<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 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 NUMBERS 33-91358, 33-95968, 33-91362, 33-95778
UNITED COMPANIES LIFE INSURANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
LOUISIANA 72-0475131
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8545 UNITED PLAZA BOULEVARD
BATON ROUGE, LOUISIANA 70809
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (504) 952-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- -------------------------
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
---------------
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
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, AS OF MARCH 17, 1997 WAS $-0-.
THE NUMBER OF SHARES OF $2.00 PAR VALUE COMMON STOCK ISSUED AND
OUTSTANDING AS OF MARCH 17, 1997 WAS 4,200,528.
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
General. United Companies Life Insurance Company and its subsidiary
("the Company", "UC Life"), domiciled in Louisiana and organized in 1955, is
currently authorized to conduct business in 47 states, the District of Columbia
and Puerto Rico. The Company is a wholly-owned subsidiary of Pacific Life and
Accident Insurance Company ("PLAIC"), which is in turn a wholly-owned
subsidiary of PennCorp Financial Group, Inc. ("PennCorp"). (See note 2 to Notes
to Consolidated Financial Statements.) PennCorp is an insurance holding company
which offers, through its wholly-owned subsidiaries, a broad range of life
insurance, annuity and accident and sickness products. The principal products of
the Company are tax deferred annuities marketed on a commission basis
principally through financial institutions and independent general agents and
generally sold to middle-income customers seeking tax deferred savings
investments. During the fourth quarter of 1995, the Company added variable
annuity products to its annuity line of business.
Sale of the Company. On July 24, 1996, United Companies Financial
Corporation ("UCFC") and PLAIC consummated the sale of UC Life, a wholly-owned
subsidiary of UCFC. Pursuant to an Amended and Restated Stock Purchase Agreement
(the "Agreement"), UCFC sold 100% of the outstanding capital stock of UC Life
(the "UC Life Common Stock") to PLAIC for a total purchase price of $110.1
million including expenses incurred of $9.7 million and earnings through the
date of consummation of the acquisition of $3.6 million. The Company paid a
$10.0 million cash dividend and distributed certain real estate and other assets
to UCFC immediately prior to the closing with a value of $48.3 million.
Immediately following the acquisition of the Company, PLAIC
contributed $57.3 million in cash to the Company, which represented the market
value of the real estate and other assets (but excluded the $10.0 million cash
dividend) distributed by the Company to UCFC.
The sale of the Company to PLAIC has been accounted for as a purchase
transaction in accordance with generally accepted accounting principles, and
accordingly, all assets and liabilities acquired were recorded at fair value,
as of the acquisition date, which became the new cost basis.
Principal Products. The principal products marketed by the Company since
1978 have been tax deferred fixed annuities. During 1996, the average premium
received on the sale of these policies was approximately $23,000. These
annuities typically guarantee an interest crediting rate for the first policy
year. Thereafter, the interest crediting rate generally may be adjusted by the
Company at any time (subject to certain minimum crediting rates stated in the
policy). A policyholder is permitted at any time to withdraw all or part of
the accumulated premiums plus the amount of interest credited on the policy,
less a surrender charge if applicable. The initial surrender charge typically
ranges from 9% - 10% of the initial premium and decreases to zero during a
penalty period of from five to ten years. Approximately 73% of the Company's
annuity policies in force at December 31, 1996, were subject to a surrender
penalty.
1
<PAGE> 3
The Company produced $109.1 million, $135.3 million, and $249.7 million
in sales of annuity products during the years ended December 31, 1996, 1995 and
1994, respectively. The Company believes that the decrease in annuity sales in
1995 and 1996 is due in part to (i) the interest rate environment, particularly
the relative relationship between short term and intermediate term interest
rates, (ii) the focus of the Company's resources on the introduction of its
variable annuity product, and (iii) the uncertainty associated with
announcements by UCFC concerning the possible sale of the Company.
During the fourth quarter of 1995, the Company introduced a
variable annuity product. During 1996, the average premium received on the sale
of variable policies was $38,000 with total sales aggregating $18.4 million.
The Company assumes no investment risk on the funds invested in the separate
account of a variable annuity, but receives income from policy related charges.
The following table presents the Company's direct annuity sales by
state by percent of total premiums for the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
State
Missouri.................. 25.3% 20.9% 10.3%
Louisiana................. 24.9 9.8 13.7
Florida................... 12.6 21.8 28.9
Illinois.................. 9.5 9.8 8.6
All others................ 27.7 37.7 38.5
----------- ----------- ----------
Total 100.0% 100.0% 100.0%
=========== =========== ==========
</TABLE>
No other state individually accounted for more than 5% of annuity
sales during 1996 or 1995.
Distribution. The Company's strategy of marketing through financial
institutions and independent general agents allows it to avoid substantial
sales management office expense and to expand its sales efforts without
significant development expense. Because financial institutions and independent
general agents usually offer the products of several insurance companies, the
Company must continue to provide products with competitive terms, interest
crediting rates, commissions and service to both policyholders and the selling
institutions and independent general agents. During 1996 and 1995, the Company
focused on expanding the independent general agent share of its distribution
network. Of the annuity policies sold during 1996 and 1995, approximately 54%
and 55%, respectively, of the total dollar amount were attributable to sales by
independent general agents versus 46% in 1994.
Reinsurance. The Company generally limits the amount of life insurance
risk that it assumes with respect to any one insured to $100,000 and for larger
policies follows industry practice of reinsuring that portion of the risk in
excess of established retention limits. The Company, however, remains
contingently liable for life insurance ceded to reinsurers and remains liable to
the policyholder in the event the reinsurer is unable to meet the obligations
assumed under the reinsurance agreement. Reinsurance is currently ceded
primarily to the following companies: First Capital Life Insurance Company of
Louisiana ("First Capital")(not affiliated with First Capital Holding Company of
California), Aetna Life Insurance Company ("Aetna"), Continental Assurance
Company ("Continental"), American United Life Insurance Company ("American
United") and Transamerica Occidental Life Insurance Company ("Transamerica").
American United and Transamerica are rated "A+" (Superior) by A.M. Best Company
("Best") at December 31, 1996. Aetna and Continental are rated "A" (Excellent").
First Capital is rated "B" (Adequate). In the case of First Capital, assets
equal to the reserve credit taken by the Company are held in trust for the
benefit of the Company.
Annuity and Life Insurance Reserves. Reserves for annuity policies
constitute the Company's primary liabilities. The duration of these liabilities
is affected 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. Since
insurance commissions incurred at the origination of annuity policies are
generally deferred and recognized over the estimated life of the policies, any
unexpected increase in surrenders of annuity contracts would require more rapid
recognition of these expenses, thereby adversely impacting profitability.
2
<PAGE> 4
The annuity reserves reflected in the consolidated financial statements are
calculated based on generally accepted accounting principles ("GAAP"). As of
December 31, 1996 and 1995, annuity reserves were $1.3 billion and $1.4 billion,
life reserves were $111.2 million and $111.1 million, and unearned premium
reserves related to credit insurance were $.3 million and $1.8 million,
respectively. These reserves are based upon the Company's best estimates of
mortality, persistency, expenses and investment income, with appropriate
provisions for adverse statistical deviation and the use of the net level
premium method for all non-interest sensitive products and the retrospective
deposit method for interest-sensitive products. Subsequent to the purchase, the
Company utilizes statutory reserves as a reasonable approximation of GAAP
reserves for all non-interest sensitive products.
Investments. The investment function of the Company is overseen by an
investment committee comprised of senior management, with the assistance of
outside investment advisors in the management of certain assets. The Company's
investment policy seeks to achieve attractive returns on a low to moderate risk
portfolio of investments. These investments, primarily bonds and mortgage
loans, must be within regulatory constraints to qualify as permitted assets,
and within the yield, risk and maturity limitations established by the Company
as necessary for meeting its objectives.
The investment strategy continues to focus on maintaining the
percentage of the Company's invested assets committed to commercial and
residential mortgages and to investment grade corporate bonds and
mortgage-backed securities.
The following table summarizes the Company's investments as of
December 31, 1996:
<TABLE>
<CAPTION>
PERCENT
AMORTIZED FAIR CARRYING CARRYING
COST VALUE(1) VALUE VALUE
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Fixed maturities held for investment:
Investment-grade corporate bonds .............. $ 4,394 $ 4,405 $ 4,394 .3%
Non-rated bonds ............................... 44,079 46,497 44,079 3.0
---------- ---------- ---------- ----------
Total securities held for investment ..... 48,473 50,902 48,473 3.3
---------- ---------- ---------- ----------
Fixed maturities available for sale:
U.S. Government and agency bonds .............. 9,029 9,122 9,122 .6
Debt securities issued or guaranteed by
foreign government(2) ....................... 10,920 11,105 11,105 .8
Municipal bonds ............................... 5,434 5,387 5,387 .4
Investment-grade corporate bonds .............. 375,943 380,198 380,198 26.1
Below-investment-grade corporate bonds ........ 30,608 31,233 31,233 2.1
Non-rated corporate bonds ..................... 8,000 8,000 8,000 .5
Mortgage-backed bonds ......................... 687,916 699,120 699,120 48.0
---------- ---------- ---------- ----------
Total securities available for sale ...... 1,127,850 1,144,165 1,144,165 78.5
---------- ---------- ---------- ----------
Commercial mortgages ............................ 182,070 185,187 182,070 12.5
Residential mortgages ........................... 53,911 55,203 53,911 3.7
Policy loans .................................... 21,536 21,536 21,536 1.5
Investment in limited partnerships .............. 5,704 5,704 5,704 .4
Short-term investments .......................... 467 467 467 --
Other investments ............................... 1,491 1,491 1,491 .1
---------- ---------- ---------- ----------
Total invested assets .................... $1,441,502 $1,464,655 $1,457,817 100.0%
========== ========== ========== ==========
</TABLE>
- --------------
(1) Fair values are obtained principally from the Company's investment
advisor.
(2) Consists principally of Canadian provincial government bonds and bonds
issued or guaranteed by the Canadian federal government (in U.S. Dollars).
3
<PAGE> 5
As reflected in the following table, the carrying value of the
Company's investments classified as investment grade at December 31, 1996, was
approximately $1.1 billion or 93% of the fixed maturity portfolio:
<TABLE>
<CAPTION>
Total Total
Held for Available Carrying Percent of
Investment for Sale Value Carrying Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Investment grade(1)
Aaa ...................... $ -- $ 692,616 $ 692,616 58.0%
Aa ....................... -- 26,105 26,105 2.2
A ........................ 1,165 260,747 261,912 22.0
Baa ...................... 3,229 125,464 128,693 10.8
---------- ---------- ---------- ----------
Total investment grade .. 4,394 1,104,932 1,109,326 93.0
Ba and below ................. -- 31,233 31,233 2.6
Not rated .................... 44,079 8,000 52,079 4.4
---------- ---------- ---------- ----------
Total fixed maturity
investments ............. $ 48,473 $1,144,165 $1,192,638 100.0%
========== ========== ========== ==========
</TABLE>
- -------------
(1) Fixed maturity investments are classified according to the ratings
assigned by Moody's Investors Service, Inc., or, in the absence of such
rating, by the National Association of Insurance Commissioners ("NAIC"),
whose ratings operate as follows: NAIC Class 1 was assumed equivalent to
an A rating; NAIC Class 2, BBB/Baa; and NAIC Classes 3-6, BB/Ba and below.
Of the bonds held by the Company, 88.8% were in the highest two NAIC
designations at December 31, 1996. The following table sets forth as of
December 31, 1996, the carrying values of these securities according to NAIC
designations:
<TABLE>
<CAPTION>
Total
Held for Available Carrying Percent of Total
NAIC Rating Investment for Sale Value Carrying Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Class 1 ............ $ 1,165 $ 929,206 $ 930,371 78.0%
Class 2 ............ 3,229 125,090 128,319 10.8
Class 3 ............ -- 19,806 19,806 1.7
Class 4 ............ -- 6,355 6,355 0.5
Not Rated .......... 44,079 63,708 107,787 9.0
---------- ---------- ---------- ----------
Total ...... $ 48,473 $1,144,165 $1,192,638 100.0%
========== ========== ========== ==========
</TABLE>
As a significant percentage of the Company's investment portfolio is
invested in fixed rate, fixed maturity investments, the fair value of these
investments is sensitive to changes in market rates of interest. In a rising
interest rate environment, the fair value of these investments would be
expected to decrease in value. An unanticipated increase in policy surrenders
or claims could impact the Company's liquidity and require the sale of certain
assets, such as bonds, prior to their maturity at a loss.
4
<PAGE> 6
At December 31, 1996, 50.3% of the Company's total invested assets
were invested in mortgage-backed securities. These mortgage-backed securities
consist principally of collateralized mortgage obligations and mortgage-backed
pass-through securities. Mortgage-backed securities generally are
collateralized by mortgages backed by GNMA, FNMA and FHLMC. Only GNMA mortgages
are backed by the full faith and credit of the United States Government.
Certain mortgage-backed securities are subject to significant prepayment risk.
In periods of declining interest rates, mortgages may be repaid more rapidly
than scheduled as individuals refinance higher-rate mortgages to take advantage
of lower interest rates. As a result, holders of mortgage-backed securities may
receive large prepayments on their investments that cannot be reinvested at an
interest rate comparable to the rate on the prepaid mortgage. In addition to
decreased investment yields, earnings could also be affected by capital gains
or losses realized on these prepayments since the carrying value of securities
purchased at a discount or premium may be different than the amount received
upon prepayment. The Company has reduced the prepayment risk associated with
mortgage-backed securities by investing in planned amortization class ("PAC")
instruments. These instruments are designed to amortize in a predictable manner
by shifting the primary risk of prepayment of the underlying collateral to
other investors. PAC instruments represented approximately 58% of the Company's
investments in mortgage-backed securities at December 31, 1996.
At December 31, 1996, the Company's investment in mortgage loans on
real estate was comprised of $53.9 million in residential home equity mortgage
loans and $182.1 million in commercial real estate mortgage loans, substantially
all of which were originated by UC Lending. During 1996, the Company funded
$36.7 million in new commercial real estate loans and refinanced $10.8 million
of existing commercial real estate mortgage loans.
At origination, substantially all of the mortgages were on existing
leased properties rather than on properties in construction or on start-up
properties. The origination of commercial mortgages was subject to underwriting
procedures, including: (i) maximum loan to value ratio of 75% of the property's
appraised value; (ii) specified debt coverage requirements; (iii) on-site
inspections; (iv) third-party appraisals; and (v) personal guarantees of
borrowers. For these reasons, the Company does not consider its commercial
loans to be high risk. Commercial mortgages range in size up to approximately
$1.9 million with an average loan size of approximately $.6 million. The
weighted average interest rate on the Company's commercial mortgage loan
portfolio was 9.40% and 9.83% at December 31, 1996 and 1995, respectively.
The mortgage loan portfolio of the Company is serviced by UC
Mortgage, an affiliate.
5
<PAGE> 7
The following table provides information at December 31, 1996,
regarding the Company's commercial mortgage loans on real estate by property
type, state and contractual maturity (excluding loan loss reserves and
discount):
<TABLE>
<CAPTION>
Percent of
Amount Total
-------- ----------
(dollars in thousands)
<S> <C> <C>
Commercial mortgage loans by property type
Retail............................................................. $ 78,203 41.9%
Office............................................................. 63,424 33.9
Office and warehouse............................................... 42,376 22.7
Other.............................................................. 2,822 1.5
-------- -----
Total......................................................... $186,825 100.0%
======== =====
Commercial mortgage loans by state
Florida............................................................ $ 34,052 18.2%
Georgia............................................................ 40,408 21.6
Colorado........................................................... 32,253 17.3
Virginia........................................................... 17,266 9.2
Tennessee.......................................................... 11,877 6.4
Texas.............................................................. 9,150 4.9
All others......................................................... 41,819 22.4
-------- -----
Total......................................................... $186,825 100.0%
======== =====
Commercial mortgage loans by contractual maturity
1997............................................................... $ 15,284 8.2%
1998............................................................... 17,956 9.6
1999 16,366 8.8
2000 24,174 12.9
After 2000......................................................... 113,045 60.5
-------- -----
Total......................................................... $186,825 100.0%
======== =====
</TABLE>
The following table reflects investment results for the Company for
each of the periods indicated.
