- -----------------------------------------------------------------------------
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 March 31, 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 MARCH 31, 1996
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION PAGE
Financial Statements:
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 . . . . . . . . . . . . . . 2
Consolidated Statements of Income
Three months ended March 31, 1996 and 1995 . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
Three months ended March 31, 1996 and 1995 . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . 5-7
Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 8-13
Review by Independent Accountants . . . . . . . . . . . . . . . . . . 14
Independent Accountants' Report . . . . . . . . . . . . . . . . . . . 15
PART II - OTHER INFORMATION
Exhibits and Current Reports on Form 8-K . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1996 December 31,
(UNAUDITED) 1995
--------------- ---------------
(in thousands) (in thousands)
<S> <C> <C>
Assets
- --------------------------------------------
Investments:
Fixed maturity securities:
Available-for-sale at fair value $ 1,092,392 $ 1,140,160
Held-to-maturity at amortized cost 50,946 50,919
Equity securities at fair value 1,008 794
Mortgage loans on real estate 305,192 336,269
Investment real estate 32,496 32,423
Policy loans 20,488 20,291
Investments in limited partnerships 25,393 25,594
Short-term investments 20,783 22,804
Other invested assets 1,943 2,469
Total investments 1,550,641 1,631,723
--------------- ---------------
Cash 17,686 3,028
Investment in indebtedness of affiliate 10,000 10,000
Accrued investment income 15,426 16,529
Due from reinsurers 33,180 33,583
Deferred policy acquisition costs 89,375 90,703
Property-net 555 575
Other assets 3,367 3,256
Assets held in separate accounts 3,569 211
Total assets $ 1,723,799 $ 1,789,608
=============== ===============
Liabilities and Stockholder's Equity
- --------------------------------------------
Annuity reserves $ 1,390,495 $ 1,417,803
Policy benefit reserves 109,981 111,209
Unearned premium reserves 1,435 1,793
Repurchase agreements 28,179 40,857
Deferred income tax payable 12,269 22,770
Other liabilities 9,886 8,440
Liabilities related to separate accounts 3,569 211
Total liabilities 1,555,814 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 121,396 119,667
Net unrealized gains (losses) on securities 9,208 29,477
Total stockholder's equity 167,985 186,525
Total liabilities and stockholder's equity $ 1,723,799 $ 1,789,608
=============== ===============
<FN>
See notes to financial statements.
</TABLE>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1996 1995
-------------------- --------------------
(in thousands) (in thousands)
<S> <C> <C>
Revenues:
Net investment income $ 29,121 $ 30,362
Net insurance premiums 1,618 2,102
Realized investment (losses) 144 (428)
Total 30,883 32,036
-------------------- --------------------
EXPENSES:
Interest on annuity policies 18,549 19,526
Amortization of deferred policy acquisition cost 3,303 3,331
Insurance commissions 116 157
Insurance benefits 2,776 2,429
Other operating expenses 3,478 3,423
Total 28,222 28,866
-------------------- --------------------
Income before income taxes 2,661 3,170
-------------------- --------------------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 517 1,457
Deferred 414 (553)
Total 931 904
Net Income $ 1,730 $ 2,266
==================== ====================
<FN>
See notes to consolidated financial statements.
