend
paid by, and certain real estate and other assets distributed by UCLIC to UCFC
immediately prior to the closing of the acquisition of UCLIC. PLAIC
ultimately obtained the right to acquire the UCLIC Common Stock from an
affiliate of Knightsbridge Capital Fund I, L.P., a private investor
partnership.
In connection with the transaction, UCFC purchased a convertible note
from PennCorp in the principal amount of $14,990,000, and immediately
converted the note into 483,839 shares of PennCorp's $0.01 par value per share
common stock. Immediately following the acquisition of UCLIC, PLAIC
contributed $57.3 million in cash to UCLIC, which represented the market value
of the real estate and other assets (but excluded the $10.0 million cash
dividend) distributed by UCLIC to UCFC.
PennCorp borrowed funds under its revolving credit agreement with The
Bank of New York as Administrative Agent (I) to fund the cash portion of the
purchase price for UCLIC, (ii) to make required capital contributions to UCLIC
and (iii) to pay related acquisition expenses. PennCorp subsequently used the
net proceeds from the sale of its $3.50 Series II Convertible Preferred Stock
to repay a substantial portion of such borrowings.
In connection with the sale of the Company, the Company entered into an
agreement wit UCFC which will provide for the Company's purchase of up to $300
million in first mortgage residential loans. The agreement provides that UCFC
will have the right for a limited time to repurchase certain loans which are
eligible for securitization by UCFC. The agreement also has a sublimit of
$150 million for loans that are not eligible for securitization by UCFC.
Also, in connection with the sale, the servicing of substantially all of
the commercial real estate mortgage loans and commercial pass-through
certificates were transferred to the Company by UCFC.
<PAGE>
REVIEW BY INDEPENDENT ACCOUNTANTS
The Company's independent accountants, Deloitte & Touche LLP, have
performed a review of the accompanying unaudited consolidated balance sheet as
of June 30, 1996 and the related consolidated statements of income and cash
flows for the six months ended June 30, 1996, and previously audited and
expressed an unqualified opinion dated February 29, 1996 on the financial
statements of the Company as of December 31, 1995, from which the consolidated
balance sheet as of this date is derived.
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
United Companies Life Insurance Company:
We have reviewed the accompanying consolidated balance sheet of United
Companies Life Insurance Company and subsidiary as of June 30, 1996, and the
related consolidated statements of income and cash flows for the three-month
and six month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of United Companies Life Insurance
Company and subsidiary as of December 31, 1995, and the related consolidated
statements of income, stockholder's equity, and cash flows for the year then
ended (not presented herein); and in our report dated February 29, 1996, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1995 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Deloitte & Touche LLP
Baton Rouge, Louisiana
August 12, 1996
PART II
OTHER INFORMATION
Items 1 through 5. Inapplicable
Item 6. Exhibits and current Reports on Form 8-K
(a) Exhibits
(15) Letter of Deloitte & Touche LLP
(b) Current Reports on Form 8-K - NONE
<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
08/13/96 /s/ Robert B. Thomas, Jr.
Date:----------- By:---------------------------------
Robert B. Thomas, Jr.
Chairman of the Board and President
08/13/96 /s/ Donald M. Woodard
Date:----------- By:---------------------------------
Donald M. Woodard
Senior Vice President and Controller
<PAGE>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<C> <S> <C>
15 Letter of Deloitte & Touche LLP 20
27 Financial Data Schedule 21
</TABLE>
<PAGE>
EXHIBIT 15
United Companies Life Insurance Company:
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited interim
consolidated financial information of United Companies Life Insurance Company
and subsidiary for the period ended June 30, 1996, as indicated in our report
dated August 12, 1996; because we did not perform an audit, we expressed no
opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is being
incorporated by reference in the following: Registration Statements No.
33-91362 and 33-95778 on Form N-4 pertaining to the registration of an
indefinite number of securities and Registration Statements No. 33-91358 and
33-95968 on Form S-1 pertaining to the registration of individual and group
fixed and variable deferred annuity contracts and certificates.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of the Act.
/s/ Deloitte & Touche LLP
Baton Rouge, Louisiana
August 12, 1996
[ARTICLE] 7
[RESTATED]
[CIK] 0000101115
[NAME] UNITED COMPANIES LIFE INSURANCE COMPANY
[MULTIPLIER] 1,000
[CURRENCY] U.S. DOLLARS
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-START] JAN-01-1996
[PERIOD-END] JUN-30-1996
[EXCHANGE-RATE] 1
[DEBT-HELD-FOR-SALE] 1,063,171
[DEBT-CARRYING-VALUE] 47,961
[DEBT-MARKET-VALUE] 44,950
[EQUITIES] 1,141
[MORTGAGE] 291,001
[REAL-ESTATE] 33,700
[TOTAL-INVEST] 1,521,706
[CASH] 11,681
[RECOVER-REINSURE] 32,868
[DEFERRED-ACQUISITION] 89,071
[TOTAL-ASSETS] 1,692,095
[POLICY-LOSSES] 1,473,118
[UNEARNED-PREMIUMS] 1,150
[POLICY-OTHER] 0
[POLICY-HOLDER-FUNDS] 0
[NOTES-PAYABLE] 33,340
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 8,401
[OTHER-SE] 152,326
[TOTAL-LIABILITY-AND-EQUITY] 1,692,095
[PREMIUMS] 3,303
[INVESTMENT-INCOME] 58,082
[INVESTMENT-GAINS] (573)
[OTHER-INCOME] 0
[BENEFITS] 5,552
[UNDERWRITING-AMORTIZATION] 5,981
[UNDERWRITING-OTHER] 44,102
[INCOME-PRETAX] 5,177
[INCOME-TAX] 1,825
[INCOME-CONTINUING] 3,352
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 3,352
[EPS-PRIMARY] 0.80
[EPS-DILUTED] 0.80
[RESERVE-OPEN] 0
[PROVISION-CURRENT] 0
[PROVISION-PRIOR] 0
[PAYMENTS-CURRENT] 0
[PAYMENTS-PRIOR] 0
[RESERVE-CLOSE] 0
[CUMULATIVE-DEFICIENCY] 0
</TABLE>