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
----------- -------------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Year Ended December 31,
----------- ----------- ----------- -----------
1996 1996 1995 1994
----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
End of the period total invested assets(1) ..... $ 1,472,304 $ 1,486,423 $ 1,644,751 $ 1,415,557
Net investment income(2) ....................... $ 50,041 $ 66,421 $ 125,591 $ 117,105
Net realized investment gains
(losses)(3) .................................. $ 559 $ (1,592) $ (3,670) $ (4,803)
Average annual yield ........................... 7.8% 8.1% 8.1% 8.3%
</TABLE>
- -------------------
(1) Consists of total investments plus cash, less amounts due to brokers for
securities committed to be purchased at end of period.
(2) Net investment income is net of investment expenses and excludes capital
gains or losses and provision for income taxes.
(3) Amounts shown above are before taxes, and include provisions for
impairments in value, if any, which are considered to be other than
temporary.
The Company's investments must comply with the insurance laws of the
states in which it is domiciled and in which it is licensed. These laws
prescribe the kind, quality and concentration of investments that may be made
by insurance companies.
6
<PAGE> 8
Insurance Ratings. The ability of an insurance company to compete
successfully depends in part on its financial strength, operating performance
and claims-paying ability as rated by A.M. Best Co. ("Best") and other rating
agencies. The Company is presently rated "A-" (Excellent) by Best. Best's 15
categories of ratings for insurance companies currently range from "A++"
(Superior) to "F" (In Liquidation). According to Best, an "A" or "A-" rating is
assigned to companies which, in Best's opinion, have achieved excellent overall
performance when compared to the standards of the life insurance industry and
generally have demonstrated a strong ability to meet their obligations to
policyholders over a long period of time. In evaluating a company's statutory
financial and operating performance, Best reviews the company's statutory
profitability, leverage and liquidity, as well as the company's spread of risk,
quality and appropriateness of its reinsurance program, quality and
diversification of assets, the adequacy of its policy reserves and surplus,
capital structure and the experience and competency of its management. Best
ratings are based upon factors of concern to policyholders, agents and
intermediaries and are not directed toward the protection of investors.
During 1996, Duff & Phelps Credit Rating Company ("Duff & Phelps")
reaffirmed its "A+" (Single-A-Plus) rating of the Company. Duff & Phelps
indicated, "The rating reflects the Company's strong and stable profitability,
reasonable operating leverage and expanding distribution channels." Standard &
Poor's revised the Company's rating to "BBBq" from "Aq" primarily as a result
of the decrease in sales during 1996. (See Management's Discussion and Analysis
of Financial Condition and Results of Operations.) Ratings such as those held
by the Company are important to maintaining public confidence in the Company
and its 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 present ratings will enable it to
continue to compete successfully.
Government Regulation and Legislation. Life insurance companies are
subject to regulation and supervision by the states in which they transact
business. The laws of the various states establish regulatory agencies with
broad administrative and supervisory powers related to, among other things,
granting and revoking licenses to transact business, regulating trade practices,
establishing guaranty associations, licensing agents, approving policy forms,
filing premium rates on certain business, setting reserve requirements,
determining the form and content of required financial statements, determining
the reasonableness and adequacy of capital and surplus and prescribing the type
of permitted investments and the maximum concentrations of certain classes of
investments. The Company is subject to periodic examinations by state regulatory
authorities. Management does not expect the results of any on-going examinations
to have a material effect on the financial condition of the Company.
Most states have enacted legislation regulating insurance holding
company systems, including acquisitions of control of insurance companies,
dividends, the terms of transactions with affiliates, investments in
subsidiaries and other related matters. Regulatory restrictions on investments
in subsidiaries and affiliates requires the Company to continually review and
may cause it to occasionally modify or restructure such investments. The
Company has ongoing dialogues with the applicable state insurance departments
regarding this issue. The Company is registered as an insurance holding company
system in Louisiana, its domiciliary state, and routinely reports to other
jurisdictions in which it is licensed.
There continues to be substantial scrutiny of the insurance regulatory
framework, and a number of state legislatures have enacted legislative
proposals that alter, and in many cases increase, state authority to regulate
insurance companies and their holding company systems. The NAIC and state
insurance regulators also have become involved in a process of reexamining
existing laws and regulations and their application to insurance companies. In
particular, this reexamination has focused on insurance company investment and
solvency issues and, in some instances, has resulted in new interpretations of
existing law, the development of new laws and the implementation of internal
guidelines. The NAIC has formed committees to study and formulate regulatory
proposals on such diverse issues as the use of surplus debentures, accounting
for reinsurance transactions, assumption reinsurance, valuation of securities,
the adoption of risk-based capital rules, and the regulation of various
products offered by insurance companies.
7
<PAGE> 9
In connection with its accreditation of states to conduct periodic
insurance company examinations, the NAIC has encouraged states to adopt model
NAIC laws on specific topics, such as holding company regulations and the
definition of extraordinary dividends. Model legislation proposed by the NAIC
to control the amount of dividends that may be paid by insurance companies
without prior regulatory approval has been adopted in most states and is being
considered by the legislatures of the other states. As of the date hereof,
Louisiana has adopted the NAIC's most restrictive dividend test. Louisiana Law
permits the Company to pay a dividend without prior consent of the Louisiana
Insurance Commissioner if the amount paid, together with all other dividends
paid in the preceding 12 months, does not exceed the lesser of (i) 10% of such
insurer's surplus as regards to policyholders as of the 31st day of December
next preceding, or (ii) the insurer's net gain from operations, not including
realized capital gains, for the 12 month period ending the 31st day of December
next preceding. Any dividend above this amount would be considered an
"extraordinary" dividend and could not be paid until the earlier of (i) 30 days
after the Louisiana Insurance Commissioner has received notice of the
declaration thereof and has not within such period disapproved such payment, or
(ii) the receipt of approval from the Louisiana Insurance Commissioner.
Based upon Louisiana statutes, the Company has the capacity to pay
dividends of $9.4 million in 1997. As part of its July 1996 approval of PLAIC's
acquisition of the Company, the Louisiana Insurance Commissioner approved an
extraordinary dividend plan for the Company pursuant to which the Company may
pay a specified amount of dividends for each of the five years following the
acquisition, beginning in 1997, amounting to the lesser of the pro forma
dividend amounts in such plan or the actual earnings of the Company, and
conditioned on the Company maintaining a risk-based capital ratio of at least
300% of the Authorized Control Level.
On the basis of statutory financial statements filed with the state
insurance regulators annually, the NAIC calculates twelve financial ratios to
assist state regulators in monitoring the financial condition of insurance
companies. A "usual range" of results for each ratio is used as a benchmark.
Departure from the usual range could lead to inquiries from individual state
insurance departments. The NAIC has not yet issued the 1996 ratios for the
Company. The Company has calculated what it expects its ratios will be. Based on
statutory financial statements for 1996, UC Life expects one of the twelve
ratios outside of the usual ranges. In the past, variances in the Company's
ratios have resulted in inquiries from insurance departments to which the
Company has responded. The Company may receive inquiries from certain insurance
departments concerning its ratio results for 1996, and there can be no assurance
that such insurance departments will not take action against the Company.
In December 1992, the NAIC adopted the Risk-Based Capital for Life
and/or Health Insurers Model Act (the "Model Act"). The main purpose of the
Model Act is to provide a tool for insurance regulators to evaluate the capital
of insurers with respect to the risks assumed by them and determine whether
there is a need for possible corrective action with respect to them. Louisiana,
the Company's domiciliary state, has adopted the Model Act.
The Model Act provides for four different levels of regulatory action
with respect to statutory financial statements for the calendar year 1994 and
thereafter, each of which may be triggered if an insurer's Total Adjusted
Capital (as defined in the Model Act) is less than a corresponding "level" of
risk-based capital ("RBC"). The "Company Action Level" is triggered if an
insurer's Total Adjusted Capital is less than 200% of its "Authorized Control
Level RBC" (as defined in the Model Act) or less than 250% of its Authorized
Control Level RBC and the insurer has a negative trend. At the Company Action
Level, the insurer must submit a comprehensive plan to the regulatory authority
which discusses proposed corrective actions to improve its capital position.
The "Regulatory Action Level" is triggered if an insurer's Total Adjusted
Capital is less than 150% of its Authorized Control Level RBC. At the
Regulatory Action Level, the regulatory authority will perform a special
examination of the insurer and issue an order specifying corrective actions
that must be followed. The "Authorized Control Level" is triggered if an
insurer's Total Adjusted Capital is less than 100%
8
<PAGE> 10
of its Authorized Control Level RBC, and at that level the regulatory authority
is authorized (although not mandated) to take regulatory control of the
insurer. The "Mandatory Control Level" is triggered if an insurer's Total
Adjusted Capital is less than 70% of its Authorized Control Level RBC, and at
that level the regulatory authority must take regulatory control of the
insurer. Regulatory control may lead to rehabilitation or liquidation of an
insurer.
Calculations using the NAIC formula and the Company's statutory
financial statements as of December 31, 1996 indicate that its capital
substantially exceeded RBC requirements.
The State of Michigan requires insurance companies to requalify for
their insurance licenses following a change in control, and has enacted
legislation substantially increasing capital and surplus requirements for
companies filing requalification applications following a change in control.
This requalification requirement may impact the Company's Michigan license
status as Michigan initially denied the Company's application for
requalification but has postponed the effective date of the denial pending
further discussions by the Company with Michigan. The Company believes the
denial was based primarily on its performance prior to its acquisition by
PennCorp. Michigan accounted for approximately 2.9% of the Company's collected
premiums in 1996.
The Company may be required, under the solvency or guaranty laws of
most states in which it does business, to pay assessments (up to certain
prescribed limits) to fund policyholder losses or liabilities of insurance
companies that become insolvent. Recent insolvencies of insurance companies
increase the possibility that such assessments may be required. These
assessments may be deferred or forgiven under most guaranty laws if they would
threaten an insurer's financial strength and, in certain instances, may be
offset against future premium taxes. The occurrence and amount of such
assessments have increased in recent years and generally are expected to
increase in future years. The Company paid approximately $1.3 million in each
of the years ended December 31, 1996, 1995 and 1994, as a result of such
assessments. The likelihood and amount of any other future assessments cannot
be estimated and are beyond the control of the Company.
Although the federal government does not directly regulate the
business of insurance, federal legislation and administrative policies in
several areas, including pension regulation, age and sex discrimination,
financial services regulation and federal taxation can significantly affect the
insurance business.
Congress has from time to time in the past considered possible
legislation that would adversely affect the federal income tax treatment of
certain annuity products offered by the Company. There can be no assurance that
future tax legislation will not contain provisions that may result in adverse
effects on the Company's products.
A substantial amount of the Company's annuity policies are marketed
through financial institutions. In a recent decision, the United States Supreme
Court upheld the United States Comptroller of the Currency's decision to permit
national banks to sell annuities in places with 5,000 or less inhabitants. The
decision is viewed by the Company as favorable. However, many states continue
to restrict the ability of state banks to sell insurance products, and pending
legislation may adversely affect the authority of banks in certain states in
this regard.
Competition. The Company competes with other life insurers, and also
competes for customers' funds with a variety of investment products offered
by financial services companies other than life insurance companies, such as
banks, investment advisers, mutual fund companies and other financial
institutions. Within the U.S. life insurance industry, there are approximately
125 companies that individually collect in excess of $150 million of annuity
premiums annually. Certain of these companies and other life insurers with
which the Company competes are significantly larger and have available to them
much greater financial and other resources. The Company believes the primary
competitive factors among life insurance companies for investment-oriented
insurance products, such as annuities and guaranteed interest contracts,
include product flexibility, product pricing, innovation in product design,
the claims-paying ability rating and the name recognition of the issuing
company, the availability of distribution channels and service rendered to the
customer before and after a contract is issued. Other factors affecting the
annuity business include the benefits (including before-tax and after-tax
investment returns) and guarantees provided to the customer and the commissions
paid.
Employees. At December 31, 1996, the Company had a total of 116
employees. None of the Company's employees are represented by unions. The
Company considers its relations with its employees to be good.
Item 2. Properties
The Company's executive offices are located in a building owned by a
former affiliate, from which the Company leases approximately 30,000
square feet.
9
<PAGE> 11
Item 3. Legal Proceedings
The nature of the Company's business is such that it is routinely
involved in litigation and is a party to or subject to other items of pending
or threatened litigation. Although the outcome of these matters cannot be
predicted, management of the Company believes, based upon information
available, that the resolution of these various matters will not result in any
material adverse effect on its consolidated financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
<PAGE> 12
PART II
Item 5. Market for the Registrant's Common Stock and Security Holder Matters
The Company is a wholly-owned subsidiary of PLAIC, and is
headquartered in Baton Rouge, Louisiana. PLAIC owns all of the Company's
4,200,528 shares of $2 par value common stock. PennCorp's Common Stock is
traded on the New York Stock Exchange under the symbol "PFG."
Item 6. Selected Financial Data
The selected financial data set forth below is derived from the
Company's audited consolidated financial statements.
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- ----------------------------------------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- -------------------------------------------------------
1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net insurance premiums ................. $ 3,483 $ 3,732 $ 8,508 $ 11,373 $ 18,684 $ 22,860
Interest sensitive policy product
charges ............................. 1,048 1,421 1,949 1,432 918 775
Net investment income .................. 50,041 66,421 125,591 117,105 112,186 107,229
Realized investment gains (losses) ..... 559 (1,592) (3,670) (4,803) (19,393) 1,486
Other income ........................... 907 52 172 (8) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total revenues ...................... 56,038 70,034 132,550 125,099 112,395 132,350
Total expenses ...................... 46,334 67,853 120,450 116,019 124,760 126,885
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes ....... 9,704 2,181 12,100 9,080 (12,365) 5,465
Provision for income taxes (benefit) .... 3,628 769 4,065 3,194 (4,107) 1,438
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) ................... $ 6,076 $ 1,412 $ 8,035 $ 5,886 $ (8,258) $ 4,027
---------- ---------- ---------- ---------- ---------- ----------
Balance Sheet Data - Period End:
Total investments ...................... 1,457,817 1,480,073 $1,641,723 $1,453,094 $1,428,405 $1,253,915
Due from reinsurance ................... 34,923 35,522 33,583 34,985 36,577 37,716
Present value of insurance in force .... 54,931 -- -- -- -- --
Deferred policy acquisition costs ...... 4,187 85,801 90,703 91,915 83,495 80,007
Costs in excess of net assets acquired . 33,373 -- -- -- -- --
Total assets ........................... 1,653,796 1,638,366 1,789,608 1,658,154 1,625,718 1,464,475
Annuity reserves ....................... 1,330,100 1,354,597 1,417,803 1,425,973 1,294,983 1,147,555
Policy benefit reserves ............... 111,206 108,633 111,209 116,501 123,328 125,177
Total liabilities ..................... 1,476,389 1,542,884 1,603,083 1,555,975 1,482,591 1,327,610
Stockholder's equity .................. 177,407 97,938 186,525 102,179 143,127 136,385
Other data:
Annuity sales ......................... $ 52,675 $ 56,402 $ 135,534 $ 249,737 $ 207,682 $ 187,050
Average interest spread on annuities .. 2.33% 2.52% 2.37% 2.73% 2.20% 1.84%
Fixed maturity securities as % of
invested assets ................. 75.0% 69.4% 68.0% 69.6% 59.6% 54.3%
</TABLE>
11
<PAGE> 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 (to the extent the
Company's product mix includes tax deferred accumulation products), the ratings
assigned to the Company by independent rating organizations such as A.M. Best
(which the Company believes are particularly important to the sale of annuity
and other accumulation products) and unanticipated litigation. There can be no
assurance that other factors not currently anticipated by management will not
also materially and adversely affect the Company's results of operations.