</TABLE>
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1996 1995
-------------------- --------------------
(in thousands) (in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income from operations $ 1,730 $ 2,266
Adjustments to reconcile net income to net cash provided
by operating activities:
(Increase) decrease in deferred policy acquisition 1,328 (888)
(Increase) decrease in policy loans (197) 479
(Increase) decrease in accrued interest and accounts receivable 1,103 (890)
Decrease in due from reinsurers 403 482
(Increase) decrease in other assets (3,468) 421
Decrease in policy benefit reserves (1,228) (2,088)
Interest on annuity policies 18,549 19,526
Decrease in unearned premium reserves (358) (954)
Income tax expense 414 215
Increase in other liabilities 4,804 3,979
Provision for losses 22 567
Amortization and depreciation 289 300
Amortization of prior loan sale gains 526 662
Investment gains (43) (85)
Net cash flows from trading investment securities (197) (85)
Net cash provided by operating activities 23,677 23,907
-------------------- --------------------
Cash flows from investing activities:
Proceeds from sales of loans held for investment 275,061 271,493
Principal collected on loans 15,437 14,735
Loan originations and acquisitions (6,842) (4,840)
Loans purchased from affiliates (252,277) (294,302)
Proceeds from sales, calls or maturities of available-for-sale securities 16,767 22,975
Proceeds from maturities or calls of held-to-maturity securities 99 299
Purchase of available-for-sale securities (158) (81,553)
Purchase of held-to-maturity securities - (25)
Change in investment in limited partnerships 201 (85)
Change in short-term investments 2,021 44,485
Capital expenditures (792) 154
Net cash provided (used) by investing activities 49,517 (26,664)
-------------------- --------------------
Cash flows from financing activities:
Deposits received from annuities and interest sensitive products 22,487 48,563
Payments on annuities and interest sensitive products (68,345) (53,829)
Decrease in repurchase agreements (12,678) -
Net cash used by financing activities (58,536) (5,266)
-------------------- --------------------
Increase (decrease) in cash 14,658 (8,023)
Cash at beginning of period 3,028 13,169
Cash at end of period $ 17,686 $ 5,146
==================== ====================
<FN>
See notes to consolidated financial statements.
</TABLE>
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 ended March 31,
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 March 31, 1996:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
(in thousands) (in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Government $ 11,655 $ 180 $ 3 $ 11,832
Municipal 424 18 - 442
Foreign 20,368 1,143 38 21,473
Corporate 322,601 12,267 1,973 332,895
Mortgage-backed 722,771 8,960 5,981 725,750
Total $ 1,077,819 $ 22,568 $ 7,995 $ 1,092,392
=============== =============== =============== ===============
HELD-TO-MATURITY:
Corporate $ 6,535 $ 475 $ - $ 7,010
Mortgage-backed 44,411 1,253 4,501 41,163
Total $ 50,946 $ 1,728 $ 4,501 $ 48,173
=============== =============== =============== ===============
</TABLE>
Net unrealized gains of $9.2 million on available-for-sale securities included
in Stockholder's equity at March 31, 1996, are presented net of deferred
income taxes of $5 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 March 31,
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) (in thousands)
<S> <C> <C> <C> <C> <C>
United Companies Life REMIC:
Series 90-1, Class B-1 Mar 29, 1990 $ 10,820 $ 10,456 10.05% Sep 25, 2009
Series 90-2, Class A-3 Dec 18, 1990 20,250 19,989 9.88% May 25, 2000
Series 90-2, Class B-1 Dec 18, 1990 15,754 13,966 9.88% Jan 25, 2009
$ 46,824 $ 44,411
=============== ===============
</TABLE>
EQUITY SECURITIES
The net unrealized capital gains and losses on common stocks were as follows:
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1996 March 31, 1996 March 31, 1996
Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
(in thousands) (in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C>
Trading $ 626 $ 324 $ 2 $ 948
Available-for-Sale 467 - 407 60
---------------- ---------------- ---------------- ----------------
Total $ 1,093 $ 324 $ 409 $ 1,008
================ ================ ================ ================
</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>
March 31, 1996 December 31, 1995
---------------- -------------------
(in thousands) (in thousands)
<S> <C> <C>
Residential $ 136,194 $ 169,175
Unearned loan charges (293) (301)
---------------- -------------------
135,901 168,874
---------------- -------------------
Commercial 170,949 169,512
Allowance for loan losses (1,658) (2,117)
---------------- -------------------
169,291 167,395
---------------- -------------------
Total $ 305,192 $ 336,269
================ ===================
</TABLE>
Included in the mortgage loans on real estate at March 31, 1996 and December
31, 1995, were non-accrual loans of $3.2 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>
Three Months Ended Year Ended
March 31, December 31,
1996 1995
-------------------- ---------------
(in thousands) (in thousands)
<S> <C> <C>
Balance, beginning of year $ 25,594 $ 26,672
Contributions and capitalized costs 531 9,869
Net partnership income 419 6,279
Distributions (1,151) (17,226)
-------------------- ---------------
Balance, end of year $ 25,393 $ 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.