General. United Companies Life Insurance Company and its subsidiary
("the Company", "UC Life"), domiciled in Louisiana and organized in 1955, is
currently authorized to conduct business in 47 states, the District of Columbia
and Puerto Rico. The Company is a wholly-owned subsidiary of Pacific Life and
Accident Insurance Company ("PLAIC"), which is in turn a wholly-owned subsidiary
of PennCorp Financial Group, Inc. ("PennCorp"). (See note 2 to Notes to
Consolidated Financial Statements.) PennCorp is an insurance holding company
which offers, through its wholly-owned subsidiaries, a broad range of life
insurance, annuity and accident and sickness products. The principal products of
the Company are tax deferred annuities marketed on a commission basis
principally through financial institutions and independent general agents and
generally sold to middle-income customers seeking tax deferred savings
investments. During the fourth quarter of 1995, the Company added variable
annuity products to its annuity line of business.
Sale of the Company. On July 29, 1996, United Companies Financial
Corporation ("UCFC") and PLAIC consummated the sale of UC Life, a wholly-owned
subsidiary of UCFC. Pursuant to an Amended and Restated Stock Purchase Agreement
(the "Agreement"), UCFC sold 100% of the outstanding capital stock of UC Life
(the "UC Life Common Stock") to PLAIC for a total purchase price of $110.1
million including expenses incurred of $9.7 million and earnings through the
date of consummation of the acquisition of $3.6 million. The Company paid a
$10.0 million cash dividend and distributed certain real estate and other assets
to UCFC immediately prior to the closing with a carrying value of $48.3 million.
Immediately following the acquisition of the Company, PLAIC contributed
$57.3 million in cash to the Company, which represented the market value of the
real estate and other assets (but excluded the $10.0 million cash dividend)
distributed by the Company to UCFC.
The sale of the Company to PLAIC has been accounted for as a purchase
transaction in accordance with generally accepted accounting principles, and
accordingly, all assets and liabilities acquired were recorded at fair value,
as of the acquisition date, which became the new cost basis.
The following analysis should be read in conjunction with the
Company's consolidated financial statements and accompanying notes presented
elsewhere herein.
Principal Products. The principal products marketed by the Company
since 1978 have been tax deferred fixed annuities. During 1996, the average
premium received on the sale of these policies was approximately $23,000. These
annuities typically guarantee an interest crediting rate for the first policy
year. Thereafter, the interest crediting rate generally may be adjusted by the
Company at any time (subject to certain minimum crediting rates stated in the
policy). A policyholder is permitted at any time to withdraw all or part of the
accumulated premiums plus the amount of interest credited on the policy, less a
surrender charge if applicable. The initial surrender charge typically ranges
from 9% - 10% of the initial premium and decreases to zero during a penalty
period of from five to ten years. Approximately 73% of the Company's annuity
policies in force at December 31, 1996, were subject to a surrender penalty.
The annuities sold by the Company are monetary in nature and
therefore sensitive to changes in the interest rate environment. Profitability
of the Company is directly affected by its ability to invest annuity premiums
at yields above the interest crediting rates on the related policy liabilities.
One of the primary financial objectives is to effectively manage this interest
spread over time in changing interest rate environments. This is accomplished,
in part, by adjusting the interest crediting rate paid on its existing and new
annuity policies. During periods of declining interest rates, the fair value of
the Company's investments, primarily fixed maturity investments, increases;
however, yields earned on investments made during such periods decline. In
contrast, during periods of rising interest rates, the fair value of the
investment portfolio declines and the risk of policy surrenders increases. An
unanticipated increase in surrenders would impact the Company's liquidity,
potentially requiring the sale of certain investments prior to their
maturities, which may be at a loss.
Reserves for annuity policies constitute the Company's primary
liabilities. The duration of these liabilities is affected 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. Since insurance
commissions incurred at the origination of annuity policies are generally
deferred and recognized over the estimated life of the policies, any unexpected
increase in surrenders of annuity contracts would require more rapid
recognition of these expenses, thereby adversely impacting profitability.
12
<PAGE> 14
Revenues. The following table sets forth information regarding the
components of the Company's revenues for the periods indicated:
<TABLE>
<CAPTION>
Purchase
basis of Historical basis
accounting of accounting
----------- -----------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Year Ended Dec 31,
----------- ----------- --------------------------
1996 1996 1995 1994
----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Premiums ............................... $ 3,483 $ 3,732 $ 8,508 $ 11,373
Interest sensitive policy
product charges ................... 1,048 1,421 1,949 1,432
Net investment income .................. 50,041 66,421 125,591 117,105
Realized investment gains (losses) ..... 559 (1,592) (3,670) (4,803)
Other income ........................... 907 52 172 (8)
----------- ----------- ----------- -----------
Total ............................. $ 56,038 $ 70,034 $ 132,550 $ 125,099
=========== =========== =========== ===========
</TABLE>
Net investment income totaled $116.5 million on average invested
assets of approximately $1.5 billion for the year ended December 31, 1996,
compared to $125.6 million and $117.1 million on average investments of
approximately $1.5 billion and $1.4 billion for the years ended December 31,
1995 and 1994, respectively. Weighted average yield on invested assets was
8.0%, 8.1% and 8.3% for the years ended December 31, 1996, 1995 and 1994,
respectively. Approximately $4.6 million of non-recurring 1995 net investment
income resulted from a limited partnership investment. During 1994, the Company
established a trading account for a portion of its investment portfolio invested
in common stocks. At December 31, 1996, the carrying value of investments in the
Company's trading account was $900,000 reflecting a $135,000 unrealized gain.
13
<PAGE> 15
The Company estimates that non-accrual loans reduced investment income
by approximately $72,000, $121,000, and $124,000 during the years ended December
31, 1996, 1995 and 1994, respectively. Loans are placed on a non-accrual status
when they are 180 days past due. As of December 31, 1996, 1995 and 1994, the
amount of non-accrual mortgage loans owned by the Company was $1.4 million, $2.4
million and $2.6 million, respectively.
Net insurance premiums declined in each of the years ended December
31, 1996, 1995 and 1994. Net insurance premiums reflect revenues associated
primarily with pre-need life insurance and credit insurance. Management has
chosen to focus on deferred annuities and variable annuities and as a result new
sales of pre-need life insurance and credit insurance have been discontinued.
Realized investment gains and losses may vary significantly from year
to year. The Company continuously evaluates its investment portfolio and the
conditions under which it might sell securities, including changes in interest
rates, changes in prepayment risk, liquidity needs, asset-liability matching,
tax planning strategies and other economic factors. 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 (losses) were as follows for the indicated periods:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- --------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Year Ended Dec 31,
---------- ---------- ------------------------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Gross gains............................................ $ -- $ 42 $ 524 $ 303
Gross loses............................................ (157) (1,388) (1,807) (3,373)
Loss provision......................................... -- 477 (350) 1,198
------- -------- -------- --------
Net losses on fixed maturity securities........... (157) (869) (1,693) (1,872)
------- -------- -------- --------
Mortgage loans on real estate:
Losses on sale......................................... -- (771) (194) --
Loss provision......................................... 716 293 (339) 861
------- -------- -------- --------
Net gains (losses) on mortgage loans on estate.... 716 (478) (533) 861
------- -------- -------- --------
Investment real estate:
Losses on sale......................................... -- (1,098) (2,638) (2,840)
Loss provision......................................... -- 853 1,134 (952)
------- -------- -------- --------
Net losses on investment real estate.............. -- (245) (1,504) (3,792)
------- -------- -------- --------
Realized investment gains (losses)................ $ 559 $ (1,592) $ (3,670) $ (4,803)
======= ======== ======== ========
</TABLE>
The Company does not believe it has any impaired loans, other than
non-accrual loans, as of December 31, 1996.
14
<PAGE> 16
Expenses
The following table presents the components of the Company's expenses
for the periods indicated:
<TABLE>
<CAPTION>
Purchase
basis of Historical basis
accounting of accounting
---------- ------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Year Ended Dec 31,
---------- ---------- -----------------------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest on annuity policies ............................ $ 32,022 $ 42,434 $ 81,035 $ 74,497
Insurance benefits ...................................... 3,836 5,967 9,930 12,654
Amortization of present value of insurance in force
and deferred policy acquisition costs .................. 5,068 9,699 13,159 13,528
Amortization of costs in excess of net assets acquired... 675 -- -- --
Underwriting and other administrative expenses........... 4,733 9,753 16,326 15,340
---------- ---------- ---------- ----------
Total .............................................. $ 46,334 $ 67,853 $ 120,450 $ 116,019
========== ========== ========== ==========
</TABLE>
Interest on annuity policies decreased $6.6 million in 1996 and
increased $6.5 million in 1995, respectively, compared to prior years primarily
as a result of the decrease in average annuity reserves in 1996 to $1,374
million from $1,421 million in 1995, and the increase from $1,360 million in
1994. As expected, annuity surrenders increased in 1996 and 1995, primarily
because of the current interest rate environment and the effect of policies
first coming out of the surrender penalty period. Management continues to
aggressively manage its interest spread between earnings and crediting rates in
an effort to balance competitiveness and profitability goals. Average renewal
credited rates ranged from 5.55% to 5.75%, 5.60% to 5.75% and 5.60% to 6.45% for
years ended December 31, 1996, 1995 and 1994, respectively.
Amortization of deferred policy acquisition costs in 1996 included an
increase of approximately $2.9 million related to increased surrender activity
through the date of sale of the Company (See note 10 to Notes to Consolidated
Financial Statements.), but decreased in each of the periods presented as a
result of the reduction in amortization of the closed block of credit life
business. The Company adjusted certain assumptions related to the credit life
business to bring them in line with current Company experience in the first
quarter of 1996.
Other operating expenses, which include general insurance and taxes,
licenses and fees, decreased during 1996, compared to the comparable period in
1995 primarily because of the elimination of corporate expenses allocated from
its former parent. The increase in 1995 from 1994 was primarily attributable to
the start-up costs, including legal and printing expenses associated with the
Company's new variable annuity product introduced in the fourth quarter of 1995
and increased corporate expenses allocated from its former parent.
15
<PAGE> 17
Asset Quality. Management continues to emphasize reducing the level
of non-earning assets owned by focusing on expediting the foreclosure process on
its commercial real estate loans and disposing of the properties on a timely
basis. The balance of foreclosed loans totaled $0 and $13.6 million at December
31, 1996 and 1995, respectively. All foreclosed loans as of the acquisition
date, totalling $13.9 million, were distributed to UCFC as part of the closing
transaction. (See note 2 to Notes to Consolidated Financial Statements.) The
Company actively manages its mortgage loan and real estate portfolios, but, 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, and loans charged-off as of the
dates indicated:
<TABLE>
<CAPTION>
Period End
---------------------------------------
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>
PURCHASE BASIS OF ACCOUNTING:
Period from July 24, 1996 to
December 31,1996
Home equity .................... $ 62,356 $ 146 .2% $ -- -- %
Commercial ..................... 186,825 1,669 .9% -- -- %
---------- ---------- ----------
Total .......................... $ 249,181 $ 1,815 .7% $ -- -- %
========== ========== ==========
HISTORICAL BASIS OF ACCOUNTING:
Period from January 1, 1996 to
July 23, 1996
Home equity .................... $ 135,971 $ 242 .2% $ -- -- %
Commercial ..................... 174,297 966 .6% 771 .4%
---------- ---------- ----------
Total .......................... $ 310,268 $ 1,208 .4% $ 771 .2%
========== ========== ==========
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%
========== ========== ==========
</TABLE>
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>
Purchase basis of
accounting Historical basis of accounting
----------------------- ------------------------------------------------------------------
Period from Jul 24 Period from Jan 1
to Dec 31,1996 to Jul 23, 1996 Dec 31, 1995
----------------------- -------------------------------- ------------------------------
Real Mortgage Real Mortgage Real Mortgage
Bonds Estate Loans Bonds Estate (1) Loans Bonds Estate (1) Loans
------ --- -------- -------- -------- -------- ------ -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 189 $-- $ 12,661 $ 666 $ 3,987 $ 2,117 $ 317 $ 5,120 $ 1,778
Losses charged to allowance -- -- (716) (1,361) (1,098) (771) (1,664) (2,638) (194)
Loss provision -- -- -- 884 (2,889) 478 2,013 1,505 533
------ --- -------- -------- -------- -------- ------ -------- --------
Balance at end of period $ 189 $-- $ 11,945 $ 189 $ -- $ 1,824 $ 666 $ 3,987 $ 2,117
====== === ======== ======== ======== ======== ====== ======== ========
Specific reserves $ 189 $-- $ 8,440 $ 189 $ -- $ 824 $ 666 $ 3,987 $ 1,117
Unallocated reserves -- -- 3,505 -- -- 1,000 -- -- 1,000
------ --- -------- -------- -------- -------- ------ -------- --------
Total reserves $ 189 $-- $ 11,945 $ 189 $ -- $ 1,824 $ 666 $ 3,987 $ 2,117
====== === ======== ======== ======== ======== ====== ======== ========
</TABLE>
(1) The provision for real estate losses relates to losses from properties
acquired in satisfaction of debt.
16
<PAGE> 18
The increase in mortgage loan loss reserves for the year ended
December 31, 1996, is comprised of $7.7 million home equity loss reserves and
$2.1 million commercial loss reserves. To the date of the sale of the Company on
July 23, 1996, the Company assumed no credit risk on the residential loans
portfolio whose principal and interest was guaranteed by UCFC. Therefore,
residential loan loss reserves were established on the portfolio in conjunction
with determining the acquisition value of the residential loans. The increase in
commercial loan loss reserves relates to a change in the Company's portfolio
management strategy concerning certain high risk loans. The Company has chosen
to seek a more aggressive approach to the potential disposition of certain high
risk loans as opposed to its former general strategy of holding loans to
maturity. The Company anticipates a larger cost of disposition under the more
aggressive strategy.
The Company owns senior and subordinated pass-through certificates
issued in 1990 for 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 of 1986, as amended ("the
Code"). These certificates are included in fixed maturities available for sale
in the accompanying consolidated financial statements. The outstanding principal
balance of all of the senior and subordinated certificates was $39.6 million and
$46.8 million as of December 31, 1996 and 1995, respectively. The principal
balance of the subordinated certificates at December 31, 1996 and 1995,
respectively, all of which were owned by the Company, was $24.9 million and
$26.5 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 million, $1.4 million, $1.7 million, and $2.5
million, for the periods from July 24, 1996, through December 31, 1996, January
1, 1996, through July 23, 1996, and years ended December 31, 1995 and 1994,
respectively.
The Company's fixed maturity securities portfolio consists primarily
of mortgage-backed securities and corporate bonds, comprising 61.5% and 67.9%,
and 36.4% and 29.3% of the portfolio as of December 31, 1996 and 1995,
respectively. At December 31, 1996 and 1995, respectively, the amortized cost
of the Company's fixed maturity portfolio was $1.2 billion and $1.1 billion
consisting primarily of $722 million and $778 million in mortgage-backed
securities and $428 million and $335 million in corporate bonds.
As of December 31, 1996 and 1995, the Company owned $.9 million and
$.8 million in equity securities classified as trading securities.
Prior to the closing of the sale of the Company, the Company had
investments in two limited partnerships which were formed for the purpose of
participating in privately placed mezzanine investments. These investments
generally include higher risk subordinated debt combined with equity
securities. Included in the assets distributed to UCFC immediately
prior to the closing of the sale of the Company was one of the limited
partnership investments with a value of $17.8 million at July 23, 1996. (See
note 2 to Notes to Consolidated Financial Statements.)
The Company had a decrease in short-term investments of approximately
$22.3 million at December 31, 1996 compared to December 31, 1995 as a result of
reduced liquidity requirements primarily from the decline in the use of the
home equity loan warehouse facility by UCFC.
Liquidity and Capital Resources. The Company's principal cash
requirements consist of funding the payment of policyholder claims and
surrenders. Liquidity requirements for the Company's operations are generally
met by funds provided from the sale of annuities and cash flow from its
investments in fixed income securities and mortgage loans.
Net cash flows from annuity operations 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 for 1996, 1995 and 1994 were approximately $83.7 million,
$88.4 million and $62.6 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 years ended December 31, 1996, 1995 and 1994 reflect cash
received primarily from sales by the Company of its annuity products of
approximately $109.1 million, $135.3 million and $249.7 million, respectively.
Cash used by financing
17
<PAGE> 19
activities during 1996, 1995 and 1994 also reflects payments of $269.9 million,
$222.8 million and $191.8 million, respectively, primarily resulting from
policyholder surrenders and claims. The increase in annuity surrenders during
1995 and 1996 was expected, due in part to an increase in the amount of
annuity policies which were beyond the surrender penalty period and to the
general interest rate environment during this period.
18
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
United Companies Life Insurance Company:
We have audited the accompanying consolidated balance sheet of United Companies
Life Insurance Company and subsidiary as of December 31, 1996, and the related
consolidated statements of operations, cash flows, and stockholder's equity for
the periods from July 24, 1996 to December 31, 1996 (Successor period), and
from January 1, 1996 to July 23, 1996 (Predecessor period). Our audit also
included the financial statement schedules listed in the Index at Item 14.
These consolidated financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of United Companies
Life Insurance Company and subsidiary as of December 31, 1996, and the results
of their operations and their cash flows for the periods from July 24, 1996 to
December 31, 1996 (Successor period), and from January 1, 1996 to July 23, 1996
(Predecessor period), in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statements schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, effective July
24, 1996, PennCorp Financial Group, Inc. acquired all of the outstanding stock
of United Companies Life Insurance Company in a business combination accounted
for as a purchase. As a result of the acquisition, the consolidated financial
information for the period after the acquisition is presented on a different
cost basis than that for the periods before the acquisition and, therefore, is
not comparable.
/s/ KPMG PEAT MARWICK LLP
Baton Rouge, Louisiana
February 28, 1997
19
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
United Companies Life Insurance Company
We have audited the accompanying consolidated balance sheet of United Companies
Life Insurance Company and its subsidiary as of December 31, 1995, and the
related consolidated statements of income, stockholder's equity, and cash flows
for each of the two years in the period ended December 31, 1995. Our audits
also included the financial statement schedules listed in the Index at Item 14.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of United Companies Life Insurance
Company and its subsidiary at December 31, 1995, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
February 29, 1996
20
<PAGE> 22
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Purchase Historical
basis of basis of
accounting accounting
---------- ----------
December 31, December 31,
1996 1995
---------- ----------
(dollars in thousands)
<S> <C> <C>
Assets
Investments:
Fixed maturity securities:
Held for investment at amortized cost (fair value $50,902 in
1996 and $59,330 in 1995)...................................... $ 48,473 $ 60,919
Available for sale at fair value (amortized cost $1,127,850
in 1996 and $1,094,385 in 1995)................................ 1,144,165 1,140,160
Mortgage loans on real estate, less allowances for doubtful
loans of $11,945 in 1996 and $2,117 in 1995........................ 235,981 336,269
Investment real estate ............................................. -- 32,423
Policy loans ....................................................... 21,536 20,291
Investments in limited partnerships ................................ 5,704 25,594
Short-term investments ............................................. 467 22,804
Other invested assets .............................................. 1,491 3,263
---------- ----------
Total investments .......................................... 1,457,817 1,641,723
Cash ................................................................. 14,487 3,028
Accrued investment income ............................................ 17,251 16,529
Due from reinsurers .................................................. 34,923 33,583
Present value of insurance in force .................................. 54,931 --
Deferred policy acquisition costs .................................... 4,187 90,703
Costs in excess of net assets acquired ............................... 33,373 --
Deferred income tax benefit .......................................... 11,589 --
Other assets ......................................................... 7,186 3,831
Assets held in separate accounts ..................................... 18,052 211
---------- ----------
Total assets ............................................... $1,653,796 $1,789,608
========== ==========
Liabilities and stockholder's equity
Liabilities:
Policy reserves .................................................... $1,441,582 $1,530,805
Repurchase agreements .............................................. -- 40,857
Deferred income tax payable ........................................ -- 22,770
Other liabilities .................................................. 16,755 8,440
Liabilities related to separate accounts ........................... 18,052 211
---------- ----------
Total liabilities .......................................... 1,476,389 1,603,083
---------- ----------
Stockholder's equity:
Common stock, $2 par value;
Authorized - 4,200,528 shares;
Issued - 4,200,528 shares ....................................... 8,401 8,401
Additional paid-in capital ......................................... 158,913 28,980
Retained earnings .................................................. 6,076 119,667
Net unrealized gains on securities ................................. 4,017 29,477
---------- ----------
Total stockholder's equity ................................. 177,407 186,525
---------- ----------
Total liabilities and stockholder's equity ................. $1,653,796 $1,789,608
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- --------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- ------------------------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Premiums ................................................... $ 3,483 $ 3,732 $ 8,508 $ 11,373
Interest sensitive policy product charges .................. 1,048 1,421 1,949 1,432
Net investment income ...................................... 50,041 66,421 125,591 117,105
Realized investment gains (losses) ......................... 559 (1,592) (3,670) (4,803)
Other income ............................................... 907 52 172 (8)
---------- ---------- ---------- ----------
Total revenues ..................................... 56,038 70,034 132,550 125,099
---------- ---------- ---------- ----------
EXPENSES:
Interest on annuity policies ............................... 32,022 42,434 81,035 74,497
Insurance benefits ......................................... 3,836 5,967 9,930 12,654
Amortization of present value of insurance in force
and deferred policy acquisition costs ................. 5,068 9,699 13,159 13,528
Amortization of costs in excess of net assets acquired ..... 675 -- -- --
Underwriting and other administrative expenses ............. 4,733 9,753 16,326 15,340
---------- ---------- ---------- ----------
Total benefits and expenses ........................ 46,334 67,853 120,450 116,019
---------- ---------- ---------- ----------
Income before income taxes ................................... 9,704 2,181 12,100 9,080
---------- ---------- ---------- ----------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current .................................................... 2,427 1,139 5,259 5,915
Deferred ................................................... 1,201 (370) (1,194) (2,721)
---------- ---------- ---------- ----------
Total .............................................. 3,628 769 4,065 3,194
---------- ---------- ---------- ----------
Net income ................................................. $ 6,076 $ 1,412 $ 8,035 $ 5,886
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Purchase
basis of Historical basis
accounting of accounting
---------- -------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23,
--------- ---------
1996 1996
--------- ---------
(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................................. $ 6,076 $ 1,412
Adjustments to reconcile net income to net cash provided by operating activities:
Capitalization of deferred policy acquisition costs ................................... (5,172) (4,797)
Amortization of intangibles, depreciation and accretion, net .......................... 5,743 9,699
Decrease in policy liabilities and accruals and other policyholder funds .............. 28,282 37,485
Purchases of trading securities ....................................................... (99) (593)
Sales of trading securities ........................................................... 228 441
Other, net ............................................................................ 2,000 3,032
--------- ---------
Net cash provided by operating activities ........................................ 37,058 46,679
--------- ---------
Cash flows from investing activities:
Purchases of securities available for sale ............................................ (94,025) (158)
Maturities of securities held for investment .......................................... 7,796 2,790
Maturities of securities available for sale ........................................... 18,781 35,692
Acquisitions and originations of mortgage loans ....................................... (112,473) (749,952)
Sales of securities available for sale ................................................ 3 --
Sales of mortgage loans ............................................................... 151,972 732,484
Principal payments on mortgage loans .................................................. 21,657 44,264
Decrease (increase) in short-term investments, net (including changes in amounts
due to broker) ................................................................... 50,063 (27,726)
Other, net ............................................................................ 153 235
--------- ---------
Net cash provided by investing activities ........................................ 43,927 37,629
--------- ---------
Cash flows from financing activities:
Receipts from interest sensitive products credited to policyholders' account balances.. 52,675 56,403
Return of policyholders' account balances on interest sensitive products .............. (109,233) (160,622)
Other, net ............................................................................ 4,961 1,982
--------- ---------
Net cash used by financing activities ............................................ (51,597) (102,237)
--------- ---------
Increase (decrease) in cash ...................................................... 29,388 (17,929)
Cash (overdraft) at beginning of year or acquisition date................................... (14,901) 3,028
--------- ---------
Cash (overdraft) at end of year or acquisition date......................................... $ 14,487 $ (14,901)
========= =========
Supplemental disclosures:
Income taxes paid ..................................................................... $ -- $ 2,797
Interest paid ......................................................................... 439 2,392
<CAPTION>
Historical basis of accounting
------------------------------
Year Ended December 31,
----------------------
1995 1994
--------- ---------
(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................................. $ 8,035 $ 5,886
Adjustments to reconcile net income to net cash provided by operating activities:
Capitalization of deferred policy acquisition costs ................................... (11,947) (21,947)
Amortization of intangibles, depreciation and accretion, net .......................... 13,159 13,528
Decrease in policy liabilities and accruals and other policyholder funds .............. 71,048 59,860
Purchases of trading securities ....................................................... (442) (919)
Sales of trading securities ........................................................... 541 232
Other, net ............................................................................ 8,017 5,974
--------- ---------
Net cash provided by operating activities ........................................ 88,411 62,614
--------- ---------
Cash flows from investing activities:
Purchases of securities available for sale ............................................ (136,503) (300,384)
Maturities of securities held for investment .......................................... 1,940 2,270
Maturities of securities available for sale ........................................... 51,000 76,778
Acquisitions and originations of mortgage loans ....................................... (1,208,195) (901,898)
Sales of securities available for sale ................................................ 25,185 7,363
Sales of mortgage loans ............................................................... 1,111,636 940,099
Principal payments on mortgage loans .................................................. 71,294 94,084
Decrease (increase) in short-term investments, net (including changes in amounts
due to broker) ................................................................... 31,860 (17,813)
Other, net ............................................................................ (180) (630)
--------- ---------
Net cash used by investing activities ............................................ (51,963) (100,131)
--------- ---------
Cash flows from financing activities:
Receipts from interest sensitive products credited to policyholders' account balances.. 135,325 249,738
Return of policyholders' account balances on interest sensitive products .............. (222,791) (191,812)
Other, net ............................................................................ 40,877 (29,956)
--------- ---------
Net cash used by financing activities.... ........................................ (46,589) 27,970
--------- ---------
Increase (decrease) in cash ...................................................... (10,141) (9,547)
Cash at beginning of year .................................................................. 13,169 22,716
--------- ---------
Cash at end of year ........................................................................ $ 3,028 $ 13,169
========= =========
Supplemental disclosures:
Income taxes paid ..................................................................... $ 4,655 $ 1,399
Interest paid ......................................................................... 3,362 1,987
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Additional Gains Total
Common Paid-in Retained (Losses) Stockholder's
Stock Capital Earnings on Securities Equity
-------------- -------------- --------------- --------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
HISTORICAL BASIS OF ACCOUNTING:
Balance, December 31, 1993................... $ 8,401 $28,980 $105,746 $ -- $143,127
Net income................................... -- -- 5,886 -- 5,886
Cumulative effect of accounting change, net.. -- -- -- (46.834) (46,834)
------ -------- -------- -------- --------
Balance, December 31, 1994................... 8,401 28,980 111,632 (46,834) 102,179
Net income................................... -- -- 8,035 -- 8,035
Change in net unrealized gains (losses)
on securities, net......................... -- -- -- 76,311 76,311
------ -------- -------- -------- --------
Balance, December 31, 1995................... 8,401 28,980 119,667 29,477 186,525
Net income................................... -- -- 1,412 -- 1,412
Change in net unrealized gains (losses)
on securities, net......................... -- -- -- (31,665) (31,665)
Distribution to stockholder.................. -- -- (58,334) -- (58,334)
------ -------- -------- -------- --------
Balance, July 23, 1996.................. $8,401 $ 28,980 $ 62,745 $(2,188) $ 97,938
====== ======== ======== ======== ========
PURCHASE BASIS OF ACCOUNTING:
Balance, July 24, 1996....................... $8,401 $101,655 $ -- $ -- $110,056
Net income................................... -- -- 6,076 -- 6,076
Capital contribution......................... -- 57,258 -- -- 57,258
Change in net unrealized gains (losses)
on securities, net......................... -- -- -- 4,017 4,017
------ -------- -------- -------- --------
Balance, December 31, 1996.............. $8,401 $158,913 $ 6,076 $ 4,017 $177,407
====== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 26
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1.1 Principles of Consolidation. The consolidated financial statements
include United Companies Life Insurance Company (the "Company") and its
wholly-owned subsidiary, United Variable Services, Inc. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.
1.2 Organization. United Companies Life Insurance Company (the
"Company" or "UC Life") is a wholly-owned subsidiary of Pacific Life and
Accident Insurance Company ("PLAIC"), a wholly-owned subsidiary of PennCorp
Financial Group, Inc. ("PennCorp"). (See note 2 to Notes to Consolidated
Financial Statements.) PennCorp is an insurance holding company which offers,
through its wholly-owned subsidiaries, a broad range of life insurance, annuity
and accident and sickness products.
The Company, a life insurance company domiciled in Louisiana and
organized in 1955, is currently authorized to conduct business in 47 states,
the District of Columbia and Puerto Rico. The primary products of the Company
are tax deferred annuity contracts marketed to individuals principally through
financial institutions and independent agents.
1.3 Basis of Presentation. The accompanying financial statements have
been prepared in accordance with generally accepted accounting principals
("GAAP") on a historical cost basis of accounting through the date of
acquisition and on a purchase GAAP push-down basis of accounting ("purchase
GAAP") from the date of acquisition to the end of the period. The comparability
of the financial condition and the operating results for the post-acquisition
period and the pre-acquisition periods are affected by the mark to market
valuation of assets and liabilities under purchase accounting which became the
new cost basis.
The preparation of financial statements in conformity with GAAP
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and the reported amounts of revenues
and expenses during the reporting period. Accounts that the Company deems to be
acutely sensitive to changes in estimates include deferred policy acquisition
costs, future policy benefits, policy and contract claims and present value of
insurance in force. In addition, the Company must determine requirements for
disclosure of contingent assets and liabilities as of the date of the financial
statements based upon estimates. In all instances, actual results could differ
from these estimates.