INVESTMENT INCOME
Investment income by type that exceeds five percent of total investment income
was as follows for the indicated periods:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
Mach 31, March 31,
1996 1995
(in thousands) (in thousands)
<S> <C> <C>
Fixed maturity securities $ 20,032 $ 20,927
Mortgage loans on real estate 9,371 9,192
All other investment income 2,894 2,699
-------------------- --------------------
32,297 32,818
Less: Investment expenses 3,176 2,456
-------------------- --------------------
Net investment income $ 29,121 $ 30,362
==================== ====================
</TABLE>
3.CASH PAID FOR INTEREST AND INCOME TAXES.
During the three months ended March 31, 1996 and 1995, the Company paid
interest on repurchase agreements in the approximate amounts of $1.2 million
and $.4 million, respectively. During the three months ended March 31, 1996,
the Company made no income tax payments. The Company paid $1.7 million income
tax payments in the three months ended March 31, 1995.
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. PENDING SALE OF THE COMPANY
On February 2, 1996, United Companies Financial Corporation ("UCFC") signed a
stock purchase agreement dated as of January 30, 1996, for the sale of all of
the outstanding capital stock of the Company to UC Life Holding Corp., a new
Delaware corporation, formed by Knightsbridge Capital Fund I, L.P.
("Knightsbridge") for an aggregate amount of $164 million plus earnings of the
Company from January 1, 1996, to closing of the transaction. Knightsbridge,
which is a private investment partnership with institutional partners, was
formed in 1995 to make equity investments in companies engaged primarily in
the life insurance industry.
Under the terms of the agreement, the sales price is comprised of cash,
estimated at January 30, 1996 to be $109 million, and real estate and other
assets owned by the Company to be distributed to UCFC prior to the closing.
The real estate to be distributed includes portions of the United Plaza office
park, including the home office. In addition, UCFC will purchase a
convertible promissory note from an affiliate of the purchaser for $15 million
in cash. The note matures in 11 years and bears interest at 8% per annum
payable at maturity.
The purchaser also agreed that the Company would continue to be an investor in
first lien home equity loans originated by UCFCs lending operations and that
the purchaser would use commercially reasonable efforts to maintain the
Company's home office operations in its present location in Baton Rouge,
Louisiana following the closing for at least two years. The agreement is
subject to approval by UCFCs stockholders and regulatory authorities and the
satisfaction of other conditions, and provides that the closing will occur on
or before July 31, 1996.
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.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Net income for the three months ended March 31, 1996 was $1.7 million,
compared to $2.3 million for the first three months of 1995. The decrease in
net income during the first three months of 1996 resulted primarily from the
better than expected results in the first three months of 1995 from the
Company's investments in limited partnerships compared to the first three
months of 1996.
The following table sets forth certain financial data for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1996 1995
-------------------- --------------------
(in thousands) (in thousands)
<S> <C> <C>
Total revenues $ 30,883 $ 32,036
Total expenses 28,222 28,866
Income before taxes 2,661 3,170
Net income 1,730 2,226
</TABLE>
REVENUES. The following table sets forth information regarding the components
of the Company's revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1996 1995
-------------------- --------------------
(in thousands) (in thousands)
<S> <C> <C>
Net investment income $ 29,121 $ 30,362
Net insurance premiums 1,618 2,102
Realized investment gains (losses) 144 (428)
-------------------- --------------------
Total $ 30,883 $ 32,036
==================== ====================
</TABLE>
Net investment income totaled $29.1 million on average investments of
approximately $1.6 billion for the first three months of 1996, compared to net
investment income of $30.4 million on average investments of approximately
$1.5 billion during the same period of 1995. At March 31, 1996, the amortized
cost of the fixed income portfolio totaled $1.1 billion and was comprised
principally of $722.8 million in investment grade mortgage-backed securities
and $333.9 million in investment grade bonds. At March 31, 1996, the weighted
average rating of the publicly traded bond portfolio, according to nationally
recognized statistical rating agencies, was "AA." At March 31, 1996 and 1995,
the carrying value of investments in the Company's trading account for common
stocks was $.9 million and $.8 million, respectively, reflecting a $.3 million
unrealized gain at March 31, 1996, and a $.1 million unrealized gain at March
31, 1995, which is included in investment income for the first three months of
1996 and 1995.