1.4 Investments.
1.4(a)Fixed Maturity and Equity Securities. During the first quarter
of 1994, the Company implemented the provisions of Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 115, which revised the method of accounting for certain of the
Company's investments. Prior to adoption of SFAS No. 115, the Company reported
its investments in fixed income investments at amortized cost, adjusted for
declines in value considered to be other than temporary. SFAS No. 115 requires
the classification of securities in one of three categories: "available for
sale," "held to maturity" or "trading." Securities classified as held to
maturity are carried at amortized cost, whereas securities classified as
trading securities or available for sale are recorded at fair value. Effective
with the adoption of SFAS No. 115, the Company determined the appropriate
classification of its investments and, if necessary, adjusted the carrying
value of such securities, accordingly, as if the unrealized gains or losses
had been realized. The adjustment, net of applicable income taxes, for
investments classified as available for sale is recorded in "Net unrealized
gains (losses) on securities" and is included in stockholder's equity on the
balance sheet. The adjustment for investments classified as trading is
recorded in "other income" in the statement of income.
25
<PAGE> 27
1.4(b) Mortgage Loans on Real Estate. Loans are carried at amortized
cost, net of an allowance for losses. The Company provides for estimated loan
losses on loans owned by the Company by establishing an allowance for loan
losses through a charge to earnings. The Company conducts periodic reviews of
the quality of the loan portfolio and estimates the risk of loss based upon
historical loss experience, prevailing economic conditions, estimated
collateral value and such other factors which, in management's judgment, are
relevant in estimating the adequacy of the Company's allowance for loan losses.
While management uses the best information available in conducting its
evaluation, future adjustments to the allowance may be necessary if there are
significant changes in economic conditions, collateral value or other elements
used in conducting the review.
1.4(c) Investment Real Estate. The Company's investments in real estate
are comprised of properties received in settlement of loans ("foreclosed
properties"). The Company records foreclosed properties at the lower of their
fair value less estimated costs to sell ("fair value") or the outstanding loan
amount plus accrued interest ("cost"). The Company accomplishes this by
providing a specific reserve, on a property by property basis, for the
difference between fair value and cost. Fair value is determined by property
appraisals performed either by its former affiliate, United Companies Lending
Corporation ("UC Lending"), or independent appraisers. The related adjustments
are included in the Company's provision for losses. Depreciation is computed on
the straight-line method over the estimated useful lives of the underlying
property. In conjunction with the sale of the Company (see note 2 to Notes to
Consolidated Financial Statements) all of the Company's investment real estate
was distributed to its former parent.
1.4(d) Policy Loans. Policy loans are reported at unpaid principal
balance.
1.4(e) Investment in Limited Partnerships. The Company's investment in
limited partnerships, whose affairs are not controlled by the Company, is
reflected on the equity method.
1.4(f) Short-term Investments. At December 31, 1996, short-term
investments totaled $467,000 bearing interest rates ranging from 4.9% to 5.3%
per annum.
1.4(g) Realized Investment Gains and Losses. Realized investment gains
and losses and declines in value which are other than temporary, determined on
the basis of specific identification, are included in net income.
1.5 Present Value of Insurance In Force. The present value of
insurance in force represents the anticipated gross profits to be realized from
future revenues on insurance in force at the date the Company was purchased,
discounted to provide an appropriate rate of return and amortized, with
interest, over the years that such profits are anticipated to be received in
proportion to the estimated gross profits.
1.6 Deferred Policy Acquisition Costs. Commissions and other costs
related to the production of new and renewal business have been deferred. The
deferred costs related to traditional life insurance are amortized over the
premium payment period using assumptions consistent with those used in
computing policy benefit reserves. Deferred costs related to annuities and
interest sensitive products are amortized over the estimated life of the policy
in relation to the present value of estimated gross profits on the contract.
The Company periodically reviews the appropriateness of assumptions used in
calculating the estimated gross profits on annuity contracts. Any change
required in these assumptions may result in an adjustment to deferred policy
acquisition costs which would affect income.
1.7 Costs in Excess of Net Assets Acquired. Costs in excess of the
fair value of net assets acquired are amortized on a straight-line basis over
20 years. Accumulated amortization was $675,000 at December 31, 1996.
The Company continuously monitors the value of costs in excess of net
assets acquired based upon estimates of future earnings. Any amounts deemed to
be impaired are charged, in the period in which such impairment was determined,
as an expense against earnings. For the periods presented there was no charge
to earnings for the impairment of costs in excess of net assets acquired.
1.8 Other Assets. Property is stated at cost less accumulated
depreciation and is included in "Other assets." Depreciation is computed on the
straight-line and accelerated methods over the estimated useful lives of the
assets.
1.9 Policy Reserves. Policy benefit reserves for traditional life
insurance policies have been provided on a net level premium method including
assumptions as to investment yield, mortality and withdrawals based on the
Company's experience and industry standards with provisions for possible
adverse deviation. Investment yield assumptions range from 5.5% to 8.5% per
annum. Policy benefit reserves include certain deferred profits on limited
payment policies. These profits are being recognized in income over the policy
term. Subsequent to the purchase, the Company utilizes statutory reserves as a
reasonable approximation of GAAP reserves for all non-interest sensitive
products.
26
<PAGE> 28
Reserves for annuity policies and interest sensitive life
policies represent the policy account balance, or accumulated fund value,
before applicable surrender charges. Benefit claims incurred in excess of
related policy account balances and interest credited during the period to
policy account balances are charged to expense.
1.10 Repurchase agreements. At December 31, 1995, the Company had a
liability of approximately $40.9 million incurred pursuant to securities sold
under agreements to repurchase ("repurchase agreements"). The securities sold
under these agreements are classified as "Available for sale" investment
securities and are carried at their aggregate market value of $42.2 million at
December 31, 1995. The repurchase agreements bore interest at 5.70% and 5.74%
and matured in January, 1996. There were no repurchase agreements at December
31, 1996.
1.11 Income Taxes. The Company accounts for income taxes under the
provisions of SFAS No. 109, "Accounting for Income Taxes." Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to (i) temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and (ii) operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which the
temporary differences are expected to be recovered or settled. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. Prior
to the date of the sale, the Company filed a consolidated federal income tax
return with its former parent and other former affiliated companies. The former
parent allocated to the Company its proportionate share of the consolidated tax
liability under a tax allocation agreement whereby each affiliate's federal
income tax provision is computed on a separate return basis. Subsequent to the
purchase, the Company files a consolidated return with PLAIC whereby the
Company's proportionate share of the consolidated tax liability is allocated
based upon separate return calculations.
1.12 Insurance Revenues. Income on short duration single premium
contracts, primarily credit insurance products, is recognized over the contract
period. Premiums on other insurance contracts principally traditional life
insurance and limited payment life insurance policies, are recognized as
revenue when due.
Revenues for interest sensitive annuity contracts represent charges
assessed against the policyholders' account balance, primarily for the
surrenders.
1.13 Reinsurance. The Company generally reinsures with other insurance
companies the portion of any one risk which exceeds $100,000. On certain types
of policies this limit is $25,000. The Company is contingently liable for
insurance ceded to reinsurers. Premiums ceded under reinsurance agreements were
$1.3 million, $1.7 million and $2.1 million in 1996, 1995 and 1994,
respectively. Reserve credit taken under reinsurance agreements totaled $33.9
million, $32.9 million and $34.0 million at December 31, 1996, 1995 and 1994,
respectively.
27
<PAGE> 29
The Company has a receivable at December 31, 1996 of approximately
$32.7 million from one reinsurer; however, the funds supporting the receivable
are escrowed in a separate trust account for the benefit of the Company by the
reinsurer. The following table reflects the effect of reinsurance agreements on
premiums and the amounts earned for the periods indicated.
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- --------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- ------------------------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Direct premiums ................. $ 2,704 $ 3,148 $ 7,659 $ 10,537
Reinsurance assumed ............. 1,214 1,461 2,589 2,966
Reinsurance ceded ............... (435) (877) (1,740) (2,130)
---------- ---------- ---------- ----------
Net insurance premiums ..... $ 3,483 $ 3,732 $ 8,508 $ 11,373
========== ========== ========== ==========
</TABLE>
1.14 Participating Policies. Direct participating business, primarily
related to the Company's pre-need funeral policies, represented 9%, 8.2% and
7.2% of the life insurance in force as of December 31, 1996, 1995 and 1994,
respectively. The amount of dividends paid on participating policies is based
on published dividend scales and totaled $1.4 million, $1.2 million and $1.0
million for the years ended December 31, 1996, 1995 and 1994, respectively.
1.15 Reclassifications. Certain amounts from prior periods have been
reclassified to conform with the current year presentation. Such
reclassifications had no effect on net income.
2. SALE OF THE COMPANY
On July 24, 1996, PLAIC consummated the acquisition of the Company from
United Companies Financial Corporation ("UC Financial"). Pursuant to an Amended
and Restated Stock Purchase Agreement (the "Agreement") dated as of July 24,
1996, PLAIC acquired 100% of the outstanding capital stock of UC Life (the "UC
Life Common Stock") for $110.1 million in cash including expenses incurred of
$9.7 million as part of the acquisition. Immediately following the acquisition
of UC Life, PLAIC contributed $57.3 million in cash to UC Life, which
represented the market value of certain real estate and other assets distributed
to UC Financial immediately prior to the consummation of the acquisition.
The Company's acquisition has been accounted for using the purchase
method of accounting. The total purchase price of the acquisition was allocated
to the tangible and intangible assets and liabilities acquired based upon their
respective fair values as of the date of acquisition. Based upon such
respective fair values, the value of the net assets acquired was $76.0 million,
resulting in costs in excess of net assets acquired at the date of acquisition
of $34.1 million.
28
<PAGE> 30
3. INVESTMENTS
3.1 Fixed Maturity Securities. The Company's portfolio of fixed
maturity securities consisted of the following:
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government ....... $ 9,029 $ 93 $ -- $ 9,122
Municipal ............. 5,434 1 48 5,387
Foreign ............... 10,920 185 -- 11,105
Corporate ............. 414,551 5,944 1,064 419,431
Mortgage-backed ....... 687,916 11,210 6 699,120
---------- ---------- ---------- ----------
Total ............ $1,127,850 $ 17,433 $ 1,118 $1,144,165
========== ========== ========== ==========
Held for Investment:
Corporate ............. $ 13,927 $ 124 $ 2 $ 14,049
Mortgage-backed ....... 34,546 2,307 -- 36,853
---------- ---------- ---------- ----------
Total ............ $ 48,473 $ 2,431 $ 2 $ 50,902
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government ....... $ 11,504 $ 409 $ -- $ 11,913
Municipal ............. 425 21 -- 446
Foreign ............... 20,394 1,916 -- 22,310
Corporate ............. 328,546 22,452 679 350,319
Mortgage-backed ....... 733,516 22,258 602 755,172
---------- ---------- ---------- ----------
Total ............ $1,094,385 $ 47,056 $ 1,281 $1,140,160
========== ========== ========== ==========
Held for Investment:
Corporate ............. $ 16,692 $ 550 $ 281 $ 16,961
Mortgage-backed ....... 44,227 1,414 3,272 42,369
---------- ---------- ---------- ----------
Total ............ $ 60,919 $ 1,964 $ 3,553 $ 59,330
========== ========== ========== ==========
</TABLE>
The cost and estimated fair value of fixed maturity securities by
contractual maturity at December 31, 1996 are shown below.
<TABLE>
<CAPTION>
Available for Sale Held for Investment
----------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
1 year or less .................... $ 14,605 $ 14,637 $ -- $ --
Over 1 year through 5 years ....... 87,224 87,973 8,507 8,568
Over 5 years through 10 years ..... 319,480 323,733 5,420 5,481
After 10 years .................... 18,625 18,702 -- --
Mortgage-backed securities ........ 687,916 699,120 34,546 36,853
---------- ---------- ---------- ----------
Total ........................ $1,127,850 $1,144,165 $ 48,473 $ 50,902
========== ========== ========== ==========
</TABLE>
29
<PAGE> 31
Expected maturities may differ from contractual maturities because
certain issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
In 1990, the Company securitized pools of commercial real estate loans
owned by it in two transactions and in connection therewith sold pass-through
certificates ("Series 90-1" and "Series 90-2") for which an election under the
real estate mortgage investment conduit provisions ("REMIC") of the Internal
Revenue Code of 1986, as amended were made. The Company retained as an
investment subordinated junior certificates in both issues, as well as a senior
certificate interest in Series 90-2.
Included in Held for investment fixed maturity securities are
investments in the two REMIC's of approximately $34 million at December 31,
1996, and $44.2 million at December 31, 1995.
A summary of the Company's investment at December 31, 1996, in the
REMIC's is as follows:
<TABLE>
<CAPTION>
Remaining
Date of Principal Carrying Interest Maturity
Issue Balance Value Rate Date
------------ ------------ ----------- ----- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
United Companies Life REMIC
Series 90-1, Class B-1........... Mar 29, 1990 $ 10,574 $ 7,263 10.05% Sep 25, 2009
Series 90-2, Class A-3........... Dec 18, 1990 14,688 14,965 9.88% May 25, 2000
Series 90-2, Class B-1........... Dec 18, 1990 14,339 11,750 9.88% Jan 25, 2009
------------ -----------
$ 39,601 $ 33,978
============ ===========
</TABLE>
At December 31, 1996, securities with a cost of $9.3 million were on
deposit with insurance regulatory authorities.
30
<PAGE> 32
3.2 Equity Securities. The net unrealized capital gains and losses on
common stocks included as "Other invested assets" are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Trading .................... $ 765 $ 169 $ 34 $ 900
Available for sale ......... 78 -- 72 6
---------- ---------- ---------- ----------
Total .................. $ 843 $ 169 $ 106 $ 906
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Trading .................... $ 545 $ 215 $ 8 $ 752
Available for sale ......... 467 -- 425 42
---------- ---------- ---------- ----------
Total ................. $ 1,012 $ 215 $ 433 $ 794
========== ========== ========== ==========
</TABLE>
3.3 Mortgage Loans on Real Estate. The following schedule summarizes
the composition of mortgage loans on real estate:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
---------- ----------
(dollars in thousands)
<S> <C> <C>
Residential ................... $ 61,911 $ 169,175
Allowance for loan losses ..... (7,734) --
Unearned loan charges ......... (266) (301)
---------- ----------
Residential, net .............. 53,911 168,874
---------- ----------
Commercial .................... 186,281 169,512
Allowance for loan losses ..... (4,211) (2,117)
---------- ----------
Commercial, net ............... 182,070 167,395
---------- ----------
Total .................... $ 235,981 $ 336,269
========== ==========
</TABLE>
Included in the loans owned at December 31, 1996 and 1995 were
nonaccrual loans of $1.4 million and $2.4 million, respectively.
The Company provides an estimate for future credit losses in an
allowance for loan losses. A summary analysis of the changes in the Company's
allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Purchase basis
of accounting Historical basis of accounting
--------------------- ------------------------------------------------------------------------
Period from Period from
Jul 24 to Dec 31, Jan 1 to Jul 23, Years ended Dec 31,
1996 1996 1995 1994
--------------------- ---------------------- ---------------------- ----------------------
Commercial Residential Commercial Residential Commercial Residential Commercial Residential
--------- --------- --------- --------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of year . $ 4,211 $ 8,450 $ 2,117 $ -- $ 1,778 $ -- $ 2,639 $ --
Loans charged to allowance ... -- (716) (771) -- (194) -- (1,510) --
Loan loss provision .......... -- -- 478 -- 533 -- 649 --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at end of year ....... $ 4,211 $ 7,734 $ 1,824 $ -- $ 2,117 $ -- $ 1,778 $ --
========= ========= ========= ========= ========= ========= ========= =========
Specific reserves ............ $ 706 $ 7,734 $ 824 $ -- $ 1,117 $ -- 752 $ --
Unallocated reserves ......... 3,505 -- 1,000 -- 1,000 -- 1,026 --
--------- --------- --------- --------- --------- --------- --------- ---------
Total reserves .......... $ 4,211 $ 7,734 $ 1,824 $ -- $ 2,117 $ -- $ 1,778 $ --
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
31
<PAGE> 33
To the date of the sale of the Company on July 23, 1996, the Company
assumed no credit risk on the residential loans portfolio whose principal and
interest was guaranteed by UCFC. Therefore, residential loan loss reserves were
established on the portfolio in conjunction with determining the acquisition
value of the residential loans.
3.4 Investment Real Estate. Immediately prior to closing, the
Company distributed all of its real estate to its former parent. (See note 2 to
Notes to Consolidated Financial Statements.)
3.5 Investment In Limited Partnerships. Immediately prior to
closing, the Company distributed a limited partnership investment to its former
parent. (See note 2 to Notes to Consolidated Financial Statements.) Following
is an analysis of the Company's investment in limited partnerships:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- ----------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Year Ended December 31,
---------- ---------- ---------- ----------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period............. $ 6,041 $ 25,594 $ 26,672 $ 26,698
Contributions and capitalized costs ..... 43 620 9,869 5,168
Net partnership income .................. 948 1,061 6,279 1,480
Distributions ........................... (1,328) (3,451) (17,226) (6,674)
Distribution of partnerships ............ -- (17,783) -- --
---------- ---------- ---------- ----------
Balance, end of period.............. $ 5,704 $ 6,041 $ 25,594 $ 26,672
========== ========== ========== ==========
</TABLE>
The limited partnerships were formed for the purpose of participating
in privately placed mezzanine investments. These investments, acquired in
leveraged investment transactions, generally include higher risk subordinated
debt combined with equity securities.
3.6 Investment Income. Investment income by type that exceeds five
percent of total investment income was as follows:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- ------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- -----------------------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities ......... $ 37,140 $ 47,606 $ 85,852 $ 74,443
Mortgage loans on real estate ..... 11,192 20,331 35,056 42,763
Other investments ................. 3,281 4,067 14,386 8,925
---------- ---------- ---------- ----------
Cross investment income ...... 51,613 72,004 135,294 126,131
Less: Investment expenses ......... 1,572 5,583 9,703 9,026
---------- ---------- ---------- ----------
Net investment income ........ $ 50,041 $ 66,421 $ 125,591 $ 117,105
========== ========== ========== ==========
</TABLE>
32
<PAGE> 34
3.7 Realized, and Changes in Unrealized, Investment Gains
(Losses). Net realized, and changes in unrealized, investment gains (losses)
were as follows:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- --------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- ---------- ----------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Gross gains ...................................... $ -- $ 42 $ 524 $ 303
Gross losses ..................................... (157) (1,388) (1,807) (3,373)
Loss provision ................................... -- 477 (350) 1,198
---------- ---------- ---------- ----------
Net losses on fixed maturity securities ..... (157) (869) (1,633) (1,872)
---------- ---------- ---------- ----------
Mortgage loans on real estate:
Losses on sale ................................... -- (771) (194) --
Loss provision ................................... 716 293 (339) 861
---------- ---------- ---------- ----------
Net gains (losses) on mortgage loans on
real estate ............................... 716 (478) (533) 861
---------- ---------- ---------- ----------
Investment real estate:
Losses on sale ................................... -- (1,098) (2,638) (2,840)
Loss provision ................................... -- 853 1,134 (952)
---------- ---------- ---------- ----------
Net losses on investment real estate ........ -- (245) (1,504) (3,792)
---------- ---------- ---------- ----------
Realized investment gains (losses) ..... $ 559 $ (1,592) $ (3,670) $ (4,803)
========== ========== ========== ==========
Changes in unrealized gains (losses):
Securities held for investment................... $ 2,429 $ (2,789) $ 681 $ (1,989)
Securities available for sale.................... 16,243 (48,716) 117,404 (72,054)
---------- ---------- ---------- ----------
Net change in unrealized gains (losses)..... $ 18,672 $ (51,505) $ 118,085 $ (74,043)
========== ========== ========== ==========
Trading portfolio:
Net gains (losses) from sales.................... $ (20) $ 37 $ (12) $ (31)
Net change in unrealized gains (losses).......... 135 (26) 184 23
---------- ---------- ---------- ----------
Total trading gains (losses)........... $ 115 $ 11 $ 172 $ (8)
========== ========== ========== ==========
</TABLE>
3.8 Individually Significant Investments. The following
investments, other than obligations of the U.S. Government or agencies
thereof, individually exceeded 10% of total stockholder's equity:
<TABLE>
<CAPTION>
December 31,1996
-----------------------
Amortized Fair
Cost Value
---------- ----------
(Dollars in thousands)
<S> <C> <C>
United Companies Life REMIC 1990-2 ..... $ 26,715 $ 27,595
FNMA Pool #161648 ...................... 25,568 25,729
---------- ----------
$ 52,283 $ 53,324
========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,1995
-----------------------
Amortized Fair
Cost Value
---------- ----------
(Dollars in thousands)
<S> <C> <C>
United Companies Life REMIC 1990-2 ..... $ 33,931 $ 35,488
FNMA Pool #161648 ...................... 30,370 31,112
FNMA Pool #124447 ...................... 18,263 18,366
CIGNA Mezzanine Partners III L.P. ...... 17,233 17,233
---------- ----------
$ 99,797 $ 102,199
========== ==========
</TABLE>
33
<PAGE> 35
4. INCOME TAXES
The provision (benefit) for income taxes attributable to operations is
as follows:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
----------- -----------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
----------- ----------- --------------------------
1996 1996 1995 1994
----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Current .................... $ 2,427 $ 1,139 $ 5,259 $ 5,915
Deferred ................... 1,201 (370) (1,194) (2,721)
----------- ----------- ----------- -----------
Total ............ $ 3,628 $ 769 $ 4,065 $ 3,194
=========== =========== =========== ===========
</TABLE>
Reported income tax expense attributable to operations differs from
the amount computed by applying the statutory federal income tax rate to income
from operations before income taxes for the following reasons:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- -------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- ------------------------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Federal income tax (benefit) at statutory rate ..... $ 3,396 $ 763 $ 4,235 $ 3,178
Differences resulting from:
Miscellaneous.................................. 232 6 (170) 16
---------- ---------- ---------- ----------
Reported income tax provision benefit .............. $ 3,628 $ 769 $ 4,065 $ 3,194
========== ========== ========== ==========
</TABLE>
The significant components of the Company's net deferred income tax
benefit and liability are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------- --------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------ ----------- -------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans on real estate ....................... $ -- $ -- $ -- $ 2,319
Deferred policy acquisition costs ................... -- 1,477 -- 29,475
Present value of insurance in force ................. -- 5,062 -- --
Unrealized gain on investment securities ............ -- 2,163 -- 12,495
Policy reserves ..................................... 19,319 -- 21,530 --
Other ............................................... 972 -- -- 11
------- ------ ------- -------
$20,291 $8,702 $21,530 $44,300
======= ====== ======= =======
</TABLE>
In assessing the realization of deferred taxes, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Based upon those
considerations, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences as of
December 31, 1996.
Payments made for income taxes, net of refunds received, during the
years ended December 31, 1996, 1995 and 1994 were $2.8 million, $4.6 million
and $1.4 million, respectively.
The Company's approximately $5.2 million of "Policyholders' Surplus"
at December 31, 1995 became taxable income to its former parent in conjunction
with the sale of the Company in 1996 and was therefore, extinguished.
34
<PAGE> 36
The Company had a current income tax payable, which is included in
"Other liabilities," in the amount of $3 million at December 31, 1996, and $2.3
million at December 31, 1995.
5. TRANSACTIONS WITH AFFILIATES
In conjunction with the sale of the Company, Knightsbridge Management
LLC ("Knightsbridge"), an affiliate, accrued transaction fees of $2.5 million,
which were capitalized as costs in excess of net assets acquired.
The Company received $57.3 million in cash from PLAIC as replacement
for assets distributed to its former parent in conjunction with the sale of the
Company. (See note 2 to Notes to Consolidated Financial Statements.)
Knightsbridge provides management consulting services to the Company
for an annualized fee of $1 million. For the period from July 24, 1996 through
December 31, 1996, the accompanying financial statements include $.4 million
for these fees. The Company was allocated certain costs from UCFC and its
affiliates under a cost sharing agreement totaling $ - million, $2.1 million,
$4.1 million and $3.3 million, for the periods from July 24, 1996 to December
31, 1996 and January 1, 1996 to July 23, 1996 and years ended December 31, 1995
and 1994, respectively.
Knightsbridge also provides investment management consulting services
to the Company for a fee based upon the average dollar amount of the related
investments. For the period from July 24, 1996 to December 31, 1996, the Company
incurred $.6 million in such fees.
UC Mortgage, an affiliate, services commercial loans for the Company
for a fee of three-eights of one percent of the principal balances. For the
period from July 24, 1996 to December 31, 1996, the Company paid UC Mortgage $.4
million for mortgage servicing fees. In addition, the Company provides employees
to UC Mortgage and is reimbursed for salary and salary related expenses for
those employees. The total amount of reimbursed employee expenses for the period
from July 24, 1996 to December 31, 1996 was $.3 million. As of December 31,
1996, 1995 and 1994, UC Lending, a former affiliate, serviced loans owned by
the Company having aggregate unpaid principal balances of approximately $62.6
million, $338.4 million, and $296.9 million, respectively. The Company paid
servicing fees relative to these loans of approximately $ - million, $.5
million, $.9 million, and $1.1 million for the periods from July 24, 1996 to
December 31, 1996 and January 1, 1996 to July 23, 1996 and the years ended
December 31, 1995 and 1994, respectively.
The Company has an agreement with UC Lending to purchase qualifying
residential home equity mortgage loans originated or purchased and underwritten
by UC Lending. (See note 10 to Notes to Consolidated Financial Statements.)
These loans are usually held three to six months until resold to UC Lending for
sale by UC Lending in loan securitizations. Also, under an agreement applicable
to the period from January 1, 1996 to July 23, 1996, and the years ended
December 31, 1995 and 1994, UC Lending was obligated to repurchase these home
equity loans previously sold to the Company at the time of foreclosure. At
December 31, 1996 and 1995, $61 million and $166.5 million, respectively, of
home equity loans originated by UC Lending were owned by the Company. During the
periods from July 24, 1996 to December 31, 1996, January 1, 1996 to July 23,
1996 and the years ended December 31, 1995 and 1994, the Company purchased home
equity loans for approximately $75.2 million, $656 million, $1,169 million and
$893 million, respectively, from UC Lending. Sales of these home equity loans to
UC Lending by the Company were $51.4 million, $679.2 million, $1.112 billion and
$932.7 million for the periods from July 24, 1996 to December 31, 1996 and
January 1, 1996 to July 23, 1996 and the years ended December 31, 1995 and 1994,
respectively. No gain or loss was recorded by the Company in these transactions.
The Company formerly leased home office space to UCFC and other former
affiliates. Rent income attributable to these affiliates was approximately $ -
million and $1 million for the periods from July 24, 1996 to December 31, 1996,
and each of the periods from January 1, 1996 to July 23, 1996 and the years
ended December 31, 1995 and 1994, respectively.
United Companies Realty & Development Co., Inc. ("UCRD"), a former
affiliate, managed the home office buildings leased by the Company to UCFC and
other third party tenants under a real estate management contract for the period
from January 1, 1996 to July 23, 1996, and for the years ended December 31, 1995
and 1994. The Company paid approximately $.2 million, $.4 million and $.3
million to UCRD in management fees for the period January 1, 1996 to July 23,
1996, and the years ended December 31, 1995 and 1994, respectively.
The Company owned at December 31, 1996 and 1995 three subordinated
debentures purchased in May 1993, from UC Lending. Listed below is summarized
information on the subordinated debentures that were issued by UC Lending:
<TABLE>
<CAPTION>
Date of Principal Interest Maturity
Series Issue Balance Rate Date
---------------- ------------ --------- -------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
A-1 May 14, 1993 $ 3,000 6.05% May 20, 1998
B May 14, 1993 3,000 6.64% May 20, 2000
C May 14, 1993 4,000 7.18% May 20, 2003
--------
Total $ 10,000
========
</TABLE>
Interest income received from UC Lending with respect to those
subordinated debentures totaled approximately $.33 million in each of the
periods from July 24 to December 31, 1996, and January 1 to July 23, 1996, and
$.67 million in each of the years ended December 31, 1995 and 1994. All
principal is paid upon maturity.
6. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN
FORCE
Deferred policy acquisition costs represent commissions, premium taxes
and certain other acquisition expenses, including underwriting and issue costs.
Information relating to these costs is as follows:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- --------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- ------------------------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Unamortized deferred policy
acquisition costs at beginning of period.. $ -- $ 90,703 $ 91,915 $ 83,495
Policy acquisition costs deferred:
Commissions ............................. 4,298 4,531 11,283 20,743
Underwriting and issue costs ............ 874 266 664 1,205
Policy acquisition costs amortized ......... (8) (9,699) (13,159) (13,528)
Unrealized investment gain adjustment ...... (977) -- -- --
---------- ---------- ---------- ----------
Unamortized deferred policy
acquisition costs at end of period .... $ 4,187 $ 85,801 $ 90,703 $ 91,915
========== ========== ========== ==========
</TABLE>
The methods used by the Company to value the fixed benefit, life, and
accumulation products purchased are consistent with the valuation methods used
most commonly to value blocks of insurance business. It is also consistent with
the basic methodology generally used to value insurance assets. The method used
by the Company includes identifying the future cash flows from the acquired
business, the risks inherent in realizing those cash flows, the rate of return
the Company believes it must earn in order to accept the risks inherent in
realizing the cash flows, and determining the value of the insurance asset by
discounting the expected future cash flows by the discount rate the Company
requires.
35
<PAGE> 37
The discount rate used to determine such values is the rate of return
required in order to invest in the business being acquired. In selecting the
rate of return, the Company considered the magnitude of the risks associated
with actuarial factors described in the following paragraph, cost of capital
available to the Company to fund the acquisition, compatibility with other
Company activities that may favorably affect future profits, and the complexity
of the acquired Company.
Expected future cash flows used in determining such values are based
on actuarial determination of future premium collection, mortality, surrenders,
operating expenses and yields on assets held to back policy liabilities as well
as other factors. Variances from original projections, whether positive or
negative, are included in income as they occur. To the extent that these
variances indicate that future cash flows will differ from those included in
the original scheduled amortization of the value of the insurance in force,
current and future amortization may be adjusted. Recoverability of the value of
insurance in force is evaluated annually and appropriate adjustments are then
determined and reflected in the financial statements for the applicable period.
Information related to the present value of insurance in force is as
follows:
<TABLE>
<CAPTION>
Purchase
basis of
accounting
----------
Period from
Jul 24 to
Dec 31,
----------
1996
----------
(dollars in thousands)
<S> <C>
Balance at the beginning of the period ..... $ --
Addition due to acquisition ................ 69,077
Accretion of interest ...................... 1,633
Amortization ............................... (6,693)
Unrealized investment gain adjustment ...... (9,086)
----------
Balance at end of period ................... $ 54,931
==========
</TABLE>
Expected gross amortization, based upon current assumptions and
accretion of interest at a policy or contract rates ranging from 5.36% to 5.43%
for the next five years of the present value of insurance in force is as
follows:
<TABLE>
<CAPTION>
Beginning Gross Accretion Net
Balance Amortization of Interest Amortization
- -------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
1997 $54,931 $13,287 $3,451 $9,836
1998 45,095 11,386 2,941 8,445
1999 36,650 10,058 2,465 7,593
2000 29,057 8,546 2,044 6,502
2001 22,555 7,082 1,696 5,386
</TABLE>
7. RETIREMENT AND PROFIT SHARING PLANS
Eligible employees may elect to participate in PennCorp's defined
contribution 401(K) retirement plan. Contributions to the Plan are made
pursuant to salary deferral elections by participants in an amount equal to 1%
to 15% of their annual compensation. In addition, the Company makes matching
contributions in an amount equal to 50% of each participant's salary deferral
to a maximum of 3% of annual compensation. The defined contribution plan also
provides for a discretionary employer profit sharing contribution, which is
determined annually by the Board of Directors for the succeeding plan year.