Interest, charges and fees on mortgage on real estate loans decreased
approximately $248,000 during the first three 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 three months of 1996. At March 31, 1996, the
Company's mortgage loans were comprised of $135.9 million in home equity loans
and $169.3 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 $2.3 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. Although the Company, since 1991, had limited
its investment in commercial real estate loans, the Company decided in 1995 to
invest on a limited basis in new commercial real estate loans, substantially
all of which are originated by UC Lending.
The Company estimates that non-accrual loans reduced mortgage loan interest by
approximately $159,000 and $140,000 during the first three months of 1996 and
1995, respectively. During the three months ended March 31, 1996, the average
amount of non-accrual mortgage loans owned by the Company was $3.2 million,
compared to approximately $2.7 million during the same period of 1995. At
March 31, 1996, the Company owned approximately $5.9 million of commercial
loans which were on an accrual status, but which the Company considers as
potential problem loans, compared to $10.4 million at March 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 $.5 million for the first three
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.gains
and (losses) were as follows for the indicated periods:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1996 1995
-------------------- --------------------
(in thousands) (in thousands)
<S> <C> <C>
Sales of fixed maturity securities $ 67 $ -
Calls and maturities of fixed maturity securities 43 86
Sales of equity securities 123 (13)
Write-downs/reserve changes (89) (501)
-------------------- --------------------
Realized investment gains (losses) $ 144 $ (428)
==================== ====================
</TABLE>
EXPENSES. The following table presents the components of the Company's
expenses for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, March 31,
1996 1995
-------------------- --------------------
(in thousands) (in thousands)
<S> <C> <C>
Interest on annuity policies $ 18,549 $ 19,526
Amortization of deferred policy acquisition costs 3,303 3,331
Insurance commissions 116 157
Insurance benefits 2,776 2,429
Other operating 3,478 3,423
-------------------- --------------------
Total $ 28,222 $ 28,866
==================== ====================
</TABLE>
Interest on annuity policies decreased approximately $1 million in the first
three 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 $1.40 billion and 1.43 billion during the first three 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 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. The Agreement is subject to
approval by UCFC's stockholders and regulatory authorities and the
satisfaction of other conditions. 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 three months of 1996 decreased by
approximately $41,000 from the same period of 1995. During the three months
ended March 31, 1996, the Company capitalized as deferred policy acquisition
costs approximately $1.8 million in commissions paid on sales of annuities,
compared to $3.9 million during 1995. Amortization of commission expense on
annuities capitalized in prior periods was $3 million during the three months
of 1996, compared to $2.6 million during the first three months of 1995.
Insurance benefits, primarily credit life, for the first three months ended
March 31, 1996 increased approximately $347,000, compared to the comparable
period of 1995.
Other operating expenses, which include general insurance and taxes, licenses
and fees, increased approximately $55,000 or 1.8% during the three month
period of 1996, compared to the comparable period in 1995.
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 March 31, 1996, was comprised primarily of $135.9 million in home
equity mortgage loans and $169.3 million in commercial mortgage loans.
At March 31, 1996, the contractual balance of loans serviced by UC Lending for
the Company was approximately $307.1 million. Included in the serviced
portfolio are the Company's commercial loans, a substantial portion of which
were originated in Florida (21.1%), Georgia (20.3%), Colorado (13.2%),
Virginia (8.5%), Tennessee (7.6%), Texas (5.7%) and Louisiana (5.0%). No
other state accounted for more than 5% 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 continues 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 $14.3 million at March 31,
1996, compared to $13.6 million at December 31, 1995. The Company can neither
quantify the impact of property value declines, if any, on its loans nor
predict whether, to what extent, or how long such declines may exist. In a
period of such declines, the rates of delinquencies, foreclosures and losses
on loans could be higher than those previously experienced. Adverse economic
conditions (which may or may not affect real property values) may affect the
timely payment by borrowers of scheduled payments of principal and interest on
the home equity loans, and, accordingly the actual rates of delinquencies,
foreclosures and losses.