Profit sharing contributions are credited to participant's accounts on the
basis of their respective compensation in accordance with a formula that
provides a higher percentage contribution for compensation in excess of the
federal Social Security wage base. Salary deferral contribution accounts are at
all times fully vested, while matching contribution accounts vest ratably from
one to two years of service, and profit sharing contribution accounts vest
ratably from one to five years of service. All participant accounts are fully
vested at death, disability or attainment of age 65. Payment of vested benefits
under the defined contribution plan may be elected by a participant in a
variety of forms of payment. The Company's funding policy is to contribute
annually an amount that can be deducted for federal income tax
36
<PAGE> 38
purposes. Expenses related to this plan for the period from July 24, 1996, to
December 31, 1996, was $78,000 compared to costs associated with employee
benefit plans of the Company's former parent of $184,600, $414,000 and $327,500
for the period from January 1, 1996, through July 23, 1996, and the years ended
December 31, 1995 and 1994, respectively.
8. STATUTORY ACCOUNTING
Accounting records of the Company are also maintained in accordance
with practices prescribed or authorized by insurance regulatory authorities.
Prescribed statutory accounting principles include a variety of publications of
the National Association of Insurance Commissioners, as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The Company's
capital and surplus pursuant to the statutory accounting basis as of December
31, 1996 and 1995, was $103.1 million and $99.9 million, respectively. On a
statutory accounting basis, net gain from operations for the years ended
December 31, 1996, 1995 and 1994, was $10.1 million, $12.8 million and $9.7
million, respectively. Net income on a statutory accounting basis, which
includes realized capital gains and losses, was $6.8 million, $10 million and
$5.8 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Under the current statutory requirements in Louisiana, the
Company has the capacity to pay dividends of $9.4 million in 1997.
Extraordinary dividends, with a statutory value of $62.6 million, consisting of
real estate, an investment in a limited partnership and $10 million cash, were
distributed to the Company's former parent immediately prior to the closing of
the sale of the Company. Immediately after the closing, PLAIC contributed $57.3
million cash to the Company as a replacement for the distributed assets. (See
note 2 to Notes to Consolidated Financial Statements.) No dividends were paid
during 1994 or 1995. As part of its July 1996 approval of PLAIC's acquisition
of the Company, the Louisiana Insurance Commissioner approved a dividend plan
for the Company pursuant to which the Company may pay a specified amount of
dividends for each of the five years following the acquisition, beginning in
1997, amounting to the lesser of the pro forma dividend amounts in such plan or
the actual earnings of the Company, and conditioned on the Company's
maintaining a risk-based capital of at least 300 percent of the Authorized
Control Level.
The Company received written approval from the Louisiana Department of
Insurance to invest in first lien residential mortgage loans originated by UCLC
on a short-term basis without recording the assignment of the mortgage loans to
the Company, which differs from prescribed statutory accounting practices.
Statutory accounting practices prescribed by the State of Louisiana require
that investments in mortgage loans be secured by unrestricted first liens on
the underlying property. As of December 31, 1996, statutory surplus was
increased by approximately $6.3 million as a result of this permitted practice.
9. DISCLOSURE ABOUT FINANCIAL INSTRUMENTS
The carrying value and fair value of the Company's financial
assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------- -----------------------
Purchase basis Historical basis
of accounting of accounting
----------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Investments:
Fixed maturity securities:
Available for sale .................. $1,144,165 $1,144,165 $1,140,160 $1,140,160
Held to maturity .................... 48,473 50,902 60,919 59,330
Mortgage loans on real estate ......... 235,981 235,981 336,269 335,157
Investment real estate ................ -- -- 32,423 38,978
Policy loans .......................... 21,536 21,536 20,291 20,291
Investment in limited partnership ..... 5,704 5,704 25,594 25,594
Short-term investments ................ 467 467 22,804 22,804
Other invested assets ................. 1,491 1,491 3,263 3,263
Cash .................................. 14,487 14,487 3,028 3,028
Financial liabilities:
Annuity reserves ...................... 1,330,100 1,271,346 1,417,803 1,350,626
Repurchase agreements ................. -- -- 40,857 40,857
</TABLE>
37
<PAGE> 39
The above values do not reflect any premium or discount from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Fair value estimates are made at a specific point in time based on
relevant market information, if available. Because no market exists for certain
of the Company's financial instruments, fair value estimates for these assets
and liabilities were based on subjective estimates of market conditions and
perceived risks of the financial instruments. Fair value estimates were also
based on judgments regarding future loss and prepayment experience and were
influenced by the Company's historical information.
The following methods and assumptions were used to estimate the fair
value of the Company's financial instruments.
Fixed Maturity and Equity Securities. The estimated fair value for the
Company's investment portfolio was generally determined from quoted market
prices for publicly traded securities. Certain of the securities owned by the
Company may trade infrequently or not at all; therefore, fair value for these
securities was determined by management by evaluating the relationship between
quoted market values and carrying value and assigning a liquidity factor to
this segment of the investment portfolio.
Mortgage Loans on Real Estate. The fair value of the Company's loan
portfolio was determined by segregating the portfolio by type of loan and
further by its performing and non-performing components. Performing loans were
further segregated based on the due date of their payments, an analysis of
credit risk by category was performed and a matrix of pricing by category was
developed. The fair value of delinquent loans was estimated by the Company's
using estimated recoveries on defaulted loans.
Investment Real Estate. The fair value of the Company's investment
real estate was based upon independent appraisals of the properties.
Policy Loans. Policy loans are generally settled at the loan amount
plus accrued interest; therefore, the carrying value of these assets is a
reasonable estimate of their fair values.
Other Invested Assets. The fair value of the Company's investment in
other invested assets approximates their carrying value.
Short-term Investments. The carrying amount of short-term investments
approximates their fair values because these assets generally mature in 90 days
or less and do not present any significant credit concerns.
Investment in Limited Partnerships. The fair value of the Company's
investment in limited partnerships approximated their carrying value.
Annuity Reserves. The Company's annuity contracts generally do not
have a defined maturity and are considered as deposits under SFAS No. 97. SFAS
No. 107 states that the fair value to be disclosed for deposit liabilities
with no defined maturities is the amount payable on demand at the reporting
date. Accordingly, the Company has estimated the fair value of its annuity
reserves as the cash surrender value of these contracts.
Repurchase Agreements. The repurchase agreements mature in less than
60 days; therefore, the carrying value of the repurchase agreements is
considered to be a reasonable estimate of fair value.
10. COMMITMENTS AND CONTINGENCIES
The Company is obligated under operating leases, including office
space, computer equipment and automobiles. Rent expense was $.6 million, $.7
million, and $.5 million in 1996, 1995 and 1994 respectively.
Minimum annual commitments under noncancellable operating leases are
as follows (in thousands of dollars):
<TABLE>
<S> <C>
1997 $ 553
1998 533
1999 44
-------
Total minimum payments required $ 1,130
=======
</TABLE>
38
<PAGE> 40
In connection with the sale of the Company, the Company entered into
an agreement with UC Financial which will provide for the Company's purchase of
up to $300 million, at any one time outstanding, of first mortgage residential
loans originated by UC Financial. The agreement provides that UC Financial will
have the right for a limited time to repurchase certain loans which are
eligible for securitization by UC Financial. The agreement also has a sublimit
of $150 million for loans that are not eligible for securitization by UC
Financial.
In conjunction with the sale of the Company, and in accordance with
past practices, historical basis deferred acquisition cost assumptions were
adjusted to reflect actual experience to July 24, 1996, the acquisition date.
This adjustment resulted in a $2.9 million increase in amortization of deferred
acquisition costs associated with certain annuity plans, primarily as a result
of revised surrender estimates. As a result of the purchase price adjustment
provision contained in the Agreement, and the adjustment noted immediately
above, the final aggregate purchase price paid for the Company is yet to be
determined, although UC Life does not expect the final aggregate purchase price
to vary materially from estimates utilized in the preparation of these
financial statements.
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.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
Historical basis Purchase basis
of accounting of accounting
------------------------------------ -----------------------
Three Three Period Period Three
Months Months from from Months
Ended Ended Jul 1 to Jul 24 to Ended
Mar 31 Jun 30 July 23, Sep 30, Dec 31,
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
1996:
Total revenues .................... $ 32,216 $ 31,239 $ 6,579 $ 23,820 $ 32,218
Income (loss) from operations
before income taxes ............. 2,661 2,516 (2,996) 4,095 5,609
Net income (loss) ................. 1,730 1,622 (1,940) 2,569 3,507
</TABLE>
<TABLE>
<CAPTION>
Historical basis of accounting
-------------------------------------------------
Three Months Ended
-------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
1995:
Total revenues .................................. $ 33,151 $ 35,146 $ 32,874 $ 31,379
Income from operations
before income taxes ............................ 3,170 4,563 2,671 1,696
Net income ...................................... 2,266 2,963 1,732 1,074
</TABLE>
39
<PAGE> 41
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company as of March 15,
1997 are listed below, together with information as to their ages, dates of
election and principal business occupation during the last five years (if other
than their present business occupation).
<TABLE>
<CAPTION>
Principal Business Occupation
Name During Last Five Years
- -------------------------------------------------------------------------------
<S> <C>
C. Paul Patsis Mr. Patsis is President, Chief Executive Officer and
(Age 49) director of the Company. Mr. Patsis joined the Company on
on February 18, 1997. Mr. Patsis also serves as President
of UC Mortgage and President, CEO and Director of United
Variable Services,Inc., affiliated companies. In addition,
Mr.Patsis serves as Chairman of the Board and Chief Executive
Officer of Marketing One, Inc. of Portland, Oregon, an affiliate.
Joel S. Kaplan Mr. Kaplan is Executive Vice President, Financial and Legal
(Age 42) Services of the Company. Mr. Kaplan joined the Company on
February 18, 1997. Mr. Kaplan also serves as Executive Vice
President, Financial and Legal Services, for affiliates UC
Mortgage and United Variable Services, Inc. of Baton Rouge,
Louisiana, and Marketing, One, Inc. of Portland, Oregon.
Prior to joining Marketing One in June 1994, Mr. Kaplan was a
partner in the Portland law firm of Tonkon, Torp, Galen, Marmaduke
& Booth.
John H. Lancaster Mr. Lancaster is Executive Vice President and Chief
(Age 49) Marketing Officer and a director of the Company. Mr.
Lancaster joined the Company in 1995. Prior to
his employment with the Company, he served as
Executive Vice President of Annuities for National
Health Insurance Company of Dallas, Texas.
Kitty S. Kennedy Ms. Kennedy has served as Executive Vice President, Chief
(Age 48) Actuary and Chief Administrative Officer since 1993. Ms.
Kennedy is also a director of the Company. Ms. Kennedy
joined the Company in 1984, was named Senior Vice
President in 1991 and has served in various management
positions within the Company.
James P. McDermott Mr. McDermott is a director of the Company and a Senior
(Age 35) Vice President of PennCorp Financial Group, Inc.
("PennCorp"), the Company's ultimate parent. Prior to
joining PennCorp, Mr. McDermott was a Senior Manager
with KPMG Peat Marwick LLP.
Michael J. Prager Mr. Prager is a director of the Company and a Senior Vice
(Age 37) President of PennCorp. Prior to joining PennCorp, Mr.
Prager was a Manager with KPMG Peat Marwick LLP.
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
Principal Business Occupation
Name During Last Five Years
- -------------------------------------------------------------------------------
<S> <C>
Scott D. Silverman Mr. Silverman is a director of the Company and a Senior Vice
(Age 38) President of PennCorp. Prior to joining PennCorp, Mr.
Silverman served as Vice President (Legal) and Secretary with
Independence Holding Company and Vice President, Counsel
and Secretary with Standard Security Life Insurance Company
of New York.
Donald M. Woodard Mr. Woodard is Senior Vice President and Controller of the
(Age 48) Company. Mr. Woodard joined the Company in June 1994.
Prior to his employment with the Company, Mr. Woodard served as Chief
Financial Officer of National Financial Insurance Company and
American Insurance Company of Texas, both of Dallas, Texas.
Francis G. Miller Mr. Miller is a Senior Vice President, Information Services,
(Age 50) of the Company. He transferred to the Company in August 1993
from the Company's former parent, which he joined in 1989, and where
he served as a Senior Vice President.
R. Andrew Davidson, III Mr. Davidson is Senior Vice President of Investments for the
(Age 44) Company. Mr. Davidson joined the Company in October 1992 as
Vice President. Prior to his employment with the Company, Mr.
Davidson served as Investment Adviser/Portfolio Analyst with
Southwest Corporate FCU in Dallas, Texas, his employer since 1990.
JoAnna Cotaya Ms. Cotaya is a Senior Vice President of the Company and
(Age 39) a Senior Vice President of UC Mortgage Company, an
affiliate since 1996. Prior to joining the Company she served
as Vice President of United Companies Lending Corporation,
a former affiliate.
James W. Lillie, Jr. Mr. Lillie has served as the Corporate Secretary since 1996.
(Age 66) In addition, he serves as Vice President, Associate General
Counsel and Secretary of PennCorp. Prior to joining the
Company, he was a Partner with the firm of Morgan, Lewis, &
Bockius LLP.
</TABLE>
41
<PAGE> 43
Item 11. Executive Compensation
The following table sets forth certain information on the annual and
long-term Compensation paid by the Company and its affiliates for the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company for the three years ended December 31, 1996, 1995 and
1994. The salary and bonus of each of the executive officers were paid by the
Company.
<TABLE>
<CAPTION>
Long-Term
Summary Compensation Table Annual Compensation Compensation Awards
---------------------------------------------------- -------------------------
Other
Annual Restricted
Name and Compensation Stock Awards Options/ All Other
Principal Position Year Salary Bonus ($)(1) ($)(2) ($)(3) SARs(%) Compensation(2)
- --------------------------------- ------- ----------- --------------- -------------- --------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Robert B. Thomas, Jr............. 1996 $220,500 $395,818 $ -- -- -- $566,956
Chairman of the Board and 1995 219,625 395,818 -- 160,000 -- 20,505
President 1994 209,366 168,116 -- -- -- 21,882
(Resigned February 18, 1997)
Kitty S. Kennedy................. 1996 124,115 49,988 -- -- -- 124,282
Executive Vice President, 1995 108,970 49,988 -- -- -- 16,015
Chief Actuary and 1994 100,320 40,800 -- -- -- 15,280
Chief Administrative Officer
Gary L. Warrington 1996 90,089 71,541 -- -- -- 219,821
Executive Vice President 1995 158,980 71,541 -- -- -- 18,047
(Retired July 23, 1996) 1994 158,980 63,592 -- -- -- 21,939
Lindsay C. Seals 1996 66,057 48,204 -- -- -- 91,226
Executive Vice President
-- Marketing 1995 106,600 48,204 -- -- -- 17,443
(Retired July 23, 1996) 1994 103,333 41,600 -- -- -- 16,474
Francis G. Miller 1996 98,950 42,750 -- -- -- 115,592
Senior Vice President -- 1995 94,333 36,400 -- -- -- --
Information Services 1994 90,399 7,866 -- -- -- --
</TABLE>
- --------------
NOTES:
(1) Amounts awarded under the United Companies Financial Corporation
Management Incentive Plan (plan of former parent) for the respective
years, even if deferred.