The following table provides a summary of mortgage loans owned by the Company
which are past due 30 days or more, foreclosed properties and 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
- --------------------------------- --------------- --------------- ------------ --------------- --------------
(in thousands) (in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
Three months ended March 31, 1996
Home equity $ 136,194 $ 1,527 1.12% $ - - %
Commercial 170,949 2,920 1.71% 157 .09%
--------------- --------------- ---------------
Total $ 307,143 $ 4,447 1.45% $ 157 .05%
=============== =============== ===============
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 nine months ended March 31, 1996.
</TABLE>
The above delinquencies of home equity loans are covered by full credit
recourse to UC Lending except $.2 million, $.2 million, and $.3 million at
March 31, 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 $46.8 million
as of March 31, 1996. The principal balance of the subordinated certificates
at March 31, 1996, all of which were owned by the Company, as $26.6 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 $1.7 million and $2.5 million for the periods ending
December 31, 1995 and 1994, respectively. For the three months ended March
31, 1996, there was a recovery of $.1 million.
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>
Three Months Ended Three Months Ended Three Months Ended
March 31, 1996 March 31, 1996 March 31, 1996
Real Mortgage
Bonds Estate (1) Loans
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Balance at beginning of period $ 666 $ 3,987 $ 2,117
Losses charged to allowance - (154) (157)
Recoveries on loans previously charged to allowance 67 - -
-------------------- -------------------- --------------------
Net charge-offs 67 (154) (157)
Loss provision (126) 450 (302)
-------------------- -------------------- --------------------
Balance at end of period $ 607 $ 4,283 $ 1,658
==================== ==================== ====================
Specific reserves $ 607 $ 4,283 $ 658
Unallocated reserves - - 1,000
-------------------- -------------------- --------------------
Total Reserves $ 607 $ 4,283 $ 1,658
==================== ==================== ====================
Three Months Ended Three Months Ended Three Months Ended
March 31, 1995 March 31, 1995 March 31, 1995
Real Mortgage
Bonds Estate Loans
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Balance at beginning of period $ 317 $ 5,120 $ 1,778
Losses charged to allowance (1) (187) -
Recoveries on loans previously charged to allowance - - -
-------------------- -------------------- --------------------
Net charge-offs (1) (187) -
Loss provision 141 432 (34)
-------------------- -------------------- --------------------
Balance at end of period $ 457 $ 5,365 $ 1,744
==================== ==================== ====================
Specific reserves $ 457 $ 5,365 $ 744
Unallocated reserves - - 1,000
-------------------- -------------------- --------------------
Total Reserves $ 457 $ 5,365 $ 1,744
==================== ==================== ====================
<FN>
(1) The provision for real estate losses relate to losses from properties acquired in satisfaction of debt.
</TABLE>
At March 31, 1996 and December 31, 1995, the Company owned $14.3 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 68.0% and 29.2% of
the portfolio at March 31, 1996, respectively. Investment purchases are made
with the intention of holding fixed maturity securities until maturity. At
March 31, 1996, the amortized cost of the Company's fixed maturity portfolio
was $1.1 billion, consisting primarily of $767.2 million in mortgage-backed
securities and $329.1 million in corporate bonds. At March 31, 1996, bonds
with an amortized cost of approximately $1.1 billion or 95.5% 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 March 31, 1996,
the Company owned $.9 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 March 31,
1996, was $14.1 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 $25.4 million and $25.6 million at March 31, 1996 and December
31, 1995, respectively. Income attributable to the partnerships for the three
months ended March 31, 1996 and 1995 was $.4 million and $.6 million,
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, was
approximately $23.7 million and $23.9 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 three months of 1996 and 1995
reflect cash received primarily from sales by the Company of its annuity
products of approximately $22.5 million and $48.6 million, respectively. The
Company believes that the decrease in annuity sales in the first three 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 is
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.