(2) Amount reported include amounts contributed or accrued for 1996, 1995, and
1994 for the named officers under the United Companies Financial
Corporation Employee Stock Ownership Plan ("ESOP") and Employees' Savings
Plan and Trust (plan or former parent).
(3) Reflects the value of the shares of restricted stock based upon the
closing price of UCFC's Common Stock reported on the National Association
of Securities Dealers Quotations National Stock Market (the "Nasdaq Stock
Market") on the date of award. The shares of the restricted stock vest in
50% increments on the anniversary date of the award in each of the two
years thereafter. The awards are also subject to certain performance-based
conditions. During the restriction period for the shares of restricted
stock, the named executive officer is entitled to receive dividends and
exercise voting privileges on such restricted shares.
Directors of the Company receive no fees for their services as members of
the Board of Directors. No shares of capital stock of the Company are owned by
the executive officer or director. The Company is a wholly-owned subsidiary of
Pacific Life and Accident Insurance Company, a wholly-owned subsidiary of
PennCorp.
Item 12. Security Ownership of Certain Beneficial Owners and Management
All of the Company's issued and outstanding common stock is owned by
Pacific Life and Accident Insurance Company, a wholly-owned subsidiary of
PennCorp.
Item 13. Certain Relationships and Related Transactions
None
42
<PAGE> 44
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements
Included in Part II of this report:
<TABLE>
<S> <C>
Independent Auditors' Reports Page 20-21
December 31, 1996 and 1995
Consolidated Balance Sheets Page 22
For the three years ended December 31, 1996
Consolidated Statements of Operations Page 23
Consolidated Statements of Cash Flows Page 24
Consolidated Statements of Stockholder's Equity Page 25
Notes to Consolidated Financial Statements Pages 26-40
</TABLE>
Financial Statement Schedules
Included in Part IV of this report:
Individual financial statements of the registrant have been omitted
because consolidated financial statements of the registrant and its subsidiary
required by Item 8 have been included in Part II of this report and, as of
December 31, 1996, the registrant was primarily an operating company and its
subsidiary is wholly owned.
Schedule I Summary of Investments at December 31, 1996. Page 47.
Schedule III Supplementary Insurance Information, for the three years
ended December 31, 1996. Page 48.
Schedule IV Reinsurance, for the three years ended December 31, 1996.
Page 49.
Schedule V Valuation and Qualifying Accounts, for the three years ended
December 31, 1996. Page 50.
43
<PAGE> 45
Exhibits
Exhibit No. Description of Document
- ----------- -----------------------
21.1(1) Subsidiary of the Company
23.1(1) Consent of KPMG Peat Marwick LLP
23.2(1) Consent of Deloitte & Touche LLP
27.1(1) Financial Data Schedule
(1) Filed herewith
Exhibit No. 21.1 - Page 51
Exhibit No. 23.1 - Page 52
Exhibit No. 23.2 - Page 53
Exhibit No. 27.1 - Page 54
Reports on Form 8K
On August 14, 1996, the Company filed a current report on Form 8-K,
stating that on July 24, 1996, United Companies Financial Corporation and
Pacific Life and Accident Insurance Company, a wholly-owned subsidiary of
PennCorp Financial Group, Inc. consummated the sale of UC Financial's
wholly-owned subsidiary, United Companies Life Insurance Company.
On October 21, 1996, the Company filed a current report on form 8-K that
as a result of the transaction described above and reported on August 14, 1996,
the Company's Board of Directors had approved the engagement of KPMG Peat
Marwick LLP as its certifying accountants, effective October 17, 1996. KPMG
Peat Marwick currently serves PennCorp and its subsidiaries as its certifying
accountants. The Company previously utilized the services of Deloitte and
Touche LLP, the certifying accountants used by its former parent, United
Companies Financial Corporation.
44
<PAGE> 46
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.
DATED: MARCH 17, 1997
UNITED COMPANIES LIFE INSURANCE COMPANY
BY: /S/ C. PAUL PATSIS
---------------------------------------
C. Paul Patsis
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934 this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 17, 1997.
<TABLE>
<S> <C>
/s/ C. PAUL PATSIS President, Chief Executive Officer and Director
- ---------------------------------------- (Principal Executive Officer)
C. Paul Patsis
/s/ JOEL S. KAPLAN Executive Vice President, Financial and Legal Services
- ---------------------------------------- (Principal Executive Officer)
Joel S. Kaplan
/s/ KITTY S. KENNEDY Executive Vice President, Chief Actuary, Chief Administrative
- ---------------------------------------- Officer and Director
Kitty S. Kennedy (Principal Executive Officer)
/s/ JOHN H. LANCASTER Executive Vice President, Chief Marketing Officer and
- ---------------------------------------- Director
John H. Lancaster (Principal Executive Officer
/s/ DONALD M. WOODARD Senior Vice President and Controller
- ---------------------------------------- (Principal Accounting Officer)
Donald M. Woodard
/s/ JAMES P. McDERMOTT Director
- ----------------------------------------
James P. McDermott
/s/ MICHAEL J. PRAGER Director
- ----------------------------------------
Michael J. Prager
/s/ SCOTT D. SILVERMAN Director
- ----------------------------------------
Scott D. Silverman
</TABLE>
45
<PAGE> 47
SCHEDULE I
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
SUMMARY OF INVESTMENTS
<TABLE>
<CAPTION>
Amount Shown
Type of Investment Cost Value on Balance Sheet
- ------------------------------------------------------------------ ------------ ------------ -----------------
(dollars in thousands)
<S> <C> <C> <C>
Fixed maturity securities available for sale:
U.S. Government and agencies and authorities ................... $ 644,795 $ 655,077 $ 655,077
Municipal ...................................................... 5,434 5,387 5,387
Foreign ........................................................ 10,920 11,105 11,105
Public utilities ............................................... 12,695 12,852 12,852
All other corporate bonds ...................................... 454,006 459,744 459,744
------------ ------------ ------------
Total fixed maturity securities available for sale ..... 1,127,850 1,144,165 1,144,165
------------ ------------ ------------
Fixed maturity securities held to maturity:
All other corporate bonds ...................................... 48,473 50,902 48,473
------------ ------------ ------------
Total fixed maturity securities ........................ 1,176,323 1,195,067 1,192,638
------------ ------------ ------------
Mortgage loans on real estate .................................... 235,981 XXXXXX 235,981
Policy loans ..................................................... 21,536 XXXXXX 21,536
Investment in limited partnerships ............................... 5,704 XXXXXX 5,704
Short-term investments ........................................... 467 XXXXXX 467
Other long-term investments ...................................... 1,491 XXXXXX 1,491
------------ ------------
Total investments ...................................... $ 1,441,502 $ 1,457,817
============ ============
</TABLE>
46
<PAGE> 48
SCHEDULE III
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G COLUMN H COLUMN I & J
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------------
Deferred Policy
Acquisition Cost
Deferred Amortization
Policy Net Benefits, and
Acquisition Future Policy Unearned Premium Investment Claims Other Operating
Costs Benefits(1) Premiums Revenues(3) Income Losses, Etc. Expenses
----------- ----------- ----------- ----------- ----------- ----------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
PURCHASE BASIS OF ACCOUNTING:
Period from July 24 through
December 31, 1996 $ 4,187 $ 1,441,307 $ 275 $ 3,483 $ 50,041 $ 3,836 $ 4,741
HISTORICAL BASIS OF ACCOUNTING:
Period from January 1 through
July 23, 1996 $ 85,801 $ 1,463,230 $ 1,074 $ 3,732 $ 66,421 $ 5,967 $ 19,452
Year ended December 31, 1995 $ 90,703 $ 1,529,012 $ 1,793 $ 8,508 $ 125,591 $ 9,930 $ 29,485
Year ended December 31, 1994 $ 91,915 $ 1,542,474 $ 4,491 $ 11,373 $ 117,105 $ 12,654 $ 28,868
</TABLE>
NOTES:
(1) Column C includes accumulated fund values on annuity and interest
sensitive products.
(2) Column E is omitted as amounts are not material and are included with
Column C.
(3) Column F excludes premiums on annuity and interest sensitive products
which are accounted for as deposits.
47
<PAGE> 49
SCHEDULE IV
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
REINSURANCE
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ---------------------------------------- ---------- ---------- ---------- ---------- --------------
Percentage
Ceded to Assumed of Amount
Direct Other From Other Net Assumed to
Amount Companies Companies Amount Net Amount
---------- ---------- ---------- ---------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Period from July 24, 1996 to
December 31, 1996
Life insurance in force
at end of period ................. $ 468,284 $ 131,816 $ 891,694 $1,228,162 72.6%
========== ========== ========== ==========
Premiums
Life insurance .................... $ 2,496 $ 481 $ 1,214 $ 3,229 37.6
Accident and health insurance ..... 208 (46) -- 254 --
---------- ---------- ---------- ----------
Total premiums ............... $ 2,704 $ 435 $ 1,214 $ 3,483 34.9
========== ========== ========== ==========
Period from January 1, 1996 to
July 23, 1996
Life insurance in force
at end of period ................. $ 498,662 $ 141,816 $ 992,672 $1,350,148 73.5
========== ========== ========== ==========
Premiums
Life insurance .................... $ 2,719 $ 341 $ 877 $ 3,255 26.9
Accident and health insurance ..... 429 (48) -- 477 --
---------- ---------- ---------- ----------
$ 3,148 $ 293 $ 877 $ 3,732 23.5
========== ========== ========== ==========
Years ended December 31, 1995
Life insurance in force
at end of period .................. $ 554,131 $ 149,080 $ 992,979 $1,398,030 71.0
========== ========== ========== ==========
Premiums
Life insurance .................... $ 6,016 $ 1,625 $ 2,588 $ 6,979 37.1
Accident and health insurance ..... 1,643 115 1 1,529 --
---------- ---------- ---------- ----------
Total premiums ............... $ 7,659 $ 1,740 $ 2,589 $ 8,508 30.4
========== ========== ========== ==========
Years ended December 31, 1994
Life insurance in force
at end of period ................. $ 709,883 $ 177,585 $1,106,148 $1,638,446 67.5
========== ========== ========== ==========
Premiums
Life insurance .................... $ 7,467 $ 1,931 $ 2,959 $ 8,495 34.8
Accident and health insurance ..... 3,070 199 7 2,878 0.2
---------- ---------- ---------- ----------
Total premiums ............... $ 10,537 $ 2,130 $ 2,966 $ 11,373 26.1
========== ========== ========== ==========
</TABLE>
48
<PAGE> 50
SCHEDULE V
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN C COLUMN D
COLUMN A COLUMN B ADDITIONS DEDUCTIONS(2) COLUMN E(3)
- ----------------------------------------- --------- ---------------------- ------------- -----------
Charged
Balance at to Costs Charged Balance at
Beginning and to Other End
of Period Expenses Accounts(1) of Period
--------- --------- ----------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Purchase basis of accounting:
- -----------------------------
Period from July 24, 1996 to
December 31, 1996
Allowance for loan losses ............ $ 12,661 $ -- $ -- $ 716 $ 11,945
Allowance for real estate losses ..... -- -- -- -- --
Allowance for bond losses ............ 189 -- -- -- 189
Unearned loan charges ................ 284 -- -- 18 266
--------- --------- --------- --------- ---------
Total ....................... $ 13,134 $ -- $ -- $ 734 $ 12,400
========= ========= ========= ========= =========
Historical basis of accounting:
- -----------------------------
Period from January 1, 1996 to
July 23, 1996
Allowance for loan losses ............ $ 2,117 $ 478 $ -- $ 771 $ 1,824
Allowance for real estate losses ..... 3,987 (1,098) -- 2,889 --
Allowance for bond losses ............ 666 884 -- 1,361 189
Unearned loan charges ................ 301 -- -- 17 284
--------- --------- --------- --------- ---------
Total ....................... $ 7,071 $ 264 $ -- $ 5,038 $ 2,297
========= ========= ========= ========= =========
Year ended December 31, 1995
Allowance for loan losses ............ $ 1,778 $ 533 $ -- $ 194 $ 2,117
Allowance for real estate losses ..... 5,120 1,505 -- 2,638 3,987
Allowance for bond losses ............ 317 2,013 -- 1,664 666
Unearned loan charges ................ 419 -- -- 118 301
--------- --------- --------- --------- ---------
Total ........................ $ 7,634 $ 4,051 $ -- $ 4,614 $ 7,071
========= ========= ========= ========= =========
December 31, 1994
Allowance for loan losses ............ $ 2,639 $ 649 $ -- $ 1,510 $ 1,778
Allowance for real estate losses ..... 4,473 2,561 -- 1,914 5,120
Allowance for bond losses ............ 1,515 1,849 -- 3,047 317
Unearned loan charges ................ 592 -- -- 173 419
--------- --------- --------- --------- ---------
Total ........................ $ 9,219 $ 5,059 $ -- $ 6,644 $ 7,634
========= ========= ========= ========= =========
</TABLE>
- ---------------------
NOTES:
(1) Represents the approximate amount of unearned loan charges on installment
loans originated during the period.
(2) Represents loans and bonds charged off and loan charges earned during the
period.
(3) All of the above are deducted in the balance sheet from the asset to which
they apply.
49
<PAGE> 51
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------
<S> <C>
21.1 Subsidiary of the Company
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 21.1
UNITED COMPANIES LIFE INSURANCE COMPANY
LIST OF SUBSIDIARIES
December 31, 1996
<TABLE>
<CAPTION>
State of
Name Incorporation
---- -------------
<S> <C>
United Variable Services, Inc................................. Louisiana
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholder
United Companies Life Insurance Company:
We consent to incorporation by reference in the registration statements (Nos.
33-91362 and 33-05778) on Form N-4 of United Companies Life Insurance Company
of our report dated February 28, 1997, relating to the consolidated balance
sheets of United Companies Life Insurance Company and subsidiary as of December
31, 1996, and the related consolidated statements of operations, cash flows,
and stockholder's equity for the periods from July 24, 1996 to December 31,
1996, and from January 1, 1996 to July 23, 1996, and all related schedules,
which report appears in the December 31, 1996 annual report on Form 10-K of
United Companies Life Insurance Company.
KPMG PEAT MARWICK LLP
Baton Rouge, Louisiana
March 28, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our opinion dated February 29,
1996 appearing in this Annual Report on Form 10-K of United Companies Life
Insurance Company in the following: Registration Statement Numbers 33-91362
and 33-05778 on Form N-4, pertaining to United Companies Life Insurance
Company's variable annuity separate account, United Companies Separate Account
One.
/s/ DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 1,144,165
<DEBT-CARRYING-VALUE> 48,473
<DEBT-MARKET-VALUE> 50,902
<EQUITIES> 930
<MORTGAGE> 235,981
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,457,817
<CASH> 14,487
<RECOVER-REINSURE> 34,923
<DEFERRED-ACQUISITION> 4,187
<TOTAL-ASSETS> 1,653,796
<POLICY-LOSSES> 1,441,307
<UNEARNED-PREMIUMS> 275
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 8,401
<OTHER-SE> 177,407
<TOTAL-LIABILITY-AND-EQUITY> 1,653,796
7,215
<INVESTMENT-INCOME> 116,462
<INVESTMENT-GAINS> 559
<OTHER-INCOME> 907
<BENEFITS> 9,803
<UNDERWRITING-AMORTIZATION> 14,767
<UNDERWRITING-OTHER> 14,486
<INCOME-PRETAX> 11,885
<INCOME-TAX> 4,397
<INCOME-CONTINUING> 7,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,488
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.78
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