The Agreement is subject to approval by UCFC's stockholders and regulatory
authorities and the satisfaction of other conditions. Since the announcement
of the Company's sale in February 1996, annuity sales have been on a positive
trend. As reflected in the net cash used by investing activities during the
same periods, investment purchases were approximately $259.3 million and
$380.7 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 three months of 1996 and 1995 also
reflects payments of $68.3 million and $53.8 million, respectively, primarily
on annuity products resulting from policyholder surrenders and claims. The
increase in annuity surrenders during the first three months of 1996 was
expected, due in part to an increase in the amount of annuity policies which
were first coming out of the surrender penalty period and to the Agreement
discussed above. The interest margin on the Company's annuity liabilities
during the three months ended March 31, 1996 was 2.44% compared to 2.38%
during the same period of 1995. Investments at March 31, 1996, included
approximately $305.2 million in home equity and commercial mortgage loans, and
the amortized cost of the bond portfolio included $361.6 million in corporate,
government and foreign bonds and private debt placements and $767.2 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 effective life of these
liabilities is influenced by a number of factors, including interest rates,
surrender penalties, ratings, public confidence in the insurance industry
generally, and in the Company specifically, governmental regulations and tax
laws. The Company employs an actuarial model to measure the interest rate
sensitivity of these liabilities to assist in the selection of assets with
appropriate characteristics.
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 March 31, 1996, to pay dividends was $9.2 million. No
dividends were paid during 1995 or the first three months of 1996 in order to
retain capital in the Company.
RATINGS
In the second quarter of 1995, A.M. Best Company ("Best"), an independent
rating organization, reaffirmed its "A-" (Excellent) rating of the Company.
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.
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.
PENDING SALE OF THE COMPANY
On February 2, 1996, United Companies Financial Corporation ("UCFC") signed a
stock purchase agreement dated as of January 30, 1996, for the sale of all of
the outstanding capital stock of the Company to UC Life Holding Corp., a new
Delaware corporation formed by Knightsbridge Capital Fund I, L.P.
("Knightsbridge"), for an aggregate amount of $164 million plus earnings of
the Company from January 1, 1996, to closing of the transaction.
Knightsbridge, which is a private investment partnership with institutional
partners, was formed in 1995 to make equity investments in companies engaged
primarily in the life insurance industry.
Under the terms of the agreement, the sales price is comprised of cash,
estimated as of January 30, 1996, to be $109 million, and real estate and
other assets owned by the Company to be distributed to UCFC prior to the
closing. The real estate to be distributed includes portions of the United
Plaza office park, including UCFC's home office. In addition, UCFC will
purchase a convertible promissory note from an affiliate of the purchaser for
$15 million in cash.
The purchaser also agreed that the Company would continue to be an investor in
first lien home equity loans originated by UCFC's lending operations and that
the purchaser would use commercially reasonable efforts to maintain the
Company's home office operations in its present location in Baton Rouge,
Louisiana following the closing for at least two years. The agreement is
subject to approval by UCFC's stockholders and regulatory authorities and the
satisfaction of other conditions, and provides that the closing will occur on
or before July 31, 1996.
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 March
31, 1996 and the related consolidated statements of income and cash flows for
the three months ended March 31, 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.
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 March 31, 1996, and the
related consolidated statements of income and cash flows for the three-month
period 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 statements of
income, stockholders' 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 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
May 10, 1996
PART II
OTHER INFORMATION
Items 1 through 5. Inapplicable
Item 6. Exhibits and current Reports on Form 8-K
(a) Exhibits
(15) Consent of Deloitte & Touche, LLP
(b) Current Reports on Form 8-K
On February 9, 1996, the Company filed a current report on Form
8-K that United Companies Financial Corporation ("UCFC"), its Parent, on
February 2, 1996, signed a stock purchase agreement for the sale of all of the
Company's outstanding capital stock to UC Life Holding Corp., a new Delaware
corporation formed by Knightsbridge Capital Fund I, LP, a private investment
partnership. Closing is scheduled to occur on or before July 31, 1996,
subject to approval of UCFC stockholders, regulatory authorities and the
satisfaction of other conditions.
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: 05/14/96 By: /s/ Robert B. Thomas, Jr.
------------------------- ---------------------------------------
Robert B. Thomas, Jr.
Chairman of the Board and President
Date: 05/14/96 By: /s/ Donald M. Woodard
------------------------- ---------------------------------------
Donald M. Woodard
Senior Vice President and Controller
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 19
27 Financial Data Schedule 20
</TABLE>
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 March 31, 1996, as indicated in our report
dated May 10, 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 March 31, 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
May 13, 1996
